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Chapter 16. Reforms to Protect Small Inv... > Extending Fiduciary Responsibility

Extending Fiduciary Responsibility

At the core of the system that generated the bubble and the massive losses that the general public sustained was a collapse of fiduciary responsibility in America. The fiduciary principal had been an important protection for investors from the rapacity of the financial markets, but had largely disappeared by the late 1990s. Under the fiduciary principal, banks and mutual funds did not sell to retail investors and pension funds the type of shares that were taken public and placed in mutual funds during the bubble.

The essence of the fiduciary principal is that a professional must subordinate his or her self-interest to that of the client or customer. It includes a duty of loyalty from professional to client that prohibits self-dealing by the professional. It includes a duty of care, which prohibits negligence, recklessness, and/or intentional misconduct by the professional. Further, it imposes on the professional a duty of disclosure, so that the client knows what is being done by the professional.


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