Securities law is a very specialized type of law. As a result, regulatory bodies such as the Securities and Exchange Commission (SEC) recruit securities lawyers in law firms to join the SEC. Many lawyers that join do so with the intent of gaining experience and leveraging their time at the SEC into a higher paying position with a Wall Street law firm.
While there is nothing inherently wrong with the practice, it leads to the question of whether the “revolving door” strategy potentially impacts investor protection, as attorneys avoid upsetting potential future employers. This question becomes significant in light of the SEC’s ongoing hesitancy to address and decide the issue of a universal fiduciary standard.
Fiduciaries are required to always act in the best interests of a client. Investment advisers are held to said fiduciary standard. Stockbrokers and other financial advisors are arguably held to a much lower standard, a so-called suitability standard, which allows them to put their own financial self-interests ahead of their customers.
The Dodd-Franks Act allows Congress and the SEC to address this obvious inequity. Yet both continue to drag their feet and present disingenuous arguments as to why a universal fiduciary standard would not be good for the public. My guess is that if you were to poll people on the street and ask them – “Should financial advisors be allowed to put their financial self-interests ahead of their customer’s financial self-interests?” – The answer would be a resounding “no!” Pure common sense tells you as much.
And yet, the continuing lack of action by both the SEC and Congress bring to mind the popular refrain from the play “1776,” “piddle, twiddle and resolve, not a damned thing do we solve.” The question, still unanswered by both the SEC and Congress, is simple – “What is so onerous or unfair in requiring that stockbrokers and other financial advisors always put their customer’s best interests first?”
So, we return to the potential issue of the SEC’s “revolving door” and its potential impact on investor protection. The suggestion that the SEC’s staff is leery of approving a universal fiduciary standard due to the possible repercussions it may have on future employment opportunities is interesting, given the recent announcement by FINRA, one of the investment industry’s regulators. In Regulatory Notice 12-25, FINRA clearly stated that stockbrokers are always required to put their customers’ best interests first, citing several enforcement actions and legal decisions supporting their position. Therefore, the SEC could justify their decision to adopt a universal fiduciary standard as simply an attempt to harmonize a universal position.
Furthermore, legal decisions have firmly established that stockbrokers and other financial advisors managing investor accounts on a discretionary basis are fiduciaries. The courts have also held stockbrokers and other financial advisors to a fiduciary standard where a customer lacks the knowledge and experience to properly understand and handle their own account, resulting in a customer routinely following their advisor’s recommendations. The SEC could simply point to these cases in support of following cases recognizing the need to protect the public against unethical practices.
Common sense dictates that stockbrokers and other advisors should not be allowed to put their own financial interests ahead of their customer best interests. The late General Norman Schwarzkopf once said that “[t]he truth is, we all know the right thing to do. The hard part is doing it.” Hopefully the SEC will heed General Schwarzkopf’s advice and honor their mission statement by stepping up and doing the right thing.
To learn more about James Watkins, visit him at www.investsense.com.
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