Law Commons^™

The Limits Of Gatekeeper Liability, Andrew F. Tuch

Scholarship@WashULaw

Gatekeeper liability – the framework under which actors such as law firms, investment banks and accountants face liability for the wrongs committed by their corporate clients – is one of the most widely used strategies for controlling corporate wrongdoing. It nevertheless faces well-recognized flaws: gatekeepers often depend financially on the clients whose conduct they monitor; to carry out their gatekeeping function, gatekeepers rely on individuals – often their employees – whose interests diverge from their own; and major transactions typically involve multiple gatekeepers, each with specific areas of expertise and information, which produces both gaps and overlaps in the gatekeeping …

Disclaiming Loyalty: M&A Advisors And Their Engagement Letters, Andrew F. Tuch

Scholarship@WashULaw

Are investment banks fiduciaries of their merger and acquisition clients? If not, what rules, if any, constrain the conflicts of interest M&A advisors may face when advising their clients? These questions are rarely asked but central to the regulation of investment banking activities. In their article Bankers and Chancellors, 93 TEX. L. REV. 1 (2014), Professors William W. Bratton & Michael L. Wachter contend that M&A advisors effectively contract out of fiduciary duties in their client engagement letters, “emerging] in practice as arm’s-length counterparties constrained less by rules of law than by a market for reputation.” They also regard recent …

Conduct Of Business Regulation, Andrew F. Tuch

Scholarship@WashULaw

This chapter provides a survey and comparative analysis of conduct of business (COB) regulation. COB regulation governs financial intermediaries’ conduct toward their clients, that is, toward the actors – whether individuals or institutions – with whom financial intermediaries transact in providing financial products and services. Modal regulatory strategies include anti-fraud rules, and duties of care, loyalty, fair-dealing and best-execution – and variants of these duties.

The chapter describes the justifications for COB regulation, the modal regulatory strategies used and the complex frameworks within which COB regulation operates. It then generally assesses US COB regulation, focusing on the regulation of broker-dealers …

The Self-Regulation Of Investment Bankers, Andrew F. Tuch

Scholarship@WashULaw

As broker-dealers, investment bankers must register with the Financial Industry Regulatory Authority (“FINRA”) and comply with its rules, including the requirement to “observe high standards of commercial honor and just and equitable principles of trade.” As the self-regulatory body for broker-dealers, FINRA functions as the equivalent of the self-regulatory bodies governing other professionals, such as lawyers and accountants. Unlike the self-regulation of these professionals, however, the self-regulation of investment bankers has thus far attracted scant scholarly attention.

This Article evaluates the effectiveness of this self-regulatory system in deterring investment bankers’ misconduct. Based on a hand-collected data set of every disciplinary …

Conflicted Gatekeepers: The Volcker Rule And Goldman Sachs, Andrew F. Tuch

Scholarship@WashULaw

In many areas of regulation, rules require one person to act with loyalty to another person, or at least constrain one person’s pursuit of self-interest by restricting the extent to which that person may act in conflict with the interests of another person. These rules are typically justified on the basis of reducing (economic) agency costs. However, recently-adopted provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act, which include the so-called Volcker Rule, impose such conflict of interest rules on underwriters selling securities to investors, including sophisticated investors - a context in which agency costs do not arise. …

The Paradox Of Financial Services Regulation: Preserving Client Expectations Of Loyalty In An Industry Rife With Conflicts Of Interest, Andrew F. Tuch

Scholarship@WashULaw

This paper considers the implications of Australian Securities and Investments Commission v. Citigroup [2007] FCA 963, a landmark decision of the Federal Court of Australia. The case highlights an apparent paradox in financial services regulation: at the same time as allowing, or even fostering, the development of financial services conglomerates, regulation in multiple jurisdictions preserves potentially incompatible general law obligations that arise from client expectations of loyalty. The paradox is most evident in the context of the modern investment bank.

The paper discusses the dynamic nature of investment banks, their organizational structure, the types of conflicts they typically face and …

Securities Underwriters In Public Capital Markets: The Existence, Parameters And Consequences Of The Fiduciary Obligation To Avoid Conflicts, Andrew F. Tuch

Scholarship@WashULaw

This article considers whether an investment bank, when acting as underwriter of a public securities offering, owes the issuing company the fiduciary obligation to avoid conflicts of interest. The question has not arisen for final judicial determination and has been overlooked by scholars and regulators. The highly lucrative and visible nature of underwriting work creates powerful incentives for investment banks to accept instructions in the face of this duty. At the same time, the web of loyalties that these institutions owe, by virtue of their broad and diverse range of products and services, creates intractable practical difficulties for compliance with …

Obligations Of Financial Advisers In Change-Of-Control Transactions: Fiduciary And Other Questions, Andrew F. Tuch

Scholarship@WashULaw

Outside the United States, financial regulators have recently focused their attention on whether a financial adviser to a party in a change-of-control transaction (such as a takeover) is obliged to avoid being in positions of conflict with the interests of that party. Because financial advisers in these transactions are typically investment banks, the integrated structure of which may make conflicts of interest inevitable, such an obligation is likely to pose difficult challenges for the investment banking industry. The question is complicated by two apparently inconsistent standards being applied: the fiduciary obligation to avoid conflicts and the statutory obligation in many …

Investment Banking: Immediate Challenges And Future Directions, Andrew F. Tuch

Scholarship@WashULaw

This article discusses the organizational nature of the integrated (or full-service) investment bank, the incidence of conflicts of interest in the financial services industry and the role and effectiveness of information barriers such as Chinese walls as an arrangement for managing conflicts. The paper also describes the growing importance to investment banks of proprietary trading and principal investing, the conflicts of interest that they can produce, and the recent responses of financial regulators to these developments.

The paper was presented at a discussion forum involving senior investment bankers, lawyers and scholars in August 2006, organized against the backdrop of litigation …

Contemporary Challenges In Takeovers: Avoiding Conflicts, Preserving Confidences And Taming The Commercial Imperative, Andrew F. Tuch

Scholarship@WashULaw

This article discusses contemporary legal, commercial, ethical and other issues that arise in the context of corporate takeover transactions. Due to their complexity and the numerous parties - including deal advisers - they involve, the loyalties of company directors and advisers are frequently tangled, creating legion opportunities for conflicted interests and breached confidences. At the same time, the high status of advising on takeovers and the financial lure they provide produce powerful incentives that inevitably inform the application of legal principles to these issues. The article adopts a hypothetical case study approach to focus on the challenges confronting these parties …

Investment Banks As Fiduciaries: Implications For Conflicts Of Interest, Andrew F. Tuch

Scholarship@WashULaw

Investment banks play an intermediary role in the financial system that is integral to its efficient operation. A core, and highly visible, part of their work involves 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 …