High Yield Securities and Elderly Investors: Risks and Remedies
Elderly investors are attracted to the idea of earning high returns on the money they have saved for retirement. While the sale of inappropriate annuities has been thoroughly discussed by elder law attorneys during the past decade, the sale of securities and mutual funds as income-producing products for elderly investors has not received the same level of attention. Elder law attorneys, protective services workers, and probate court judges may be in the best position to spot cases where unsuitable or fraudulent securities sales threaten the elderly, at the moment when they are most vulnerable. This page contains a bibliography of resources discussed in High-Yield Securities and Elderly Investors: Risks and Remedies, by Attorney John L. Roberts, published in the October, 2011 edition of ElderLaw Report.
Rules governing securities sales are “based on the premise that a broker, when he or she undertakes to give investment advice to a customer . . . assumes an obligation to make only such recommendations as would be consistent with the customer’s financial situation and needs.” Poser & Fanto Broker-Dealer Law & Regulation §19.02[A] at 19-6 (2010 Supp.).
Professors Poser and Fanto have summarized the four criteria of suitability doctrine:
(1) the investor must be able to bear the risks of the recommended security
(2) the investor must be able to understand these risks
(3) the investment must be consistent with the investor’s investment objectives; and
(4) the recommendation must enable the investor to buy the security at the minimum cost
A securities dealer cannot avoid knowledge of her customer’s financial and tax status, investment objectives and “such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.” NASD Rule 2310
In Massachusetts, the relationship between a securities dealer and her customer may be either a fiduciary relationship, or an ordinary business relationship. Determining the broker's fiduciary duty “is a factual issue that turns on the manner in which investment decisions have been reached and transactions executed for the account." Patsos v. First Albany Corp., 433 Mass. 323, 332, 741 N.E.2d 841, 849 (2001). The investor’s capacity and level of sophistication are relevant in determining the relationship between broker and investor, and deciding who was responsible for making the decision to buy securities.
“An inexperienced or naive investor is likely to repose special trust in his stockbroker because he lacks the sophistication to question or criticize the broker's advice or judgment.” Patsos, 430 Mass at 335. This is frequently the situation in the case of an elder investor.
The Massachusetts Secretary of State has proposed that the standard of care for fiduciaries operating under authority of a Power of Attorney document be lowered beneath traditional fiduciary law standards. The bill filed by Massachusetts Secretary of State Galvin in 2011 would require a deliberate breach of duty by the power of attorney, rather than the duty of care traditionally required of a fiduciary. PDF. The Boston Globe missed this issue in the article it published in 2011. Securities attorneys view this proposal as "a wolf in sheep's clothing" and a danger to elderly investors, because broker-dealers who act under authority of a power of attorney could easily avoid liability under the lower standard. The Secretary of State, who licenses securities brokers, has refused to comment on this issue
When deciding whether a securities dealer has become a fiduciary, courts compare one party's lack of sophistication relative to another party on relevant issues, and consider whether one party has granted another party a great deal of discretion. Compare: McAdams v. Massachusetts Mutual Life Ins. Co., 391 F.3d 287 (1st Cir. 2004) (affirming summary judgment for defendant in case of MassMutual general agents who claimed the company shorted their deferred compensation plans); Pearce v. The Duchesneau Group, Inc., 392 F.Supp.2d 63 (D. Mass. 2005) (denying broker’s motion to dismiss fiduciary duty claim involving customer’s IRA account).
“When a stock broker or financial advisor is providing financial or investment advice, he or she is required to exercise the utmost good faith, loyalty, and honesty toward the client. The broker or advisor implicitly represents to the client that he or she has an adequate basis for the opinions or advice being provided.” Johnson v. John Hancock Funds, 217 S.W.3d 414, 429 (Tenn. Ct. of Appeals 2006) (collecting cases). A securities dealer is “required to disclose facts that are material to the client's decision-making.” Johnson v. John Hancock Funds, 217 S.W.3d at 429 (providing a client with a prospectus is not a complete defense to claims that investment advisor failed to disclose material facts to clients).
A “fiduciary who benefits in a transaction with the person for whom he is a fiduciary bears the burden of establishing that the transaction did not violate his obligations.” Cleary v. Cleary, 427 Mass. 286, 295, 692 N.E.2d 955, 961 (1998). The burden shifting prescribed in Cleary is applied “in circumstances where a fiduciary stands to receive a benefit indirectly.” Germain v. Girard, 72 Mass. App. Ct. 409, 412-13 (2008).
If a fiduciary “benefits in a transaction with the person for whom he is a fiduciary” the fiduciary “bears the burden of establishing that the transaction did not violate his obligations.” Cleary, 427 Mass. at 295, 692 N.E.2d at 961 (nephew who held power of attorney had burden to prove aunt intended to designate him beneficiary of annuity policies).
In reviewing claims of fiduciary duty, Massachusetts courts note “a difference between cases involving fiduciary beneficiaries and those in which a beneficiary occupies a confidential but not fiduciary relationship.” Cleary at note 2, emphasis added. “[W]here a confidential relationship exists it generally takes less to establish undue influence "than in the ordinary cases in which there is neither a confidential nor a fiduciary relationship.”
. “When the Donor is enfeebled by age or disease, although not reaching to unsoundness of mind, and the relation between the parties is fiduciary or intimate, the transaction ordinarily is subject to careful scrutiny.” In Re: Estate of Moretti, 69 Mass. App. Ct. 642, 652 (2007) (burden shifted to fiduciary who asserted that his principal was decisive, independent minded, fully informed and engaged), quoting Neill v. Brackett, 234 Mass. 367, 369 (1920).
Class action cases have recovered securities losses for investors of all ages. Example: Class Action Settlement Oppenheimer Core Bond Fund. Complaint