Risk Management: Foundations for a Changing Financial World

CHAPTER 35

RISK MANAGEMENT AND FIDUCIARY DUTIES^ai

Robert M. McLaughlin

Risk management for firms in the investment profession must address the potential for fiduciary violations, especially in derivative-related activities. Analysis of fiduciary relationships, laws, duties, and court cases provides guidance for minimizing the risk of fiduciary violations.

Examination of the activities of fiduciaries involves, above all, an inquiry into the propriety of profit-making. What is at stake is whether the court should sanction or stigmatize a particular act performed by a businessman in a commercial context.¹

It is striking to see contemporary courts . . . haul professional trustees over the coals for investment policies that few financial economists would find exceptional.²

Fiduciary law is a highly compartmentalized, complex field with as many different branches of law as there are types of institutions, investors, and investment managers. Worse yet, a distinctive feature of fiduciary law—especially in its application to derivatives—is its often elusive and unpredictable moral underpinning. When large unexpected losses occur, it is all but inevitable that charges of fiduciary wrongs will follow; indeed, large losses are often construed as invitations to litigation and regulatory enforcement actions. But capital markets depend on risk taking, and when risky economic decisions result in judicial and regulatory responses that are based on attacks against the decision makers for supposed ...