Investment Banks as Fiduciaries: Implications for Conflicts of Interest
Tuch, Andrew, Melbourne University Law Review
[Investment banks play an intermediary role in the financial system that is integral to its efficient operation. A core, and highly visible, aspect of their work is providing financial advisory services to institutional clients on transactions that have strategic importance, such as mergers and acquisitions. As these services are but one aspect of the broad and diverse range of financial services that investment banks typically provide, challenges such as conflicts of interest inevitably arise. Somewhat anomalously, the question of whether these firms owe fiduciary duties to their clients when providing financial advisory services has received little regulatory, judicial or scholarly, attention. This article will address that question, consider the parameters of any fiduciary obligation to avoid conflicts of interest that may arise, and discuss the implications for responses to these conflicts.]
CONTENTS I Introduction II Theoretical Basis III Investment Banks A Origins and Importance B Evolution C Range of Operations D Potential for Conflicts of Interest IV The Factual Relationship between Investment Banks and Financial Advisory Clients V The Law Relevant to Identifying Fiduciary Relationships A Nature and Identification of the Fiduciary Relationship B Limitation of Analysis C The 'Analogical Core' 1 Stockbroking Firm and Client 2 Bank and Customer 3 Corporate Adviser and Client 4 Solicitor and Client D Synthesis of Case Law E Contractual Techniques to Modify or Displace Fiduciary Obligations F Continued Relevance of the Fiduciary Question VI Is the Relationship between Investment Banks and Financial Advisory Clients Fiduciary in Nature? A Existence of Fiduciary Relationship 1 Previous Cases and Established Relationships 2 Reasonable Expectations and Policy Justification 3 Other Considerations B Content of Fiduciary Obligations C Remedial Consequences of Breach and Accessorial Liability D Summary VII Consequences of the Obligation to Avoid Conflicts A Practical Consequences 1 Difficulties with Discharging the Obligation 2 Overlap with the Duty to Protect Confidential Information 3 Termination of the Obligation to Avoid Conflicts B Regulatory Consequences 1 Regulation of Conflicts of Interest 2 Mismatch between Regulatory Requirements and Fiduciary Obligations C Industry and Institutional Consequences VIII Conclusion
This article discusses whether, in the context of financial advisory services, (1) the relationship between investment banks and their clients is fiduciary in character, such that it gives rise to the obligation to avoid conflicts of interest. The fiduciary obligation is a demanding standard of propriety in conduct that is unequalled elsewhere in the law. (2) Discharging it may require an investment bank to decline instructions from a prospective client that are likely to give rise to a conflict between the bank's duty to that client and either the bank's self-interest or its duty to another client--or else risk confronting the distinctive remedial consequences of breaching the obligation.
The question is significant for a number of reasons. First, in the absence of a fiduciary relationship and outside any express contractual undertaking, investment banks will, generally speaking, not be obliged to avoid conflicts of interest in providing these financial advisory services. Second, the imposition of fiduciary obligations could have very real practical consequences for investment banks: they may be restrained from acting on a transaction or be exposed to equity's gain-stripping remedies, and the banks' current measures for responding to conflicts of interest--involving the use of Chinese walls--may be ineffective. …