Disclosure and Fair Dealing by Stockbrokers

Abstract

The fundamental fiduciary principle of agency law is that of the economic loyalty owed by agent to principal. This duty of the agent (in this paper, the stockbroker) to act in the interests of the principal (its client) can be strengthened by the terms of the agency contract, and specific requirements set out in securities industry legislation and the relevant stock exchange market conduct rules. This priority to be accorded to the principal has in the United States been confirmed as the ‘Shingle Theory’ under which a securities dealer (the agent), by the fact of putting up its shingle, impliedly represents that it will deal fairly and competently with its customers (its principals). Neither the common law, securities industry legislation nor stock exchange rules permits an agent to enter any transaction where its personal interest may conflict with legal duties owed to its principal, but the agent’s duty of economic loyalty can be diluted by full disclosure and informed consent on the part of the principal. Transactions between agent and principal are therefore not void per se. They may be supported by the rules of custom or usage of the stock exchange if such can be imported into the agent/principal contract as an implied term of the contract on the basis of notoriety, certainty and acquiescence. But without full disclosure and informed consent to anything less expressly or by implication, the fundamental fiduciary principle of agency owed by a stockbroker to its client by law can never be diluted.