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Disciplinary law: the client's knowledge of investments is relevant in determining the extent of broker's obligations

In a decision rendered in August 2015, the Disciplinary council concluded that a broker, who must always consider the answers given by the client to the questions asked in the “Know your client” form, as well as the particular financial situation of that client, is well placed to determine the degree of risk that would be acceptable to the client and if the strategy suggested by said client would be appropriate. The client’s knowledge of investments is also relevant in assuring that he properly understands the consequences of his purchase and can help to determine if he can really assume the risks that may be associated with his investment (Chambre de la securité financière v. Zhang, 2015 QCCDCSF 44).

THE FACTS

The respondent, a financial broker, is accused of having not attempted to obtain a complete understanding of the facts related to the financial situation of her clients before recommending that they buy a certain fund, as well as having not acted as a conscientious broker in recommending that said clients buy the fund by way of a leverage loan of $100 000.

Generally speaking, the syndic pleaded that the investment profile of each of the two clients in question was not properly constituted by the respondent, who is said to have not proceeded in the complete data collection that was necessary to evaluate the clients’ risk level before recommending that they contract a significant leverage loan. The evidence reveals that even though the clients had no experience with leverage loans, they both had fairly aggressive investment profiles. According to the clients themselves, the broker never informed them of the risks associated with their investment, causing them to mistakenly believe that their investment was guaranteed. The syndic argued that the product purchased did not suit the clients’ financial situations, and thus, the broker had failed to adequately represent and advise her clients.

On the other hand, the respondent pleaded that her clients had extensive knowledge of investments, as was indicated in the answers they had given when filling out the forms required when opening an account. By way of their answers, the clients had declared regularly following the financial markets, seeking to grow their investments and having a certain tolerance to risk as aggressive investors. In addition, before finalizing any transactions concerning the account of said clients, the evidence reveals that the respondent always received very precise and written instructions from her clients. Furthermore, the appropriate documentation that made mention of the numerous risks associated with the investment in question, notably that there was no guarantee, was always issued to the clients.

THE DISCIPLINARY COUNCIL’S DECISION

After having considered the arguments invoked by both parties, the Disciplinary council draws the following conclusions:

  1. A client’s knowledge in investments is a fundamental factor to consider when determining the extent of the explanations and verifications that need to be made by the representative.
     
  2. The fact that a certain community is uncomfortable in providing a broker with its complete financial information prior to investing is not a factor to consider, as the obligations imposed on brokers in Québec cannot be adapted to meet the particular needs or wants of the different communities that may require services from financial professionals.
     
  3. An expert may be hired in the context of a disciplinary debate to provide calculations of certain ratios in order to determine whether or not the client in question was in a sound financial position allowing for the purchase of investments that may be considered riskier.
     
  4. In order to determine the intensity of the broker’s obligations in a particular situation, the Disciplinary council must consider all the answers provided by the client to the questions asked on the numerous forms filled out, notably those questioning his knowledge of investments, as well as his available revenue and expenses.
     
  5. In addition, a client who transmits precise instructions to his broker concerning the changes he wishes to be made to his portfolio is considered to be more knowledgeable in investments than the average client.

THE LESSONS TO BE LEARNED

  1. The answers obtained from a client in response to the questions asked on the “Know your client” form serve as a guide allowing the broker to make suitable recommendations on fund choices.
     
  2. When a client has an aggressive investment profile and is particularly knowledgeable in investments, the options that his broker can recommend may be riskier Dubé Légal inc., Montréal disciplinary law lawyers.