A “fiduciary” is from the Latin fiducia meaning “trust”, a person (or a business like a bank, trust company or a stock brokerage) who has the power and obligation to act for another ( often called a beneficiary) under circumstances which require total trust, good faith and honesty. Typically, a fiduciary has greater knowledge and expertise about the matter being handeled. A fiduciary is held to a standard of conduct and trust above that of a stranger or casual business person. He/she/it must avoid “self-dealing” or “conflicts of interest” in which the potential benefit to the fiduciary is in conflict with what is best for the person who trusts him/her/it. Basically, one person has an obligation to act for another’s benefit.
Courts have neither defined the particular circumstances of fiduciary relationships nor set any limitations on circumstances from which such an alliance may arise. In order to prove a breach of fiduciary duty claim the plaintiff is required to show 1) a fiduciary relationship doe, in fact, exist , 2) the relationship was breached, 3) damages were proximately caused by the breach. Typically, breach of fiduciary claims focus on either how the trust assets were managed, and/or how the trust was administered.
A fiduciary relationship exists whenever the relationship with the client involves a special trust, confidence and reliance on the fiduciary to exercise his/her/its discretion or expertise in acting for the client. A relationship of trust and confidence exists in all cases where there has been a special confidence reposed in one who in equity and good conscience is bound to act in good faith and with due regard to the interests of the one reposing the confidence.
Fiduciary requirements of a trustee and executor that could provide grounds for a breach of fiduciary claim include:
Misappropriation or theft of trust assets
Conflicts of interest or self-dealing acts
Disloyalty to beneficiaries
Colluding with certain beneficiaries to the detriment of others
Failure to account to the beneficiaries or to keep them informed
Allowing a co-trustee to commit a breach
Comingling outside funds with trust assets
Hopefully, this brief review of what creates a fiduciary relationship and various fiduciary duties and responsibilities will be of assistance in your practice in analyzing and establishing if a fiduciary relationship has been established in your clients’ situation and whether a breach occurred resulting in actionable damages.
I have enjoyed working with you and your firm providing expert witness services concerning fiduciary liability litigation on trusts, estates and investment management matters in the past and look forward to doing so in the future. Over the past 10 years I have worked with nearly 100 law firms in 22 states providing fiduciary litigation consulting and expert witness services for both plaintiff beneficiaries and defendant trustees and have testified in both state and federal courts. If I can be of any assistance please call me at: 704-366-8875, or email me at: [email protected] Thanks!
When property is transferred from one person to another the transferees legal status with respect to the property will depend on the transferor’s intent. If the intent is to make an outright gift, the transferor imposes no duties on the transferee with respect to the property. if, however, the intent is to create a trust then the transferor imposes certain enforceable duties on the transferee trustee with respect to the transferred property.
Unless a testator, grantor, or other transferor manifests an intention to impose enforceable duties on the transferee, the intention to create a trust is lacking and no trust is created. See Restatement (Third) of Trusts, Section 13, comment d. A trust relationship brings with it 5 fundamental duties: 1)duty to be generally prudent, 2) duty to act and carry out the terms of the trust, 3) duty to be loyal to the trust – honesty and good faith, 4) duty to give personal attention to the trust, 5) duty to account to the beneficiaries. In the creation of a trust one bifurcates the ownership of trust assets with the trustee being the legal owner and the beneficiaries being the equitable owners.
2. What are the fiduciary duties and responsibilities of a trustee or executor
Quite often in the dispute resolution process or fiduciary litigation consulting/expert witness activities we are called upon to review the activities of a trustee or executor to ascertain if any fiduciary duties or responsibilities were breached during the administration of the trust or estate resulting in damages to a beneficiary. In order to prove a breach of fiduciary claim the plaintiff is required to show: 1) a fiduciary relationship does exist, 2) the relationship was breached, 3) damages were proximately caused by the breach. Typically, breach of fiduciary duty claims focus on either how the trust assets were managed, or how the trust was administered, or both.
A fiduciary is required to act honestly, in good faith and in the best interest of another person because of the relationship that exists between them. A fiduciary relationship is generally described as arising when there has been a special confidence reposed in one who in equity and good conscious is bound to act in good faith and with due regard for the interests of the one reposing confidence. De Jure fiduciary relationships would include: attorney-client, executor and heir/devisee, guardian and ward, principal and agent, trustee and beneficiary.
In pursuinig a potential breach of fiduciary duty claim a plaintiff should examine:
1) Parameters of the potential defendant’s fiduciary obligation.
2) What standards will be used to measure the potential defendant’s fiduciary obligations
3) Burden of proof
4) Documents or facts altering the fiduciary obligations.
3. Duty of Loyalty – Self Dealing
The trustee shall administer the trust solely for the interests of the income and remainder beneficiaries in good faith and in accordance with the trusts terms and purpose and shall avoid self dealing and conflicts of interest. See Uniform Trust Code (“UTC”) Section 78, comment c(2). The trustee’s two primary duties are loyalty and prudence with loyalty the more fundamental of the two.
A transaction affected by a conflict between the trustee’s fiduciary and personal interests is voidable by a beneficiary who is affected by the transaction. See UTC Section 802, comment, and Restatement (Second) of Trusts, Section 170, comment p (1959). The trustee is entitled to take a reasonable fee for all fiduciary services. See UTC Section 802(h)(2). An unauthorized act of self- dealing will be regarded as constructively fraudulent and, at the option of the beneficiaries, will be set aside. See Restatement (Second) f Trusts, Section 206, comment (b) (1959).
A trustee may not sell trust property to itself, purchase trust property, or use trust property for it’s own purposes. Further, a trustee may not be guided by the interests of a third party or sell trust assets to benefit a third party.
4. Duty of Impartiality
If the trust is structured as a split interest trust (ie. multiple income and/or remainder beneficiaries), the trustee must act impartially concerning the management of the trust assets and the investment and distribution of the trust assets.
If the trust is created for beneficiaries in succession, the trustee must act with due regard for their respective interests. Under the Uniform Principal and Income Act (“UPIA”) the trustee must give due regard for the production of income and the preservation of principal and the allocation of expenses between principal and income.
The trustee is not required to treat all income and remainder beneficiaries equally, but rather to treat them equitably considering the terms and purpose of the trust. See UTC Section 803, comment. The trustee is under a duty to act with due regard to the beneficiaries respective interests. See 4 Scott & Ascher Section 20.1. The trustee’s general duty of loyalty concerns the specific duty to treat all beneficiaries impartially. See Restatement (Third) of Trusts, Section 79 and 3 Scott & Ascher Section 17.5.
5. Duty to Administer a Trust Prudently and in Good Faith
The trustee must administer the trust according to the terms of the trust instrument and in the interests of the income and remainder beneficiaries. In exercising reasonable care, caution and skill, the trustee must also take control, collect, and insure the trust assets. See UTC Section 801, 804 &805.
The trustee shall administer the trust as a prudent person would by considering the purposes, terms, distribution requirements and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skil,l and caution. See UTC, Section 804. Upon acceptance of the trusteeship the trustee shall administer the trust in good faith and in accordance with its terms and purposes, and the interests of the beneficiaries. See UTC, Section 801, Restatement (Second) of Trusts, Section 609 (1959) and 3 Scott & Aschher, Section 17.14.
In addition, the trustee must take control of and segregate the trust assets. See Restatement (Second) of Trusts, Section 175 (1959), and make trust assets productive, ie. provide returns or other benefits from trust property. See Restatement (Third) of Trusts, Section 76(2) ( c ).
The affairs of the trust must be kept confidential. See Restatement (Second) of Trusts, Section 170, comment s (1959). Finally, the trustee has a duty to cooperate with his/her co-trustees, unless it would be unreasonable to do so. See Restatement (Third) of Trusts, Section 81, comment c.
6. Duty to inform, report and maintain accurate records
The trustee’s duty to account to someone other than himself is indispensable. A trustee must act honestly and in a state of mind contemplated by the settlor. See Restatement (Third) of Trusts, Section 50, comment c and UTC, Section 813 & Section 105.
The trustee must provide beneficiaries with a copy of the trust instrument, information on the actual trust assets, and the ability to inspect the trust assets in order to protect their equitable interests. See Restatement (Third) of Trusts, Section 813(a).
The trustee must inform, on an ongoing basis, those entitled or eligible to receive distributions of income or principal, and those who would be entitled to take their share of the trust upon the termination of the current interest or the trust itself, whether their interests are contingent or vested, ie. “qualified beneficiaries” and “fairly representative beneficiaries”. See UTC, Section 103(12) and Restatement (Third) of Trusts, Section 82. Restatement (Third) of Trusts, Section 82, comment b, sets forth the initial information that must be furnished to fairly representative beneficiaries.
7. Duty Not to Delegate/Duty to Delegate
Under common law a trustee was not allowed to delegate duties to an agent. Recently, however, with the increasing complexity and sophisticatin of trust investment alternatives, a failure to effectively delegate may be a breach of fiduciary duty. A trustee has a fiduciary obligation to seek whatever assistance necessary to execute the efficient and competent administration of the trust. See 3 Scott & Ascher, Section 17.3.1.
The trustee may eliminate or contain its fiduciary liability by using care, skill, and caution in the selection of an agent, establishing the scope and terms of the delegation, and monitoring the agent’s activities. A downward adjustment of fees may be appropriate if a trustee has delegated significant duties to agents, such as the delegation of investment authority to outside managers. See UTC, Section 708, comment.
The trustee may not delegate to an agent the responsibility to coordinate the trust’s administration and to supervise other agents. See Restatement (Third) of Trusts, Section 80, comment d(2). The trustee may not delegate discretion on how income and principal may be used in furtherance of the purpose of the trust. See Restatement (Third) of Trusts, Section 80, comment f(3). Ministerial tasks such as custody and record keeping may be delegated to others. See Restatement (Third) of Trusts, Section 80, comment e. A trustee may delegate some investment discretion to investment advisors and others provided there is adequate supervision by the trustee. See Restatement (Third) of Trusts, Section 80, comment f, and UTC Section 807. The trustee must define the trust’s investment objectives and establish the trust’s investment strategies and programs to avoid fiduciary liability. See UTC, Section 807( c ).
The Uniform Prudent Investor Act (“UPIA”) adopts modern portfolio theory and portfolio-level analysis. Accordingly, the trustee’s major duties under UPIA are:
1. Define risk and return objectives
2. Delegate investment discretion
3. Objectively evaluate the worthiness of initial investment assets
4. Diversify the trust portfolio
For the prudent investment of trust funds the trustee should:
1. Determine overall goal for the trust portfolio
2. Determine appropriate investment objectives – asset allocation
3. Statement (“IPS”)
4. Implement the investment strategy
5. Evaluate and maintain the portfolio
6. Regularly review – OCC Reg. 9 Requirement
8 A Breach of Trust versus A Breach of Fiduciary Duty
A breach of trust is a breach of contract action where the trust is the contract. This is distinguished from the trustee’s breach of the beneficiaries’ trust which is a breach of fiduciary duty or a constructive fraud claim. A trustee may be required to perform its duties, pay money, account, or it may be denied compensation or removed. In pursuing damages, courts may seek to restore the trust to the position it would it would have been if no harm occurred and disallow the trustee to profit from its wrong.
A violation by a trustee of any duty owed under the trust is a breach of trust. The failure by the trustee to perform as directed by the trust instrument is a breach of trust.
9. Breach of Fiduciary Duty versus Constructive Fraud
The requirements for a Breach of Fiduciary claim are discussed above. Constructive fraud requires: 1) That the defendant took advantage of a position of trust and confidence to bring about a transaction, 2) The defendant’s action to bring about the transaction benefited the defendant to the plaintiff’s detriment.
Constructive fraud claims in North Carolina have a statute of limitations of 10 years versus 3 years for a breach of fiduciary duty claim. The required fiduciary must benefit from a constructive fraud claim. The defendant must prove that he acted in an open, fair and honest manner to rebut the presumption of fraud, however, that does not constitute an affirmative defense.
10. Other Causes of Action Often Accompanying a Breach of Fiduciary Claim
2. Gross Negligence
3. Unfair and Deceptive Trade Practices
4. Fraud and Fraud in the Inducement
5. Negligent Misrepresentation
7. Legal Malpractice
8. Unjust Enrichment
9. Breach of Contract
9 Declaratory Judgement
I hope you will find the above material useful in your practice. Pease call me at: 704-366-8875, or email me at: [email protected] in the future if I can provide any assistance in the form of fiduciary litigation consulting or expert witness services.
The trustee of my late father’s testamentary trust continues to use dad’s old commission based broker at a wire house firm to buy and sell securities for the trust. Several of the investments have not done well and don’t seem to be appropriate for either my mother as the current income beneficiary or for me as the remainderman. Can I get any redress against the broker and/or the trustee in light of the Department of Labor’s (“DOL”) recently promulgated Final Fiduciary Rules, possibly a breach of fiduciary duties and responsibilities?
Admittedly, the new Department of Labor Final Fiduciary Rules are designed to primarily apply to retirement accounts and IRAs, not personal trust accounts. However, views expressed by the SEC and FINRA at hearings concerning the 2015 preliminary regulations and the April 6, 2016 final regulations suggest that fiduciary responsibility has been redefined and is taken quite seriously by regulatory agencies concerned with “trust accounts”. Accordingly, a brief overview of the DOL Final Fiduciary Rules is in order to get ahead of industry trends that may impact fiduciary litigation and potential personal trust trustee and investment management responsibility and liability in the future.
DOL FINAL FIDUCIARY RULES
The new DOL regulations expand the definition of who is a fiduciary when providing investment advice on retirement accounts aiming to eliminate conflicts of interest (along the lines of 12 CFR Part 9 “Fiduciary Activities Of National Banks”, and Regulation Section 9.12, “self-dealing and conflicts of interest”), and to give investors transparent information about the total costs of investments, including fees and commissions. As the Final Fiduciary Rules explain, ERISA safeguards participants in a qualified plan by imposing trust law standards of care and undivided loyalty on plan participants and by holding fiduciaries accountable when they breach those obligations. In addition, fiduciaries to plans and IRAs are not permitted to engage in “prohibited transactions” which pose special dangers to the security of retirement, health, and other plan benefits because of fiduciaries’ conflicts of interest with respect to the transactions.
The new rule covers anyone paid directly or indirectly for providing retirement account investment advice. This is a major shift for brokers and broker-dealer firms who will no longer be judged by a suitability standard but instead owe a higher fiduciary duty to put their clients’ best interest first. The new rules prohibit commission based fee arrangements and other forms of conflicted compensation in the brokerage industry.
A broker who wants to continue to receive otherwise prohibited compensation may utilize the new rules “best intent contract” ( Best Interest Contract Exemption – “BICE”) approach acknowledging their fiduciary duty owed to clients to provide advice in the clients’ best interest including disclosure up front of the total cost of each new investment, fees, conflicts of interest, etc. They must also adopt policies and procedures designed to mitigate conflicts of interest. The BICE now covers all asset types. These requirements are to be included in a written agreement for IRA’s or clients that are not otherwise subject to ERISA (possibly personal trusts?). Proprietary investment products may be offered under certain circumstances. Retirement Advisers are not required to recommend the lowest fee option if another product is better for the client.
Admittedly, the currently issued DOL Final Fiduciary Rules are designed primarily to apply to retirement accounts, including IRAs, however, it is probably not unrealistic to assume that a court might give some type of expanded judicial cognizance to these new fiduciary rules and requirements when reviewing future personal trust and investment management litigation, including robo-advisors, possibly including a breach of fiduciary duties and responsibilities.
The power of a trustee to adjust receipts and disbursements between principal and income was recognized under Section 104 of the 1997 Uniform Principal and Income Act (“UPIA”).
Most states have recently enacted enabeling legislation setting forth the various steps required to convert a net income trust to a private unitrust. State statutes may typically include many of the following provisions:
Definitions – Terms used in the statute.
Fiduciary duties and general principals – requirement for a fiduciary allocating receipts and disbursements between principal and income.
Fiduciary power to adjust between principal and income to the extent the fiduciary considers it necessary.
Total return unitrust definitions.
Indication that the trustee may in it’s sole discretion and without judicial approval convert an income trust to a total return unitrust if the trustee adopts a policy for the trust stating that future distributions from the trust will be unitrust amounts not net income.
The trustee will send notice of its intention to take such action along with copies of such written policies to the grantor, if living, qualified trust beneficiaries, and trust advisors and protectors.
No person receiving such notice shall object within a stated time period.
The fair market value of the trust shall be determined at least annually.
The percentage used in determining the unitrust amount shall be either a stated fixed amount or within a certain range.
If the trustee desires to convert an income trust to a unitrust, but does not want to do so under the statutory provisions, the trustee may in many cases petition the appropriate court for an order to do so.
See Internal Revenue Service (“IRS”) Regulation Section 1.643(b)-1 (“643 Regs.”) redefining a safe harbor income amount of between 3% and 5% of the fair market value of the trust assets as being a “reasonable apportionment” of the total return of the trust. A switch using the method authorized by state statute will not constitute a recognition event under Internal Revenue Code Section 1001 and will not result in a taxable gift from the trust’s grantor or any of the trust’s beneficiaries. The 643 Regs clarify circumstances under which capital gains are included in the Distributable Net Income (“DNI”) of the trust. See, “Drafting to Allow for the Inclusion of Capital Gains in DNI under the 643 Regulations”, by Timothy A. Nordgren, North Carolina Bar Association, 2014.
Hopefully, this report will provide useful information on the advisability of the potential investment and administrative benefits of converting a trust from an income trust to a private total return unitrust.
Modern Portfolio Theory utilizes a Total Return approach which is the sum of income (dividends and interest) and realized and unrealized capital gains.
Generally, the terms of the trust specify whether unitrust amounts are to come in whole or in part from net trust accounting income, in whole or in part from the trust principal account, or whether the settlor has left it to the trustee to make the call. Absent such guidance, the better view is that the trustee has the default authority to make the unitrust disbursements from the general funds of the trust without regard to distinction between income and principal. See 3 Scott & Ascher, Section 13.2.8.
The trustee and the income beneficiaries would know at the beginning of the year the precise amount that would be distributable in the course of the year and can set up automatic monthly or quarterly distributions in a uniform amount.
The interests of the life beneficiary and the remainder men are aligned by conversion to the unitrust, everyone is happy!
If you have a client that is either the income beneficiary or the remainderman of a traditional net income trust, they might be receptive to exploring the suggestion to convert the investment and dispositive provisions of that trust to a private unitrust.
Trusts have been used for many years to hold title to property and, in some cases, pass title to a beneficiary. A trust holds title to property for someone’s benefit. In establishing a trust the person establishing it, the grantor or settlor bifurcates the ownership of the property, the trust corpus or principal placed in to the trust. The designated trustee, or co-trustees, receive the legal title to the trust corpus, and the equitable title passes to the trust beneficiaries.
Quite often a trust is established with two classes of beneficiaries: the income beneficiaries who receive the current income produced by the trust corpus, and the remainder beneficiaries who will receive the trust corpus upon the occurence of a given event such as the termination of the trust. This arrangement is often described as a split interest trust or a net income trust .
Unfortunately with a net income trust the rigid demarcation between trust income and trust principal is counter productive when it comes to trust investments. The trustee is often caught in the middle between the life income beneficiaries who are clamoring for more income and the remaindermen who are clamoring for more growth in the trust principal. Under these circumstances Modern Portfolio Theory and a total return investment strategy aimed at growth rather than income is difficult to pursue. See 4 Scott & Ascher, Section 20.11 and Section 20.610.
Over the past several years the significant decline in interest rates and an unprecedented decline in dividend yields has produced an impossible task for the trustee today to satisfy both the income beneficiaries and the remaindermen of a net income trust. The typical noncharitable unitrust governing instrument will provide that all of the trust accounting income shall be added to principal and the life beneficiary in a given year shall then receive a fixed percentage of the net market value of the trust estate valued at the end of the prior year. The more a trustee pursuing a total return investment strategy invests for growth the more the duty of impartiality is implicated.
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Have you been presented with this question: “The bank has handled the investments for dad’s trust under his will for the past 10 years since he died. I don’t think that they have done a very good job, have they?”
Quite often we are contacted by litigation attorneys involved with a dispute resolution question similar to the one above concerning the duties, responsibilities and possible liabilities of a bank acting in some capacity for their client’s estate and/ or financial planning/wealth management needs. To a great extent, the duties, responsibilities and potential liability of the bank will depend on the actual capacity under which the bank is acting. This can often be ascertained by referencing the language in the underlying document, i.e. trust agreement, will (typically prepared by an attorney), investment management agreement, agency agreement, custody agreement, brokerage agreement, etc. (typically on bank prototype forms).
The bank may be acting in one of several capacities:
Trustee or Cotrustee: Depending on the specific language in the underlying trust instrument (will or agreement), the bank will assume fiduciary duties and responsibilities.
Investment Agent/Managing Agent: Under this account relationship, typically administered in the bank’s Trust Department, the bank would also assume fiduciary duties and responsibilities.
Custodian: Again, this account relationship would typically be administered in the bank’s Trust Department. Tthe bank would generally not assume fiduciary duties and responsibilities being primarily responsible only for the safekeeping of the assets in the account and following the account principal’s directions as spelled out in the Custody Agreement form.
Investment Agent/Managing Agent – administered by a Registered Investment Advisor (“RIA”) subsidiary of the bank or the bank holding company: The bank would assume fiduciary duties and responsibilities with it’s affiliate RIA being regulated by the Securities Exchange Commission (“SEC”) under the Investment Advisors Act of 1940.(“Act”)
Broker: Under an account maintained at the bank’s, or the bank holding company’s, registered broker/dealer (“BD”) firm regulated by the Financial Industry Regulatory Authority (“ FINRA”) ,formerly the National Association of Securities Dealers (“NASD”), the bank currently has no fiduciary duty or responsibilities being held only to “suitability” rules governing the brokerage industry.Accordingly, the duties, responsibilities and potential liability of the bank are determined, to a great extent, by the exact capacity under which they are acting.
Advice versus Transactions: Fiduciary Duties versus Suitability Requirements
Blacks Law Dictionary describes a fiduciary relationship as founded on trust or confidence reposed by one person in the integrity and fidelity of another. Law.com defines a fiduciary as, “ A person who has the power and obligation to act for another under circumstances which require total trust, good faith and honesty”. A fiduciary has both ethical and legal responsibility to act for another’s best interest at all times.
A RIA under the Act is required to act as a fiduciary , putting the clients interest above the RIA and to declare any conflicts of interest that may arise. A Broker, or a Registered Representative of a broker-dealer firm, regulated by the Securities Exchange Act of 1934, is required only to recommend investments that are “suitable” for the client. Thus, a broker can legally put his/her own interest above the client’s when recommending investments as suitable for the situation.
Brokers/Registered Representatives are typically paid by commission on products sold through transactions. In addition, many broker/dealer firms manufacture investment products and utilize their brokers as a prime distribution channel to sell their proprietary in house investment products. RIAs typically do not take marketing incentives or commissions from investment product providers. RIAs receive advisory fees generally based on the size of the account.
Registered Representatives of broker-dealer firms must provide the client with suitable investment products. However, the “suitability standard” is very broad and often difficult to impose. A suitable investment recommendation may mean that the investment has to fit the client’s needs and tolerance for risk. However, the suitability standard permits the Registered Representative to recommend an inferior investment fund because it gives them a higher commission, as long as it is still a suitable investment.
Fiduciary Responsibilities and Duties
Under common law Agency rules an investment advisor, as agent, owes fiduciary duties to its client, as principal. See Restatement (Third) of Agency, Section 1.01 (2006). The investment advisor’s fiduciary duty also comes from Section 206 of the Act , 75 U.S.C. Section 80b-1 et seq. and the rules there under, Title 17,Part 275 of the Code of Federal Regulations, also see Section 36(a) of the Act. Section 206 is an anti fraud provision securities section that prohibits an advisor from engaging in fraudulent or deceptive acts or manipulation. In addition, the SEC, and its Division of Investment Management, provide interpretive guidance. Also see SEC v. Capital Gains Research Bureau, 375 US 180 (1963) holding that Section 206 of the Act imposes a fiduciary duty on investment advisors by operation of law. It is implied that every violation of Section 206 would also ground a breach of fiduciary duty claim under common law. Section 202(a)(ii) of the Act sets forth who is required to register.
Fiduciary duties owed to the client by the advisor require care, loyalty, obedience, as well as acting in good faith and disclosure.
Broker-Dealer Registered Representatives may be subject to RIA fiduciary responsibilities
In March 2015 Mary Jo White, Chairman of the SEC, stated that she would propose , pursuant to Section 913(a) of Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), that a uniform fiduciary duty should be imposed on broker-dealer firms transactions, the same as on RIAs. Also see Section 913(g) of Dodd-Frank. indicating that when providing personalized investment advice about securities to retail customers, the standard of conduct shall be to act in the best interest of the customer without regard to the financial or other interest of the broker-dealer or investment advisor providing the advice. This process would be somewhat similar to the recently announced Department of Labor (“DOL”) rules amending it’s definition of a fiduciary under the Employee Retirement Income Security Act (“ERISA”).
Chairman White’s position was stated shortly after the Obama Administration advanced a plan through the Labor Department to impose the higher standard on brokers who manage retirement accounts. White’s plan would make all financial advisors follow the same rules.
Securities regulators agree that the fiduciary duty should not apply to all brokerage services, but only to those services that fall within a reasonable definition of personalized investment advice to retail customers. The regulators further state that personalized investment advice to retail customers should be governed by a fiduciary duty regardless of whether that advice is provided by an investment advisor or a broker-dealer.
Finally, J.P. Morgan Chase is currently in advanced talks with the SEC to pay more than $150 million to resolve allegations that it inappropriately steered investment clients to its own proprietary in house investment products, typically its mutual funds, without proper disclosure generating excessive fees for the bank.
In analyzing the duties and responsibilities taken on by the trustee or investment advisor of a trust, one must ascertain the exact nature of the appointment or engagement. Potential future regulatory changes could impact the duties and potential liability of the trustee/investment advisor.
Federal Rules of Civil Procedure Rule 26 was revised in 2010 resulting in a favorable environment for attorneys in that now they do not have to worry about discoverable documents such as Expert Witness Report drafts. The attorney no longer has to disclose draft expert witness reports and all communications between the attorney and the expert witness. Many state courts are also adopting a similar arrangement.
Under the new FRCP Rule 26 most communications between the attorney and the expert witness are now protected from discovery under the attorney work product doctrine. In order to be compliant with the new FRCP Rule 26, and to be admitted as evidence, an Expert Witness Report must:
Contain a statement of all opinions to be expressed and the basis and reasons for them
Contain the facts and data considered by the expert witness in forming the opinion.
Any exhibits to be used.
The witness qualifications including a list of all publications authored in the previous 10 years.
A list of all other cases during the past 4 years where the expert witness testified as an expert at the trial or by deposition.
A statement of compensation to be paid to the expert witness.
Contact John Rodgers & Associates ( www.fiduciaryconsultants.com, [email protected], 704-366-8875 ) for fiduciary litigation consulting and expert witness services concerning litigation matters for trusts, estates and investment management .We are fully compliant with the new above stated requirements of FRCP Rule 26. Take advantage of the recent FRCP Rule 26 changes to assist your clients trust, estate and investment management litigation efforts.
JULY, 2013 WAS A BIG MONTH FOR JOHN RODGERS & ASSOCIATES!
During July, 2013 John Rodgers & Associates provided fiduciary litigation consulting, expert witness services, reports, depositions and trial testimony in three successful litigation’s:
Retained by counsel as an Expert Witness representing a family of trust beneficiaries versus a large professional trustee. Qualified as an expert in trust administration in Federal Court in a case that was tried to a verdict and settled on appeal resulting in a judgment for the plaintiffs in excess of $1Million.
A successful verdict representing a corporate fiduciary in a jury trial in Wisconsin state court
A successful verdict representing a corporate fiduciary in Ohio state court.
We look forward to working with you and your clients.
If the transferor, or grantor or settlor intends to create a trust the transferor will impose certain duties on the transferee with respect to the transferred property. Typically, the establishment of a trust relationship brings with it five fundamental duties:
The duty to be generally prudent (to include the duty to segregate the property);
The duty to act and to carry out the terms of the trust;
The duty to be loyal to the trust (to include acting honestly and in good faith;
The duty to give personal attention to the affairs of the trust: and
The duty to account to the beneficiary.
If any one of these duties is totally lacking, there is a good chance that the transferee’s legal status with respect to the property is something other than that of a trustee.
Duty to Be Generally Prudent
The Uniform Trust Code, in Section 804, states that, “A trustee shall administer the trust as a prudent person would, by considering the purpose, terms, distributional requirements and other circumstances of the trust. In satisfying this standard the trustee shall exercise reasonable care, skill and caution. ” In addition, Restatement (Third) of Trusts, Section 77(2) states that, “The duty of prudence requires that the trustee exercise reasonable care, skill and caution in the administration of the trust.” In fact, Scott & Ascher in Section 17.6 indicates, ” It is not sufficient that a trustee uses such diligence as the trustee ordinarily employes in the trustee’s own affairs. The standard is an objective one, that of the prudent person.”
Restatement (Third) of Trusts is Section 77 and 77(1) indicates that the standard of prudence is a standard of conduct, not performance. A trustee’s action or inaction will not be judged in hindsight, but will be judged in light of the “purposes, terms and other circumstances of the trust.” It further states, “The duty to act with caution does not, of course, mean the avoidance of all risk, but refers to a degree of caution that is reasonably appropriate or suitable to the particular trust, it’s purposes and circumstances, the beneficiaries’ interest and the trustee’s plan for administering the trust and achieving it’s objectives.”
Restatement (Third) of Trusts Section 77 comment a and Section 801 of the Uniform Trust Code indicate one who holds oneself out as a professional trustee with special skills is under a duty to employ those skills. In fact, 3 Scott & Ascher, Section 17.6 states that the law has been tending in the direction of holding the corporate trustee to a higher standard of care than the standard to which an individual non-professional trustee is generally held.
Duty to Carry Out the Terms of the Trust
Addressing the trustee’s duty to carry out the terms of the trust the Uniform Trust Code, Section 801, states, “Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith in accordance with it’s terms and purposes and the interests of the beneficiaries.” Restatement (Third) of Trusts, Section 76 (1) and comment b, indicate “A person accepting the office of trustee has an affirmative duty to act, that is to say, to administer the trust diligently.”
Restatement (Second) of Trusts, in Section 164, comment a, and 2A Scott 0n Trusts, Section 164 and 154.1 state that the trustee has an overarching duty to carry out the intentions of the settlor as they have been manifested in the terms of the trust.Restatement (Third) of Trusts, Section 76 (2) indicates that in administering the trust, the trustee has a duty to ascertain his duties and obligations, the beneficiaries, and the purposes of the trust. He is then under a duty to “comply with the terms of the trust and applicable law in distributing or applying income and principal to to or for the benefit of the beneficiaries.” According to 3 Scott & Ascher, Section 17.14 and Restatement (Third) of Trusts, Section 76, comment f, the duty to read the governing instrument and get the facts is all part and parcel of the trustees duty to carry out the terms of the trust.