Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, May 5, 2010

Criminalizing Breaches of Fiduciary Duty?

In the aftermath of the SEC's complaint against Goldman Sachs and the recent Congressional hearing, there is talk of imposing a fiduciary standard on broker-dealers, not only in their dealings with retail customers, but in their dealings with institutional investors.  In addition, a proposal is floating to criminalize breaches of fiduciary duty.  Senator Arlen Specter is out in front on these issues.

As I have written before, retail customers who rely on their broker-dealers for investment advice are entitled to expect that their brokers will act as professionals and live up to professional standards of care and competence.  They are also entitled to upfront clear and specific disclosures about conflicts of interest.  These are professional standards, and referring to fiduciary duty concepts confuses the issue; "fiduciary duty" is simply too indeterminate to provide guidance.  In contrast, institutional investors are entitled to expect that their brokers do not lie to them, but unless the sophisticated customer has engaged the broker as an investment adviser (in which case there is already a fiduciary duty), he is not entitled to assume that the broker is putting his interests first (whatever that phrase means in the context of a profit-seeking relationship).

As to criminalizing a breach of "fiduciary duty," this is truly a dreadful idea.  Criminal statutes must, under the constitution, provide fair notice of the wrongdoing that is being criminalized.  The law can and does criminalize certain forms of  misconduct that would be categorized as breach of fiduciary duty -- lying and embezzlement come to mind.  But the courts have had enough trouble determining what is securities fraud under section 10(b) and Rule 10b-5; "fiduciary duty" is simply too amorphous a concept to use in a criminal statute.

I have thought for some time that "fiduciary duty" is one of those fancy phrases we lawyers like to use because it sounds so impressive, but it really encourages lazy thinking.  Let's think about what obligations investment advice providers should be held to and recognize the distinctions between different kinds of investors.  When broker-dealers engage in criminal conduct, prosecute them under the securities fraud, mail fraud, wire fraud and other criminal statutes.  But let's not add a lot of rhetoric to the financial reform legislation and persuade ourselves that anything has been accomplished.

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