Photo by Hugh Williams.
On Oct. 29, Boston University School of Law is honoring law professor Tamar Frankel with a conference on The Role of Fiduciary Law and Trust in the 21st Century. Frankel, a previous Lawdragon 500 honoree, is the author of several books, including Trust and Honesty, America’s Business Culture at a Crossroad, and Securitization, among others. She also is the author of the forthcomingFiduciary Law, which can be read about and ordered here.
Our readers may remember that we did a Q&A with Frankel back in 2007, in which she discussed much of her fascinating career that included a stint in Israel’s Ministry of Justice.
Lawdragon: Having a conference inspired by your work must be quite an honor. How did this come about and what was your reaction?
Tamar Frankel: I am honored by this Conference. However, I believe that this Conference came about because of the importance of the subject matter, as much, if not more, than the importance of me. Somehow, it happened that I wrote about subjects which at the time were not topical but became topical later. Such was the Regulation of Money Managers (mutual funds law), which I started at the beginning of 1970s and completed in 1979, and the treatise on Securitization, which I started in 1978 and completed the first edition in 1991 (second edition in 2006). These were interesting subjects that had scattered available material but had no combined coherent body of knowledge.
Fiduciary law appeared in so many of the subjects that I taught: trusts and estates, corporations, securities regulation and securitization, as well as mutual funds law and trust and honesty, all of which lead to Fiduciary Law. All these topics deal with people who hold other people’s money and people who offer expert services to which others resort. Society needs fiduciaries. But since they are entrusted with money or power or both in order to enable them to provide the service, they face temptations, which the entrustors cannot control. Control would undermine the usefulness of the service. Therefore, law is necessary to curb fiduciaries’ temptations.
This is an area that invokes disagreements (although I do not know any legal area that does not involve disagreements). The Conference is designed to present different views on the subject, and so does my book, noting at the end of most chapters “The Debates.” In light of the current national problems, attention to fiduciary law is appropriate. The entire financial system is based on fiduciaries: decision makers who hold other people’s money.
LD: What is the main goal for this conference?
TF: The main purpose of the Conference is to highlight Fiduciary Law as one area of law rather than a grab bag of many areas, and to show both the common themes and the differences among the various fiduciaries. Fiduciary law has been dealing with the same problems for over 3000 years, even though solutions may have differed, depending on the environments.
Thus, one session in the Conference deals with history. Another session deals with the current debate on whether and to what extent brokers should be deemed fiduciaries. And yet another session involves economics and finance presented by experts in those areas. I believe that the need for more in-depth education on this category of law will be presented as well. And at the same time there will be views that negate the existence of fiduciary law as a category and consider it an off-shoot of contract law.
LD: You’ve authored many books and articles throughout your career. What made you want to author a new book on Fiduciary Law?
TF: Sometimes it takes years to combine specific ideas and instances into an overview or a theory. The process may start with disparate items that fall into the right parts of a jigsaw puzzle and create a coherent map. Then comes the “Aha!” and “why did I not see this before?!” I wrote five articles and a teaching book on fiduciary law (which I will rewrite, hopefully soon) before the entire picture emerged. It is the “Aha” that made me write this book.
LD: Over time, have we seen a greater abuse of fiduciary relationships in our society?
I am not sure. Temptations have increased, and rules were refined to allow for creative solutions, some of which opened the door for abuse as well. In Hammurabi’s time an agent who received money or articles from a merchant in one place to sell or buy in another place owed double the entrusted amount to the merchant. There was no way for the merchant to control or supervise the agent. Today there may be ways and the agent need not be responsible.
At the same time, mistakes were made: We believed that markets would resolve excesses and abuse of entrustment. We believed that fiduciary relationships are contracts. We believed that people who bought homes at bubble prices, which they could not afford, at disastrous loan terms, which they may not have understood, should be responsible if they are evicted and their homes are sold at a deep discount. They made their bed – let them sleep in it (in this case become homeless). When people rely on “advisers,” “brokers” or whatever they call themselves in areas that others do not fully understand, those “advisers” and “brokers" etc. are fiduciaries. That is especially true when these “advisers” cash-in short term and the buyers and borrowers undertake long-term liabilities that may ruin their lives.
When ”trust me” people threaten our economic and financial system because too many people do not take care of themselves against the “trust me” syndrome, our system and our culture are in danger. No longer can we wash our hands of homelessness and say: They got what they deserve. That may be absolutely true. But I do not want to live in a country with beggars who ask for food. That is why I would like the “trust me” people to be trustworthy. That means – fiduciaries.
LD: What is your advice for how this abuse can be curtailed?
TF: There is a story of an old man who spoke to his grandson: “There are two wolves residing in each of us,” he said. “One is avaricious, greedy, dishonest and cruel. The other is good intentioned, fair, honest and helpful to others.” The grandson turned to his grandfather: “Who wins, Grandpa”? And the old man thought for a minute and said: “The one whom we feed.”
We need to cease feeding the greedy wolf within us. I believe it can be done. Let us enforce the laws on the books. We have enough rules to stem the tide. We may change some of the rules that have been eliminated and demonstrated their toxic resulting freedoms. But by and large, let us enforce the law. Let us adopt a less of: “where is it written?” approach, and consider the purpose of the laws we have. Otherwise, as the mutual fund advisers found out, we may drown in minute details at high cost. Looking at the purpose rather than at the dictionary is not new. In the 1960s that is the way the courts interpreted the laws.
Let us re-interpret the concept of freedom. We should make sure that people who assert the freedom to exploit those who cannot protect themselves, will receive the same free treatment from those who can stand up to them. And if the victims are weak, notwithstanding our suspicion of government (big or small, political or private), law should “reward” them the same way.
Finally, we need private sector leadership. Leadership should show the way and demonstrate by its behavior how to cease feeding the greedy wolf. That is regardless of how weak and greedy the victims are. Our system will be healed not by the victims but by self-controlling powerful private leadership and intermediaries of the financial system. Law and lawyers should play this role as well and take the lead.
LD: In this context, what is your opinion of the recent financial reform regulation?
TF: I have not studied the entire legislation, but much of it transfers power to agencies. Therefore, the law book is not yet fully written. Congress obviously is concerned and at the same time very conflicted. Because I believe that enforcement of existing laws has been weak, one of the short articles I am now completing suggests that the Securities and Exchange Commission should be authorized to “outsource,” in a limited way and under its direction, large complex cases which require more funding than the agency has. We might have fewer embarrassing settlements of claims, which the courts reject. But it is clear that the devil is in the details.
The recent financial reform regulation must cover the creative hybrids, shadow banking, and trading all of which undermine value, even though all have some virtue. But all are too destructive to be left without some constraints. There is a price to regulation. But the price to non-regulation in these cases seems higher. I see signs that other countries are waking up and may close the door to our financial system and its innovations. If we do not reign-in the fiduciaries, the world will. Therefore, I see the legislation as the beginning of a new design for controlling the financial intermediaries and their creativity. A new financial design is no different from a new health pill. Both can heal or kill.
LD:Anything else on these topics you want to comment on?
TF: Unbridled power, whether private or public, endangers democracy. Fiduciary law limits private power but will be effective only if it does not limit the freedom of people to innovate and trade. Let us hope that the lessons of the past few years will help us find a better balance than we have followed before. If one wolf of the two within us is the sole winner, we will fail. Teaching the two wolves to combine and balance conflicted objectives and ambitions then all of us will win.