There seems some confusion in Japanese courts concerning the notion of fiduciary duty and suitability rule so far. Both instruments have been popular gradually in court rulings. Especially, the suitability rule is used explicitly as the tool of criteria of the unfairness of business practices whereas the word of fiduciary rule is used implicitly.
Requirement
However, the requirements of these notions are still uncertain; while the suitability rule is found in several laws and these law defined the notion, several courts might ask additional requirements for applying the notion; one of the requirement is that customers rely on their economic decision to the broker-dealers, depending on the advices provided by the broker-dealers.
Ruling
The decision of Osaka Appeal Court on March 9th, 2007[1] was concerning securities transaction between defendant broker-dealer and the plaintiff customer. The court stated as follows:“The securities companies and their employees have duty not to infringe the self-determination of their customers; the obligation contains the duty not to take advantage of their customers by soliciting transaction, if their trading continue in significant period, and therefore their customers rely on the broker-dealer and tend to obey their recommendations and solicitations by their achievement of result until then; Thus, the securities companies also have the duty not to undertake the tracings unsuitable for their customers in investment policy and objectives that are indicated in explicitly or implicitly, even if the customers entrust the transactions to the securities companies; if the customers do not leave their tracings in the hands of the securities companies, the companies have to take a consideration for the customers’ self-determination; therefore they have to explain the difference concretely, clearly and understandably to customers , if they solicit the trading different from customers’ investment policy or objectives; these explanation duties still remain even if the securities company get reliance from the customers.”
Comment
Probably, the court is confused. If the customers rely upon their trading decision or their advices utterly, the securities companies dealing with the trading have fiduciary duty to the customers, although there might be existing the argument that the fiduciary duty does not exist in the securities transactions between broker-dealer and customers.On the other hand, if the trading is not suitable to the customers’ knowledge, objects, experience and financial status, the tracings have not suitable to the customers; the securities companies have to investigate the customers’ suitability to particular transactions; unless the securities companies execute their investigation and confirmation duty, they might have to compensate damages. After all, the notion of suitability rule is not always necessary of the reliance or dependence of the customers to the broker-dealers.
[1] See Law reports of securities transaction, vol28,p104.
