Several years ago I wrote up my theory of fiduciary duties in an inaptly titled paper, Are Partners Fiduciaries? My basic point was that fiduciary duties are and should be narrowly applied, as befits a strict standard that transcends general norms of commercial behavior. Since then I’ve been trying to get across the notion that, yes, fiduciary duties are what I said: strict and narrow.
This comment on the work of Professor Tamar Frankel builds on her encyclopedic discussion of the various types of duties that have been classified as “fiduciary.” I argue for a more precise definition and more limited application of fiduciary duties which recognizes that their usefulness depends on their being limited and separated from other duties that apply in other settings. The fiduciary duty is appropriately construed as one of unselfishness, as distinguished from lesser duties of care, good faith and fair dealing, and to refrain from misappropriation. The fiduciary duty of unselfishness is appropriate only for a limited class of agency relationships in which the principal delegates open-ended power to the agent, and not for those who may exercise lesser power over the property of others, including co-investors, advisors, professionals, and those in confidential relationships. More broadly applying fiduciary duties could unnecessarily constrain parties from self-protection in contractual relationships, impose excessive litigation costs, provide an unsuitable basis for contracting, and impede developing fiduciary norms of behavior. This analysis of fiduciary duties helps address current issues, including those regarding the duties of brokers, dealers, and investment and mutual fund advisors. In short, fencing fiduciary duties protects both fiduciary and non-fiduciary relationships and enables parties to contract for the precise level of protection that is appropriate to the services they are purchasing.
This work is particularly timely as Congress, the courts and the SEC seem hell-bent on stretching the fiduciary duty out of shape as part of financial reform. I’ve discussed these issues here several times — e.g., on Goldman. I’ve recently posted two other papers on misshapen federal fiduciary law — Federal Misgovernance of Mutual Funds, and my Senate testimony on Goldman.
Fencing Fiduciary Duties is my most complete discussion of fiduciary duties since my initial paper and includes applications to recent financial reforms, particularly including broker-dealer fiduciary duties now being considered by the SEC (which I discussed earlier here). So read it while it’s hot.