Research On The Fiduciary Duty Of American Investment Banks

As an important innovation in financial history, investment banking business hasbeen developing its scope together with the development of stock markets and bondmarkets. Development of investment banks, especially that of the U.S. investmentbanks had played a great role in the booming of the U.S. capital markets. It provided apowerful support to the internationalization of the U.S. enterprises at themeantime. Investment banking business has certain public services functions andattracts many talents with a high income and high social status. These elites, with theirbold imagination, combined various mathematical models, technologies and skills tocreate new products and services. Over the years, Wall Street investment banks haveenjoyed the positive reputation as profitable, aggressive and innovative.Capital market is developed based on trust and investment banks are engaging inthe trust business in which they are spending others' money. Therefore, trust is crucialto the capital market as well as to investment banks. Though the trust for investmentbanks shall be in consistent with the trust as the principle of civil law, it has differentfeature which is different from the civil law activities and other commercial activities.China is undergoing an unprecedented process of reform. This brings us liquidityand competition and meanwhile, sets a higher standard to the regulatory andlegislative system. Investment banks and relevant legislation developed only for thepast two decades. Facing the globalization of economy and challenges from foreigninvestment banks, we have to deeply look at the issues relating trust for the sake ofensuring a healthy development of investment banking industry as well as protectinglawful rights and interests of the rest of capital market participants. The U.S. isreputable for its well-established capital market with its unique regulatory system oninvestment banks. The transformation of Goldman Sachs and Morgan Stanley did notprove the failure of the regulatory model. Even if we shall draw the conclusion thatsuch transformation is the end of independent investment banks, such conclusion shallnot erase the epoch-making impact the U.S. experience left. All this mean a lot whenwe study, digest and learn from the U.S. investment bank regulation and legislationpractices.Trust of investment banks has a broad meaning, ranging from the fiduciary duty,which is the topic of this paper, to the rules that the investments shall obey during its proprietary trading business, to the fiduciary duties the investment banks owe to itsinvestors, debtors, employees and other stake-holder and to the social responsibilitiesthe investment banks shall shoulder for the nations, governments and communities.This paper is focusing on the basic theory of the investment banks' fiduciary duties,business and regulations and discussing the fiduciary evolution in the U.S. Based onthe study, this paper proposes recommendations and suggestions for China to improveits legislation and regulatory system on the fiduciary duties of investment banks.In the Introduction, this article confirms the positive functions that theinvestment banks have been playing during the development of the capital markets.Meanwhile, it is pointed out that the nature of investment banking business isbrokering. Investment banks grew from very narrow business scope and naturally,investment banking business is speculative and the banks will gain extra and unfairprofits by taking advantage of the information asymmetry. Furthermore results fromsuch misconduct will be amplified through the key roles that investment banks play inthe capital markets. That is to say, investment banks enjoys the born informationasymmetry and unfairness in technology and skills which leaves the possibilities thatinvestment banks will abuse such advantageous position to impair the interests oftheir clients and consequently impair the healthy development of the capital markets.The impairing behaviors of the investment banks could be very professional andtricky, external regulation and supervision are not very effective in preventing theinvestment banks from infringing their clients' interests. Therefore, we shall seek formore effective means to encourage investment banks to focus on its business withbrokering nature. To define and construct the fiduciary duties of the investment banksis an effective way. However, what have been done in this area is superficial andtherefore, this paper can have some significance.Chapter one of this paper sets the academic base for this paper. Origination anddevelopment of fiduciary duties are discussed from the point view of economics, legaland other perspectives. This chapter also briefly talks about the definition and detailsbusiness scope of investment bank. Meanwhile, this chapter also touches the fiduciaryduties under the U.S. law.Chapter two analyses the fiduciary duties of investment banks to its retail client.The analysis is conducted from the two basic roles for investment banks: investmentadvisor and broker-dealer. Statute laws and case laws are combined; the writer drawsthe conclusion that under most circumstances the investment advisors are requested to undertake fiduciary duties. Though it was rare that the cases laws put fiduciary dutieson broker-dealers, we expect that such duties will be put on them together with thepromulgation of the Wall Street Reform and Consumer Protection Act.Chapter three talks about the fiduciary duties of the investment banks owe to itsinstitutional clients. Similar to Chapter2, this chapter chooses two typical investmentbanking businesses: mergers and acquisitions and IPO underwriting as the targets.According to the study, the writer thinks most rights and obligations betweeninvestment banks and their institutional clients are pretty much set out in relevantcontracts and agreements. Regularly, investment banks will not undertake fiduciaryduties to their institutional clients though there are few cases request them do so.Lastly, Chapter four discusses the inspiration we can draw from the study at theU.S. experience. After a systematic comparison between the U.S. and China practice,the writer makes relevant suggestions and recommendations. The writer thinks weshall also distinguish the fiduciary duties of the securities firms according to thefeatures of their clients.Based on the study at the U.S. practices, the writer deems it is necessary toamend the existing regulations after proper interpretation of the Securities Law andthe nature of fiduciary duties. Meanwhile, we shall ensure the investor' lawfulinterests be protected by differentiating the responsibilities of individual frominstitutional clients.