Alan R. Novak began clerking for Supreme Court Justice Potter Stewart in 1963, the same year he graduated from the Yale Law School. As luck would it for Novak, the Supreme Court was in the midst of considering what would prove to be a landmark case, that of Jacobellis v. Ohio. It seemed Nico Jacobellis, the manager of an art theatre in Cleveland Heights, had decided to offer a screening of the French film Les Amants. French films being what French films are, little was left to the imagination. As a result, the state of Ohio, which apparently placed an inordinate value on the ability to exercise one's imagination, declared the film unsuitable for the tony citizens of Cleveland Heights. Jacobellis was fined $2,500 and appealed, losing all the way to the Supreme Court. We'll let Novak tell the rest of the story…
"After several days reviewing with the other court members the materials related to the '63 Term pornographic materials, Justice Stewart came to the office for a Saturday stint of opinion writing. I was there alone when he arrived, and we visited together to discuss his reaction to the case. . . . I had been a Marines officer; he a Navy officer. We discussed our experiences with material we had seen during our military careers, and discovered we had both seen materials we considered at the time to be pornographic, but this conclusion was arrived at somewhat intuitively. We agreed that 'we know it when we see it,'…" ("The Origins of Justice Stewart's 'I Know It When I See It,'" Wall Street Journal Law Blog, September 27, 2007)
The phrase "I know it when I see it" thus became part of the American lexicon, not merely because of its eloquent simplicity, but for the very fact that, while admitting certain expressions can be deemed "obscene" (and thus outlawed), the majority could not agree on what constituted an obscenity.
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So it is, more than a half century later, we find the state of the fiduciary standard in pretty much the same condition. As a result of the DOL's proposed "Best Interests" standard fails to define precisely what it means by "best interests." Indeed, it expects the definition to evolve through arbitration and, more likely (and with the DOL's explicit expectation) the courts. Making matters worse, the DOL has now formally endorsed self-dealing transactions as not inconsistent with the client's "best interests."
My, how the centuries have changed. In what many cite as the first codified Fiduciary Rule – the Magna Carta – the good Archbishop of Canterbury drafted specific language to force King John to act like a fiduciary. Among the list of 63 clauses include these two:
"4. The guardian of the land of an heir who is thus under age, shall take from the land of the heir nothing but reasonable produce, reasonable customs, and reasonable services, and that without destruction or waste of men or goods…
"5. The guardian, moreover, so long as he has the wardship of the land, shall keep up the houses, parks, fishponds, stanks, mills, and other things pertaining to the land, out of the issues of the same land; and he shall restore to the heir, when he has come to full age, all his land, stocked with ploughs and wainage, according as the season of husbandry shall require, and the issues of the land can reasonable bear."
Far be it for the DOL to be as precise as the Archbishop of Canterbury. Now, I'm sure there are those who will argue that, by requiring disclosure of self-dealing, the DOL's proposed trust rule goes far beyond the Uniform Trust Code. According to the Cardozo Law Review, "The UTC relieves institutional trustees of the burden of making full disclosure ex ante, and places the burden of detecting and objecting to the self-dealing behavior squarely on the beneficiary" (Vol 27:6, p. 2722)
Yet, for all its promises, the DOL leaves us with an empty stomach because it fails to state what it means by "best interests." Let's just look at two popular ways to define "best interests." Do fees have anything to do with "best interests"? Certainly, in repeatedly attacking "high" fees, the DOL believes so. But pinpointing what types of fees are "high" and what types of fees are contrary to the "best interests" of the client proves to be a challenge. The usual answer is "any self-dealing fee," but the DOL, as I've said, specifically exempts those prohibited transactions from the naughty list.
Furthermore, one client's "high" fee is another client's "excellent service." This is an artifact from the DOL's own Fee Disclosure Rule where it specifically said it's not the size of the fee, but the size of the value derived from that fee.
So fees aren't a good proxy for "best interests." What about the second favorite bogeyman: investment performance. Well, since the phrase "past performance can never guarantee future results" works both ways, we've long been taught never to use performance alone to assess "sound decision making." Indeed, the DOL has long trumpeted the idea that it's not about the outcome, it's about the process.
In the end, the best we can conclude about defining "best interests" is to borrow from Potter Stewart's script: "We'll know it when we see it."
And that, frankly, is obscene.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
