Securities

Due Diligence & Fiduciary Responsibility

Are you thinking about purchasing a security? Maybe stock in a company? It can be difficult to decide what company to invest in. Getting an expert to help you may be a smart idea.

Many investors will talk to an investment adviser to help make decisions about a stock. This adviser will give sound advice about securities. Other investors will go to a broker-dealer. A broker-dealer might recommend a particular stock and will act as an intermediary between the buyer and the seller.

Investors need to be able to rely on the information given to them. Accurate information is needed to make a knowledgeable decision. There are certain laws that can protect you and your investments. Some of these laws center around the concept of due diligence and fiduciary responsibility.

What's Due Diligence?

The Securities Act of 1933 imposes liability for errors on the registration statement of a security. The registration statement is a document that provides information to potential investors. It's filed with the US Securities and Exchange Commission (SEC). The information can be used to decide whether to purchase the security.

Investors can't get an accurate picture of a company if there's false information. They can sue certain people for material misstatements or omissions. This includes:

  • Anyone who signed the registration statement
  • Directors of the company
  • Accountants who help prepare the statement
  • Security underwriters

These people are held to a due diligence standard. This means that they must reasonably believe that the registration statement is accurate and free of errors. If they don't, they can be found liable to investors.

The due diligence standard can also be used as a defense. If any director or accountant meets the standard, he can't be found liable for any omissions or misstatements. The standard varies by a person's involvement in the company and the registration statement.

What's Fiduciary Responsibility?

A fiduciary is someone who owes a duty of care and loyalty to another. The directors of a company owe a fiduciary duty to both the company and the stockholders. They violate this duty by making decisions for their own benefit. Directors owe you a fiduciary duty if you own stock in their company.

Investment advisers also have fiduciary responsibilities. They owe their clients the duties of good faith, integrity and loyalty. An investment adviser has a special relationship of trust with his clients. He must act in their best interests.

Broker-dealers haven't normally been held to the fiduciary duty standard. They usually have a suitability standard. This means that they're only required to provide suitable investments.

Congress has recently decided that the standard for broker-dealers should be increased to match investment advisers. The SEC has been granted the authority to extend the fiduciary duty standard to broker-dealers. They'll be held to this higher standard when they give investment advice. Broker-dealers will be required to disclose all conflicts of interest and act in the best interests of their clients.

Questions for Your Attorney

  • Is there a difference between an investment adviser and a broker-dealer?
  • I believe that a company sent out false information to get investors to purchase stock. Whom can I bring a lawsuit against?
  • I am being sued for errors on a registration statement? How can I prove that I was due diligent in checking the accuracy of the statement?

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