A fiduciary duty is one of complete trust and the utmost good faith. A fiduciary is a person, committee, or organization that has agreed to accept legal ownership and control and management of an asset or group of assets belonging to someone else. While fiduciaries take legal title to assets, they do not take equitable title. The assets do not belong to fiduciaries. Rather, legal title allows fiduciaries to administer and manage the assets. The assets are the fiduciary's only for a temporary period and only for a specific purpose. Fiduciaries must not derive any direct or indirect profit from their position, and they may not place their own interests above those of the beneficial owners of the assets.
In taking control of another's assets fiduciaries also agree to manage the assets in accordance with the wishes of the individual who established the fiduciary relationship. The powers and duties of fiduciaries are often established in a document that creates the fiduciary relationship. The conduct of fiduciaries is also governed by common law as well as specific federal and state laws. The Uniform Fiduciary Act and the Uniform Trustees' Powers Act serve as models for state legislation.
Banks, through their trust departments, often act as fiduciaries. A federally chartered bank that wishes to exercise fiduciary powers must file a special application with the Comptroller of the Currency. State laws typically allow state-chartered banks and specially formed trust companies to exercise fiduciary powers. Banks often act as fiduciaries with regard to trusts and estates and may assume such roles as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates, assignee, receiver, and managing agent.
Corporate directors have a fiduciary duty to their shareholders. They are accountable not only for the safekeeping of assets but also for their efficient and effective use. Directors may not profit personally at the expense of, or contrary to, the corporation's shareholders. Corporate directors must place the interests of shareholders above their own interests.
Other examples of fiduciary relationships include those between attorneys and clients, stockbrokers and clients, and agents and principals. In all cases the interests of the beneficial owners must come before those of their fiduciaries, whether the fiduciaries are attorneys, stockbrokers, or agents.
The most common forms of formal fiduciary relationships involve estates and trusts, where fiduciaries act as trustees, executors, or personal representatives for beneficial owners. Such fiduciaries are different from agents in that they take legal title to the assets. Where agencies typically depend on the existence of the parties involved, trusts and estates are more impersonal in nature. In the case of estates, fiduciaries are known as executors if there is a will, administrators if there is no will. Both are also known as personal representatives. The conduct that executors must follow is determined by the will. In the case of administrators, they must follow state law. Reports may need to be made to probate courts, and the assets must be administered and finally distributed as directed by the will or state law.
In the case of trusts, fiduciaries serve as trustees. Their conduct is determined by a written instrument that created the trust. If there is a testamentary trust, or one that was included in a will, then the trustee's directions should be part of the decedent's will that established the trust. Trust instruments do not necessarily have to be recorded in public records. Trustees are primarily responsible to the beneficiaries of the trust.
Fiduciaries have all the powers "necessary and appropriate" to accomplish the purposes of the estate or trust. These powers may include some that are not specifically given in the trust document. The trust instrument may also prohibit certain powers to fiduciaries. In general, fiduciaries have the power to sell property, whether specifically granted or not. Unless it is specifically stated in the trust instrument, however, fiduciaries do not have the power to borrow against property. In some cases the courts may grant such powers to fiduciaries in order to preserve the assets and if it seems consistent with the grantor's probable intent. Fiduciaries may also incur reasonable expenses in the administration of the assets. They may make improvements to property when necessary. In short, their powers are very broad, subject to general rules and any specific instructions.
Every privilege has a corresponding responsibility, and fiduciary powers also involve fiduciary duties. All fiduciaries must exercise the care and skill of a "reasonably prudent person." The reasonably prudent person rule is one that is based in common law. In the United States it was first articulated in an 1830 case, Harvard College v. Amory. Such a rule, for example, prohibits trustees from speculating. The rule guides the conduct of fiduciaries in terms of preserving capital and producing income from a trust's or estate's assets. Federal and state legislation may serve to enhance the prudent person rule and set forth additional guidelines regarding permissible conduct. In addition to acting prudently, fiduciaries are expected to exercise any special skills they might have for the benefit of the estate or trust.
Thus, the major objectives for fiduciaries in the case of estates and trusts are to preserve the estate's assets and to use them to produce income. Fiduciaries also have a duty to keep their own funds and assets entirely separate from those of the trust. They are not allowed to make loans to the trust or estate, nor can they accept loans from it. They are not allowed to accept any compensation from a third party for their actions in connection with the trust or estate.
Fiduciaries have a duty to examine the instrument that created the trust or estate, to determine the property and assets involved as well as the identity of the beneficiaries. They must examine the instrument to determine what their own duties are as fiduciaries, and they must administer their office in accordance with the terms of the trust or estate document.
Fiduciaries must exercise reasonable diligence in locating the property and assets of an estate or trust. They must take tangible or real property into possession without undue delay. They must also take possession of any documents representing intangible assets. They are allowed to employ agents as needed to accomplish these duties. In caring for the assets and property, fiduciaries must use reasonable care and prudence. Their duties may include recording deeds, carrying adequate insurance, renting a safe-deposit box, inspecting property from time to time, supervising all investments, paying off encumbrances and taxes that might jeopardize title, and keeping property in good repair.
In many estates and trusts fiduciaries have an additional duty to make the assets produce income. Fiduciaries may have to develop an investment plan for generating income. They may have to sell off nonproductive assets, if such power has been granted, and reinvest the proceeds in more-productive assets.
Fiduciaries must administer their office solely for the benefit of the beneficiaries or beneficial owners. Fiduciaries may not take a position that could be considered adverse to the beneficiaries. They may not obtain a personal advantage at the expense of the beneficiaries. They are under a duty of absolute loyalty to the beneficiaries.
Employers who establish employee benefit plans, such as 401(k) plans or other types of pension plans, have a fiduciary duty to their employees. The Employee Retirement Income Security Act of 1974 (ERISA) regulates and sets standards for employee benefit plans. ERISA confirmed the prudent-person rule found in common law, but it also set higher standards of fiduciary duty for individuals who have control over a plan's assets.
In spelling out fiduciary duties with regard to employee benefit plans, ERISA covers the duty of loyalty, the duty to use prudence, and the duty to comply with the plan. The duty of loyalty means that fiduciaries must act in the best interests of the plan and its participants. If fiduciaries are also plan participants, they must subordinate their own interests to those of the plan. In cases where plan participants form a diverse group with different interests, it may be difficult to balance the interests of all concerned.
ERISA expands the concept of prudence beyond that found in common law. Section 404(a)(1) of ERISA states that a fiduciary shall discharge his duties with respect to a plan "with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims." Thus, fiduciaries of employee benefit plans must discharge their duties with adequate expertise. The courts have found that fiduciary duties were breached when nonexpert laypersons failed to seek independent qualified counsel when making decisions affecting plan assets. Plan fiduciaries are under an obligation to not only use their special skills and expertise, they must engage qualified advisers and managers if they lack the expertise themselves.
The prudent-person standard, as expressed in ERISA, also requires that fiduciaries "diversify the investments of the plan so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so." ERISA also makes note of prohibited transactions. Additional specific duties of plan fiduciaries may be set forth in the plan document, and fiduciaries have a duty to administer the plan "in accordance with the documents and instruments governing the plan." Fiduciary duties outlined in the plan document must be consistent with ERISA.
A much-discussed aspect of ERISA is that it established personal liability for breaches of fiduciary duty. That is, fiduciaries of employee benefit plans can be held personally liable for any breaches of their duties as spelled out in ERISA. ERISA expanded the concept of fiduciary to cover named fiduciaries as well as anyone who has the power to manage, acquire, or dispose of any assets of a plan. Thus, even if they are not named specifically as fiduciaries, chief financial officers, controllers, and management accountants can be held to ERISA's standards of fiduciary duty if they have the power to manage, acquire, or dispose of the plan's assets.
The year 2000 (Y2K) problem poses a unique set of liability issues for fiduciaries. The yet-to-be-determined standard of care with which a fiduciary must deal with the impact of Y2K will involve factors such as how other fiduciaries address Y2K, the scope and nature of a fiduciary's operations, the role of automated systems in a fiduciary's primary activities, the difficulty of obtaining adequate information and assistance on Y2K issues, and the probable consequences of noncompliance.
At the least fiduciaries can be expected to review the Y2K readiness of third-party service providers, including transfer agents, custodians, brokers, and others who provide administrative support. Fiduciaries will also need to assess the impact of Y2K on the value of their investments, since they have a responsibility to preserve assets under their control. Failure to properly address Y2K concerns could leave fiduciaries subject to a unique set of liabilities, although the standard of care required of fiduciaries with regard to Y2K will likely not be determined for some years to come.
SEE ALSO : Employee Benefits
[ David P. Bianco ]
Peterson, Robert M. "A CPA's Fiduciary Duty." Outlook, summer 1998, 53.
Smith, Brian W., and Joseph E. Yesutis. "Fiduciary Duties and the Year 2000." ABA Banking Journal, August 1998, 45. Zall, Milton. "An Employee's Obligation Not to Compete." Managing Office Technology, July-August 1998, 6.