What Is the Difference Between a Breach of Fiduciary Duty and a Breach of Contract? - Transcript

While breaches of fiduciary duty and breaches of contract both violate obligations, they differ significantly in their origins, scope, and legal implications. These distinctions are crucial when determining the appropriate legal remedies for aggrieved investors who have suffered financial harm. At Malecki Law, we help clients navigate these complexities to hold brokers, investment advisers, and other financial professionals accountable. Our securities lawyers have decades of combined experience, as well as the tenacity and dedication needed to ensure your claim receives the attention it deserves.

A breach of contract occurs when one party fails to fulfill the terms of an agreement with another party. Contracts in the securities industry often involve written agreements, such as account management agreements, trading authorizations, or investment advisory contracts. These agreements outline specific duties and obligations, such as:

• Adhering to investment restrictions (e.g., avoiding certain securities or industries).
• Managing accounts according to specified strategies.
• Following explicit instructions regarding trades or transactions.

For example, if an investor instructs their adviser not to invest in a particular stock or sector and the adviser violates that instruction, it may constitute a breach of contract. Importantly, written agreements, including emails or other communications, can serve as enforceable contracts if they demonstrate clear terms and mutual consent.

A fiduciary duty arises in relationships where one party is obligated to act in the best interests of another. In the securities industry, fiduciary duties are most commonly associated with registered investment advisors (RIAs), who must act with undivided loyalty and care toward their clients. Fiduciary duties can arise from:

• Contracts: Certain agreements, such as those for discretionary account management, explicitly establish a fiduciary relationship.
• Statutes: Laws like the Investment Advisers Act of 1940 impose fiduciary duties on RIAs.
• Conduct: Even in the absence of a formal contract, a fiduciary duty may arise from the nature of the adviser’s relationship with the investor, such as when the adviser assumes significant control over investment decisions.

A breach of fiduciary duty occurs when an adviser acts in their own interest or neglects their obligation to prioritize the client’s needs. Examples include:

• Failing to disclose conflicts of interest.
• Recommending investments against their clients’ best interest for personal gain.
• Neglecting to adequately monitor or manage an account.

While breaches of contract and fiduciary duty can overlap, they are distinct legal concepts:

1. Source of Obligation:
   • A breach of contract arises solely from the terms of an agreement between parties.
   • A fiduciary duty may arise from a contract, statute, or the conduct of the parties.
2. Standard of Behavior:
   • Contracts typically impose specific, limited obligations outlined in the agreement.
   • Fiduciary duties require a higher standard of care, including loyalty, honesty, good faith, and acting in the client’s best interest.
3. Legal Remedies:
   • Breach of contract claims typically involve compensation for financial losses caused by the violation of the agreement.
   • Breach of fiduciary duty claims may include equitable remedies, such as disgorgement of profits, in addition to compensatory damages.
4. Scope of Application:
   • Contractual obligations are limited to the terms agreed upon by the parties.
   • Fiduciary duties may extend beyond the contract to encompass broader ethical and legal responsibilities.

Since June 2020, Regulation Best Interest (Reg BI) has established a new standard for broker-dealers. While not identical to a fiduciary duty, Reg BI requires brokers to act in the best interests of their clients, considering factors such as:

• The costs and risks associated with recommendations, including an investor’s financial goals, risk tolerance, age, and knowledge.
• Conflicts of interest that may affect their advice.

Reg BI provides additional protections for investors but differs from the fiduciary duties imposed on RIAs under the Investment Advisers Act of 1940.

At Malecki Law, we understand the complexities of breach of contract and fiduciary duty claims in the securities industry. Our team works diligently to analyze the relationship, agreements, and conduct involved in each case to determine the appropriate legal framework. Whether the issue stems from a contractual violation or a failure to uphold fiduciary obligations, we are committed to securing the best possible outcome for our clients. If you believe your financial professional has breached their obligations, contact Malecki Law at (212) 943-1233 or reach out online to schedule a consultation. We are here to help you understand your rights and pursue justice for any harm caused.

Transcript:

Contract and breach of fiduciary duty can be related a contract is any agreement between two people that agreement could be a agreement for discretionary management of an investment account in those cases that would be a contract where the broker or investment advisor would be a fiduciary so you know breach of contract could be anything it could be any agreement between parties I told you and we had an agreement that I would never invest in XYZ Corporation but the broker or investment advisor did that’s an agreement and if it’s been in writing in any way even if it’s just in emails that’s something that’s enforceable now fiduciary duty well it can arise by contract can also arise by operation of a statute so the investment advisors act uh of 1940 creates a fiduciary duty between a client an investor and a registered investment advisor and state blue sky laws tend to have the same sort of fiduciary duty associated with the relationship between an investment advisor and an investor now and your ordinary brokerage agreement you’re not necessarily there’s not necessarily A fiduciary duty however it could arise by the manner in which the advisor and the investor interact with one another but they are now guided in brokerage Relationships by a standard called best interest standard and there’s a new law since June of 2020 called regulation best interest that is akin to a fiduciary duty but maybe not exactly the same.