Professional Liability Flashcards
Under the common law, liability may be based upon any of the following:
Breach of contract.
Negligence.
Fraud.
Define Negligence
Negligence occurs when a person does something that a reasonable person would not do, or fails to do something that a reasonable person would do, under the circumstances. Therefore, a financial planner is expected to exercise the same standard of care that another reasonably prudent planner would do, given the same situation.
What four requirements must a client satisfy in order to seek damages against a financial planner
The plaintiff must show that the planner had a duty not to be negligent.
The planner must have breached that duty by failing to exercise reasonable care.
The plaintiff must establish a causal connection between the negligence and the injury.
The plaintiff must prove damage or actual loss.
Statutory Liability
Statutory liability refers to responsibilities imposed on parties by law. For financial planners, this includes liability under the Federal Securities Law.
Section 11 of the Securities Act of 1933
Imposes liability for misstatements or omissions in applicable registration statements. It applies to accountants, engineers, or other experts (financial planners) who prepare or certify parts of the registration statement.
Under Section 18(a) of the Securities Exchange Act of 1934,
Planners may be held liable for material misstatements or omissions in documents they prepare and file with the Securities and Exchange Commission (SEC).
Planners may be held liable under Section 10(b) and Rule 10b-5 for fraud in the purchase or sale of any security.
They are held liable if:
The fraudulent statement or omission was considered material.
There was an intent by the planner to deceive or defraud others.
As a result of misinformation, the client incurs a loss.
Investment Advisors Act of 1940
Section 21180b-11(1):
[T]he standard of conduct for all brokers, dealers, and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.
Employee Retirement Income Security Act (ERISA)
Section 404 (a)(1)(B):
A fiduciary must act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent [person] acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”
CFP Board Code of Ethics and Standards of Conduct
Fiduciary Duty (Standard A.1):
At all times when providing Financal Advice to a Client, a CFP® professional must act as a fiduciary, and therefore, act in the best interests of the Client. The following duties must be fulfilled:
Duty of Loyalty: A CFP® professional must:
Place the interests of the Client above the interests of the CFP® professional and the CFP® Professional’s Firm;
Avoid Conflicts of Interest, or fully disclose Material Conflicts of Interest to the Client, obtain the Client’s informed consent, and properly manage the conflict; and
Act without regard to the financial or other interests of the CFP® professional, the CFP® Professional’s Firm, or any individual or entity other than the Client, which means that a CFP® professional acting under a Conflict of Interest continues to have a duty to act in the best interests of the Client and place the Client’s interests above the CFP® professional’s.
Duty of Care: A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the Client’s goals, risk tolerance, objectives, and financial and personal circumstances.
Duty to Follow Client Instructions: A CFP® professional must comply with all objectives, policies, restrictions, and other terms of the Engagement and all reasonable and lawful directions of the Client
