The March 2005 edition of the Yale Law Journal contains this interesting (perhaps even provocative) article by the noted Yale Law School Professor John H. Langbien. The logic underlying his thesis is somewhat circular in nature, although it is sure to warm the hearts of corporate fiduciaries (or more specifically, the “business development” folks at large banks). In a world dominated by an ever smaller group of financial-services conglomerates that maximize shareholder returns by cross selling an ever growing array of financial products and services to a single set of clients (the fancy word for this is “synergy”), it is no surprise that corporate fiduciaries seek to cross sell to their trust clients as well. The only problem is that they are hampered by these old fuddy duddy fiduciary self-dealing prohibitions that were developed within the context of a supposedly more genteel 18th century English business culture. The gist of Prof. Langbien’s article is that if today’s corporate environment conflicts with two-century’s worth of Anglo-American fiduciary common law, then there must be something wrong with the law (see what I mean by the circular nature of this argument). Prof. Langbien proposes a technical fix that could be easily incorporated into state statutory regimes governing trustees and other fiduciaries (e.g., personal representatives of estates).
As you can probably tell, I remain unconvinced. Corporate cross selling is nothing new. But recent history shows that bundling fiduciary-type services with standard banking and investment services can be problematic. April 13, 2005 marked the second anniversary of the $1.4 billion global research settlement that New York Attorney General Eliot Spitzer and the Securities & Exchange Commission reached with 10 of the largest investment banks. As reported in this article, the 2003 settlement required brokerage firms to fund and distribute independent research alongside their own in-house reports. The rationale is simple: bundling fiduciary-type services (i.e., independent research) with standard banking and investment services inevitably leads to biased, unreliable fiduciary advice. Moreover, trust beneficiary advocacy groups like Heirs, Inc. have already sprung up in response to perceived existing conflicts of interests with their corporate trustees. Bottom line, the last thing we need is to water down the existing self-dealing prohibitions that protect the public from conflicts of interest with their corporate fiduciaries.