Exempt Market Update | Fall 2013 | www.emdacanada.com 104
enforcement action is warranted. The standard
requires dealers to deal fairly, honestly and in
good faith with clients.
In addition, under the common law, you may
be subject to a more demanding standard known
as the fiduciary standard. This is the standard of
conduct which an unhappy client will probably
invoke when taking you to court. A fiduciary
standard applies when one person is under a duty
to act in another person’s best interests.
In a normal commercial transaction, both
parties are deemed to be equal and each party is
entitled to advance its own interest. For example,
if I am selling my house and the roof is obviously
leaking, I have no obligation to direct the attention
of a potential buyer to the gaping hole in the roof.
It is up to the buyer to take notice of the hole and
decide if this should influence his decision to buy
or the price that he should pay.
Contrast this with a fiduciary relationship.
In a fiduciary relationship, one party is under an
obligation to act in another person’s best interests,
which means placing the interests of the other
party ahead of one’s own interests.
The Fiduciary Duty of Dealers under the
The courts have found on a number of
occasions that persons giving investment advice
owe a fiduciary duty to their clients. In one case,
the Supreme Court of Canada said:
“The courts have consistently shown a
willingness to enforce a fiduciary duty
in the investment advice aspect of many
kinds of financial service relationships.”
The courts have been particularly inclined to
find a fiduciary duty in situations where the
client is vulnerable.
A Statutory Fiduciary Duty
The securities commissions are currently
carrying out a consultation on the appropriateness
of enhancing the statutory standard of conduct
for dealers and advisers. The question is whether
the statutory duty to deal fairly, honestly and in
good faith with clients should be replaced with a
statutory fiduciary duty.
If a statutory fiduciary duty is implemented,
The fiduciary standard would require you to
go one step further. You would have to ensure not
only that the recommended investment is suitable
but also that it is in the best interests of the client.
Suppose that there is another product B which is
identical in all respects to product A except that
the client is required to pay a lower commission.
Clearly, product A cannot be in the client’s best
interests, given that he or she would benefit from
a lower commission if buying product B, which is
otherwise identical with product A. How far do you
need to go to locate product B, assuming it does
exist in the first place? Quite obviously, you cannot
be knowledgeable about all the products in the
marketplace but where do you draw the line? Is it
even possible to draw a line objectively? These are
difficult issues which would need to be addressed.
So, a statutory fiduciary duty will affect you
because it may require you to enhance your
business practices. It will also make it easier for
clients to sue you. Clients will no longer need
to prove the existence of a fiduciary duty, for
example, on account of their vulnerability. It will
be sufficient to point to the relevant section of the
Ethical Conduct and Conflicts of Interest
Let us now look at situations involving conflicts
of interest. These situations present possibly the most
difficult issues for ethical conduct.
A conflict of interest exists when your interests
pull in one direction and those of your client in
another. I have provided a number of examples,
all of which are relevant in an EMD context:
• lending to or borrowing from clients
• selling complex or opaque products
• selling shares or debt instruments issued by
a company managed by the same persons as
the EMD, and
• situations where a representative has business
activities outside of the dealer