Agents of Change: The Fiduciary Duties of Forwarding Market Professionals

Abstract:     
In the wake of the financial crisis of 2008, the legal system struggles to effectively regulate forwarding market professionals — broker-dealers and investment advisers who invest client funds with third parties. Defining the fiduciary duties these forwarding market professionals owe their clients when they invest funds with third parties raises complex issues concerning due diligence, postinvestment monitoring of investments, and disclosure of material facts. Weak regulatory standards, advances in technology in the financial-services industry, and changes in the scope of services provided by broker-dealers emphasize both the inadequacies of the system created by the Securities Exchange Act of 1934 (1934) Act and the Investment Advisers Act of 1940 (IAA) and the urgent need for a new regulatory standard. This Note contends that agency law provides a clear framework for defining the fiduciary duties that forwarding market professionals owe their clients for third-party investments. It then explains how the SEC is well situated to establish a fiduciary duty for forwarding market professionals based on agency principles under the Dodd-Frank Act.

Number of Pages in PDF File: 36

Keywords: Dodd-Frank, financial crisis, broker-dealer, investment adviser, fiduciary duties, Madoff, forwarding market professional, agent, agency law, due diligence, post-investment monitoring, financial institution, economic crisis, financial regulation, bank, SEC, 1934 Act, Investment Advisers Act

JEL Classification: E62, G14, G18, G20, G21, G23, G24, G28, H32

Accepted Paper Series