Monday, June 23, 2014

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.

Saturday, June 21, 2014

Discover the Power of a Gratitude Journal

Tackle this challenge.
One evening each week, for the next nine weeks, write a few paragraphs in a personal journal. Each week, you should seek to answer these questions as you write your journal entry: “What am I most thankful for – this week?” and “Why?”
Set an alarm on your smart phone, at the same time and day of each week for the next nine weeks, to remind you to complete these journal entries. 
Here are some tips for reaping the greatest psychological rewards from your gratitude journal:
  • Don’t just go through the motions. Research by psychologist Sonja Lyubomirsky and others suggests that journaling is more effective if you first make the conscious decision to become happier and more grateful. Motivation to become happier plays a role in the efficacy of journaling.
  • Go for depth over breadth. Elaborating in detail about a particular thing for which you’re grateful carries more benefits than a superficial list of many things.
  • Get personal. Focusing on people to whom you are grateful has more of an impact than focusing on things for which you are grateful.
  • Try subtraction, not just addition. One effective way of stimulating gratitude is to reflect on what your life would be like without certain blessings, rather than just tallying up all those good things.
  • Savor surprises. Try to record events that were unexpected or surprising, as these tend to elicit stronger levels of gratitude.
  • Don’t overdo it. Writing occasionally (once or twice per week) is more beneficial than daily journaling. In fact, one study by Lyubomirsky and her colleagues found that people who wrote in their gratitude journals once a week for six weeks reported boosts in happiness afterward; people who wrote three times per week didn’t. “We adapt to positive events quickly, especially if we constantly focus on them,” said another researcher. “It seems counterintuitive, but it is how the mind works.”
  • If you become stuck, always revert back to square one. Be thankful for each breath you take.

Various studies have shown that simply doing a five-minute gratitude journal, once or twice a week, can increase a person’s happiness by 10%. Doesn’t sound like much, until you realize that it takes a doubling of income to achieve the same effect (and often that effect is not as long-lasting).

Writing a “gratitude journal” reduces feelings of envy, makes our memories happier, lets us experience good feelings, and helps us bounce back from stress. The simple journaling of gratitude builds self-esteem and makes a person less self-centered and more optimistic from day-to-day. Studies have shown that a gratitude journal deepens relationships with others, and also makes a person even friendlier (and, as a result, possessing of more friends).
As so many philosophers have opined, it is far better to "live in the present" rather than in the "past" or the "future." Writing a gratitude journal assists in doing this. You realize that it is not major accomplishments that fuel happiness; rather, it is the everyday relationships you possess that can secure for you a far greater, and more permanent, source of happiness.
Take the challenge. Schedule your weekly "gratitude journal" entries. Keep them up for nine straight weeks, and see how your life changes.

Professor Ron A. Rhoades, JD, CFP(r) teaches Business Law, Retirement Planning, Investment Planning, Employee Benefits Planning, Money & Banking, Insurance & Risk Management, and the Personal Financial Planning Capstone courses at Alfred State College, Alfred, NY.

He is also the author of "CHOOSE TO SUCCEED IN COLLEGE AND IN LIFE: Continuously Improve, Persevere, and Enjoy the Journey," a 10-week program for success in college (available for $2.99 in Kindle store at, or in paperback for $6.99). Professor Rhoades may be reached by e-mail at: