Fiduciary Thinker: Scholar Tamar Frankel

Scholar Tamar Frankel leads the way on fiduciary law.

One of Wealth Manager's 50 Top Women in Wealth for 2010, Tamar Frankel has been in demand for decades as a top scholar in fiduciary law--perhaps never more than this past year, however, as the debate continues over whether brokers who provide advice should have fiduciary duty to their clients.

When Tamar Frankel got to Harvard Law School as visiting scholar from Israel, she thought it would be for a "relatively short time." But she ended up deciding to stay, "got married" and went to Harvard Law School for her master of laws, LLM degree, and then the SJD--the PhD law degree for those interested in scholarship and teaching of law. "I wanted to teach very much," she says. En route to teaching, Frankel worked at law firms in Boston and Washington, and after doing some work for the government, began to teach at Boston University School of Law.

Along the way, Frankel spent a year at the Brookings Institution in Washington--"that's where I heard the word 'securitization,'" in 1987. Since then, Frankel has become one of the nation's foremost authorities on trust and fiduciary issues, particularly as they relate to investing and securities. She was a visiting scholar at the Securities and Exchange Commission (SEC), and has lectured at many top universities. She literally "wrote the books" on securities regulation and investor trust, including: "The Regulation of Money Managers," (2d ed. 2001 Aspen Publishers), her treatise on mutual funds with Ann Taylor Schwing; "Securitization," (2nd ed. 2006 Fathom Publishing Company), with Ann Schwing; and "Investment Management Regulation," (3rd ed. 2005, Fathom Publishing Company), with Clifford E. Kirsch.

There is a new book in the works: "Abuse of Trust (Con Artists and Ponzi Schemes)," (Oxford University Press). It is a "theory of fiduciary law," that she hopes will be published, "hopefully, in the next year."

Ponzi schemes don't start out "necessarily, as Ponzi schemes," Frankel explains. "Every company borrows on the one hand and pays a dividend on the other hand--so you have two groups of investors: one receives an obligation and the other receives money. When does it become a Ponzi scheme? When there is no money in the institution or the company itself--when the company is not productive. And it can happen to an entrepreneur. They had an idea and it didn't work out."

What happens next is what is important, says Frankel: "At that point the question is what a person does. A person may say 'I goofed, I didn't do it right, I'll return the money and that is it; I'll try again.' And some people say, 'Something will come around, I'm going to continue.' And it is at that point that it becomes a Ponzi scheme where the money of some investors is paid to other investors."

Frankel has been "thinking about trust for a long time. Trust is an internally conflicting idea. You remember President Reagan said "trust, but verify," and everybody chuckled. Why did they chuckle? Because if you verify, you don't trust--it's just the opposite. And yet I came to the conclusion that trust and verify is the right approach."

This year, with fiduciary duty to investors the subject of a study and then perhaps rulemaking by the SEC as part of the new Dodd-Frank financial services reforms, Frankel's views will undoubtedly be a part of the public discussion. The SEC has requested comment on the study. See "SEC Seeks Public Comment, Greater Transparency on Financial Regulation."

The Boston University Review of Banking & Financial Law and The Committee for the Fiduciary Standard have announced a "call for papers" to address applying the fiduciary standard to brokers who provide advice to individual investors. This editor is a member of that Committee.

A prolific writer, Frankel remembers one of her early influencers, Prof. Louis Loss at Harvard. He supervised the work Frankel did on her thesis on variable annuities. She noted that she was "very depressed" after she finished it and couldn't figure out why--until she talked with Loss. He pointed out that everyone goes through that--why? They think of its flaws, "every missing comma," Frankel says. But she cheered up when he told her, she remembers, "'there's always a second edition!'"

Comments? Please send them to kmcbride@wealthmanagerweb.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

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