1 See generally, Financial Crisis Inquiry Commission, ‘The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States’ xxii (2011), available at https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf, accessed 8 October 2018.
2 Laura Keller, ‘Wells Fargo Boosts Fake-Account Estimate 67% to 3.5 Million’, Bloomberg (August 2017), available at https://www.bloomberg.com/news/articles/2017-08-31/wells-fargo-increases-fake-account-estimate-67-to-3-5-million, accessed 10 October 2018; see also Jabbari v Wells Fargo, No 3:15-cv-02159 (ND Cal, 2017); Carmel Crimmins and Karen Freifeld, ‘Best Banker in America’ Blamed for Wells Fargo Sales Scandal, Reuters, 10 April 2017, available at https://www.reuters.com/article/us-wells-fargo-accounts/best-banker-in-america-blamed-for-wells-fargo-sales-scandal-idUSKBN17C18P, accessed 8 October 2018; E Scott Reckard, ‘Wells Fargo Pressure-cooker Sales Culture Comes at a Cost’, LA Times, 21 December 2013, available at http://www.latimes.com/business/la-fi-wells-fargo-sale-pressure-20131222-story.html, accessed 8 October 2018.
5 D A Moore et al, ‘Conflicts of Interest and The Case of Auditor Independence: Moral Seduction and Strategic Issue Cycling’, Academy of Management Review (2006), 31, 1, 10–29.
6 This chapter principally focuses on how the law addresses conflicts of interest in the retail investment space—though it touches briefly, for illustrative purposes, on related spaces, like retail banking.
7 Given space constraints, this chapter does not further define ‘culture’ here, though it is acknowledged by the authors that it is an inherently slippery concept. For an in-depth analysis, see Guido Ferrarini and Shanshan Zhu, Chapter 16, this volume. See also Dan Awrey, William Blaire, and David Kershaw, ‘Between Law and Markets: Is There a Role for Culture and Ethics in Financial Regulation’, Delaware Journal of Corporate Law (2013), 191, 205.
8 See generally, John Armour et al, Principles of Financial Regulation, Oxford University Press, 2016, 62.
9 See ibid; see also Donald C Langevoort, ‘The SEC, Retail Investors, and the Institutionalization of the Securities Markets’, Virginia Law Review (2009), 95, 1025, 1026 n 4.
12 Directive 2003/71/EC (Prospectus Directive)  OJ L345/64, Recitals 10, 12, 16; Directive 2014 65/EU (Second Markets in Financial Instruments Directive or ‘MiFiD II’  OJ L173/349, Recitals 7, 39, 45, 57, 58, 97, 133; Directive 2004/109/EC (Transparency Directive)  OJ L390/38, Recitals 1, 5, 7.
14 ibid; see also Code of Federal Regulations, Title 17, Chapter II, Part 230, § 501 (defining ‘accredited investor’).
15 ibid; see also Armour et al, n 8, 64 (defining retail investors as ‘individuals investing modest sums on their own account’).
16 Speech, Kara M Stein, SEC Commissioner, ‘Surfing the Wave: Technology, Innovation, and Competition—Remarks at Harvard Law School’s Fidelity Guest Lecture Series’, 9 November 2015, available at https://www.sec.gov/news/speech/surfing-wave-technology-innovation-and-competition-remarks-harvard-law-schools-fidelity, accessed 9 October 2018; see also White, n 11. For a basic definition of conflict of interest, see Hamid Mehran and Rene M Stulz, ‘The Economics of Conflicts of Interest in Financial Institutions’, NBER Working Paper No 12695/2006, available at http://www.nber.org/papers/w12695, accessed 9 October 2018 (‘A conflict of interest exists when a party to a transaction could potentially make a gain from taking actions that are detrimental to the other party in the transaction.’).
17 See Uniform Trust Code, § 802, Duty of Loyalty (‘a trustee shall administer the trust solely in the interests of the beneficiaries’); Uniform Prudent Investor Act, § 5 (‘A trustee shall invest and manage the trust assets solely in the interest of the beneficiaries.’). See generally John H Langbein, ‘Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest?’, Yale Law Journal (2005), 114, 929.
21 It bears clarifying, however, that fiduciary duties as a matter of general corporate law are based in state law. ‘Delaware is the preeminent state in corporate law and fiduciary duties, and has been for the last century.’ American Bar Association, ‘Corporate Governance and Fiduciary Duties’, available at https://apps.americanbar.org/buslaw/newsletter/0026/materials/46.pdf, 3, accessed 11 October 2018.
29 Though tied agents were also subject to this requirement, they could market their firm’s products, and therefore remain salespersons on behalf of companies that offer financial instruments. See Niamh Moloney, How to Protect Investors. Lessons from the EC and the UK, Cambridge University Press, 2010.
30 Luca Enriques and Matteo Gargantini, ‘The Overarching Duty to Act in the Best Interest of the Clients in MiFID II’, in Danny Busch and Guido Ferrarini, Regulation of the EU Financial Markets: MiFID II and MiFIR, Oxford University Press, 2017, 85–122, 87.
31 FCA Principles for Business, Principle 6.
32 82 Federal Register 56545 (29 November 2017).
33 Chamber of Commerce of the US v US Dep’t of Labor, No 17-10238 (5th Cir, 15 March 2018).
34 US Department of Labor, ‘Conflict of Interest Final Rule’, available at https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2, accessed 7 January 2018; see also Opinion, Alexander Acosta, ‘Deregulators Must Follow the Law, So Regulators Will Too’, Wall Street Journal, 22 May 2017, available at https://www.wsj.com/articles/deregulators-must-follow-the-law-so-regulators-will-too-1495494029, accessed 7 January 2018.
35 81 Federal Register 20946 (8 April 2016).
36 ‘ERISA safeguards plan participants by imposing trust law standards of care and undivided loyalty on plan fiduciaries, and by holding fiduciaries accountable when they breach those obligations’. ibid.
39 See Department of Treasury, ‘Protect Consumers and Investors from Financial Abuse, Financial Regulatory Reform: A New Foundation: Rebuilding Financial Supervision and Regulation’ 2009, 70–1.
41 Dodd-Frank Act, § 913.
43 MiFID II and Regulation (EU) No 600/2014,  OJ L173/84: they recast and replace Directive 2004/39/EC,  OJ L145/1 (MiFID I).
44 MiFID II, Article 24(1).
45 Communication must be ‘fair, clear and not misleading’ (MiFID II, Article 24(3)). See Martin Brennke, ‘The Legal Framework for Financial Advertising: Curbing Behavioural Exploitation’, European Business Organization Law Review (2018), forthcoming.
46 Niam Maloney, EU Securities and Financal Makets Regulation, 3rd ed, Oxford University Press, 2014, 800.
48 ‘One of the central objectives of the Retail Distribution Review (RDR) was to remove the potential for adviser remuneration to distort the advice consumers receive. By ending commission payments from investment product providers (providers) to advisory firms, we wanted to help ensure that: providers compete on the price and quality of their products to secure distribution rather than on commission levels, and advisory firms are not inappropriately influenced by the payment of commission when providing advice to their customers.’ FCA, ‘Supervising Retail Investment Advice: Inducements and Conflicts of Interest, Finalised Guidance’, para 1.2 (January 2014), available at https://www.fca.org.uk/publication/finalised-guidance/fg14-01.pdf, accessed 7 January 2018 [hereinafter fca, Final Guidance]. See also FCA, ‘Retail Investment Advice: Adviser Charging and Services’, available at https://www.fca.org.uk/publications/thematic-reviews/tr14-21-retail-investment-advice-adviser-charging-and-services, accessed 15 June 2018).
49 This requirement does not apply to tied agents.
51 In January 2014, the FCA issued a final guidance document on ‘Supervising Retail Investment Advice: Inducements and Conflicts of Interest.’ fca, Final Guidance, n 48. In addressing how investment firms should, ideally, manage conflicts of interest and potential inducements, the FCA noted that the guidance was relevant to ‘all providers of retail investment products to be sold by advisers and any advisory firm providing personal recommendations in relation to retail investment products.’ ibid, para 1.7.
55 Gormen and Occhino, n 37.
57 See Christina Parajon Skinner, ‘Whistleblowers and Financial Innovation’, North Carolina Law Review (2016), 94, 861 (discussing ways in which financial innovation can create opportunity and incentive for misconduct).
59 Even assuming that the DOL rule would be relevant in this scenario (i.e., that a retirement plan is involved), it is not clear that the Goldman employee making the allocative decision would be covered, as he or she may fall under a carve-out for employee advice given to a retirement plan sponsor.
64 SEC, IM Guidance Update, n 22, 10 n 8.
67 See Fein, n 60, 14, 18.
68 See SEC, IM Guidance, n 22, 6.
73 See Jose Garcia-Zarate, ‘Why Passive Funds are Growing in Popularity’, Morningstar, 20 February 2017, http://www.morningstar.co.uk/uk/news/156449/why-passive-funds-are-growing-in-popularity.aspx, accessed 27 November 2018; Sarah Krouse et al, ‘Why Passive Investing is Overrunning Active, in Five Charts’, Wall Street Journal, 17 October 2016, available at http://www.wsj.com/graphics/passive-investing-five-charts, accessed 7 January 2018; Attracta Mooney, ‘Passive Funds Grew 4.5 Times Faster Than Active in 2016’, Financial Times, 12 February 2017, available at https://www.ft.com/content/c4f6ee56-e48c-11e6-9645-c9357a75844a, accessed 7 January 2018; Andrew Osterland, ‘Passive Investing Hums with Activity as ETFs Grow, Evolve’, CNBC, 3 October 2017, available at https://www.cnbc.com/2017/10/03/passive-investing-hums-with-activity-as-etfs-grow-evolve.html, accessed 7 January 2018.
74 See, e.g., Amil Dasgupta, Andrea Prat, and Michela Verardo, ‘The Price Impact of Institutional Herding’, The Review of Financial Studies (2011), 24, 892; Brad Jones, ‘Asset Bubbles: Re-thinking Policy for the Age of Asset Management’, IMF Working Paper, WP/15/27 (February 2015), available at https://www.imf.org/external/pubs/ft/wp/2015/wp1527.pdf, accessed 10 October 2018.
75 Dasgupta, Prat, and Verardo, n 74; see also, e.g., Dilip Abreu and Markus K Brunnermeier, ‘Bubbles and Crashes’, Econometrica (2003) 173, 71.
78 Compliant, In re Wells Fargo & Company Shareholder Derivative Litig, No 3:16-cv-05541 (N D Cal, filed 24 February 2017), available at https://www.maglaw.com/publications/books/in-re-wells-fargo-company-shareholder-derivative-litigation-consolidated-amended-verified-stockholder-derivative-complaint/_res/id=Attachments/index=0/In%20re%20Wells%20Fargo%20&%20Company%20Shareholder%20Derivative%20Litigation%20-%20Consolidated%20Amended%20Verified%20Stockholder%20Derivative%20Complaint.pdf, 27–28, accessed 11 October 2018; see also FDIC, ‘FDIC Law, Regulations, and Related Acts, 5000 Statements of Policy’, available at https://www.fdic.gov/regulations/laws/rules/5000-3300.html, accessed 11 October 2018.
79 See Lawrence G Baxter, ‘Fiduciary Issues in Federal Banking Regulation’, Law and Contemporary Problems (1993), 56, 14, and n 1 (and sources cited therein).
80 The use of the word ‘client’ encompasses all types of advisees, e.g., patients, consumers, etc.
81 R B Cialdini, C A Kallgren, and R R Reno, ‘A focus theory of normative conduct: A theoretical refinement and reevaluation of the role of norms in human behavior’, Advances in Experimental Social Psychology (1991), 24, 20, 201–34; R B Cialdini, C A Kallgren, and R R Reno, ‘A focus theory of normative conduct: recycling the concept of norms to reduce littering in public places’, Journal of Personality and Social Psychology (1990), 58, 6, 1015.
82 Sunita Sah, ‘Conflict of Interest Disclosure as a Reminder of Professional Norms: Clients First!’ (on file with the author).
83 P Cappelli and P D Sherer, ‘The missing role of context in OB-the need for a meso-level approach’, Research in Organizational Behavior (1991), 13, 55–110.
85 See Kimberly D Krawiec, ‘Cosmetic Compliance and the Failure of Negotiated Governance’, Washington University Law Quarterly (2003), 81, 487, 513.
86 LOI No 2016-1691 du 9 décembre 2016 relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique, JORF no 0287 du 10 décembre 2016.
88 See Federal Sentencing Guidelines, § 8B2.1(a) .
89 See Geoffrey P Miller, ‘The Compliance Function: An Overview’, 2014, 1, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2527621, accessed 7 January 2018; see generally Geoffrey P Miller, The Law of Governance, Risk Management and Compliance, Wolters Kluwer, 2nd ed, 2017.
90 See Basel Committee on Banking Supervision (BCBS), ‘Compliance and the Compliance Function in Banks’, April 2005, 7, available at https://www.bis.org/publ/bcbs113.pdf, accessed 7 January 2018.
91 See, e.g., finra, ‘2016 Regulatory and Examination Priorities Letter’, 5 January 2016, 1, available at http://www.finra.org/sites/default/files/2016-regulatory-and-examination-priorities-letter.pdf.; cf Testimony of Thomas J Curry, to Financial Services Committee of the US House of Representatives (19 June 2012), available at https://financialservices.house.gov/uploadedfiles/hhrg-112-ba00-wstate-tcurry-20120619.pdf, 10, accessed 10 October 2018 (noting that ‘As part of their ongoing supervision, OCC examiners are evaluating the state of these key oversight functions and identifying areas that require strengthening’).
96 The SEC has also made clear that it ‘focus[es] on conflicts of interest as an integral part of our assessment of which firms to examine, what issues to focus on, and how closely to scrutinize’. ibid; see also Peter Tsirigotis, ‘SEC Examinations Focused on Private Equity Fund Conflicts of Interest’, Financier Worldwide, September 2016, available at https://www.financierworldwide.com/sec-examinations-focused-on-private-equity-fund-conflicts-of-interest/#.WjZEvSOcbjA, accessed 7 January 2018.
Though a self-regulatory organization, FINRA does act consistently with SEC priorities and has itself set out how it will assess a firm’s culture, by looking to five indicators:
‘whether control functions are valued within the organization; whether policy or control breaches are tolerated; whether the organization proactively seeks to identify risk and compliance events; whether supervisors are effective role models of firm culture; and whether sub-cultures (e.g., at a branch office, a trading desk or an investment banking department) that may not conform to overall corporate culture are identified and addressed.’ FINRA n 91, 1.
97 Klaus Hopt, ‘A Plea for a Bankers’ Code of Conduct’ in Patrick S Kenadjian and Andreas Dombret (eds), Getting the Culture and the Ethics Right. Towards a New Age of Responsibility in Banking and Finance, De Gruyter, 2016, 75–84.
98 J-Cl Trichet, ‘Summary of Group of Thirty Findings’, in Kenadjian and Dombret (eds), n 97, 3–6.
100 Christina Parajon Skinner, ‘Misconduct Risk’, Fordham Law Review (2016), 84, 1559.
102 See generally Charles F Sabel and Jonathan Zeitlin, ‘Experimentalist Governance’, in David Levi-Faur (ed), The Oxford Handbook of Governance, Oxford University Press, 2012, 169–83.
103 Skinner, n 100, 1601.
104 But see Stavros Gadinis and Amelia Miazad, ‘The Hidden Power of Compliance’ (unpublished draft, February 2018), available at http://dx.doi.org/10.2139/ssrn.3123987, 36–39 (noting growing risk of liability for ‘legal and compliance personnel’).
105 Christina Parajon Skinner, ‘Executive Liability for Anti-Money-Laundering Controls’, Columbia Law Review Sidebar (2016), 116, 1.
106 See, e.g., In re Citigroup Inc Shareholder Deriv Litig, 964 A 2d 106, 123–24 (Del Ch 2009); Stone v Ritter, 911 A 2d 362 (Del Supr 2006); In re Caremark Int'l Inc Derivative Litig, 698 A.2d 959 (Del Ch 1996).
107 See In re Wells Fargo & Co Shareholder Derivative Litig, No 16-5541, slip op, at 49 (N D Cal 4 October 2017). This suit was still ongoing at the time this chapter was finalized.
108 See Skinner, n 100 (discussing these compensation-related mechanisms as keyed to conduct).