The Uncertain Fiduciary Duty of Investment Banks (2022)

Courts have reached opposite conclusions on whether investment banks owe a fiduciary duty to their clients in addition to any duties set forth in a contract between an investment bank and its client. In an opinion issued in August of this year, the U.S. Court of Appeals for the Seventh Circuit determined that investment banks’ duties toward their clients under Illinois law derive solely from the parties’ contracts.1 This article summarizes the differing court decisions and provides some practical advice regarding how investment banks can establish evidence that they do not owe a fiduciary duty to their clients.

Seventh Circuit Decision

(Video) Fiduciary duties of investment intermediaries - what does the law say?

In Joyce v. Morgan Stanley & Co., the Seventh Circuit held that an investment bank, in the course of advising an acquired company in a stock-for-stock merger, did not have a fiduciary duty to the acquired company’s shareholders to recommend that they enter into hedging transactions for their newly acquired shares.2 Under Illinois law, in order for the investment bank to have owed such a fiduciary duty to the shareholders, (1) the shareholders would have trusted the investment bank, as the more experienced party in merger transactions, to protect their interests and (2) the investment bank would have affirmatively demonstrated that it had accepted such trust of the shareholders.3 The fiduciary duty, if it existed, also would have gone beyond the terms of the investment bank’s contract with the acquired company.4 The Seventh Circuit determined that the relevant documents made clear that the investment bank never owed any duties at all to the acquired company’s shareholders but only to the acquired company.5 Furthermore, the Seventh Circuit concluded that the investment bank could not have owed such a fiduciary duty to the shareholders because “investment banks’ responsibilities are set by contract.”6

Differing Decisions

In determining whether investment banks might have a fiduciary duty toward their clients outside of the parties’ contracts, the courts have focused, as the Seventh Circuit did in Joyce, on the issue of whether the superior knowledge of the investment banks caused their clients to trust or rely on the investment banks to such an extent to create a fiduciary duty even though such a duty was not established expressly in the governing contract. Some courts have agreed with Joyce that, under normal circumstances, investment banks’ duties to their clients are determined solely by their agreements. For example, in Cafe La France, Inc. v. Schneider Secs., Inc., the U.S. District Court for the District of Rhode Island held that under Rhode Island law, the commercial relationship between an investment bank and its client did not give rise to the level of trust and confidence that would establish a fiduciary duty.7 The parties’ letter of intent, therefore, defined the parties’ relationship.8

Other courts have taken a differing view and concluded that a jury could find that an investment bank owes an extra-contractual fiduciary duty to its clients.9 In Bear Stearns & Co. v. Daisy Sys. Corp., an investment bank advised a corporate client on the acquisition of another entity and promised to assist that client in raising financing for the acquisition.10 The U.S. Court of Appeals for the Ninth Circuit held that under California law, a jury could conclude that the investment bank owed a fiduciary duty to the client beyond the terms of their contract if the jury determined that the client placed an inordinate amount of trust in the investment bank’s advice due to the investment bank’s superior knowledge of mergers.11

(Video) 17. Investment Banking and Secondary Markets

In 2005, the highest court in New York surprised the investment banking community by holding in EBC I, Inc. v. Goldman, Sachs & Co. (the case is commonly referred to as “eToys,” which was the former name of EBC I, Inc.) that, under New York law, investment banks, in their roles as underwriters, may have fiduciary duties to issuers of securities.12 The case was of particular importance because most contracts, including underwriting agreements, entered into by U.S. investment banks are governed by New York law. In EBC I, the Court of Appeals of New York decided that issuers may rely on underwriters’ superior knowledge of security offerings to such an extent that juries may determine that underwriters owe a fiduciary duty to the issuers.13 The court limited the potential underwriters’ fiduciary duty to their role as advisor.14 As a practical result of this decision, many underwriters now include provisions in underwriting agreements providing expressly that they do not owe the applicable issuers of securities any fiduciary duty, that the parties entered their agreement through arms-length transactions, that the issuers understand and accept the risks of the transactions, and that the issuers waive any claims against the underwriters based on owing them a fiduciary duty.

Practical Advice: Make It Clear

As the above cases demonstrate, courts have reached conflicting conclusions on whether juries could find that investment banks owe an extra-contractual fiduciary duty to their clients. Any court’s decision that such a fiduciary duty could exist will rely on facts that demonstrate that the investment bank’s client placed its trust in the investment bank’s advice to an extent beyond the terms of their contract. Investment banks should, therefore, make clear in their agreements with their clients that their relationship is solely contractual in nature and that the relationship does not give rise to any fiduciary duties. For example, investment banks could use the following language, which is now standard in many underwriting agreements (edited as necessary for the relevant agreement):

The company acknowledges and agrees that:

(Video) Lecture "Liability and responsibility"

(a) the investment bank’s responsibility to the company is solely contractual in nature, the investment bank has been retained solely to act as underwriter in connection with the offering of the securities contemplated herein, and no fiduciary, advisory, or agency relationship between the company and the investment bank has been created in respect of any of the transactions contemplated by this agreement, regardless of whether the investment bank or its representatives have advised or are advising the company on other matters;

(b) the price of the securities set forth in this agreement was established following armslength negotiations and the company is capable of evaluating and understanding, and understands and accepts, the terms, risks, and conditions of the transactions contemplated by this agreement;

(c) it has been advised that the investment bank, its representatives, and their respective affiliates are engaged in a broad range of transactions that may involve interests that differ from those of the company and that the investment bank has no obligation to disclose such interests and transactions to the company by virtue of any fiduciary, advisory, or agency relationship; and

(d) it waives, to the fullest extent permitted by law, any claims it may have against the investment bank for breach of fiduciary duty and agrees that the investment bank shall have no liability (whether direct or indirect) to the company in respect of such a fiduciary duty claim or to any person asserting a fiduciary duty claim on behalf of or in right of the company, including stockholders, employees, or creditors of the company.

(Video) Insider trading and Corporate Takeovers

If a lawsuit develops with a client and the court hearing the case does not adhere to the reasoning of Joyce and Cafe La France, such language should serve to supply evidence that the parties desired that their contracts alone should define the scope of their duties to each other.

Footnotes

1) 1 Joyce v. Morgan Stanley & Co., 2008 U.S. App. LEXIS 17588, at *11 (7th Cir. 2008)
2) Id. at *11-12.
3) Id. at *9.
4) Id. at *8.
5) Id. at *11.
6) Id.
7) Cafe La France, Inc. v. Schneider Secs., Inc., 281 F. Supp. 2d 261, 272-74 (D.R.I. 2003).
8) Id. at 273.
9) In a case tried without a jury, the judge will determine the facts of the case. In such a situation, the judge then would decide whether an investment bank owed a fiduciary duty to its client arising from the client’s trust in the investment bank.
10) Bear Stearns & Co. v. Daisy Sys. Corp., 97 F.3d 1171, 1172-75 (9th Cir. 1996).
11) Id. at 1177-79.
12) EBC I, Inc. v. Goldman, Sachs & Co., 832 N.E.2d 26, 31-33 (N.Y. 2005).
13) Id. at 32.
14) Id.

View PDF version of this OnPoint.

(Video) Consumer Protection in an Age of Uncertainty

FAQs

What are the three core responsibilities of an investment banker? ›

structure and negotiate the detailed terms of a deal, often in liaison with other professionals. liaise with project teams in a deal to obtain relevant specialist information and market intelligence. thoroughly research market conditions and developments. identify new business opportunities.

What is breach of fiduciary duty? ›

Breach of Fiduciary Duties

A party affected by a person who is not acting in the best interests of the organisation they work for or represent may be in breach of their statutory and common law fiduciary duties.

What is the most important fiduciary duty? ›

Fiduciaries should act in good faith in the interests of their beneficiaries, should impartially balance the conflicting interests of different beneficiaries, should avoid conflicts of interest and should not act for the benefit of themselves or a third party.

What does fiduciary duty stand for? ›

Fiduciary duties are owed when someone “has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence”.

What are the 3 most important qualities of an investment banker? ›

  • Intellect. Investment bankers facilitate transactions between two firms (like mergers or acquisitions) or between the firm and the market (think IPOs), or within a firm (helping to establish business plans). ...
  • Discipline. ...
  • Creativity. ...
  • Open-mindedness. ...
  • Relationship Building Skills.

What is the most important function of an investment bank? ›

The primary goal of an investment bank is to advise businesses and governments on how to meet their financial challenges. Investment banks help their clients with financing, research, trading and sales, wealth management, asset management, IPOs, mergers, securitized products, hedging, and more.

What are the 5 fiduciary duties? ›

Specifically, fiduciary duties may include the duties of care, confidentiality, loyalty, obedience, and accounting.

What types of actions constitute a violation of fiduciary duties? ›

Breach of Fiduciary Duty Examples
  • Sharing an employer's trade secrets;
  • Failing to follow the employer's directions;
  • Improperly using or failing to account for employer funds;
  • Acting on behalf of a competitor;
  • Failing to exercise care in carrying out duties; and.
  • Profiting at the employer's expense.
10 Jul 2020

What damages are available for breach of fiduciary duty? ›

Remedies available for claims for breach of fiduciary duty provide include:
  • lost profits, as the natural and probable consequence of the breach;
  • out-of-pocket losses, as the difference between the value paid and the value received;
30 Apr 2018

What are the two main types of fiduciary duties? ›

Fiduciary duties fall into two broad categories: the duty of loyalty and the duty of care.

What are the three components of fiduciary duty? ›

Each state has its own laws about exactly what kinds of fiduciary duty are required, but these are the three general areas of duty that are included:
  • Duty of care. ...
  • Duty of loyalty. ...
  • Duty of good faith.
2 May 2022

What are the three fiduciary duties? ›

Three Key Fiduciary Duties
  • Duty of Care. Duty of care describes the level of competence and business judgment expected of a board member. ...
  • Duty of Loyalty. Duty of loyalty revolves primarily around board members' financial self-interest and the potential conflict this can create. ...
  • Duty of Obedience.
8 Mar 2022

Why fiduciary duty is important? ›

The fiduciary duty is the highest standard of care. It's acting in the best interest of the client or beneficiary in all situations, even if those decisions are contrary to your own interests. For financial advisors, this may mean giving advice that results in no compensation.

Does a bank have a fiduciary duty to its customers? ›

As a fiduciary, a bank's primary duty is the management and care of property for others. The Board of Directors and senior management must be able to identify, measure, monitor and control the risks inherent in fiduciary activities, and respond appropriately to changing business conditions.

Who is bound by fiduciary duty? ›

Fiduciary duty is the requirement that certain professionals, like lawyers or financial advisors, work in the best financial interest of their clients. U.S. law dictates that members of certain professions who are doing business for certain clients be bound by fiduciary duty.

What personality type are investment bankers? ›

Many investment bankers are Type A personalities, which means they are ambitious and driven. Young bankers are inducted into a stressful lifestyle from the get-go. They are encouraged to work long hours with very little free time to fit in socializing or relaxation.

What are the big 4 investment banks? ›

Largest full-service investment banks
  • JPMorgan Chase.
  • Goldman Sachs.
  • BofA Securities.
  • Morgan Stanley.
  • Citigroup.
  • UBS.
  • Credit Suisse.
  • Deutsche Bank.

What are the 4 important investment considerations? ›

Let's look at 4 key considerations when you evaluate a particular investment opportunity:
  • Risk. Unfortunately, there is no such thing as a “sure thing”. ...
  • Investment horizon and liquidity. ...
  • The composition of your expected return. ...
  • Your partners and advisers.
16 Jul 2018

What are the three major investment banks activities? ›

investment banking (mergers and acquisitions, advisory services, and securities underwriting), asset management (sponsored investment funds), and. trading and principal investments (broker-dealer activities, including proprietary trading ("dealer" transactions) and brokerage trading ("broker" transactions)).

What are the 3 major components of every investment? ›

Historically, the three main asset classes are considered to be equities (stocks), debt (bonds), and money market instruments. Today, many investors may consider real estate, commodities, futures, derivatives, or even cryptocurrencies to be separate asset classes.

What are the 3 major functions a bank has? ›

Major Functions of Banks in India

Lending loans and advances. Transfer of funds. Issue of notes/ drafts. Credit deposits.

What are the limits of fiduciary duty? ›

It means that the fiduciary must act in the best interests of the beneficiary at all times and can never take any action which harms the beneficiary intentionally and must avoid negligently harming the interests of the beneficiary as well.

What are some examples of fiduciary duties? ›

Some examples of fiduciary duties include duties of undivided loyalty, due diligence and reasonable care, full disclosure of any conflicts of interest, and confidentiality. While a fiduciary duty may be violated accidentally, it is still a breach of ethics.

What happens when fiduciary duties are not fulfilled? ›

What is the penalty for breach of fiduciary duty? The most frequent penalties for breach of fiduciary duty include suspension or removal as trustee or executor and the payment of money damages, attorney fees, and court costs.

How hard is it to prove breach of fiduciary duty? ›

A breach of fiduciary duty happens if a fiduciary behaves in a manner that contradicts their duty, and there are serious legal implications. It is also easier to prove a breach of fiduciary duty as there is no need to prove fraudulent or criminal intent. A breach of fiduciary duty is serious and complex.

How do you establish breach of fiduciary duty? ›

Jurisdiction
  1. Fiduciary Relationship Must Exist.
  2. Defendant's Conduct Must Violate a Duty Owed to Plaintiff.
  3. Defendant's Breach Must Proximately or Directly Cause Damages to Plaintiff.

What fiduciary duties Cannot be waived? ›

Similarly, duties of loyalty, good faith, and disclosure in a general partnership may not be waived. Fiduciary duties imposed by statute on trustees cannot be waived.

What are the four 4 modes of breach of breach of obligation? ›

Generally speaking, there are four types of contract breaches: anticipatory, actual, minor and material.

What are the 4 types of damages available for breach of contract? ›

Today, we're looking into four types of damages you may be able to receive in a breach of contract case.
  • Compensatory damages. ...
  • Punitive damages. ...
  • Nominal damages. ...
  • Liquidated damages.
20 Sept 2022

What are the six damages that may be awarded? ›

In Philippine laws, there are six kinds of damages, namely:
  • Actual or compensatory Damages.
  • Moral Damages.
  • Exemplary or corrective Damages.
  • Liquidated Damages.
  • Nominal Damages.
  • Temperate or moderate Damages.

Do all financial advisors have a fiduciary duty? ›

All investment advisors registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator must act as fiduciaries. On the other hand, broker-dealers, stockbrokers and insurance agents are only required to fulfill a suitability obligation.

Is breach of fiduciary duty a crime? ›

If a director of a company breaches his or her fiduciary duties, they could face civil action and, in some cases, criminal sanction. Breach of directors' duties and resulting legal action can have significant consequences for the director, company, shareholders and creditors.

Is fiduciary duty common law or equity? ›

A fiduciary relationship arises under common law where A and B agree that A will act on behalf of or for the benefit of B in circumstances which give rise to a relationship of trust and confidence.

What is the difference between fiduciary duties and fidelity duties? ›

Another important difference is that while a fidelity bond is designed to protect against fraud, fiduciary liability insurance specifically carves out fraudulent acts and does not provide coverage for them. Fidelity bond coverage is mandatory, but fiduciary liability insurance is completely optional.

Are fiduciary duties legal? ›

A fiduciary duty is a legal obligation for one party to act in the best interests of another (such as a company). In a fiduciary relationship, the person who is legally and ethically bound by this duty is known as the fiduciary.

What are the fiduciary standards? ›

The first is the fiduciary standard. Established as part of the Investment Advisors Act of 1940, the fiduciary standard states that an advisor must put their clients' interest above their own. They must follow the very best course of action, regardless of how it affects them personally or their income.

What is fiduciary duty and why is it relevant to ESG investing? ›

Fiduciary duties exist to ensure that those who manage money on behalf of others act in the interests of beneficiaries, rather than serving their own interests.

What's another word for fiduciary? ›

synonyms for fiduciary
  • curator.
  • depositary.
  • guardian.
  • trustee.

What is another name for fiduciary duty? ›

“The duty arose from the fiduciary relationship of guardian and ward, as established by statute.”
...
What is another word for fiduciary?
trusteedepositary
stewarddepository
agentcustodian
keeperadministrator
executrixexecutor
4 more rows

What is fiduciary in banking? ›

Definition. Fiduciary accounts are deposit accounts established by a person or entity for the benefit of one or more other parties, also known as principals. The deposit account can be established for the benefit of a single owner or a commingled account may be established for the benefit of multiple owners.

Does a bank have a duty of care? ›

Whilst a bank has a duty to implement instructions promptly to avoid causing financial loss to a customer, the bank cannot execute an order or “shut its eyes” to obvious dishonesty.

Can you sue a bank for stress? ›

Usually you can sue only for monetary damages, but in some cases you can be awarded damages for emotional distress and inconvenience as well. The cost to file a suit varies by jurisdiction.

What are the essential elements of a breach of fiduciary duty claim? ›

The four elements are:
  • The defendant was acting as a fiduciary of the plaintiff;
  • The defendant breached a fiduciary duty to the plaintiff;
  • The plaintiff suffered damages as a result of the breach; and.
  • The defendant's breach of fiduciary duty caused the plaintiff's damages.

What is a material breach of fiduciary duty? ›

Material breach of any fiduciary duty. (c) ―represents a material breach of any fiduciary duty owed by such person to. the entity or any partner, member, shareholder, creditor or investor of the. entity under any law applying to the entity or the conduct or management.

What happens if a director breached fiduciary duties? ›

If a director breaches their fiduciary duties towards their company, the company can take legal action against the director. This action is usually instigated by the company seeking restitution for financial loss or damage.

What are the 3 basic investment considerations? ›

The options for investing your savings are continually increasing, but every one of them can still be categorized according to three fundamental characteristics: safety, income, and growth.

What is the responsibility of investment banker? ›

What Is an Investment Banker? Investment bankers are investment professionals who combine financial services industry expertise, analytical prowess, and effective persuasive communication skills to support institutional clients in activities like capital raising and mergers and acquisitions.

What are the 3 main objectives of every investment? ›

Safety, growth, and income are the primary objectives of an investor. Liquidity and Tax Savings are the secondary objectives of an investor. An investor must understand their goal before making an investment decision. Factors affecting investments include your goals, age, lifestyle, risk appetite, and returns expected.

What are the 4 principles of investment? ›

Principles for investing success
  • Goals. Create clear, appropriate investment goals. An appropriate investment goal should be measurable and attainable. ...
  • Balance. Develop a suitable asset allocation using broadly diversified funds. ...
  • Cost. Minimize cost. ...
  • Discipline. Maintain perspective and long-term discipline.

What are the 4 investment strategies? ›

TYPES OF INVESTMENT STRATEGY
  • Growth investing. Growth investing focuses on selecting companies which are expected to grow at an above-average rate in the long term, even if the share price appears high. ...
  • Value investing. ...
  • Quality investing. ...
  • Index investing. ...
  • Buy and hold investing.

What are 4 responsibilities tasks of an investment fund manager? ›

A fund manager is responsible for implementing a fund's investment strategy and managing its trading activities. They oversee mutual funds or pensions, manage analysts, conduct research, and make important investment decisions.

Why are investment bankers paid so much? ›

For a hefty fee, they bring industry, financial, and transactional expertise. They are basically gatekeepers — a company that wants to issue stock, issue debt, buy other companies, or sell itself has to engage with an investment bank (though some tech firms are working on ways around this).

What are the 8 determinants of investment? ›

This section examines eight additional determinants of investment demand: expectations, the level of economic activity, the stock of capital, capacity utilization, the cost of capital goods, other factor costs, technological change, and public policy.

What are the five basic investment considerations? ›

Five basic investment concepts that you should know
  • Risk and return. Return and risk always go together. ...
  • Risk diversification. Any investment involves risk. ...
  • Dollar-cost averaging. This is a long-term strategy. ...
  • Compound Interest. ...
  • Inflation.

What are the major four 4 assets of an investors portfolio? ›

The main types of asset classes are cash, equities, fixed income and alternative investments. Diversifying your portfolio by investing in different types of assets can help protect you from volatility.

What is the most important in investment decisions? ›

Asset allocation is the single most important investing decision you will make.

What two key concepts are involved in investment decisions? ›

Investment decisions are made to reap maximum returns by allocating the right financial resource to the right opportunity. These decisions are taken considering two important financial management parameters—risks and returns.

Videos

1. Complicity & Accountability in the Great Recession
(Library of Congress)
2. The Psychology of the Financial Crisis
(YaleUniversity)
3. SEC’s new standard of conduct rules – important considerations for bank-affiliated BD's and IA's
(Eversheds Sutherland - Legal Insights)
4. Why Bond Yields Are a Key Economic Barometer | WSJ
(Wall Street Journal)
5. 5 Key Considerations in Agriculture’s Financially Uncertain Times
(Dorsey & Whitney LLP)
6. Energy Transition Implications on the Fiduciary Responsibilities of Corporate Directors in the PH
(Institute for Climate and Sustainable Cities)

Top Articles

You might also like

Latest Posts

Article information

Author: Rev. Porsche Oberbrunner

Last Updated: 01/06/2023

Views: 6173

Rating: 4.2 / 5 (53 voted)

Reviews: 84% of readers found this page helpful

Author information

Name: Rev. Porsche Oberbrunner

Birthday: 1994-06-25

Address: Suite 153 582 Lubowitz Walks, Port Alfredoborough, IN 72879-2838

Phone: +128413562823324

Job: IT Strategist

Hobby: Video gaming, Basketball, Web surfing, Book restoration, Jogging, Shooting, Fishing

Introduction: My name is Rev. Porsche Oberbrunner, I am a zany, graceful, talented, witty, determined, shiny, enchanting person who loves writing and wants to share my knowledge and understanding with you.