'You can’t do something wonderful'
The narrow scope of a fiduciary's duty needs explicit direction
In September, as part of Bank of Nature’s commissioned research into legal strategies that test fiduciary duty in the climate era, we met with Tamar Frankel, the esteemed law professor emerita from Boston University and one of the world’s foremost experts on the powers of fiduciary duty.
There are all kinds of fiduciary relationships, but we’re zeroing in on one with the duty, mission and scale (we say) to lead on climate: Public sector employees and their pension fiduciary. A pension fiduciary is the person or organization in charge of delivering a pension promise to those same public sector employees. Fiduciary duty comprises the instructions that inform the fiduciary-beneficiary social contract.
We asked Ms. Frankel the central question to our litigation initiative:
“Can a beneficiary of a pension plan sue their pension fiduciaries for breach of fiduciary duty if they invest in industries that contribute to the climate crisis?”
We were to be disappointed because the answer, regardless of what we were investigating, is limited by the language of the fiduciary duty agreement, she says. At the same time, we were shown a different way to get at the answer we wanted through the technicalities that the law loves so much.
In the back-and-forth of the answer to the question, she said:
“If it’s not explicit in the trust document,
you can’t do something wonderful.”
It was such an odd turn of phrase. It might also be the most important sentence I’ve ever heard.
A stickler technician, Frankel was very clear that fiduciaries must follow instructions as part of their duty to beneficiaries or face penalties, like prison, for their breaches of fiduciary duty. So, the arbiter of what is allowed is the precise language of the instructions when, as a best practice everywhere, fiduciaries are following implied language — rather loosely. This is a big difference.
To unpack this gem:
“You” – A fiduciary is a person obligated by fiduciary duty to manage the best interests of a beneficiary. A fiduciary has a position of power over the beneficiary.
“Fiduciary duty” – A contract of sorts that guides a fiduciary and protects the beneficiary from fiduciary malpractice.
“Trust document” – The instructions. For example, US State governments have statutes in governing law that outline “fiduciary standards” for fiduciaries of state-level public pensions for civil servants.
“Explicit” – To a technician like Frankel, this is the meat of it. What do the instructions actually say? Can you do something wonderful? Can you do something terrible?
The timing of this conversation was in the wake of the US Supreme Court’s new take on the right to abortion. For illustration, she posited: Can you, as a fiduciary, put fiduciary money toward women’s health? Not if it isn’t explicit in the trust document.
“You can’t do something wonderful.”
It makes no difference what the fiduciary wants. That begs the question: “Do the beneficiaries know how they are instructing their fiduciaries?”
I’m not the lawyer, which I get to say regularly, but shouldn’t we take a hard look at the instructions guiding fiduciaries? What’s explicit and what’s not explicit can answer our question about what is fiduciary and what is not fiduciary.
Can we argue that state laws, for example, are badly written guidelines for fiduciaries of public pensions that allow fiduciaries to be, uh, non fiduciary?
Can fiduciaries, with proper instruction, do something wonderful?
Not to bore you with legalese, but this is what is written in Massachusetts General Law for fiduciary standards. It’s short:
Fiduciary Standards — A fiduciary as defined in section one shall discharge his duties for the exclusive purpose of providing benefits to members and their beneficiaries with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person 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 and by diversifying the investments of the system so as to minimize the risk of large losses unless under the circumstances it is clearly prudent not to do so. Each member of a retirement board established under this chapter shall upon the commencement of the member's term file with the commission a statement acknowledging the member is aware of and will comply with the standards set forth in chapter 268A, this chapter and rules and regulations promulgated under this chapter.
These are the fiduciary guidelines – the trust document – for 300,000 public pension plan participants in MA and the $101 billion held to deliver their “pension promise” – which is a regular check from retirement, whenever that is, until death. Every level of government that establishes a “defined benefits” pension plan for its public sector workers will have something like this boilerplate language.
This language defines a fiduciary. Check.
It dictates that a fiduciary provides benefits to members. Check.
Fiduciaries must use prudence – an important word and a relic of the earliest modern pensions that commonsense prevails if there is any question about how to proceed. Check, though are we all clear on what we mean by “commonsense”?
Retirement board members who are the fiduciaries in a public pension must abide by the standard ethics rules. Check. Conflict of interest, for example, is a no no.
Then, there is this bit of law that gets interesting as a focus on precision:
“Diversifying the investments of the system so as to minimize the risk of large losses”.
In stickler technician’s world:
What, in fact, is a “loss” and how do we know it’s “large”?
What, specifically, is “the system”?
At what point is a fiduciary failing to “minimize”?
And how do we challenge any of this as an unhappy beneficiary alleging a breach of fiduciary duty?
MA standards don't say explicitly that a “loss” is limited to a large loss of money, does it?
I suggest a large loss could include a bleaker future habitat, where the beneficiaries live in retirement, degraded by a fiduciary’s investments in climate-dimming enterprises like fossil fuels today. I mean, does the language exclude that definition of loss?
If we are working with the text of the trust document, it is woefully incomplete and out of sync with how fiduciaries of public pensions actually get the job done. This is our legislative challenge. What does your governing law for public pensions say about fiduciary standards?
Fiduciary law includes a number of precepts that are uncontroversial and uncontested – but the language and meaning is too often only implied, not explicit:
Duty of Loyalty
Duty of Care
Duty of Impartiality — an intergenerational duty particular to pension fiduciaries, whose beneficiaries range from the youngest new hires to the oldest living retirees.
These precepts, not explicit in MA law, say that pension fiduciaries must be loyal to the beneficiaries, must not benefit one class of beneficiary at the expense of another and that the execution of the duty must not harm others… who are not direct beneficiaries.
So, Mass General Law has vague instructions for fiduciaries of the Commonwealth’s public pensions. According to a December Stand.Earth report, the Massachusetts Pension Reserves Investment Trust (PRIT) has $2.6 billion in fossil fuel investments — hardly the worst offender. That’s not a number I found on the MA website. I didn’t find any number, nor the key words “oil”, “gas” or “fossil”.
What happens when we make the implied rules explicit? What percentage of the $101 billion in MA retirement accounts would require a fiduciary review for noncompliance. How much money would need to find an investment that complied with explicit fiduciary duty — and maybe addressed the climate crisis in ways that benefit the beneficiaries owed that duty?
I have a number. It's wonderful. Stay tuned.