Fiduciary Duty
A legal obligation to act in the best interests of another party, as directors owe to shareholders.
What is Fiduciary Duty?
Fiduciary duty is a legal and ethical obligation requiring one party (the fiduciary) to act in the best interests of another (the beneficiary), placing the beneficiary's interests above the fiduciary's own. In corporate governance, directors owe fiduciary duties to the company and its shareholders, comprising the duty of care (informed decision-making) and duty of loyalty (avoiding self-interest and conflicts of interest). In investment management, registered investment advisers are generally held to a fiduciary standard under the Investment Advisers Act of 1940. Breach of fiduciary duty can result in civil liability, disgorgement of profits, and removal from office.
Example
The SEC's Regulation Best Interest (Reg BI), effective June 2020, requires broker-dealers to act in the best interest of retail customers when making recommendations, though it stops short of a full fiduciary standard. Registered investment advisers, by contrast, are held to the higher fiduciary standard under the Investment Advisers Act.