In the Magna Carta, King John conceded to hismiddle-class knights rights and freedoms never before granted — andamong them was the concept of the duty of a fiduciary.(Photo:Shutterstock)

Most people remember King John as the “bad guy” of the RobinHood legend. In fact, it was the beleaguered King John who on June15, 1215 emerged from the misty fields of Runnymede a weakenedmonarch, having conceded to his middle-class knights' rights andfreedoms never before granted by the British Throne.  TheMagna Carta, signed that muggy day, was spawned by many factors,among them: the duty of a fiduciary.

From these medieval times through England, its colonies, andultimately America, came a series of court rulings culminating inthe Restatement of the Law of Trusts (see “Exclusive Interview: Roger Levy Says 401k FiduciaryAdvisers Should Heed Results of Putnam Case,”FiduciaryNews.com, March 19, 2019).

Fundamental to trust law lies the concept of “fiduciary.” Atrustee must always act selflessly and only in the best interestsof the trust's beneficiary (or “cestui que use” as they used to sayin the eighteenth century).

It's very cut and dried. A trustee cannot use the beneficiary'sassets for his own benefit. A trustee cannot enter into contractsinvolving the beneficiary's assets for which he will profit. Atrustee cannot sell a beneficiary's assets to himself.

In short, a trustee is merely a custodian, a caretaker, asentinel dispassionately watching over the beneficiary's assets. Ifthis sounds a tad too altruistic, your ears may not be deceivingyou. So powerful is the temptation to take advantage of thebeneficiary, that state laws often dictate the limits of the feesindividual trustees may charge. (Oddly enough, corporate trusteescan be exempted, perhaps because corporate trustees fall undergovernment regulation while individual trustees generally donot.)

Roger Levy sees the potential convergence of traditional trustlaw metrics and fiduciary case law. This implies that “fiduciary”will return full circle to its roots.

Long before the Investment Adviser Act of 1940, two competingbusiness models ruled the investment world. On one hand, we hadtrust companies, which for the longest time were not permitted toinvest in anything except bonds. (Beginning in the nineteenthcentury, the redefinition of the Prudent Man Rule loosened thisstringent, but fully understandable, requirement.)

On the other hand, we had brokers who greased the wheels ofcapitalism (and therefore industrial growth and national expansion)by promoting what traditional trust companies might have called“speculative” investments.

There was a clear distinction between these two types ofbusinesses. One fell under the realm of “fiduciary,” while theother was free to sell at will (and all the caveat emptor thatimplied). The 1940 Act recognized the ongoing need for thisdistinction when it specifically exempted brokers from its clutchesin that their “investment advice” was merely “incidental” and notwithin the scope of their services.

Like a camel sticking its nose under the tent, brokers nudgedtheir way closer to “advice” until, twenty years ago, the SECcapitulated. Brokers could be Investment Advisers – they could weartwo hats – and thus was birthed a new caveat emptor.

Once fully inside the tent, is it possible to coax the camelback out?

Only your tort attorney knows for sure. READMORE:

A 3-word fiduciary rule — Carosa

The 'Fiduciary Rule' versus the 'Rule of Fiduciary'— Carosa

Do you have the 'knows' to be a fiduciary? —Carosa