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Ongoing Debate: When (If Ever) Can a Fiduciary Legally Engage in Self-Dealing?

Ongoing Debate: When (If Ever) Can a Fiduciary Legally Engage in Self-Dealing?
July 10
00:20 2018

While all the talk has been about the now-vacated DOL Fiduciary Rule, we may have forgotten about the ongoing debate pertaining to the matter of self-dealing in circumstances where a fiduciary relationship clearly does exist. On the face of it, there appears to be little room for debate. Upon closer examination, however, the specifics of particular circumstances can muddle things up. Would you like to see what we mean by this? Here’s what you get when you ask the experts whether or not a fiduciary can ever legally engage in self-dealing:

“How might the third party (the agent or attorney in fact) engage in self-dealing?” says Chris Cooper a California Licensed Professional Fiduciary located in San Diego, California. “EASILY!” he answers, “When there is no one watching, and they are not caught until after the self-dealing has taken place. This can often be in a form of elder financial abuse or exploitation.”

All kidding aside, ask any trust or ERISA attorney this question, and you’re bound to get answers that range for strict black-and-white to extended nuance.

As an example of the former, there’s “An agent can never legally engage in self-dealing because self-dealing always implies that the agent puts their interests ahead of the principal,” says Marc Fitapelli, a partner at Fitapelli Kurta in New York City.

On the other hand, Harry W. Drozdowski, Attorney at Anglin Flewelling Rasmussen Campbell & Trytten LLP in Pasadena, California, says, “So long as the actions are in the best interest of the Principal, the Agent is generally not prohibited from self-dealing. As to authorizing actions that are not in the Principal’s best interest, there can be no authority because the entire foundation of the Agent/Principal relationship rests upon the notion that the Agent will only act in the best interest of the Principal. But if there’s a gray area where the Agent is unsure of whether an action will be in the Principal’s best interest, an Agent can (and should) seek the pre-approval of the action from a judicial authority. In California, this approval comes from the Probate Court, and will require an investigation into the facts and circumstances surrounding any proposed transaction.”

Some believe a legal document may allow self-dealing. Adam D. Citron, Senior Counsel at Davidoff Hutcher & Citron LLP in New York City, says, “With the knowing permission of the client, the agent could engage in self-dealing. But otherwise, it’s dubious.”

Still others believe, while such documentation is possible, they question the reasoning behind such a document. “If the power of attorney specifically granted the attorney in fact the power to engage in self-dealing transactions, these might not be prohibited,” says Gerard F. Miles, Jr. a partner at Huesman, Jones and Miles, LLC in Hunt Valley, Maryland. “However, this would not be a good idea and any attorney would suggest that a different attorney in fact be appointed.”

There are those who consider any attempt to legitimize normally prohibited self-dealing transactions to cross a moral line. “An agent may have authority over a bank account or a brokerage account and may (directly or indirectly) use that authority and those funds to his benefit (e.g., a broker with a limited POA that engages in churning),” says Oleg Cross an attorney at Cross Law APC in San Diego, California, “but any such practice is both unethical and prohibited.”

Finally, while federal law does offer some guidelines, the ultimate test may come down to state law. “The power of attorney may be drafted to waive the prohibition against self-dealing,” says Jill Scherff, a partner at Dinsmore & Shohl LLP in Cincinnati, Ohio. “However, a blanket statement waiving this prohibition may not be sufficient. Many states require the principal to specifically authorize acts of self-dealing. The Uniform Power of Attorney Act contains a default rule that prohibits an agent who is not an ancestor, spouse, or descendant of the principal from exercising the agent’s authority under the power of attorney in a manner that will create in the agent an interest in the principal’s property unless it is specifically authorized in the document. Accordingly, a general power to make gifts on the principal’s behalf would not allow a non-relative agent to make gifts to him or herself. The principal would need to specifically authorize that agent to make gifts to him or herself in the document.”

We’ve been worrying so much about the definition of “Who is a fiduciary?” that we overlook, even if we agree to the “Who is?” we still need to come to terms with the “What is?”. What is a prohibited self-dealing transaction may seem obvious, but it is not.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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