Monday, April 1, 2013

IMPORTANT NOTICE: Surprise SEC Temporary Rule Redefines "Fiduciary"

Author's Note:  This April Fool's Day blog post was, surprisingly, viewed as true by several readers, including a journalist working for a major industry publication, a law professor, and several others. The fact that this was viewed as even possibly true, by some, is itself a sad commentary on the possible direction that the SEC may take as it considers applying the fiduciary standard to the delivery of personalized investment advice by broker-dealers.

In subsequent blogs, later this month, I will explore the fact that the delivery of personalized investment advice - by whomever - is already subject to fiduciary standard of conduct under a robust body of state common law.

Following is the original April Fool's Day blog post. Enjoy ...

In a surprise U.S. Securities and Exchange Commission Temporary Rule issued today, the SEC announced the following:

"To end ongoing consumer confusion, the Commission has unanimously voted to issue an emergency Temporary Rule, effective with the publication date, providing for the adoption of the following Temporary Rule 275-204.1T:

  1. All registered representatives of broker-dealer firms will be immediately permitted to provide personalized investment advice, including financial plans, strategic asset allocation, tactical asset allocation, portfolio rebalancing, individual stock selection, to their customers.
  2. All registered representatives of broker-dealer firms will be immediately permitted to receive ongoing fees for such personalized investment advice, through asset-based percentage fees, albeit paid indirectly through deduction from the investment products which are sold. These fees will be immediately renamed as "relationship fees" rather than 12b-1 fees.
  3. All registered representatives of broker-dealer firms will be immediately permitted to use titles which denote relationships of trust and confidence, such as "financial consultant" and "financial advisor" and "wealth manager."
  4. All registered representatives of broker-dealer firms will be immediately permitted to tout, both directly and through "house on the beach" and "attend their clients' childrens' soccer games" advertisements, their "objective advice" and that they act "in the best interests of the client" (in accord with their firms' advertisements and representations and, as well, their firms' codes of ethics).
  5. All registered representatives of broker-dealer firms shall, accordingly, be immediately required to adhere to the fiduciary duty of loyalty. However, this adherence will only require, when a conflict of interest is present, that casual disclosure of that conflict of interest occur to the client. Only the disclosure "Our interests may not be aligned with yours" shall be required. There shall be no requirement that the registered representative ensure that the client achieve an understanding of the conflict of interest, given that behavioral biases (which registered representatives have been trained to take advantage of) exist which negate such understanding, anyway. There shall, henceforth, be no requirement that informed consent of the client be obtained; in other words uninformed consent shall be permitted instead. Additionally, the proposed transaction need not, with such uninformed consent, be in the best interest of the client and substantatively fair to the client. In other words, under the Commission's new definition of fiduciary, clients may accordingly consent to harm.
  6. When acting as a "fiduciary," even then registered representatives of broker-dealer firms will be permitted to remove their fiduciary hats, at will, with only casual notice to the client, in order to be permitted to more blatantly sell their customers highly costly, toxic and inappropriate securities products. Furthermore, continual "hat-switching" is permitted, for it is known that investment recommendations will need to be undertaken by reference back to the investment strategy and the financial plan provided to the client. Furthermore, two hats - one fiduciary and one non-fiduciary, may be worn at the same time, with respect to the same client as long as two different accounts are maintained, even though it is acknowledged that clients / customers will possess even greater confusion as to the standards to which their "advisors" are held.
This Tempoary Rule is designed to preserve the business practices of broker-dealer firms, by adapting the "fiduciary standard" to fit those business practices. Justice Cardoza's warning of granting "particular exceptions" to fiduciary principles shall be deemed inapplicable, given our broad "redefinition" of the term "fiduciary" itself.

It is recognized that this rule largely codifies already-existing business practices which have been permitted to occur by SEC and FINRA inattention and lack of enforcement over the past several decades. Hence, the economic impact of this rule is deemed to be minimal.

The Commission is ever mindful of the necessity of preserving the high profits of the investment banks and broker-dealer firms, in order to ensure that never again shall the percentage of profits generated by U.S. firms and absorbed by Wall Street fall below 35%. The Commission desires to ensure that, when Commissioners and SEC staff depart the SEC, that its retired commissioners as well as SEC departing staff find excellent-paying jobs with Wall Street firms and the law firms which provide services to them, and receive the huge year-end bonuses they so richly deserve.

The Commission likewise does not desire to see that a true profession of investment advisers and financial planners come into being, it being instead the Commission's desire to preserve, at all costs, the merchandizing aspects of the securities business. It is acknowledged that professional regulation, under a bona fide fiduciary standard, would greater ensure the financial and retirement security of all Americans, but the Commission is under the view that the financial security of Wall Street's firms takes precedence.

This rule shall be effective immediately upon its publication.

Dated this 1st day of April, 2013.  Sadly, one can only speculate if this is an April Fools' joke.

1 comment:

  1. As might be expected, yesterday’s surprise announcement generated a few objections, with some even labeling the proposal as “phony fiduciary,” or “Phon-Fid” for short.

    Asked to comment, an SEC spokesperson responded, “If the FDA could approve Fen-Phen to benefit drug manufacturers while knowing that a few deaths might result, why can’t we approve Phon-Fid to benefit product manufacturers while knowing that a few investors may die in poverty as a result?”

    “Think about this from our point of view,” continued the SEC spokesperson. “The harm to Wall Street from holding product salespersons to a true fiduciary standard would be readily identifiable; the harm to individual investors from adopting Phon-Fid, while far greater in aggregate, would be widely dispersed.”


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