The term fiduciary is an important one in the business world, and refers to relationships in which trust is place in one party to manage and protect the assets of another. The relationship entails what is commonly referred to as fiduciary duties, which include the obligation to manage assets for the benefit of the individual or entity who entrusts the assets.
A variety of legal relationships can involve fiduciary duties, including relationships between attorneys and clients, principals and agents, trustees and beneficiaries, and brokers and principals. When a fiduciary violates his or her—or its—legal duties, the costs can be high, particularly when the fiduciary is a large investment firm.
A recent example of the potentially high cost of breaching fiduciary duties is a settlement between private equity firm Kohlberg Kravis Robert & Co. and the US Securities and Exchange Commission. The settlement was reached after the commission accused the firm of breaching its fiduciary duty by charging institutional investor fees for buyout bids that were ultimately unsuccessful.
The activity, according to the SEC, occurred over a period of six years and involved over $17 million. KKR apparently failed to allocate some of the institutional investor fees to co-investors, some of whom were KKR executives. Neither did the company have a written compliance policy in place concerning its practices regarding fee allocation. All of this ended up costing the firm a fair amount of money.
Businesses acting in the position of a fiduciary, of course, need to establish thorough programs for complying with their fiduciary duties and ensuring company-wide compliance. Working with an experienced legal team is important, not only to avoid legal troubles, but also to maintain integrity of business operations to ensure the company is successful.