- Best Practices
- Fiduciary September
- Campaign for Investors
Investment managers owe fiduciary duties to clients, including the duty of loyalty and the duty of care. A persistent question, with no clear answer, is what precisely is required by the duties of loyalty and care. In this paper, I argue that much of investment management regulation is a response by regulators to the uncertainty inherent in the fiduciary obligation. Regulators design investment management rules to guide managers regarding the proscriptions imposed by the duty of loyalty and the diligence required by the duty of care. Regulators, acting through agency rulemaking and enforcement actions, are attempting to specify what precisely is required of investment managers in the context of exercising their fiduciary obligation to clients. Viewing investment management law as I propose here leads to an important insight about the law, and it challenges an alternative view of the fiduciary obligation. Some writers claim that detailed conduct rules effectively displace fiduciary duties. By contrast, I argue that, far from being an alternative to fiduciary duties, investment management law and regulation serves to explicate what the fiduciary obligation entails. Rules prepared by regulators governing the investment management industry are not a substitute for a fiduciary duty; they compose its essence.
In July 2010, the U.S. Securities and Exchange Commission (“SEC”) began the process of conducting a study on the effectiveness of the standards of care for broker-dealers and investment advisers.
DOL Conflict of Interest Survey
An excellent paper on the origins, meaning and importance of professions, and the status of financial planning as a profession.
Whether a financial advisor is an “investment advisor” or a “broker” (or neither) under the federal securities laws, an advisor may be an agent under the common law of agency. In such situations, for example the situation in which the financial advisor has discretionary trading authority over a client’s account, the advisor is a fiduciary who is subject to the fiduciary duties of loyalty, care, and a host of subsidiary rules.
While both investment advisers and broker-dealers provide advice about securities, only advisers are subject to a fiduciary standard to act in their clients’ best interest. Brokers, meanwhile, are subject to a less strict suitability standard. Because investors reasonably expect that brokers will in fact operate in a fiduciary capacity, the SEC should impose a fiduciary duty on brokers that give investment advice.
Despite the fact that mutual funds’ past performance is not a good predictor of future returns, mutual fund companies routinely advertise the returns of their best funds. While the SEC requires certain warnings be attached to performance advertisements, current regulation is grossly inadequate. At least, the SEC should strengthen its currently-mandated warnings. Better yet, it could reinstate its prohibition of fund performance advertising altogether.
This paper was presented as part of a conference on fiduciary law at Boston University on October 29, 2010. The conference was held in honor of Tamar Frankel and her contributions to the field. In the article, the author discusses the components of the fiduciary relationship, the management of risk in the fiduciary relationship, and the cost of enforcement.
The SEC, authorized by the Dodd-Frank Wall Street Reform and Consumer Protection Act, should impose a fiduciary duty on all brokers (and similar financial professionals) who suggest specific securities to clients. The current legal regime must be replaced with a fiduciary model in order to adequately protect the interests of investors.
An investment adviser’s fiduciary duty derives primarily from common law and federal statutory law. There are two basic duties, those of care and loyalty. Some authorities list additional duties such as a duty of obedience, a duty to act in good faith, and a duty of disclosure.
Institute Research Associate – Darren Fogarty
Darren Fogarty is an undergraduate at the University of North Carolina at Greensboro (UNCG), where he studies Economics and Sustainability Studies. He also recently graduated from a summer program studying International Relations at Georgetown University.
Darren also works at UNCG’s writing center as a consultant, where he aids students and alumni in their writing processes. He is passionate about the work he does for the Institute, and is dedicated to promoting and preserving the principles which uphold our capital markets.