Saturday, April 27, 2013

Can You Legislate Morality?

A reader to my blog post on the fiduciary duty of brokers, already existing under state common law, writes: "You can't legislate morals."  Here's my reply:

I often here the phrase (often made by those opposed to the application of the fiduciary standard) "You cannot legislate morality." In one sense this statement is true, in another sense this statement is not true.

The law - whether developed over the centuries through the "common law" (judicial decisions) or via legislative dictates (statutes) - reflects the morals of our society. The great jurist Oliver Wendell Holmes once wrote: " The law is the witness and external deposit of our moral life. Its history is the history of the moral development of the race. The practice of it, in spite of popular jests, tends to make good citizens and good men." The Path of the Law, by Oliver Wendell Holmes, Jr., 10 Harvard Law Review 457 (1897).

At times we deem it important enought to specify, through laws, that a breach of something "wrong" is grave enough to warrant either a prviate remedy (i.e., damages for breach of contract, or damages for a tort - such as breach of duty of due care) or a public remedy (fine, loss of licensure, imprisonment, etc.). In essence, the law sets forth minimum moral standards that everyone is expected to follow.

There are many instances where breach of fiduciary duties can result in fines (i.e., public discipline). Attorney disciplinary proceedings are just one example. In the professional setting, more often breaches of the duty of care result in a private cause of action, and professional disciplinary proceedings occur only after "probable cause" has been found through a review of the advisor's actions by his or her peers.

Hence, can we legislate "morality"? Yes, in the sense that we can define, in the law, principles-based standards which we expect of professional advisors, and all professional advisors are expected to adhere to these baseline standards.

No, we cannot legislate "morality," in the sense that we cannot assure that everyone adheres to such standards. Yet, of course, no enacted law provides such a guarantee.

Moreover, one aspect of integrity is doing what is "right" even if it meets minimum legal standards. This aspect of morality - subscribing to even higher standards than the law should require (as a minimum standard) - cannot and should not be legislated. But it should be encouraged as a "best practice" by professional societies.

I don't think it is too much to ask that all financial advisors and investment advisers adhere to a legal standard to "act in the best interests of their clients." This is clearly what consumers desire, and expect. It would resolve the great deal of confusion that consumers possess at present. It would help restore trust in our financial services system.

And I would observe, if we are to become a true profession, the baseline standard for the delivery of investment and financial advice must be grounded in a bona fide fiduciary standard of conduct.

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