Constraining Corporate Law Principles in Affiliate World

A defining characteristic of the financial industry is the overwhelming
presence of affiliates—entities that are connected with one another through
ownership, management, or a contractual relationship. Although the
relationships among affiliated entities serve the business needs of financial
enterprises, they give rise to conflicts of interest that create significant risks for
investors, whether they be investment advisory clients, mutual fund
shareholders, or brokerage customers. Reflecting this fact, the regulation of
financial intermediaries under the securities laws focuses on mitigating these
conflicts. However, when harm to investors occurs, the tools available to courts
to provide remedies fail to do so because they are founded not on the special
nature of the financial industry but, instead, on corporate law principles.
Corporate law is incapable of helping harmed investors because it concerns
itself only with relationships within an entity—primarily the relationship
between a firm’s shareholders and its board of directors. Accordingly, it cannot
address concerns arising from extra-entity actors that are affiliated with one
another. Although this incongruence has persisted for decades, no scholar has
previously offered a workable solution to it. That is the project of this Article. It
proposes that, to remedy investor harms, courts and policymakers ought to move past the entity-centrism of corporate law and its imperative to respect entity boundaries.