Exclusive Interview with Tamar Frankel: DOL Should Return to ERISA’s Original Definition of Fiduciary

July 23
00:18 2013

Just days ago, The Institute for the Fiduciary Standard announced Robert A. G. Monks as the first winner of the Frankel Fiduciary Prize. According to the press release issued by the Institute, the Frankel Fiduciary Prize, named for Professor Tamar tamarimage3new_300Frankel, the Michaels Faculty Research Scholar at the Boston University School of Law, was established to acknowledge individuals who have made significant contributions to the preservation and advancement of fiduciary principles in public life. We are honored to feature Professor Frankel in this month’s Exclusive Interview.

Professor Tamar Frankel has written and taught in the areas of securitization, mutual funds, financial system regulation, fiduciary law and corporate governance. Among her books are The Ponzi Scheme Puzzle (OUP 2012); Fiduciary Law (OUP 2011); Trust and Honesty, America’s Business Culture at a Crossroad (OUP 2006), Securitization (2d.ed 2006), and The Regulation of Money Managers (2d ed. with Ann Taylor Schwing) (2d ed. 2001). She has published numerous articles and book chapters, (see her website: A native of Israel, Professor Frankel served in the Israeli Air Force, Israel’s Ministry of Justice and as the legal advisor of the State of Israel Bonds Organization in Europe. She has been in private practice in Israel, Boston and Washington, D.C. and is a member of the Massachusetts Bar, a life member of the American Law Institute, and The American Bar Foundation. She was noted in The Lawdragon publication as one of 500 Leading Lawyers in America. In 2010 she was named one of 50 Top Women Wealth Management, and in 2007 as one of the Women Trailblazers in the Law.

FN: Professor Frankel, it’s an honor and a pleasure to speak with you. You’re recognized as the per-eminent authority on all things fiduciary.  Since this is breaking news, would you mind sharing with our readers your thoughts on the Frankel Fiduciary Prize and its inaugural winner?
Professor Frankel: Fiduciary standards are crucial to a free market society. The Institute’s prize is designed to recognize outstanding contribution to the practice and ideas of trustworthiness, and Robert A. G. Monks is a wonderful choice to receive this prize as a leader in fiduciary standards.

FN: You’ve long advanced fiduciary principles. What got you interested in fiduciary matters and how does it feel to be seen as a leader in this field?
Professor Frankel: Anyone who learns or teaches about the financial system must realize how important fiduciary issues are. We deal with people who hold other people’s money and know more than most people about financial matters. In addition, any lawyer is a fiduciary because people and large institutions rely on the lawyer’s advice. But, beyond the financial intermediaries and professionals, a society whose members do not trust (and there are few of these left) is a miserably destitute society. Reliance on others requires trust. Trust is the foundation of a successful society.

FN: While you’ve been working in the fiduciary arena for a long time, it’s really only been within the last decade that regulators, the industry and perhaps even investors have begun to take the concept more seriously. Why do you think there’s been such a spurt of interest in fiduciary issues these last few years?
Professor Frankel: It takes time to discover fraud, but once it is discovered, the price to society (both fraudsters and honest actors) is enormous. It starts with mistrusting people demanding more from honest servicers, and ends with a rotting economy and angry suspicious population. Abuse of fiduciary duties has inevitably come to bite! The attempt to mask breach of fiduciary duties by asserting good advice (but not obligating to avoid conflicting interest advice) will not be accepted. When the cost of failure to avoid conflict-of-interest is high enough, then and only then will fiduciary issues become a matter of course – to be practiced, not argued about.

FN:  As you are aware, the Department of Labor (DOL) is considering expanding its Fiduciary Rule to include more ERISA service providers and to add the same fiduciary coverage to IRAs that it currently has for other retirement plans. Why is it important the DOL expand its Rule and what are the conditions that exist today that demand the expansion of this Rule?
Professor Frankel: The financial system has become more complex and its servicers are now in a chain of brokers, who benefit advisers, who benefit managers, lawyers etc. ERISA included all in 1974, but the DOL Rule has excluded many [beginning] in 1975, perhaps because they were not prevalent. With the enormous number of retirees that may live longer on scant savings, it is time to include them again.

FN: The DOL currently allows exemptions to plan Fiduciaries whereby these fiduciaries can continue to engage in normally prohibited self-dealing transactions (like collecting commissions and 12b-1 fees). What are the consequences of watering down the definition of “fiduciary” in this manner and, can a provider truly be a fiduciary and engage in self-dealing?
Professor Frankel: If the investors truly know the “free lunch” their broker offers costs them continuous fees, (that is, if they knew the price of the services and the nature of the services and understood the true dollar numbers), then there is no breach of fiduciary duties, provided the investors agreed to the pay. However, usually investors do not know how much the brokers’ fees truly cost them (and for how long). Their agreement without knowledge does not relieve fiduciaries of their duty to avoid conflicts-of-interest. But investors truly do not know what they are buying and how much they are paying. Their trust is unjustified and the brokers do not meet fiduciary duties. Perhaps they do not meet even contract duties.

FN: The Securities and Exchange Commission (SEC) is also considering its own policies regarding a uniform fiduciary standard, which the brokerage and insurance industries are fighting. There’s a proposal being floated by these opponents that would classify brokers as a fiduciary as long as they can continue to engage in normally prohibited self-dealing practices. How does this – and the concept of dual registration where firms can register both as brokers and advisers – confuse the public and what is the best way to remove this confusion?
Professor Frankel: Confusion has been around for a long time when untrustworthy brokers were and still are trusted. Sales can be clarified if what is being sold and how much it truly costs are specified in signed writing and registered with the SEC. However, no adviser can change his hat at will and therefore, once the broker contacts a client, the broker is an adviser. If the client contacts the broker with no personal prior contact, I believe that the broker is not an adviser.

FN: You’ve written extensively on fiduciary law. How consistent is the current regulatory discussion with your original legal constructs? What worries you most about the direction we are heading in?
Professor Frankel: I understand fiduciary relationships to mean: (1) professional service (usually paid for); (2) which cannot be performed without entrustment of power or property and cannot be controlled or directed by the entrusting party; and, (3) Which are never intended to be used except for the sole benefit of the entrusting party or its designates. The current discussion mixes quality services with honest services. Yet, quality services can be provided dishonestly – for far more money. The lack of distinction worries me very much.

FN: If you can write a piece of regulation or legislation regarding “Fiduciary,” what would it be?
Professor Frankel: “Do to others as you want them do to you.”

FN: Is there anything else you’d like to add for the benefit of our audience?
Professor Frankel: I believe that the Court of Public Opinion will be the last decision maker in this case. So if a broker calls or if you see an attractive invitation, regardless of anything you see ask: “Are you a registered adviser?” And go with those who say: Yes, in writing!

FN: Thank you very much Professor Frankel for all your pioneering work and for your willingness to share your thoughts with our audience. It’s been a pleasure to speak with you. We wish you continued success. Again, thank you so much!

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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