With more than 3,000 public comments to consider, and facing pressure on many fronts, the DOL has a lot to chew on as it works to finalize its proposed rule defining the term “fiduciary.” As we await the outcome of those deliberations, let’s remind ourselves why it’s such a big deal.
The fiduciary concept is not to be taken lightly
Plenty of ink has been spilled over the DOL’s proposed new fiduciary rule, but this is an important subject so I’m going to spill a tiny bit more. Most people working in the investment world look at the fiduciary concept through the lens of legislation such as ERISA or UPMIFA. But, for lawyers, there’s much more to it than that.
With origins dating back to Roman times (as detailed in one of our Great Moments in Financial History), the fiduciary role has had centuries to reach the status it enjoys today as the highest standard of care required by the law. To sum up that status, lawyers are fond of the following quote, which dates from a 1928 partnership law case:
“Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate.”
For those of you not familiar with the term, a punctilio—according to Collins English Dictionary—is “strict attention to minute points of etiquette.”¹ Justice Benjamin Cardozo’s flowery language drives at the point that while there are plenty of laws to do with not lying, not cheating, and not stealing in the context of normal business, a fiduciary’s duty of care is at a different level. It goes on to talk of “uncompromising rigidity” in the courts’ attitude to applying that duty. The law does not mess around when it comes to fiduciary status.
So behind the specific requirements of ERISA and other investment legislation, behind the prohibited transactions and the principles of expertise, alignment and accountability, there lies an expectation that goes beyond honesty alone, that demands of the fiduciary an extraordinary loyalty.
As the DOL propose to extend the application of fiduciary status, there have been a lot of valid comments made about the details of the proposed rule (as well as some that seem to me to be not–so–valid). Certainly, making the rule fit a wide range of circumstances will be challenging. I will make no predictions about exactly what changes might be made in the final version, although I do expect that the rule’s impact on the institutional investment world (which is the world on which this blog is focused) will most likely end up being quite different from the way it affects the individual investment world.
But wherever we end up, nobody should be in any doubt that the fiduciary designation is, in the eyes of the law, a very big deal indeed.