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scour the entire landscape of a company’s the defense argued on appeal that the trial ciary rule,” InvestmentNews, Nov. 10, 2015, http://www. Judge Kenneth Karas discussed at length the differing
investmentnews.com/article/20151110/FREE/151119998/ views regarding the source of a duty to disclose and ob-
business, management and inancial records court had failed to instruct the jury regarding sec-chairwoman-white-says-agency-is-full-out-working- served that the “cases highlight what Justice Scalia empha-
to identify information that was not disclosed, the difference between a discretionary and on-iduciary.
2. On April 20, 2015, the Department of Labor (DOL) sized in his Skilling concurrence: that courts have looked to a smorgasbord of sources to ind the iduciary duty.”
and then present a witness to testify that the a nondiscretionary account, “permitting the published its proposed rule regarding the deinition of 10. Pehlivanian, 2015 U.S. Dist. LEXIS 171220, at *25 (in-
undisclosed information would have been jury to believe that all brokers had a iduciary iduciary, which provides that one who renders certain ternal quotations and citation omitted).
“material” to his or her decision to purchase duty to disclose outside compensation.” The retirement investment advice, particularly an individual- 11. Harbinger, 2015 U.S. App. LEXIS 21290, at *5. A
or sell securities.
court rejected that argument, insisting that ized “recommendation,” in exchange for a fee or compen- duty to disclose can arise from other circumstances, e.g.,
The most significant limitation on that the trial court had instructed the jury “on the sation, in relation to ERISA or IRA assets, is a iduciary. “Deinition of the Term ‘Fiduciary’; Conlict of Interest “where one party possesses superior knowledge, not readily available to the other, and knows that the other is
otherwise expansive approach begins with circumstances that make a broker a iduciary Rule—Retirement Investment Advice,” 80 Fed. Reg. 21806 acting on the basis of mistaken knowledge.” Id.
the basic proposition that “silence is not mis- and thus enabled the jurors to distinguish (proposed April 20, 2015).
12. United States v. Skelly, 442 F.3d 94, 97-98 (2d Cir.
3. In December 2015, Morningstar published an analy- 2006); Press v. Chem. Inv. Servs., 166 F.3d 529 (2d Cir. 1999).
leading absent a duty to disclose.”7 Indeed, between the circumstances that imposed sis stating that the DOL rule alone will affect $3 trillion of retirement assets and $19 billion of revenue in the i- Indep. Order of Foresters v. Donald, Lufkin & Jenrette, 157
an alleged material omission ‘“is actionable iduciary obligations on a broker and those nancial services industry, and that investment managers F.3d 933, 940 (2d Cir. 1998); De Kwiatkowski v. Bear Stearns
under the federal securities laws only where that did not.”21
could see their business models “drastically” altered, like- & Co., No. 96 Civ. 4798 (JGK), 1999 U.S. Dist. LEXIS 19966, at *27 n.4 (S.D.N.Y. Dec. 29, 1999); Perl v. Smith Barney,
the defendant is subject to a duty to disclose The Impact.
ly curtailing commission-based sales. Morningstar Quar- 230 A.D.2d 664, 666, 646 N.Y.S.2d 678, 680 (1st Dep’t 1996).
the omitted facts.’”8 As stated in In re UBS AG As relected in Skelly, there is a consistent ter End Insights, Dec. 29, 2015, http://news.morningstar. See Thomas Hazen, “Are Existing Stock Broker Standards
Securities Litigation: “[I]t is well established line of authority that states that an actionable com/articlenet/article.aspx?id=733096.
4. John J. Topoleski and Gary Shorter, Congressional Suficient? Principles, Rules and Fiduciary Duties,” 2010
that there is no liability in the absence of a omission exists only where there is a duty to Research Service, “Department of Labor’s 2015 Proposed Colum. Bus. L. Rev. 710, 742 (2010) (“[T]he apparent ma-
duty to disclose even if the information would disclose, that a duty to disclose exists where Fiduciary Rule: Background and Issues,” dated Oct. 8, jority view of the cases applying state common law is that there is no iduciary relationship between a broker-dealer
2015, https://www.fas.org/sgp/crs/misc/R44207.pdf.
and a client as a matter of law.”).
have been material.”9 Disclosure of informa- the parties have a iduciary relationship, and 5. See Richard Ketchum, FINRA Chairman and Chief Executive, “Remarks From the 2015 FINRA Annual Confer- 13. BNP Paribas, 866 F. Supp. 2d at 270 (internal quota-
tion is not required “simply because it may be that brokers ordinarily do not have such a ence,” May 27, 2015, available at https://www.inra.org/ tions and citation omitted).
relevant or of interest to a reasonable inves- iduciary relationship with their customers.
newsroom/speeches/052715-remarks-2015-inra-annual- 14. 442 F.3d at 96.
tor” and is not required where the information conference.
15. Id. at 97 (emphasis added).
16. Id. at 98 (quoting Indep. Order of Foresters, 157 F.3d
is available and widely reported.10
6. See Cyril Tuohy, “DOL, Industry Years Apart on Fi- at 940).
Under current New York law, a duty to duciary Rule Implementation Schedule,” July 22, 2015, http://insurancenewsnet.com/innarticle/2015/07/22/dol- 17. Id. at 98. Although the Second Circuit found that
disclose exists where the parties stand in a While the starting point of industry-years-apart-on-fiduciary-rule-implementation- the district court had failed to adequately instruct the
iduciary “or conidential” relationship,11 and schedule.html.
jury regarding the circumstances under which a iduciary
case law makes clear that a broker does not most securities fraud prosecu- 7. Pehlivanian v. China Gerui Advanced Materials Grp.,, duty would exist, it nonetheless held that the instruction regarding omission did not constitute plain error because
No. 14 Civ. 9443 (ER), 2015 U.S. Dist. LEXIS 171220, at *25 (S.D.N.Y. Dec. 23, 2015).
the government’s case was predicated on other theories.
ordinarily stand in a iduciary relationship tions is an alleged material The jury instructions for a criminal securities fraud Skelly, 442 F.3d at 99.
to a typical customer.12 Because “there is no misrepresentation, New York charge provide: “To establish that the defendant omit- 18. 711 F.3d 129, 143 (2d Cir. 2013).
general iduciary duty inherent in an ordinary ted to state a material fact, the government is required to 19. Id. at 141 (citation omitted).
broker/customer relationship,”13 courts rou- state and federal prosecutions show that the defendant had a duty to disclose the infor- 20. Id. Nonetheless, the Second Circuit held that it was
not plain error because the broker had recommended
tinely dismiss claims predicated on purported mation.” 3-57 Modern Federal Jury Instructions-Criminal ¶ 57-15 (Matthew Bender).
the security and had a duty to reveal the payment that
omissions absent a special circumstance that often include alleged misrep- 8. In re Francesca’s Holdings Corp. Sec. Litig., Nos. 13- he received.
creates the duty.
resentations in the form of cv-6882 (RJS) and 13-cv-7804 (RJS), 2015 U.S. Dist. LEXIS 21. Id. at 43. This same issue will arise under New York
In Skelly,14 for example, prosecutors 50726, at *41 (S.D.N.Y. March 31, 2015) (quoting In re Bank state’s Martin Act, General Business Law §352. See e.g.,
charged that defendant brokers engaged in “omissions.”
of Am. AIG Disclosure Sec. Litig., 980 F. Supp. 2d 564, 575 People v. Bank of New York Mellon, 40 Misc.3d 1232(A), at *56-59 , 977 N.Y.S.2d 668 (Sup. Ct. N.Y. Cnty. 2013); People
(S.D.N.Y. 2013), aff’d, 566 F. App’x 93 (2d Cir. 2014). See Harbinger Capital Partners v. Deere & Co., No. 15-408-cv, v. Joseph Stevens & Co., 31 Misc.3d 1223(A), at *93-97, 929
fraud by not disclosing to customers that 2015 U.S. App. LEXIS 21290, at *4 (2d Cir. Dec. 7, 2015). N.Y.S.2d 202 (Sup. Ct. N.Y. Cnty. 2009).
they received enhanced compensation on ‘“The existence of a iduciary duty in a crimi- BNP Paribas Mortg. v. Bank of Am., N.A., 866 F. Supp. 2d 22. United States v. Harper, No. 13-CR-601 (RJD), 2015
the sales of particular stocks. The district nal prosecution is a fact-based determination 257, 270 (S.D.N.Y. 2012).
U.S. Dist. LEXIS 140581, at *9 (E.D.N.Y. Oct. 15, 2015)
court properly instructed the jury that “an that must ultimately be determined by a jury 9. No. 07 Civ. 11225 (RJS), 2012 U.S. Dist. LEXIS 141449, at *95-96 (S.D.N.Y. Sept. 8, 2012), aff’d, 75 F.3d 173 (2d Cir. (quoting United States v. Milovanovic, 678 F.3d 713, 723 (9th Cir. 2012)).
intentional failure to disclose a material fact properly instructed on this issue.’”22 “[A] idu- 2014) (internal quotations and citation omitted). In United 23. United States v. Chestman, 947 F.2d 551, 567 (2d Cir. 1991).
could give rise to liability for securities fraud ciary duty cannot be imposed unilaterally,”23 States v. Smith, 985 F. Supp. 2d 547, 597 (S.D.N.Y. 2014),
24. United States v. Falcone, 257 F.3d 226, 234 (2d Cir. 2001).
if the broker had a iduciary duty to disclose the and a iduciary relationship “exists only where
information.”15 This instruction, the Second there is explicit acceptance of a duty . or

Circuit noted, was consistent with its prior where such acceptance may be implied from
holdings that ‘“there is no general iduciary a similar relationship of trust and conidence
duty inherent in an ordinary broker/customer between the parties.”24
relationship.’”16 The court further stated:
The passage of a regulation deining all
At the same time, a iduciary obligation brokers as fiduciaries—regardless of the
is not to be lightly implied, lest it under- tasks performed or their speciic contextual
cut the basic principles of commercial circumstances—would inevitably result in
law . . To label someone a iduciary is to arguments from prosecutors and regulators
alike that the regulation automatically and
impose on that person obligations addi- exPerience the
tional, and often contrary, to the ordinary conclusively resolves the issue of duty so
allocations of responsibility that govern that any “material” omission (presumably neW LAW.coM
commercial transactions.17
supported by investor testimony) would form
a suficient basis for a conviction of securi-
In United States v. Nouri,18 the Second Cir- ties fraud. Defendants who have previously
cuit speciically addressed the appropriate found protection in existing case law that has,
jury instruction regarding a broker’s duty to this point, served as a constraint on the Perfect
to disclose in a securities fraud case. The scope of omission liability, may ind exist- Your PrActice
government in Nouri alleged inter alia that ing precedent upended by the broadened

the defendant broker had failed to disclose DOL or SEC designations and a practically
that he was bribed by a certain issuer to per se deinition of iduciary status imported Law.com introduces national and regional
sell the issuer’s stock. The trial court had even to criminal prosecutions. In light of the news by practice area, from the ALM
injected into the securities fraud instruction stark consequences of criminal liability, these sources you trust. With real time news,
the statement that ‘“a iduciary owes a duty downstream effects merit consideration by powerful insights, and expert contributors,
of honest services to his or her customer, the SEC and DOL, and monitoring by the it’s the perfect way to explore the news
including a duty to disclose all material facts defense bar, as they inalize their prospec- that matters to you.
concerning the transaction entrusted to it.’”19 tive rules.

The Second Circuit found that the reference •••
to a “duty of honest services” amounted to ••••••••••••••••••••••••••
error because the concept of honest servic- 1. See, e.g., Nick Thornton, “SEC to set a iduciary rule
es “has no application to securities fraud as part of 2016 agenda,” BeneitsPro, Nov. 25, 2015, http://
offenses defined in Title 15.”20 As for the www.beneitspro.com/2015/11/25/sec-to-set-a-iduciary- rule-as-part-of-2016-agenda; Mark Schoeff Jr., “SEC Chair-
language that the broker was a “iduciary,”
woman White says agency is ‘full-out’ working on idu-