24 Jul PUBLIC PENSION CORNER, #50: Modern Fiduciary Duties: the Origin Story
NEWS:
I. ECB is Expanding Climate Rules
The European Central Bank has announced a new framework whereby it will expand its discounting of the value of assets used as collateral if those assets have what it considers higher climate-related risk:
The ECB Governing Council has approved the use of climate factors for certain eligible credit claims involving non-financial corporate debtors. The measure aims to protect the Eurosystem against potential losses if transition shocks reduce the value of pledged collateral. It also expands the role of climate risk within the central bank’s financial risk controls. Implementation is expected by the end of 2027 at the earliest….
The policy extends a climate factor already applied to marketable assets issued by non-financial corporations and affiliated entities. The ECB approved that measure in July 2025, and it took effect on 15 June 2026.
By adding certain corporate credit claims, the central bank is moving climate risk controls beyond publicly traded debt. This broadens the framework’s reach into bank lending portfolios and private credit exposures.
II. Trump Team to Impose Tariffs for Forced-Labor
The Trump Administration will impose new tariffs on countries that it says aren’t doing enough to stop forced labor/modern slavery:
The Trump administration on Friday will impose new tariffs of 10% and 12.5% on goods from 60 trading partners, including the European Union, over allegations of lax enforcement of forced labor bans, just as a temporary 10% global tariff expires….
“The United States has had a forced labor import ban for nearly a century, and rigorously enforces it. It’s well past time for our trading partners to do the same,” U.S. Trade Representative Jamieson Greer said in a statement. “Today’s action will begin to correct what is both a human rights abuse and distortive trade practice to improve the welfare of workers everywhere.”…
Under the final determination, the U.S. will impose a 10% duty on goods of Argentina, Bangladesh, Britain, Cambodia, Canada, Ecuador, El Salvador, Guatemala, Honduras, India, Indonesia, Jordan, Malaysia, Mexico, Pakistan, Sri Lanka, Trinidad and Tobago.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Modern Fiduciary Duties: the Origin Story’”
Today’s commentary is an excerpt from my upcoming book, The Dictatorship of Big Capital, due out from Encounter Books in early 2027. In this section, I pinpoint the codification of the modern understanding of the fiduciary duties underpinning pension management.
In 1963, Studebaker closed its South Bend, Indiana plant, putting more than 10,000 employees out of work. More relevantly for this newsletter, at the time of the plant’s closure, Studebaker’s employee pension plan had liabilities that outweighed assets by more than $15 million – a huge figure in 1963. Of the roughly 10,600 employees covered by the plan, 3,600 who’d reached retirement age received full benefits. Of the remaining 7,000, however, nearly half received nothing at all, while the rest collected only 15 cents on the dollar.
After a series of fits and starts, various policy proposals and refinements, eleven years later, Congress passed and President Ford signed the law that was initially inspired by the Studebaker pension default. That law – the Employee Retirement Income Security Act (ERISA) – turned out to be one of the most important developments in the history of American financial markets. The following explains why.
ERISA: A Good Law with Unintended Consequences
ERISA is a hefty law, with numerous provisions spread out across a variety of locations in the United States Code. For our purposes, the most relevant and important provisions are those found in Title 29 of the United States Code, which deals exclusively with the Labor Department and its mandates. Specifically, Section 1104 defines fiduciary duties under ERISA and contains both the “prudent expert standard” and the diversification mandate (subsections B and C), which read as follows:
(B) 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;
(C) by diversifying 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; and….
Before ERISA, the old common-law “prudent man” rule judged investments on a case-by-case basis. Fiduciaries could be sued by their beneficiaries for holding a single risky stock, even if the overall portfolio was sound. ERISA replaced that rule with a portfolio-level standard. Subsection (B)’s “familiar with such matters” text raised the bar for retirement fiduciaries. No longer could a layperson’s prudent judgment be considered sufficient. Under ERISA, fiduciaries were expected to exert expert-level prudence, which meant that they were legally expected to be knowledgeable of investments and especially portfolio construction. Subsection C took this one step further, establishing diversification as a legal duty, rather than just a best practice.
To be sure, these provisions are the very heart of what makes ERISA such a good and powerful law. They make pension managers liable to beneficiaries for the prudent, responsible, and reliable administration of portfolios. In so doing, they don’t guarantee that pension plans will remain viable and will provide for corporate employees in their retirement – largely because nothing and no one can guarantee such a thing. They do, however, come as close as a government mandate possibly can.
The catch, unfortunately, is that these two provisions are also the heart of ERISA’s unintended consequences.
What ERISA’s prudent expert standard and diversification mandate did was create a demand curve for diversified, low-cost investment products. Those provisions went into effect almost immediately – on January 1, 1975 – although existing pension plans were given a year of leeway to get their proverbial houses in order. What this meant in practice was that suddenly, professional investment experts were invaluable to pension trustees. Trustees needed diversification, they needed it inexpensively, and they needed it professionally administered. In short, they needed people familiar with the theories of finance developed over the previous quarter century. They needed the expertise of people “familiar with such matters” – such matters largely being defined as: Modern Portfolio Theory and the Efficient Market Hypothesis.
For the record, this is hardly idle speculation on my part. Almost immediately after ERISA was enacted into law, legal and financial scholars began documenting the largely inarguable meaning of the law’s definitions and provisions, necessarily tying them to Markowitz, Samuelson, Fama and their innovations in finance and management. In March 1975, the Harvard Law Review published a note titled “Fiduciary Standards and the Prudent Man Rule under the Employment Retirement Income Security Act of 1974,” that, explicitly made the case that ERISA’s “familiar with such matters” language replaced the old prudent man standard with a prudent expert standard, and that the diversification mandate incorporated portfolio-level thinking into pension management. Among other things, this note serves as evidence that the legal community understood immediately what ERISA meant for portfolio management and how it would force pension trustees to put their faith – and their assets – in the hands of trained professionals.
The following year, Harvey E. Bines, a securities lawyer, penned a piece for the Columbia Law Review, making the same case, albeit in much greater detail with accompanying statistical analysis. The article, titled “Modern Portfolio Theory and Investment Management Law: Refinement of Legal Doctrine,” concluded with Bines noting that “Modern Investment Theory has introduced a profound shift in perspective into portfolio management” and that the law would have to make an accommodation with this perspective. In other words, MPT would almost certainly become a part of the legal understanding of trust management (thanks in large part to the mandates found in ERISA).
In 1992, the American Law Institute (ALI) – a private organization of about 3,000 prominent judges, lawyers, and law professors – released the Prudent Investor rule of its Restatement (Third) of Trusts, which is to say, its third semi-official interpretation of trust law (the prior two having been released in 1935 and 1959, respectively). The Restatement isn’t an official, legally binding rule or regulation, but courts do treat it as the near-definitive authority on trust matters. (Moreover, 44 states plus DC have adopted the Uniform Prudent Investor Act, which is more or less the Restatement’s investment rules turned into actual binding legislation.) In the scheme of this narrative, the Restatement (Third) is incredibly important in that it codified and thus completed the work that started with ERISA and had been generally understood ever since. It put the meat on ERISA’s bones. And among other things, it stated the following:
“Reasonably sound diversification is fundamental to the management of risk.”
“Effective diversification depends not only on the number of assets in a portfolio but also on the ways and degrees in which their responses to economic events tend to cancel or neutralize one another.”
“Failure to diversify on a reasonable basis in order to reduce uncompensated risk is ordinarily a violation of both the duty of caution and the duties of care and skill.”
Not to belabor the point, but this point – that ERISA was a good law that produced inarguably positive reform in pension management – is worth emphasizing, re-emphasizing, and re-re-emphasizing. It’s the key to understanding how and why the entire post-Great Crash period built, slowly but surely, to the conglomeration of circumstance that produced the intolerable concentration of financial power in so few hands. It is everything, in other words.
In 1994, two years after the Restatement (Third), John Langbein, a law professor at Yale, authored the above-mentioned Uniform Prudent Investor Act, which has since been adopted by 44 states and the District of Columbia. Two years after that, Langbein wrote a guide to understanding the law, which he (fittingly) titled “The Uniform Prudent Investor Act and the Future of Trust Investing.” In it, he was probably more explicit than any of his predecessors in making the case that ERISA and trust law in general required skilled, professional asset management by people who understood Modern Portfolio Theory and the Efficient Market Hypothesis. After tracing the somewhat spotty and occasionally imprudent history of trust law from the late 18th century forward, Langbein noted that the legal responsibilities of trustees as established by the language and precedent of ERISA were threefold. Fiduciaries have a duty of Diversification; a duty “to be sensitive to the risk/return curve in place of the [former] ban on speculation”; and a duty of delegation, that is, a duty to disregard “the nondelegation rule of former law and…delegate investment responsibilities to professionals.”
In the twenty years after ERISA’s enactment, the basics of the law and the associated fallout had been stated and clarified repeatedly: managing pensions was a solemn responsibility that required outsourcing to professionals who understood portfolio construction, the trade-offs between expected return and risk, and the absolute undeniable criticality of diversification.
