Fiduciary Rulemaking: Does the SEC Chair Have the Courage to Defeat Wall Street's Undue Influence?

Defeating the American Oligarchy: Wall Street, FINRA and the Challenge for SEC Chair Mary Jo White

For long it has been known that a series of meetings by representatives of the largest brokerage firms in the United States has been held over the past several years. In these meetings strategy sessions occur on how to best defeat the reforms of the financial services industry contained in the Dodd Frank Act of 2010, by influencing the many regulations being drafted.

Specific meetings have been held by Wall Street firm representatives (and lobbyists) on how to defeat the fiduciary standard of conduct, authorized (but not mandated) to be applied by the SEC under Section 913 of the Dodd Frank Act, from being applied to “personalized investment advice” when provided by stockbrokers (i.e., registered representatives of broker-dealer firms). In such meetings the brokerage firms' representatives have stated that they will do “whatever it takes” – in terms of lobbying efforts (including campaign contributions) to defeat both the SEC’s and the DOL’s initiatives to apply the fiduciary standard of conduct.

Why is Wall Street so opposed to the fiduciary standard, requiring firms and their "financial consultants" to act in the best interests of American consumers? Because at its core the fiduciary standard is a restraint on conduct. It results in disintermediation. If more and more Americans become represented by trusted "purchaser's representatives" (i.e., fiduciaries), no longer would Wall Street firms, through a host of fees (including often-unknown-to-the-consumer back-office revenue sharing payments) extract excessive rents from the American consumer of investment products. More of the returns of the capital markets would flow to individual Americans, and less to financial services firms. Wall Street firms would, in essence, lose tens or even hundreds of billions of dollars of revenue each year (while individual Americans would gain).

To defeat the expanded application of the fiduciary standard by the SEC, over the past few years Wall Street has flooded Washington, DC with newly-hired lobbyists (both internal and external). By one estimate, the number of visits by Wall Street’s various anti-fiduciary lobbyists to the halls of Congress, the SEC and the DOL outnumber the visits by pro-fiduciary groups by at least 20 to 1.

Campaign contributions to members of Congress serving on the House Financial Services Committee or the Senate Banking Committee have also surged; many of those members of Congress receiving large campaign contributions from Wall Street and the insurance industry have signed onto letters urging the DOL and SEC to delay fiduciary rulemaking.

Of course, it’s not just visits by Wall Street and its lobbyists that seek to influence, nor is it also just campaign contributions. A far more subtle way of wielding influence is to serve as the “next employer” for many who work at the SEC. For example, FINRA (the broker-dealer “self-regulatory organization, which is owned by broker-dealer firms, and which over its entire history has failed to incorporate fiduciary standards into its regulatory codes in favor of the much lower, and Wall Street-friendly, meaningless suitability standard) often offers ex-SEC staffers high-paying positions. According to a June 2014 InvestmentNews article, FINRA’s average employee compensation is twice that of the securities industry it regulates.

Law firms representing Wall Street firms, and the broker-dealer firms themselves, also provide high-paying jobs to many ex-SEC staffers. As the Project on Government Oversight reports, “Former employees of the Securities and Exchange Commission (SEC) routinely help corporations try to influence SEC rulemaking ….” Even the SEC’s Inspector General issued reports raising troubling questions about whether the promise of future employment representing Wall Street causes some SEC officials to treat potential employers and their clients with a lighter touch.

The “reverse revolving door” also operates. FINRA, Wall Street and the many law firms that represent brokerage firms also become the source of senior SEC staff personnel. And Wall Street firms encourage their executives to take government jobs, even though the pay is usually far less for working at government agencies. As summarized in an article appearing on March 22, 2013 in The Huffington Post: “On the heels of disclosures that major financial institutions maintain policies to pay special bonuses to executives who leave for high-level government positions, a prominent consumer advocacy group has threatened to file lawsuits to challenge such practices. Public Citizen, the organization founded by consumer advocate Ralph Nader, told The Huffington Post that it was so incensed by news of these bonus policies -- as detailed in a report from watchdog group Project on Government Oversight -- that it is now readying a legal challenge.”

Recently Martin Gilens, the co-author of a recent academic study by researchers at Northwestern and Princeton, “Testing Theories of American Politics: Elites, Interest Groups and Average Citizens,” summarized the research by describing the United States as an oligarchy (rather than a democracy, or a republic) and further stating: “[C]ontrary to what decades of political science research might lead you to believe, ordinary citizens have virtually no influence over what their government does in the United States. And economic elites and interest groups, especially those representing business, have a substantial degree of influence. Government policy-making over the last few decades reflects the preferences of those groups -- of economic elites and of organized interests.”

Will new SEC Chair Mary Jo White, a former federal prosecutor with a keen knowledge of issues involving public corruption, have the courage to stand up to Wall Street and adopt a bona fide fiduciary standard? (I define this to be the “best interests fiduciary standard” applicable under the Advisers Act and state common law to investment and financial advisors, in which the fiduciary duty of loyalty is not satisfied by mere disclaimers or disclosures, but instead where the client must be treated substantively fair at all times when a conflict of interest is not avoided and continues to exist; in other words, a fiduciary duty of loyalty which respects the fundamental principles that no trusted advisor can serve two masters, and no client would ever provide meaningful consent to be harmed.)

More importantly, will SEC Chair Mary Jo White effectively manage others – including the SEC’s own staffers – in a manner in which outside undue influence is defeated, in order that fiduciary rulemaking can proceed with earnest and properly.

Will SEC Chair Mary Jo White possess the personal courage to face up to the oligarchy?

Only time will tell.