In a previous blog (http://scholarfp.blogspot.com/2013/01/wall-streets-deceptions-brokers-as.html) I noted that “trust-based selling” can get a person into trouble, if they don’t accept fiduciary status and fulfill their fiduciary obligations. Yet, far too often federal and state securities officials and other enforcement arms fail to take action against these fraudulent practices. Hhowever, in a recent case, arising out of Illinois, a financial advisor faces two separate legal actions involving his trust-based selling practices.
The State of Illinois Attorney General has filed an action seeking civil penalties against Mr. Richard Lee Van Dyke, Jr. (a.k.a. "Dick Van Dyke"), a seller of fixed indexed annuities who, in advertising, stated: “If you want a successful financial plan, you need a financial advisor you can really trust … He believes in principles like full disclosure and transparency and he doesn’t sell investments on commission which means he’s on your side so you get to reach your goals first before he does. When’s the last time an investment advisor put you first?” The basis of the complaint is a violation of Illinois’ Consumer Fraud and Deceptive Business Practices Act. Andy Gluck provides commentary and Advisors4Advisors also provides a copy of the Complaint, at http://advisors4advisors.com/compliance/advertising-compliance/article/17314-financial-advisor-in-illinois-accused-in-lawsuit-by-state-securities-regulators-of-advertising-he-acted-as-a-fiduciary-says-hes-done-nothing-wrong.
In addition, the Division of Securities filed an administrative action against Mr. Van Dyke (in the form of a Notice of Hearing, which can be found at:
http://www.ilsos.gov/adminactionssearch/adminactionssearch) in which it is alleged that Mr. Van Dyke violated his duties to his clients as an investment adviser, during the time that he was registered as such. One of the sections of the investment adviser state statutes cited has been construed to impose fiduciary duties upon investment advisers.
There are allegations of both actual fraud (in the deceptive trade practices action) and constructive fraud (in the administrative action). In both cases, substantial harm to customers is alleged to have occurred.
From the facts set forth in the two actions, one can only wonder why the state insurance commissioner did not pursue a case of churning (a.k.a. twisting) against this seller of fixed indexed annuities. Then again, under Illinois law, unlike the law of most states, fixed indexed annuities are (at present) regarded as securities. Either that, or this is just more evidence that market conduct regulation and its enforcement by state insurance commissioners remains dismal.
While it is unlikely that a case like this will proceed all the way to a trial, much less become the subject of appeals and subsequent written opinions, this may be a case to watch. Far too long those in arms-length relationships, selling securities and/or insurance products, have engaged in “trust-based selling” techniques. They have held themselves out as experts through the use of titles (many of which lack substance) - an act which is a factor in imposing fiduciary status under state common law. Moreover, many of those in the securities industry have inappropriately touted their “objective” advice.
Will all those who hold out as "putting the best interests of the client first" be held to account, as fiduciaries, for such representations? From Goldman Sachs on Wall Street to small sellers of insurance and investments on Main Street, we can only hope so.
Is the tide beginning to turn? Will our regulators stamp out misrepresentations – both through administrative/court actions and also through prudent regulation? Time will tell.
There are many battlegrounds in the war over fiduciary standards - not just in D.C. Stay tuned.