“Piddle, Twiddle and Resolve”

I just finished Bob Clark’s excellent article, “Dear SEC Chairwoman: About That Pesky Fiduciary Issue…” (http://www.advisorone.com/2013/06/28/dear-sec-chairwoman-about-that-pesky-fiduciary-iss). In the article, Mr. Clark suggests that the SEC be reminded of various statements listed on its web page, including its mission statement to help protect investors.

While I totally agree with Mr. Clark’s suggestions and sentiments, whenever I think of the ongoing attempts by Congress and the SEC to block a meaningful fiduciary standard to protect the public against the proven abuses in the financial services industry, I cannot help but think of John Adams’ lament in the play “1776” – “piddle, twiddle and resolve, not a damned thing do we solve.” What makes all of the stonewalling by the SEC and Congress even more amusing is that FINRA, the SRO for the financial services industry, has already clearly stated that brokers already have a legal duty to always put a customer’s best interests first, especially with regard to financial interests.

  • “As we have frequently pointed out, a broker’s recommendations must be consistent with his customer’s best interests.” (1)
  • “the suitability rule and the concept that a broker’s recommendations must be consistent with the customer’s best interests are inextricable intertwined.” (2)
  • “The suitability requirement that a broker make those recommendations that are consistent with the customer’s best interests prohibit a broker from placing his or her interests ahead of the customer’s interests.” (3)
  • “A broker’s recommendations must serve his client’s best interests…” (4)
  • A broker violates the suitability rule “when he put[s] how own self-interest ahead of the interests of his customer.” (5)

Sound familiar? In fact, when FINRA released Regulatory Notice 11-02, the similarity of the “best interests” language for ERISA fiduciaries was immediately noticed by the legal community. FINRA subsequently released Regulatory Notices 11-25 and 12-25 to address the questions and concerns over the “best interests.” FINRA responded by saying that “best interests” language had always been the applicable standard for brokers, citing several enforcement decisions in support of their position.

So despite cries by Congress and the SEC of the need for harmony, by blocking a universal fiduciary standard that requires brokers to always act in a customer’s “best interests,” Congress and the SEC are actually preventing such harmony. Furthermore, since brokers and broker-dealers are already operating under such a standard and seem to be doing so without  extreme financial hardship, the arguments for a need for cost-benefit analyses are clearly disingenuous, but we already knew that.

Bottom line, the stonewalling by the SEC and Congress is not going to prevent investors from successfully litigating their actions against such brokers and their broker-dealers since FINRA rules are admissible to show the requisite industry standard of conduct. The stonewalling simply shows that the SEC has no desire or intent to protect the public and that author P.J. O’Rourke was right about Congress in his epic, “Parliament of Whores.”

I realize that few brokers, and even some compliance officers,  take the time to review the notices put out by FINRA and/or the SEC. I review these for my RIA compliance clients to make sure they are up-to-date with the current issues and standards. The reviews can prove to be very valuable.

One of the emerging issues in connection with the prudence and suitability of investment advice centers on the issue of mutual fund fees and expenses. Industry leaders Charles Ellis and Burton Malkiel have recently authored articles arguing that fund fees are, in fact, extremely high when evaluated on the basis of incremental return.

I created a proprietary metric, the Active Management Value Ratio (AMVR), which allows investors and fiduciaries to quantify the prudence of a mutual fund’s fee by performing a simple cost-benefit analysis. A number of brokers have responded to my posts regarding fees and the AMVR, saying performance is the only consideration that matters.

Brokers should remember that the regulators regularly review online sites for signs that brokers may be acting in violation of the law. A review of NASD Notice to Members 95-80 reminds members that a fund’s expense ratio and sales charge are factors in determining whether a fund is suitable for an investor. Using the AMVR, my experience has been that the incremental fees for many actively managed greatly exceed the incremental benefit provided by the fund, often by as much as 300-400 percent.  Hard to justify an investment in such as fund as either prudent or as one in the “best interests” of a customer.

“Living is easy with eyes closed, Misunderstanding all you see.” As I have argued herein, those lines from the Beatles classic, “Strawberry Fields Forever ,” are applicable to the current fiduciary debate. Others have argued that the current situation is more a case of financially induced conscious indifference.

I am an advocate of a universal fiduciary standard, as it simply codifies what the rules are and will help prevent the confusion over legal obligations that was revealed in the Rand Corporation study that the SEC’s sponsored. Legally, I know that can usually have a fiduciary standard imposed on a broker by using FINRA’s rules and enforcement decisions, as well as precedent established by legal decisions such as Follansbee or Carras.

When I try a case, opposing counsel and the court know that 99 percent of the time I am going to use the quote by the late General Norman Schwarzkopf to challenge the jury. General Schwarzkopf said “[t]he truth of the matter is that you always know the right thing to do. The hard part is doing it.” The SEC and Congress can make all the disingenuous statements and throw up all the smokescreens that they want, but they know the truth and what the right thing to do is. The question is whether they have the courage and integrity to do the right thing?


(1) In the Matter of Wendell D. Belden, Exchange Act Release No. 34-47859 (May 14, 2003); In the Matter of Dane S. Faber, Exchange Act Release No. 34-49216 (February 10, 2004)
(2) FINRA Regulatory Notice 12-25, Question No. 1
(3) Ibid.
(4) Dept. of Enforcement v. Bendetsen, 2004 NASD Discip. LEXIS, 13, at *12 (NAC August 9, 2004)
(5) In the Matter of Scott Epstein, Exchange Act Release No. 34-54722 (November 8, 2006)

© Copyright 2013 InvestSense, LLC. All rights reserved.

This article is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.

About jwatkins

I am a securities and ERISA attorney. I am a CFP Board Emeritus™ member and an Accredited Wealth Management Advisor™. I am a 1977 graduate of Georgia State University and a 1981 graduate of the University of Notre Dame Law School. I am the author of "CommonSense InvestSense: The Power of the Informed Investor" and " The 401(k)/403(b) Investment Manual: What Plan Sponsors and Plan Participants REALLY Need To Know. " As a former compliance director, I have extensive experience in evaluating the legal prudence of various types of investments, including mutual funds and annuities. My goal is to combine my legal and compliance experience in order to help educate investors on sound, proven investment strategies that will help them protect their financial security.
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