The Weakening of Fiduciary Law
In the 1970s and 80s, as major financial institutions grew and diversified their operations, courts and scholars recognized that fiduciary law posed profound challenges for the organizational practices of these firms. The challenges were considered existential by some: firms, ultimately, would need to slim down their operations, and perhaps even need to disaggregate some units, to avoid fiduciary liability. However, since these challenges were recognized, financial conglomerates have grown massively and focused more on taking direct stakes as principals, a practice that accentuates the risk of conflicts of interest.
How were financial conglomerates able to continue growing and diversifying despite the imposition of fiduciary constraints generally seen as robust? Did fiduciary law weaken, as some scholars contend? In The Weakening of Fiduciary Law, a contribution to the Research Handbook on Fiduciary Law, I examine these questions under both US and UK law by considering potential explanations for firms’ increasing scale and scope. These explanations include the contractual erosion of fiduciary principles, the regulators’ and courts’ legitimation of information barriers as checks on conflicts, the molding of fiduciary law by regulation, the shift toward arbitration of client disputes, and clients’ non-enforcement of fiduciary duties.
I argue that contract has been fairly successful in eroding the force of fiduciary doctrine in the United Kingdom, yet contract does not fully resolve the fiduciary dilemma there. While UK courts have become more willing to permit parties to contractually exclude, modify, or otherwise defeat fiduciary protections, important limits still exist on parties’ ability to avoid the constraints of fiduciary law. Perhaps surprisingly, in the United States fiduciary doctrine has retained its vigor in important areas. Indeed, agency law has arguably grown stricter in prohibiting parties contracting out of fiduciary duties.
Judicial or regulatory acknowledgement of information barriers also does not offer a complete explanation for the apparent weakness of fiduciary constraints on financial conglomerates. In the United States, the Securities and Exchange Commission has never formally endorsed information barriers as legally effective means of preventing fiduciary breach, although the regulator acknowledges their usefulness for other purposes, such as avoiding insider-trading liability. In the United Kingdom, information barriers may serve a similar purpose, especially when used in combination with contractual measures. However, as in the United States, doubt remains as to their legal effectiveness in satisfying fiduciary duties.
There are indications under US and UK law that courts will take account of coexisting regulatory regimes to mold the scope of fiduciary duties. The position in the United Kingdom is clearer: the Law Commission in 2014 asserted that fiduciary duties would conform to inconsistent regulatory rules, in effect allowing firms to perform functions that would otherwise be incompatible under fiduciary law.
In the chapter, I explore two other possible explanations for the continued growth and diversification of firms despite the imposition of fiduciary constraints. One is that financial conglomerates have avoided the consequence of conflicting duties and interests in litigation by requiring many of their disputes to be arbitrated. This explanation finds support in the US.
Finally, in some contexts, clients of financial conglomerates rarely sue their fiduciaries. In the case of investment banking, for example, it is most unusual for a client to sue its financial advisor. In the chapter, I briefly consider reasons for clients’ failure to pursue fiduciary remedies.
Weighing potential explanations, I tentatively conclude that the weak deterrent force of fiduciary duties in the US owes less to changes in the law than to inhibitions on its enforcement. Financial conglomerates there have successfully evaded the constraints of fiduciary law, engaging in activities that have amplified the risk of conflict even as legal doctrine supposedly ameliorates it. In the United Kingdom, by contrast, courts have been generally willing to conform fiduciary duties to inconsistent regulatory rules, thus explaining firms’ increasing scale and scope in the face of challenges posed by fiduciary law.
Andrew F. Tuch is a Professor of Law at Washington University in St Louis School of Law
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