Investor Remedies Against Fiduciaries in Rising and Falling Markets

Abstract

In collective investment products, ranging from retail managed funds and investor directed portfolio services (usually called "wraps") to funds of funds and hedge funds, one or more fiduciaries is interposed between the investor and the market. The regulatory framework for these products is provided, in Australia, by the Corporations Law but much of the detail is still supplied by the general law of fiduciaries that was developed in England in the 19th Century.

Under Anglo-Australian law, the parties involved in the management and administration of collective investment products (such as investment managers, custodians and prime brokers) are considered to be in a fiduciary relationship with the investors in those products. Accordingly, an investment manager or custodian who innocently commits funds to an unauthorised investment or permits such an investment to be placed in an investor's portfolio may face a claim for breach of its fiduciary duties to that investor.

This article is concerned with the remedies - and, more particularly, the quantum of compensable loss - available to investors where a fiduciary has allowed an unauthorised investment into their portfolio. The law in Australia and, until very recently, England has approached this problem from a perspective that emphasises the preservation of the investor's capital at all costs. This, however, disregards the fact that, in contrast to the traditional Anglo-Australian trusts for which capital preservation was paramount, the investors in collective investment products have explicitly bargained with the fiduciary for their capital to be exposed to the market.

Accordingly, this article argues that it is time that the remedies available to investors under Australian law for unauthorised investments took account of this bargain as US law does. Thus, the appropriate benchmark for compensating an investor for an unauthorised investment under Australian law should be the performance of the authorised alternatives, and not the capital committed to the unauthorised investment.

Note: This is a description of the article and not the actual abstract.

Keywords: Mutual Funds, Managed Investments, Fiduciaries, Trustees, Investment Managers, Unauthorised Investments, Equitable Compensation

JEL Classification: K22, G23