Congress, regulators and the financial industry itself sit on the cusp of requiring all financial service providers who provide investment advice to adopt the fiduciary standard. Now is a great time for ERISA Plan Sponsors (as well as those who provide investment advice to ERISA plans or participants), to familiarize themselves with the nature of fiduciary duties. The anticipated change in the law may expose these officers and vendors to a fiduciary liability they might not have anticipated.
“The duties ascribed to corporate trustees, especially the duty of loyalty, are often benchmark standards for other types of fiduciaries,” writes Janice J. Sackley, CLU, CFE in the March/April edition of Currents, a publication from the National Society of Compliance Professionals. She explains how many might be surprised to discover the fiduciary standard being debated in Washington D.C. today derives from well established trust law. A healthier appreciation of these traditional fiduciary duties may allow ERISA trustees, fiduciaries and plan sponsors to better assess their true liability risks. This awareness will become more important if, in the future, Congress and/or regulators adopt the fiduciary standard across the board. Additionally, where fiduciary relationships already exist, a deeper understanding of these duties can help the plan fiduciary better evaluate whether their current advisers adhere to true fiduciary principles.
Among these and other critical points Sackley identifies, the following three trustee duties especially apply to ERISA fiduciaries:
* Duty of Loyalty – The fiduciary must not engage in acts of self-dealing. This is perhaps the most fundamental duty. * Duty to Keep Property Separate and Maintain Adequate Records – Client property must be segregated from the property of the fiduciary and adequate records must be kept. * Duty of Prudent Investment – The fiduciary who manages investments has a duty to comply with the prudent investor rule unless otherwise agreed to with the client.
Sackley is a fiduciary consultant with Fiduciary Foresight, LLC, a firm that advises financial institutions on regulatory compliance and fiduciary risk management issues. These duties and others are discussed in the context of bank and thrift trustees in her original (and very well written) Currents article “Duties of a Trustee and Other Fiduciaries; Will Trustees Set the Bar for the Fiduciary Standard?” The piece discusses the fact regulations governing banks acting as investment managers are prescribed by the banking regulators and in some cases are more onerous than those currently prescribed by the SEC for registered investment advisers and by the Department of Labor for firms advising ERISA plans.
One wonders when regulators will ever go beyond the “Fiduciary Standard vs. Suitability Standard” debate and begin to address the real issue. Will Congress, the SEC and the DOL upgrade the current fiduciary standard to the trust model used by bank trust departments so successfully for more than a century? After all, unlike the mortgage derivative fiasco, when’s the last time you heard of a bank scandal coming from the trust department?