Most people remember King John as the “bad guy” of the Robin Hood legend. In fact, it was the beleaguered King John who on June 15, 1215 emerged from the misty fields of Runnymede a weakened monarch, having conceded to his middle-class knights' rights and freedoms never before granted by the British Throne. The Magna 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, and ultimately America, came a series of court rulings culminating in the Restatement of the Law of Trusts (see “Exclusive Interview: Roger Levy Says 401k Fiduciary Advisers Should Heed Results of Putnam Case,” FiduciaryNews.com, March 19, 2019).

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

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

In short, a trustee is merely a custodian, a caretaker, a sentinel dispassionately watching over the beneficiary's assets. If this sounds a tad too altruistic, your ears may not be deceiving you. So powerful is the temptation to take advantage of the beneficiary, that state laws often dictate the limits of the fees individual trustees may charge. (Oddly enough, corporate trustees can be exempted, perhaps because corporate trustees fall under government regulation while individual trustees generally do not.)

Roger Levy sees the potential convergence of traditional trust law 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 competing business models ruled the investment world. On one hand, we had trust companies, which for the longest time were not permitted to invest in anything except bonds. (Beginning in the nineteenth century, the redefinition of the Prudent Man Rule loosened this stringent, but fully understandable, requirement.)

On the other hand, we had brokers who greased the wheels of capitalism (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 of businesses. One fell under the realm of “fiduciary,” while the other was free to sell at will (and all the caveat emptor that implied). The 1940 Act recognized the ongoing need for this distinction when it specifically exempted brokers from its clutches in that their “investment advice” was merely “incidental” and not within the scope of their services.

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

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

Only your tort attorney knows for sure. READ MORE:

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

Instant Insights /

Fiduciaries shouldn't underestimate trust law roots – Carosa

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