Fiduciary Contours: Perspectives on Mutual Funds and Private Funds

The thesis of this essay, written as a chapter in a forthcoming book, is that in the mutual fund context, the specifics of fiduciary duty reflect the distinctive qualities of this form of investment in securities. The particular contours that shape fiduciary duty reflect many factors, including the highly prescriptive regulatory context distinctively applicable to mutual funds. To sharpen its depiction of the fiduciary distinctiveness of mutual funds, I draw contrasts with two other avenues through which an investor may delegate investment choice: (1) "private" funds, that is, vehicles for pooled investments that are not subject to the full regulatory regime applicable to mutual (or "public") funds; and (2) non-fund investment relationships through which an investment adviser undertakes to manage an investor's individual securities account. The essay also argues that mutual funds represent a distinctively hybrid form of investment. Interposing the fund between investors and the fund's assets implicates questions of entity governance, however the fund is organized; the fact that regulation requires mutual fund shares to be redeemable causes them to resemble products that may be sold into secondary markets. And the ongoing tri-partite relationship between a mutual fund's manager, its assets, and its investors at least by analogy constitutes an agency relationship, in which managers owe fiduciary duties on an ongoing basis. Contrasts between mutual funds and private funds are timely, in part because the population of investment advisers now registered with the SEC includes many who advise at least one private fund. Newly-available information about private funds' practices calls into question whether they are always consistent with fund managers' duties to investors, as do data concerning practices of hedge fund managers during the financial crisis. Investments in private funds are not (unlike mutual funds) subject to a redeemability requirement. Even when investors in private funds met criteria for investor sophistication, they made investment decisions in an environment of informational opacity, including how fund managers might use the discretion they retained. Crisis-era data suggest that discretion was not always used in a manner consistent with the fiduciary duties that private fund managers owed to investors.