Fiduciary


A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for example, a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to another party, who, for example, has entrusted funds to the fiduciary for safekeeping or investment. Likewise, financial advisers, financial planners, and asset managers, including managers of pension plans, endowments, and other tax-exempt assets, are considered fiduciaries under applicable statutes and laws. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter. In such a relation, good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.
Fiduciary duties in a financial sense exist to ensure that those who manage other people's money act in their beneficiaries' interests, rather than serving their own interests.
A fiduciary duty is the highest standard of care in equity or law. A fiduciary is expected to be extremely loyal to the person to whom he owes the duty such that there must be no conflict of duty between fiduciary and principal, and the fiduciary must not profit from their position as a fiduciary, unless the principal consents. The nature of fiduciary obligations differs among jurisdictions. In Australia, only proscriptive or negative fiduciary obligations are recognised, whereas in Canada, fiduciaries can come under both proscriptive and prescriptive fiduciary obligations.
In English common law, the fiduciary relation is an important concept within a part of the legal system known as equity. In the United Kingdom, the Judicature Acts merged the courts of equity with the courts of common law, and as a result the concept of fiduciary duty also became applicable in common law courts.
When a fiduciary duty is imposed, equity requires a different, stricter standard of behavior than the comparable tortious duty of care in common law. The fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, not to be in a situation where their fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from their fiduciary position without knowledge and consent. A fiduciary ideally would not have a conflict of interest. It has been said that fiduciaries must conduct themselves "at a level higher than that trodden by the crowd" and that "he distinguishing or overriding duty of a fiduciary is the obligation of undivided loyalty".

In different jurisdictions

Different jurisdictions regard fiduciary duties in different lights. Canadian law, for example, has developed a more expansive view of fiduciary obligation than American law, while Australian law and British law have developed more conservative approaches than either the United States or Canada.
In Australia, it has been found that there is no comprehensive list of criteria by which to establish a fiduciary relationship. Courts have so far refused to define the concept of a fiduciary, instead preferring to develop the law on a case-by-case basis and by way of analogy. Fiduciary relationships are of different types and carry different obligations so that a test appropriate to determine whether a fiduciary relationship exists for one purpose might be inappropriate for another:
In 2014 the Law Commission reviewed the fiduciary duties of investment intermediaries, looking particularly at the duties on pension trustees. They commented that the term "fiduciary" is used in many different ways.
The question of who is a fiduciary is a "notoriously intractable" question and this was the first of many questions. In SEC v. Chenery Corporation, Frankfurter J said,

The law expressed here follows the general body of elementary fiduciary law found in most common law jurisdictions; for in-depth analysis of particular jurisdictional idiosyncrasies please consult primary authorities within the relevant jurisdiction.
This is especially true in the area of Labor and Employment law. In Canada a fiduciary has obligations to the employer even after the employment relationship is terminated, whereas in the United States the employment and fiduciary relationships terminate together.

Fiduciary duties under Delaware corporate law

The corporate law of Delaware is the most influential in the United States, as more than 50% of publicly traded companies in the United States, including 64% of the Fortune 500, have chosen to incorporate in that state. Under Delaware law, officers, directors and other control persons of corporations and other entities owe three primary fiduciary duties, the duty of care, the duty of loyalty and the duty of good faith.
The duty of care requires control persons to act on an informed basis after due consideration of all information. The duty includes a requirement that such persons reasonably inform themselves of alternatives. In doing so, they may rely on employees and other advisers so long as they do so with a critical eye and do not unquestionably accept the information and conclusions provided to them. Under normal circumstances, their actions are accorded the protection of the business judgment rule, which presumes that control persons acted properly, provided that they act on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.
The duty of loyalty requires control persons to look to the interests of the company and its other owners and not to their personal interests. In general, they cannot use their positions of trust, confidence and inside knowledge to further their own private interests or approve an action that will provide them with a personal benefit that does not primarily benefit the company or its other owners.
The duty of good faith requires control persons to exercise care and prudence in making business decisions—that is, the care that a reasonably prudent person in a similar position would use under similar circumstances. Control persons fail to act in good faith, even if their actions are not illegal, when they take actions for improper purposes or, in certain circumstances, when their actions have grossly inequitable results. The duty to act in good faith is an obligation not only to make decisions free from self-interest, but also free of any interest that diverts the control persons from acting in the best interest of the company. The duty to act in good faith may be measured by an individual's particular knowledge and expertise. The higher the level of expertise, the more accountable that person will be.
At one time, courts seemed to view the duty of good faith as an independent obligation. However, more recently, courts have treated the duty of good faith as a component of the duty of loyalty.

Fiduciary duty in Canadian corporate law

In Canada, directors of corporations owe a fiduciary duty. A debate exists as to the nature and extent of this duty following a controversial landmark judgment from the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders. Scholarly literature has defined this as a "tripartite fiduciary duty", composed of an overarching duty to the corporation, which contains two component duties— a duty to protect shareholder interests from harm, and a procedural duty of "fair treatment" for relevant stakeholder interests. This tripartite structure encapsulates the duty of directors to act in the "best interests of the corporation, viewed as a good corporate citizen".

Relationships

The most common circumstance where a fiduciary duty will arise is between a trustee, whether real or juristic, and a beneficiary. The trustee to whom property is legally committed is the legal—i.e., common law—owner of all such property. The beneficiary, at law, has no legal title to the trust; however, the trustee is bound by equity to suppress their own interests and administer the property only for the benefit of the beneficiary. In this way, the beneficiary obtains the use of property without being its technical owner.
Others, such as corporate directors, may be held to a fiduciary duty similar in some respects to that of a trustee. This happens when, for example, the directors of a bank are trustees for the depositors, the directors of a corporation are trustees for the stockholders or a guardian is trustee of their ward's property. A person in a sensitive position sometimes protects themselves from possible conflict of interest charges by setting up a blind trust, placing their financial affairs in the hands of a fiduciary and giving up all right to know about or intervene in their handling.
The fiduciary functions of trusts and agencies are commonly performed by a trust company, such as a commercial bank, organized for that purpose. In the United States, the Office of the Comptroller of the Currency, an agency of the United States Department of the Treasury, is the primary regulator of the fiduciary activities of federal savings associations.
When a court desires to hold the offending party to a transaction responsible so as to prevent unjust enrichment, the judge can declare that a fiduciary relation exists between the parties, as though the offender were in fact a trustee for the partner.
Relationships which routinely attract by law a fiduciary duty between certain classes of persons include these:
  • Trustee/beneficiary;
  • Conservators and legal guardians/wards;
  • Agents, attorney in fact usually from written grant of authority by principal, brokers and factors/principals;
  • Buyer agent /buyer client;
  • Confidential advisor including financial adviser and investment advisor/advisee or client;
  • Lawyer/client ;
  • Executors and administrators/legatees and heirs;
  • Corporate partners, joint venturers, directors and officers/company and stockholders;
  • Board of directors / legal persons, including companies;
  • Partner/partner;
  • Senior employee/company;
  • Retirement plan administrators /retirees and workers;
  • Retirement account advisors;
  • Promoters/company and related subscribers;
  • Liquidator/company;
  • Mutual savings banks and investment corporations/their depositors and investors;
  • Receivers, trustees in bankruptcy and assignees in insolvency/creditors;
  • Governments / indigenous peoples ;
  • Doctor/patient—in Canada, not in Australia;
  • Guardian/ward;
  • Teacher/student;
  • Priest/parishioner seeking counseling.
In Australia, the categories of fiduciary relationships are not closed.
Roman and civil law recognized a type of contract called fiducia, involving essentially a sale to a person coupled with an agreement that the purchaser should sell the property back upon the fulfillment of certain conditions. Such contracts were used in the emancipation of children, in connection with testamentary gifts and in pledges. Under Roman law a woman could arrange a fictitious sale called a fiduciary coemption in order to change her guardian or gain legal capacity to make a will.
In Roman Dutch law, a fiduciary heir may receive property subject to passing it to another on fulfilment of certain conditions; the gift is called a fideicommissum. The fiduciary of a fideicommissum is a fideicommissioner and one that receives property from a fiduciary heir is a fideicommissary heir.
Fiduciary principles may be applied in a variety of legal contexts.