Commandment 7 is famous: no adultery.
Adultery is another one of the universal prohibitions in human society. There are few if any cultures that sanction a married partner abandoning his or her spouse. Family life enjoys social, civil, and legal protection because in many ways, domestic life is a basic building block of society. If promises made in the family break down, other social institutions suffer.
In the same way, the fiduciary responsibilities that investors undertake are the basic building blocks of investment advice. At the heart of the fiduciary relationship is the duty of loyalty—to undertake investment advice and transactions as if the advisor were the client, and to act solely in the client’s best interest. This seems simple and basic, and indeed a lot of grey areas would be resolved if a strict fiduciary standard were applied.
For example, suppose a manager is having lunch in a public park and overhears two junior associates from a legal firm nearby discussing a pending merger. The merger hasn’t been announced, and the target company is trading at a significant discount to the deal price. What should he do?
Fiduciary standards indicate that such an inadvertent disclosure puts him in the position of a constructive insider. He didn’t figure out that a merger might happen through his own analysis—he was accidentally told. As such, he now has a duty to refrain from trading in the two stocks involved—just as if he were a principal in the law firm—until the news is made public. The legal associates made him an insider, and trading on that information would be insider trading.
Fiduciary duties matter. Loyalty matters. They allow us to trust in the integrity of the markets, and in one another.
Douglas R. Tengdin, CFA
Chief Investment Officer
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