Filling the Accountability Gap in Structured Finance Transactions: The Case for a Broader Fiduciary Obligation

Abstract

This article examines the regime of legal liabilities designed to protect investors in complex structured finance transactions, notably collateralised debt obligations (CDO). In reviewing the duties and liabilities of the main actors involved in these transactions – namely directors, trustees and asset managers – the article critically assesses whether the existing law is adequate to hold them to account. It also explores more specific avenues to establish accountability, namely the law of misrepresentation and fiduciary law. The analysis shows that in the context of structured transactions there remains an accountability problem due to the extent of the applicable duties, the nature of the conflicts of interest, the problematic disclosure (misrepresentation) of the transactions’ risks. The article contends that the complexity of the legal relationships underpinning CDOs and the resulting asymmetry of information between financial institutions on the one hand and investors on the other pushes for either a broader application of fiduciary obligations or alternatively a statutory redefinition of structured transactions.