SEC vs. Capital Gains Research Bureau Misconstrued: Much More Than Disclosure of a Conflict of Interest Is Required

The following is excerpted from the comment letter recently submitted to the SEC by The Committee for the Fiduciary Standard's Steering Group.

THE FIDUCIARY ADVISOR AND CONFLICTS OF INTEREST: THE TRUE MEANING OF SEC vs. CAPITAL GAINS RESEACH BUREAU – IT IS NOT JUST DISCLOSURE

It has been written[i] by some in the securities bar that the U.S. Supreme Court’s landmark decision in SEC v. Capital Gains provided a road map for an investment adviser’s handling of conflicts of interest, in that disclosure of a conflict of interest would be sufficient to comply with the fiduciary’s duty of loyalty.  Is this true, or did the U.S. Supreme Court intend something altogether different?  In essence, the questions should be asked:

Have some securities law attorneys misconstrued SEC vs. Capital Gains? - Yes.

Does there exist, for investment advisers, a duty to avoid certain insidious conflicts of interest? - Yes.

For permitted conflicts of interest which are disclosed and for which informed consent is provided, does there exist a continuing duty to properly manage such conflicts of interest? – Yes.

In the seminal 1963 decision of SEC v. Capital Gains Research Bureau, the U.S. Supreme Court stated:

An adviser who, like respondents, secretly trades on the market effect of his own recommendation may be motivated – consciously or unconsciously – to recommend a given security not because of its potential for long-run price increase (which would profit the client), but because of its potential for short-run price increase in response to anticipated activity from the recommendation (which would profit the adviser). (Citation omitted.)  An investor seeking the advice of a registered investment adviser must, if the legislative purpose is to be served, be permitted to evaluate such overlapping motivations, through appropriate disclosure, in deciding whether an adviser is serving ‘two masters” or only one, ‘especially . . . if one of the masters happens to be economic self-interest.’[ii] [Emphasis added.]

This section of the opinion may appear to suggest that, with disclosure of a conflict of interest, all that is required is that the client of the adviser be given the option of proceeding with the advisor’s counsel.  However, at a footnote to this section of the opinion, the U.S. Supreme Court went further, explaining the “no conflict” rule and providing alternative rationales behind the prohibition on serving two masters:

This Court, in discussing conflicts of interest, has said: ‘The reason of the rule inhibiting a party who occupies confidential and fiduciary relations toward another from assuming antagonistic positions to his principal in matters involving the subject matter of the trust is sometimes said to rest in a sound public policy, but it also is justified in a recognition of the authoritative declaration that no man can serve two masters; and considering that human nature must be dealt with, the rule does not stop with actual violations of such trust relations, but includes within its purpose the removal of any temptation to violate them .... In Hazelton v. Sheckells, 202 U.S. 71, 79, we said: ‘The objection . . . rests in their tendency, not in what was done in the particular case … The court will not inquire what was done. If that should be improper it probably would be hidden and would not appear.’[iii]  [Emphasis added.]

Moreover, the U.S. Supreme Court in the Capital Gains decision only held that the fiduciary investment adviser had an affirmative obligation to “to make full and frank disclosure of his practice of trading on the effect of his recommendations.”[iv]  Why did the U.S. Supreme Court not go further, and hold that the Advisers Act prohibited the very existence of such a conflict of interest?  The answer lies in the decision itself:

It is arguable – indeed it was argued by ‘some investment counsel representatives’ who testified before the Commission -- that any ‘trading by investment counselors for their own account in securities in which their clients were interested ….’ creates a potential conflict of interest which must be eliminated. We need not go that far in this case, since here the Commission seeks only disclosure of a conflict of interests with significantly greater potential for abuse than in the situation described above.[v]  [Emphasis added.]

In other words, it was not necessary to the U.S. Supreme Court decision, as it was before the Court, for the Court to find that the Advisers Act outlawed significant conflicts of interest between investment advisers and their clients. The SEC in the underlying action only sought an injunction pertaining to disclosure; given that this was the only relief requested, the Court did not need to address the other parameters of the fiduciary duty of loyalty.

Despite this factual limitation, the U.S. Supreme Court went to great lengths to recite legislative history, especially portions which discussed prohibitions on conflicts of interest as applied to investment advisers:

Although certain changes were made in the bill following the hearings, there is nothing to indicate an intent to alter the fundamental purposes of the legislation.  The broad proscription against ‘any ... practice … which operates … as a fraud or deceit upon any client or prospective client’ remained in the bill from beginning to end.  And the Committee Reports indicate a desire to preserve ‘the personalized character of the services of investment advisers,’ and to eliminate conflicts of interest between the investment adviser and the clients as safeguards both to ‘unsophisticated investors’ and to ‘bona fide investment counsel.’  The Investment Advisers Act of 1940 thus reflects a congressional recognition ‘of the delicate fiduciary nature of an investment advisory relationship,’ as well as a congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser – consciously or unconsciously – to render advice which was not disinterested.  [Emphasis added.]

Hence, while the U.S. Supreme Court was not called upon to decide if conflicts of interest should be avoided by investment advisers, this does not lead to the conclusion that that the “no conflict” and “no profit” rules which form foundations of the fiduciary duty of loyalty in English common law do not remain imbedded within the Advisers Act. Nor can it be concluded from the decision, as some interpreters may have done, that all that is required when a conflict of interest exists is that disclosure of material facts to the client occur, followed by the client’s consent to proceed with the recommendation or transaction despite the presence of the conflicts of interest.

Furthermore, some key aspects of the legislative history underlying the Advisers Act were summarized by the U.S. Supreme Court’s landmark 1963 decision, SEC v. Capital Gains Research Bureau, and this additional legislative history bolsters the conclusion that the “no-profit” and “no-conflict” rules are firmly embedded within the Advisers Act.  In the decision, the U.S. Supreme Court stated:

The Public Utility Holding Company Act of 1935 ‘authorized and directed’ the Securities and Exchange Commission ‘to make a study of the functions and activities of investment trusts and investment companies ….’  Pursuant to this mandate, the Commission made an exhaustive study and report which included consideration of investment counsel and investment advisory services.  This aspect of the study and report culminated in the Investment Advisers Act of 1940.

The report reflects the attitude - shared by investment advisers and the Commission - that investment advisers could not ‘completely perform their basic function - furnishing to clients on a personal basis competent, unbiased, and continuous advice regarding the sound management of their investments -- unless all conflicts of interest between the investment counsel and the client were removed.’  The report stressed that affiliations by investment advisers with investment bankers, or corporations might be ‘an impediment to a disinterested, objective, or critical attitude toward an investment by clients …’

This concern was not limited to deliberate or conscious impediments to objectivity. Both the advisers and the Commission were well aware that whenever advice to a client might result in financial benefit to the adviser – other than the fee for his advice – ‘that advice to a client might in some way be tinged with that pecuniary interest [whether consciously or] subconsciously motivated ….’  The report quoted one leading investment adviser who said that he ‘would put the emphasis . . . on subconscious” motivation in such situations.  It quoted a member of the Commission staff who suggested that a significant part of the problem was not the existence of a ‘deliberate intent’ to obtain a financial advantage, but rather the existence ‘subconsciously [of] a prejudice’ in favor of one's own financial interests. The report incorporated the Code of Ethics and Standards of Practice of one of the leading investment counsel associations, which contained the following canon:

‘[An investment adviser] should continuously occupy an impartial and disinterested position, as free as humanly possible from the subtle influence of prejudice, conscious or unconscious; he should scrupulously avoid any affiliation, or any act, which subjects his position to challenge in this respect.’ [Emphasis added in Supreme Court’s own decision.]

Other canons appended to the report announced the following guiding principles: that compensation for investment advice ‘should consist exclusively of direct charges to clients for services rendered”; that the adviser should devote his time ‘exclusively to the performance’ of his advisory function; that he should not ‘share in profits’ of his clients; and that he should not ‘directly or indirectly engage in any activity which may jeopardize [his] ability to render unbiased investment advice.’  These canons were adopted ‘to the end that the quality of services to be rendered by investment counselors may measure up to the high standards which the public has a right to expect and to demand.’

This study and report -- authorized and directed by statute – culminated in the preparation and introduction by Senator Wagner of the bill which, with some changes, became the Investment Advisers Act of 1940.  In its ‘declaration of policy’ the original bill stated that ‘Upon the basis of facts disclosed by the record and report of the Securities and Exchange Commission … it is hereby declared that the national public interest and the interest of investors are adversely affected - … (4) when the business of investment advisers is so conducted as to defraud or mislead investors, or to enable such advisers to relieve themselves of their fiduciary obligations to their clients. ‘It is hereby declared that the policy and purposes of this title, in accordance with which the provisions of this title shall be interpreted, are to mitigate and, so far as is presently practicable to eliminate the abuses enumerated in this section.’ S. 3580, 76th Cong., 3d Sess., § 202.

Hearings were then held before Committees of both Houses of Congress.  In describing their profession, leading investment advisers emphasized their relationship of ‘trust and confidence’ with their clients and the importance of “strict limitation of [their right] to buy and sell securities in the normal way if there is any chance at all that to do so might seem to operate against the interests of clients and the public.’ The president of the Investment Counsel Association of America, the leading investment counsel association, testified that the ‘two fundamental principles upon which the pioneers in this new profession undertook to meet the growing need for unbiased investment information and guidance were, first, that they would limit their efforts and activities to the study of investment problems from the investor's standpoint, not engaging in any other activity, such as security selling or brokerage, which might directly or indirectly bias their investment judgment; and, second, that their remuneration for this work would consist solely of definite, professional fees fully disclosed in advance.’[vi]

Although certain changes were made in the bill following the hearings, there is nothing to indicate an intent to alter the fundamental purposes of the legislation.  The broad prescription against ‘any … practice … which operates … as a fraud or deceit upon any client or prospective client’ remained in the bill from beginning to end.  And the Committee reports indicated a desire to preserve ‘the personalized character of the services of investment advisers’ and to eliminate conflicts of interest between the investment adviser and the clients as safeguards both to ‘unsophisticated investors’ and to ‘bona fide investment counsel.’  The Investment Advisers Act of 1940 thus reflects a congressional recognition ‘of the delicate fiduciary nature of an investment advisory relationship,’ as well as a congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser – consciously or unconsciously – to render advice which was not disinterested.   [Citations omitted.] [Emphasis added.]

As seen in the text above, the U.S. Supreme Court’s recitation of the legislative history of the Advisers Act references aspects of both the “no conflict” and “no profit” rule, and appears to indicate that the scope of an investment adviser’s activities should be limited in order to avoid conflicts of interest and the deviation of profits away from the client (except as to profits derived from compensation paid directly by the client, which has been previously agreed to by the client).

A philosophy of full disclosure is not the Advisors Act’s only purpose. While some commentators have advanced the argument that the Advisers Act’s purpose was “to substitute a philosophy of full disclosure for the philosophy of caveat emptor,” a closer reading of the decision reveals that this purpose was set forth as a “common” purpose of the federal securities acts enacted in the 1930’s and in 1940.  This does not lead to the conclusion that the Advisers Act’s only purpose was to require disclosure; it was merely one means by which Congress sought to protect clients of investment advisers.

Moreover, other commentators on the decision have focused on the language found in the last paragraph quoted above of the decision, that the “congressional intent” was “at least to expose” conflicts of interest.  And they seize upon this language of the decision:

An investor seeking the advice of a registered investment adviser must, if the legislative purpose is to be served, be permitted to evaluate such overlapping motivations, through appropriate disclosure, in deciding whether an adviser is serving “two masters” or only one, “especially . . . if one of the masters happens to be economic self-interest.” United States v. Mississippi Valley Co., 364 U.S. 520, 549.

Yet, again, this reading of the decision is far too narrow.  While certainly disclosure is one means by which the intent of Congress was effected, the avoidance of conflicts of interest is another fundamental purpose of the Advisers Act.  As the U.S. Supreme Court stated in its own footnote to the passage set forth above:

This Court, in discussing conflicts of interest, has said … The reason of the rule inhibiting a party who occupies confidential and fiduciary relations toward another from assuming antagonistic positions to his principal in matters involving the subject matter of the trust is sometimes said to rest in a sound public policy, but it also is justified in a recognition of the authoritative declaration that no man can serve two masters; and considering that human nature must be dealt with, the rule does not stop with actual violations of such trust relations, but includes within its purpose the removal of any temptation to violate them....

Furthermore, the Supreme Court near the end of its majority opinion stated: “The statute, in recognition of the adviser's fiduciary relationship to his clients, requires that his advice be disinterested. To insure this it empowers the courts to require disclosure of material facts.”  But, again, this is but one requirement of the Advisers Act.  The avoidance of investment adviser conflicts of interest, and profit-taking resulting from actions of investment advisers, are additional purposes of the Advisers Act.

Why did the Supreme Court not go further, and hold in the Capital Gains decision that the investment adviser’s secret purchase of shares of a particular security shortly before recommending it to clients (and thereby profiting from the increase in market price which occurred as a result of the recommendation, by selling the shares ) was prohibited?  As mentioned above, the SEC’s request for an injunction was limited to requiring disclosure, and not more.  Hence, it should not be inferred from this language that investment advisers are only required to undertake disclosures of conflicts of interest, as opposed to avoiding them.

Think about it … If disclosure was effective as a means of consumer protection, there would be no need for the fiduciary standard of conduct!

The Advisers Act imposes, in situations where a conflict of interest is not avoided, substantial additional burdens upon the fiduciary adviser, beyond mere disclosure. We have suggested the boundaries of these additional duties in our suggested rules for adoption, above.

ADDENDUM: WHAT DOES THE FIDUCIARY STANDARD REQUIRE, WHEN A CONFLICT OF INTEREST IS PRESENT? To properly observe the fiduciary standard of conduct requires the active avoidance of conflicts of interest. However, it is not possible to avoid all conflicts of interest. Under the "best interests" fiduciary standard, a person who is a fiduciary to a financial/investment adviser client possesses the specific duties to:

fully disclose[i] all material[ii] facts to their clients[iii] affirmatively[iv] and in a timely[v] manner, including but not limited to conflicts of interest which are not reasonably avoided, in a manner in which client understanding[vi] is assured;

properly manage any remaining conflicts of interest in order to secure the client’s informed consent[vii] to a transaction which remains substantively fair to the client, in order that that the client’s best interests remain paramount[viii] above the interests of the broker or adviser[ix];

All advisors should remember this fundamental truth - a client cannot consent to be harmed.

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[i]  See Barbash, Barry P., and Massari, Jai, “The Investment Advisers Act of 1940: Regulation by Accretion,” 39 Rutgers L.J. 627, stating: “[T]he Court in Capital Gains … provided investment advisers with clear guidance on fulfilling their obligations under the Act: appropriate disclosure can cure a conflict of interest. As the Court said, an adviser may “make full and frank disclosure” of the conduct in question to address the concerns raised by the Commission under the Advisers Act. The disclosure, the Court went on to say, would serve the purposes of the Act’s anti-fraud provisions by allowing clients to evaluate ‘overlapping motivations’ …. in deciding whether an adviser is serving ‘two masters’ [i.e., the client and its own economic self-interest] or only one … Capital Gains both expanded the scope of the duties owed by an investment adviser to its client as a fiduciary and, consistent with the Advisers Act’s approach, found disclosure an effective tool in curing conflicts of interest faced by an adviser..”) Id. at 631, 633-4.  See also Jennifer L. Klass, “Investment Adviser Conflicts of Interest Disclosures” (Outline for IAA Annual Compliance Workshop, Oct. 27, 2008), stating: “[T]he Advisers Act, like the other federal securities laws, is based on the fundamental principal of “full disclosure.’ In this regard, the Advisers Act reflects the “congressional intent to eliminate, or at least to expose, all conflicts of interest which might incline an investment adviser – consciously or unconsciously – to render advice which was not disinterested.”

[ii] 375 U.S. 180, ___, citing United States v. Mississippi Valley Co., 364 U.S. 520, 549.

[iii] Id. at p.___, fn. 50, citing United States v. Mississippi Valley Co., 364 U.S. 520, 550, n. 14.

[iv] Id. at p.___.

[v] Id. at p.___.

[vi] Capital Gains, 375 U.S. 180, ____, citing “Investment Trusts and Investment Companies, Report of the Securities and Exchange Commission, Pursuant to Section 30 of the Public Utility Holding Company Act of 1935, on Investment Counsel, Investment Management, Investment Supervisory, and Investment Advisory Services,” H. R. Doc. No. 477, 76th Cong., 2d Sess., 1.

ADDENDUM NOTES:

[i] “[T]he duty of full disclosure was imposed as a matter of general common law long before the passage of the Securities Exchange Act.”  In the Matter of Arleen W. Hughes, SEC Release No. 4048 (February 18, 1948) (a case involving a conflict of interest arising out of principal trading). See also, e.g., General Instructions for Part 2 of Form ADV: “Under federal and state law, you are a fiduciary and must make full disclosure to your clients of all material facts relating to the advisory relationship.” Id., at #3. In fact, the SEC requires registered investment advisers to undertake a broad variety of affirmative disclosures, well beyond disclosures of conflicts of interest, and many of these disclosures are required to be found in Form ADV, Parts 1 and 2A and 2B.  Part 2A requires information about the adviser’s range of fees, methods of analysis, investment strategies and risk of loss, brokerage (including trade aggregation policies and directed brokerage practices, as well as use of soft dollars), review of accounts, client referrals and other compensation, disciplinary history, and financial information, among other matters.

SEC Staff recently noted that under the “antifraud provisions of the Advisers Act, an investment adviser must disclose material facts to its clients and prospective clients whenever the failure to do so would defraud or operate as a fraud or deceit upon any such person.  The adviser’s fiduciary duty of disclosure is a broad one, and delivery of the adviser’s brochure alone may not fully satisfy the adviser’s disclosure obligations.”  SEC’s “Staff Study on Investment Advisers and Broker-Dealers - As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act” (Jan. 21, 2011), p.23 (available at http://sec.gov/news/studies/2011/913studyfinal.pdf.)

Disclosure must be full and frank: “If dual interests are to be served, the disclosure to be effective must lay bare the truth, without ambiguity or reservation, in all its start significance.” See “Will the Investment Company and Investment Advisory Industry Win an Academy Award?” remarks of Kathryn B. McGrath, Director of the SEC Division of Investment Management, at the 1987 Mutual Funds and Investment Management Conference, citing Scott, The Fiduciary Principle, 37 Calif. L. Rev. 539, 544 (1949).

[ii] “When a stock broker or financial advisor is providing financial or investment advice, he or she … is required to disclose facts that are material to the client's decision-making.”  Johnson v. John Hancock Funds, No. M2005-00356-COA-R3-CV (Tenn. App. 6/30/2006) (Tenn. App., 2006).

A material fact is “anything which might affect the (client’s) decision whether or how to act.” Allen Realty Corp. v. Holbert, 318 S.E.2d 592, 227 Va. 441 (Va., 1984).  A fact is considered material if there is a substantial likelihood that a reasonable investor would consider the information to be important in making an investment decision. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); Basic, Inc. v. Levinson, 485 U.S. 224, 233 (1988).

The existence of a conflict of interest is a material fact that an investment adviser must disclose to its clients because it "might incline an investment adviser -- consciously or unconsciously -- to render advice that was not disinterested." SEC v. Capital Gains Research Bureau, Inc., 375 U.S. at 191-192.

The standard of materiality is whether a reasonable client or prospective client would have considered the information important in deciding whether to invest with the adviser. See SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992).

All facts which might bear upon the desirability of the transaction must be disclosed. “[W]hen a firm has a fiduciary relationship with a customer, it may not execute principal trades with that customer absent full disclosure of its principal capacity, as well as all other information that bears on the desirability of the transaction from the customer's perspective … Other authorities are in agreement. For example, the general rule is that an agent charged by his principal with buying or selling an asset may not effect the transaction on his own account without full disclosure which ‘must include not only the fact that the agent is acting on his own account, but also all other facts which he should realize have or are likely to have a bearing upon the desirability of the transaction, from the viewpoint of the principal.’”  Geman v. S.E.C., 334 F.3d 1183, 1189 (10th Cir., 2003), quoting Arst v. Stifel, Nicolaus & Co., 86 F.3d 973, 979 (10th Cir.1996) (applying Kansas law) (quoting RESTATEMENT (SECOND) OF AGENCY § 390 cmt. a (1958)).

See also RESTATEMENT (THIRD) OF AGENCY, §8.06(1):

(1)    Conduct by an agent that would otherwise constitute a breach of duty … does not constitute a breach of duty if the principal consents to the conduct, provided that

(a)    In obtaining the principal’s consent, the agent

(i)              acts in good faith;

(ii)            discloses all material facts that the agent knows, has reason to know, or should know would reasonabley affect the principal’s judgment …

(iii)           otherwise deals fairly with the principal; and

(b)    the principal’s consent concerns either a specific act or transaction, or acts or transactions of a specified type that could reasonably be expected to occur in the ordinary course of the agency relationship.

[iii] See SEC vs. Capital Gains Research Bureau, 375 U.S. 180, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963) (“Courts have imposed on a fiduciary an affirmative duty of 'utmost good faith, and full and fair disclosure of all material facts,' as well as an affirmative obligation 'to employ reasonable care to avoid misleading' his clients.” Id. at 194.)

[iv] The duty to disclose is an affirmative one and rests with the advisor alone.  Clients do not generally possess a duty of inquiry. See, e.g., SEC’s “Staff Study on Investment Advisers and Broker-Dealers - As Required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act” (Jan. 21, 2011), p.117 (available at http://sec.gov/news/studies/2011/913studyfinal.pdf.) “The [SEC} Staff believes that it is the firm’s responsibility—not the customers’—to reasonably ensure that any material conflicts of interest are fully, fairly and clearly disclosed so that investors may fully understand them.”

As stated in an early case applying the Advisers Act: “It is not enough that one who acts as an admitted fiduciary proclaim that he or she stands ever ready to divulge material facts to the ones whose interests she is being paid to protect. Some knowledge is prerequisite to intelligent questioning. This is particularly true in the securities field. Readiness and willingness to disclose are not equivalent to disclosure. The statutes and rules discussed above make it unlawful to omit to state material facts irrespective of alleged (or proven) willingness or readiness to supply that which has been omitted.” Hughes v. SEC, 174 F.2d 969 (D.C. Cir., 1949).

[v] “[D]isclosure, if it is to be meaningful and effective, must be timely. It must be provided before the completion of the transaction so that the client will know all the facts at the time that he is asked to give his consent.” In the Matter of Arleeen W. Hughes, SEC Release No. 4048 (February 17, 1948), affirmed 174 F.2d 969 (D.C. Cir. 1949).

“The adviser’s fiduciary duty of disclosure is a broad one, and delivery of the adviser’s brochure alone may not fully satisfy the adviser’s disclosure obligations.” SEC Staff Study (Jan. 2011), p.23, citing see Instruction 3 of General Instructions for Part 2 of Form ADV; Advisers Act Rule 204-3(f); also citing see also Release IA-3060.

Disclosures of fees, costs, risks and other material facts, far in advance of specific investment recommendations, such as those found upon the initial delivery of Form ADV, Part 2A, would not meet the requirement of undertaking affirmative disclosure in a manner designed to ensure client understanding. We suggest that the Commission re-explore the delivery of point-of-recommendation disclosures, for recommendations of pooled investment vehicles of any form, in order to provide all fiduciary advisors with the benefit of a provisional safe harbor for disclosures. However, to be meaningful and operable as a full disclosure of all material facts, such a disclosure form, if adopted, should incorporate an estimate of all of the fees and costs attendant to pooled investment vehicles, such as brokerage commissions and other transactional costs within the fund which are not included in the fund’s annual expense ratio.

We also recommend that the SEC’s Division of Investment Management replace the currently misleading computational method of “portfolio turnover” within a fund, in which funds are permitted to report the lesser of purchases or sales of securities in relation to the fund’s net assets, to a more accurate method in which purchases and sales of securities within a fund are averaged; it is currently conceivable that a fund with significant inflows or outflows report a “zero” portfolio turnover in its filings, when in fact substantial purchases and sales within a fund exist.

[vi] As stated in an early decision by the U.S. Securities and Exchange Commission: “[We] may point out that no hard and fast rule can be set down as to an appropriate method for registrant to disclose the fact that she proposes to deal on her own account. The method and extent of disclosure depends upon the particular client involved. The investor who is not familiar with the practices of the securities business requires a more extensive explanation than the informed investor. The explanation must be such, however, that the particular client is clearly advised and understands before the completion of each transaction that registrant proposes to sell her own securities.”  [Emphasis added.]   In re the Matter of Arleen Hughes, SEC Release No. 4048 (1948).

The extent of the disclosure required is made clear by cases applying the fiduciary standard of conduct in related professional advisory contexts, such as the duties imposed upon an attorney with respect to his or her client: “The fact that the client knows of a conflict is not enough to satisfy the attorney's duty of full disclosure.” In re Src Holding Corp., 364 B.R. 1 (D. Minn., 2007).  "Consent can only come after consultation — which the rule contemplates as full disclosure.... [I]t is not sufficient that both parties be informed of the fact that the lawyer is undertaking to represent both of them, but he must explain to them the nature of the conflict of interest in such detail so that they can understand the reasons why it may be desirable for each to [withhold consent].") Florida Ins. Guar. Ass'n Inc. v. Carey Canada, Inc., 749 F.Supp. 255, 259 (S.D.Fla.1990) [emphasis added], quoting Unified Sewerage Agency, Etc. v. Jeko, Inc., 646 F.2d 1339, 1345-46 (9th Cir.1981)); “[t]he lawyer bears the duty to recognize the legal significance of his or her actions in entering a conflicted situation and fully share that legal significance with clients.” In re Src Holding Corp., 364 B.R. 1, 48 (D. Minn., 2007) [emphasis added].

The burden of affirmative disclosure rests with the professional advisor; constructive notice is insufficient. See also British Airways, PLC v. Port Authority of N.Y. and N.J., 862 F.Supp. 889, 900 (E.D.N.Y.1994) (stating that the burden is on the client's attorney to fully inform and obtain consent from the client); Kabi Pharmacia AB v. Alcon Surgical, Inc., 803 F.Supp. 957, 963 (D.Del.1992) (stating that evidence of the client's constructive knowledge of a conflict would not be sufficient to satisfy the attorney's consultation duty); Manoir-Electroalloys Corp. v. Amalloy Corp., 711 F.Supp. 188, 195 (D.N.J.1989) ("Constructive notice of the pertinent facts is not sufficient.").  A client of a fiduciary is not responsible for recognizing the conflict and stating his or her lack of consent in order to avoid waiver.  Manoir-Electroalloys, 711 F.Supp. at 195.

[vii] The consent of the client must be “intelligent, independent and informed.”  Generally, “fiduciary law protects the [client] by obligating the fiduciary to disclose all material facts, requiring an intelligent, independent consent from the [client], a substantively fair arrangement, or both.”  Frankel, Tamar, Fiduciary Law, 71 Calif. L. Rev. 795 (1983). [Emphasis added.].

[viii] “The duty of loyalty requires an adviser to serve the best interests of its clients, which includes an obligation not to subordinate the clients’ interests to its own.” SEC Staff Study, January 2011, at p.22, citing see, e.g., Proxy Voting by Investment Advisers, Investment Advisers Act Release No. 2106 (Jan. 31, 2003 (“Release 2106”); also citing Amendments to Form ADV, Investment Advisers Act Release No. 3060 (July 28, 2010) (“Release 3060”).

[ix] The Commission recently characterized this as an adviser’s obligation “not to subrogate clients’ interests to its own.” ADV Release, at 3. See also “Without Fiduciary Protections, It’s ‘Buyer Beware’ for Investors,” Press Release issued by the Investment Adviser Association, et al., June 15, 2010, available at: http://www.financialplanningcoalition.com/docs/assets/3C7AB96C-1D09-67A1-7A3E526346D7A128/JointFOFPressRelease-ConferenceCommitteeFINAL6-15-10.pdf.

A 4-Part Series: Why FINRA Should Be Disbanded, and How Personal Financial Advisors Might Move Toward a True Profession

FINRA SHOULD BE DISMANTLED. Here's an overview of why ...

1942: A Dismal Year for Individual Investors - Due to FINRA. In the year following the commencement of World War II, when all Americans had their attention diverted to the enormous threats from abroad, FINRA (formerly known as the National Association of Securities Dealers, or NASD) adopted rules of conduct for its member. Strangely missing from such rules was a fiduciary standard of conduct for brokers (i.e., registered representatives of broker-dealer firms) when providing personalized investment advice, despite the fact that courts and even FINRA (NASD) itself had acknowledged the existence of such a duty. Over seven decades have passed, and FINRA has compounded its error 1000-fold, for it has yet to rectify this agregious error.

Is the Term "Best Interests" Being Co-opted by FINRA? Even worse, FINRA's Dec. 2012 NTM regarding its "revised" suitability standard stated that brokers must act in the "best interests" of their customers. Sounds like a fiduciary standard! Indeed, as stated by one recent federal court decision: "The federal fiduciary standard requires that an investment adviser act in the 'best interest' of its advisory client." Belmont vs. MB Investment Partners, Inc., 708 F.3d 470; 2013 U.S. App. LEXIS 3732; Fed. Sec. L. Rep. (CCH) P97,297 (2013) (citing other previous federal court decisions). Yet, FINRA only uses the term "best interests" in its explanation of its suitability rule, without any reference the the fact that acting in the best interests of a customer is a long-standard, though short-hand, method of explaining the fiduciary duty of loyalty.

Nor is this "best interests" standard enforced with any level of diligence by FINRA, as would be expected from a competent regulator. Of course, enforcement of its rules is required by the Maloney Act, which requires that FINRA possess rules governing business ethics which must provide that the members "shall be appropriately disciplined ... by expulsion, suspension, limitation of activities, functions, and operations, fine, censure, being suspended or barred from being associated with a member, or any other fitting sanction."

This also begs some question? Is it an attempt to co-opt the term "best interests" and redefine it as something other than fiduciary? Is this an attempt by FINRA to hold out to the public that its members act under a fiduciary duty of loyalty, when most deny the existence of such duties? Worse yet, is this intentional misrepresentation on FINRA's behalf?

FINRA's Omissions and Mistakes: Pernicious, Widespread Effects.  The result of FINRA's mistakes? We have possessed over seven decades of operation under a financial services system in which certain business practices should have been outlawed, or at least substantially constrained. Consumer distrust of Wall Street is at an all-time high, leading to lower participation in the capital markets by individual investors. This, in turn, increases the costs of capital for American business.

Additionally, there exists substantial deviation of the returns of the capital markets away from individual investors, with returns instead fueling excessive compensation for Wall Street's investment bankers and brokers. This exorbitant consumption of the profits of American business, by Wall Street, which has grown to over 35% of the corporate profits.

In the years ahead, the result will likely be less financial security of our fellow Americans, reduced capital formation, and stagnant economic growth in the U.S. In addition, higher tax rates for both individual Americans and corporations will result, as the government shoulders an increased burden of caring for those retirees with inadequate personal resources.

What Can be Done? What are the Solutions?

In a four-part series of articles at www.RIABiz.com, I explore the huge problem which FINRA poses, and suggest possible solutions.

I suggest FINRA be disbanded, and that a new, true "Professional Regulatory Organization" assume its market conduct functions.

Of course, other possible solutions are possible. For example, the SEC has the power to adopt rules for FINRA's members to follow, and has the power to sanction FINRA for not enforcing its own rules. In addition, it might be possible to establish a competitive regulatory organization, for investment advisers (and possibly some brokers, as well), which could create a framework for a "rush to the top" as far as standards of conduct are concerned. Competition can be a good thing, if the competition is correctly structured.

Here is a copy of the editors' preliminary notes, as well as a link to the entire article.

• June 24, 2013 (Part 1 of 4): "Why keeping FINRA from ruling RIAs is critical to these firms, the investor -- and even the U.S. economy." "In Part 1 of a four-part series, our One Man Think Tank pulls back the lens to look at how the resolution of the fiduciary furor could reverberate nationwide."  READ the article at http://www.riabiz.com/a/22918833/why-keeping-finra-from-ruling-rias-is-critical-to-these-firms-the-investor----and-even-the-us-economy

• "Dina’s Note: Ron Rhoades returns to RIABiz with a four-part series that updates and expands An in-depth analysis of FINRA’s attempted takeover of RIAs and why the group should be disbanded, Part 2, originally published by RIABiz on May 31, 2012. In this first installment, Rhoades explores the effect lack of trust will have on the capital markets and our economy. In future installments, Rhoades will delve into the history of the regulation of brokers; FINRA’s early — and more recent — failures to protect the investing public; and, finally, discuss options for reform, including the creation of a true profession for financial and investment advisors."

• "Brooke’s Note: The free enterprise system is no more compartmentalized than any other system. If one part is sick, damaged or tainted, it is only a matter of time before it affects the body whole. The recognition of that immutable natural law is, in effect, what Ron Rhoades draws our attention to in this column. Is it farfetched to think that a kink in the economic hose in as critical a point as the one where capital flows back from the consumers to companies and governments — i.e. though financial advisors as guided by their regulators — would be like a low-level virus for the grander economy? A good think tank made up of of several cross-disciplinary academics could work that one out. Fortunately for us, Ron is it. See: Part One: Investment Advisers: Is our path toward, or away, from a true profession?"

• July 9, 2013 (Part 2 of 4): The story of FINRA's implacable drift from its founding ideals to a pallid 'no-lying baseline'. In Part 2 of a four-part series, our one-man think tank narrates the back story of today's fiduciary standoff, getting to the root of the 'insidious conflicts' that made the terms 'broker' and 'trustee' oxymoronic. READ the article at http://www.riabiz.com/a/22935495/the-story-of-finras-implacable-drift-from-its-founding-ideals-to-a-pallid-no-lying-baseline

• "Brooke’s Note: The plot thickens. In this second — absorbing — combination of history and fiduciary bible thumping, Ron Rhoades tells the life story to date of FINRA from its infancy in 1939, when it was called NASD, to its idealistic adolescence and then, well then it’s pretty much downhill, according to our fiercely partisan and erudite one-man think tank. Along the way, there’s a crusading New Deal senator, gripping courtroom drama and a whole lot more. Simply put, for anyone with a dog in this hunt, it’s a good read. For more, check Part 1: Why keeping FINRA from ruling RIAs is critical to these firms, the investor — and even the U.S. economy — and stay tuned for Part 3, which delves more deeply into FINRA’s misdeeds."

• July 17, 2013 (Part 3 of 4): FINRA's scandalous litany of failures. In which our one-man think tank offers a scathing indictment of the broker-dealers' SRO (Part 3 of a four-part series).  READ the article at http://www.riabiz.com/a/22992247/finras-scandalous-litany-of-failures

• "Dina’s Note: To recap: In part 1 (See: Why FINRA’s power grab for RIAs needs to be stopped to avert the death of the profession, Part 1) and part 2 (See: An in-depth analysis of FINRA’s attempted takeover of RIAs and why the group should be disbanded, Part 2) of this remarkable series, Ron Rhoades reviewed FINRA’s early history, including its failure to adopt rules that applied the fiduciary standard of conduct to brokers who provided personalized investment advice, and the limited protections offered to investors under the 'failed standard' of 'suitability.' In this installment, Ron explores FINRA’s long history of failure, and its continued opposition to providing protections to the investing public under the fiduciary standard of conduct."

• July 28, 2013 (Part 4 of 4): T
• he 8 pillars of an RIA-created professional organization and how it would put the SRO issue to bed forever. 
• Forget the SRO controversy -- what the the industry -- and the country -- needs is to control its own destiny by creating its own group to serve investors, not Wall Street

 READ the article at http://www.riabiz.com/a/23015131/the-8-pillars-of-an-ria-created-professional-organization-and-how-it-would-put-the-sro-issue-to-bed-forever  

• Dina’s note: In this final installment of this four-part series, Ron Rhoades outlines a vision for a true profession of investment and financial advisors, through the creation of a professional regulatory organization that will protect the investor, not Wall Street interests. The last refuge of the criticized is to say: Well, then what would you do? With this article, Ron has preemptively struck down that line of counterattack.

Thank you to Brooke Southall and Dina Hampton at RIABiz for publishing these articles. - Ron

Ron A. Rhoades, JD, CFP® serves as Asst. Professor and Program Coordinator for the Financial Planning Program at Alfred State College, Alfred, New York. He currently serves as Chair of the Steering Committee for The Committee for the Fiduciary Standard, and he frequently speaks at conferences and in presentations to policy makers in Washington, DC on the fiduciary standard. In 2013, Ron was named one of NAPFA's "30 Most Influential" persons in NAPFA's 30-year history. He is an academic member of NAPFA and of the Financial Planning Association. Ron Rhoades is the author of several books and many articles on topics relating to investments and financial planning. He received the "Tamar Frankel Fiduciary of the Year" award in 2011, and also was named as one of the "Top 25 Most Influential" by Investment Advisor magazine in 2011.

To follow Ron’s blog posts, please follow him on Twitter (@140ltd) or link to him via LinkedIn.

Please undertake inquiries of an academic research, advocacy or media nature directly to RhoadeRA@AlfredState.edu.

If you are a consumer interested in learning more about financial and investment advisory services from Ron Rhoades, JD, CFP® and his fee-only investment advisory firm, ScholarFi, Inc. - please e-mail Cathy@ScholarFi.com, or call Cathy Rhoades, Director of Client Services, at 607-247-5008.

Bob Veres Opines Re: A New PROFESSIONAL Organization - What Do You Think?

Bob Veres, long a thought leader in the profession, and publisher of the influential Inside Information newsletter (a must read for financial advisors; well-worth the subscription), recently opined on a possible future path for the profession. See his blog post, "The Way Out of Our Regulatory Dilemma," at www.bobveres.com.

In his article, Bob goes further with an idea I've been circulating - that FINRA is altogether a failed organization, and that the only way to create a true profession is to create a "Professional Regulatory Organization," in which all members adhere to a bona fide fiduciary standard of conduct, peer review is conducted, and other attributes exist.

Yet Bob takes my idea a step further. With his long-standing knowledge of the development of our industry organizations, he suggests the formation of VOLUNTARY (non-profit) professional organization for this purpose. This voluntary organization could, at some future date (i.e., when Congress is ready) morph into a professional regulatory organization appropriately sanctioned by law.

What do you think?

   - Ron

P.S. - Bob refers to a white paper (unpublished), which is being serialized by RIABiz into four articles. The first of these articles can be found at http://www.riabiz.com/a/22918833/why-keeping-finra-from-ruling-rias-is-critical-to-these-firms-the-investor----and-even-the-us-economy. I'm advised that the remaining articles will be published the week of July 8, 2013, by RIABiz.

Should you desire my full, unedited white paper - with footnotes - please e-mail me at RhoadeRA@AlfredState.edu, and I'll be happy to forward it to you.

Students: Live Your Life by Design, Not By Default

STUDENTS: LIVE YOUR LIFE BY DESIGN, NOT BY DEFAULT!

Develop S.M.A.R.T. Goals to propel you to success this semester.

What are "S.M.A.R.T." Goals? They are:

• S - Specific 

• M - Measurable

• A - Achievable

• R - Resourced

• T – Time-Limited

Possessing S.M.A.R.T. Goals at the beginning of each semester is your first step toward propelling yourself toward a new level of achievement, as well as success in all aspects of your life.

Here’s a suggested course of action to follow:

1.              COPY goals you select from below into a document your create. Most of these goals should appear on your personalized list of goals.

2.              COMPLETE your goals by adding other, personal-to-you specific academic, socialization, self-control and career development goals – which can be achieved over the course of the next semester.

3.              MAKE A PERSONAL COMMITMENT to achieve the goals you have established for yourself.

4.              PRINT AND POST your goals sheet for the semester by your study location.

5.              SELECT SPECIFIC GOALS AND SCHEDULE TIME during each upcoming week for the completion of select goals (concentrate on just a few major goals, each week, and a few minor goals; no more than five at any one time, to start ... if you are successful with accomplishing all of the activities for five goals during a week, you can consider adding another goal for activity during the following week)

6.              TRACK YOUR GOALS – once each week. Record on the goals sheet (or in your personal journal): (a) what goals you were to work on and whether you accomplished, or did not accomplish, those goals during the past week; and (b) why you did or did not accomplish all that you intended; and (c) how you feel about that. Then repeat Step 5 for the next week.

“I WILL LIVE MY LIFE BY DESIGN, NOT BY DEFAULT.” 

MY GOALS FOR THIS TERM

MY NAME: _____________________________________

MY S.M.A.R.T. ACADEMIC GOALS

I will achieve an average G.P.A. of _________ in all of my classes this term.

I will attend 90% or more of my classes this term (even accounting for times I might get sick).

I will be an active participant in class discussions.

I will go to the Student Learning Center, as needed, for the following:

·      to receive help in the Math Lab and Writing Center

·      to request a tutor or another form of assistance for a specific class or classes, if and when my average in the class falls below the average G.P.A. goal I set for myself

·      to meet with an academic support specialist for assistance with time management or study strategies

I will complete the MAPWorks survey this term and I will print out and review the results.

I will meet with my academic advisor this term to discuss: (a) any obstacles to my ability to excel academically this term; (b) review the results of my MAPWorks survey; (d) develop my course schedule for next term; (d) ideas relating to networking and finding a position within my chosen career; and (f) review a draft of my résumé.

MY S.M.A.R.T. SELF-CONTROL GOALS

I accept personal responsibility for my own success this term.

“9 hours 15 minutes” - I will consistently seek to attain sufficient sleep each night this term, as I require.

·      I will set an alarm on my phone to remind me to start preparing to go to bed

·      I will record my progress as to this goal, and record how I physically feel, through reflection in my journal, once each week.

I will plan out my week, using an hour-by-hour calendar, in order to attain 2-3 hours of study time, on average, for each hour I spend in the classroom.

If I have difficulty starting a project or activity, I will say out loud to myself: “Just do it! Do it, do it, do it! Do it NOW!”

I will spend less than 10 hours each week watching television and/or playing video or computer games.

MY S.M.A.R.T SOCIALIZATION GOALS (TO “EXPAND MY COMFORT ZONE”)

I will smile at all times, every day, when walking between classes and when entering a room

I will greet others (including those I don’t yet know) on campus with a “Good morning,” “Good afternoon,” “Good evening,” “Hi,” or “How you doing?”

I will introduce myself _____ times each week to a student or other person I don’t know, and get to know them better (i.e., I will practice this essential skill)

I will join and participate in the following NCAA sports, intramural sports, clubs and/or organizations this term (at least one of which will require some form of civic engagement):

1. 

2. 

Additional (optional; I won’t overextend myself):

I will attend the following events and/or participate in seven additional activities on-campus this term:

1.

2.

3.

4. 

5.

6.

7.

Additional (optional; I won’t overextend myself):

MY S.M.A.R.T. NETWORKING, CAREER PLANNING AND OTHER PERSONAL DEVELOPMENT GOALS

I will develop and maintain a list of potential contacts whom may be in a position to land me a good position within my chosen career area.

I will write in my Journal twice a week to record people and events and other things for which I am grateful.

I will write and mail/deliver thank-you notes three times a week to new and existing contacts, family members, friends, and those who have done a service for me.

I will perform 3 random acts of kindness each week; and I will record them in my Journal.

If I choose to go to parties or other places where alcohol may be served, I will go with a group, and at least one of my friends will be the “Designated Friend” (who will not drink and who will assume responsibility for watching over me, should I inadvertently drink to excess and possess impaired judgment).

I will revise my résumé this term to reflect all of my activities to date, and I will look for “gaps” in the résumé that need filling.

Remember ... you control your own destiny, to a large degree. You have the ability to design your own life, and to construct the foundations for a lifetime of success. So ... just do it!

Does Wall Street Control Congress? What Can YOU Do - NOW?

I am writing this just a couple of hours after the House Financial Services Committee approved a bill which, in effect, would delay (and probably kill) the enactment of fiduciary rules for brokers by the SEC, as well as the DOL's "Definition of Fiduciary" re-proposal. The bill is expected to receive a favorable vote on the House floor within the next couple of weeks, and thereafter move to the U.S. Senate.

While prospects in the U.S. Senate are perceived to be less than 50/50 for passage, anything can happen - especially where Wall Street's money is in play. While President Barack Obama is unlikely to support putting obstacles to agency rule-making as mandated by the Dodd Frank Act, the bill emerging from the House could find its way into broader legislation that may prove more difficult for the White House to reject.

Let's examine what is going on, in more detail:

AN ANTI-CONSUMER, ANTI-FIDUCIARY, PRO-WALL STREET BILL.

The CFP Board issued the following press release today, which aptly summarizes what the House Financial Services Committee is really up to. The coalition of financial planner groups and consumer groups is to be applauded for their effort, which may have aided in having parts of the bill struck today. The CFP Board's press release stated:

    "'Despite its name, H.R. 2374 is not an investor protection bill,' stated the groups in a letter. 'To the contrary, it would leave American investors with significantly less protection.'

    "The organizations signing the letter – AARP, Certified Financial Planner Board of Standards, Consumer Federation of America, Financial Planning Association, Investment Adviser Association, National Association of Personal Financial Advisors and the North American Security Administrators Association – cited two specific negative outcomes should the legislation, as written, become law.

    "First, the bill 'imposes unnecessary and onerous rulemaking requirements that the Securities and Exchange Commission (SEC) must meet before it can adopt a fiduciary rule.' While rules the SEC adopts should undergo economic analysis before adoption, the legislation sponsored by Rep. Ann Wagner (R-MO), requires a burdensome cost-benefit analysis that 'would delay (or even prevent) the rulemaking and increase the likelihood of it being struck down by the courts upon legal challenge.'"

   "The second concern is that the legislation links the two rulemakings and would prevent the Department of Labor (DOL) from moving forward with its rulemaking on the definition of fiduciary under ERISA, a statute that plays an important role in protecting Americans’ retirement accounts. In short, the legislation prevents the DOL from moving forward with its rulemaking until two months after the SEC issues a final rule related to broker-dealer conduct standards."

    "This not only unnecessarily slows DOL’s rulemaking, but it potentially halts DOL’s rulemaking altogether if the SEC does not act on a fiduciary rule,” noted the group in its letter, urging the Committee to let the DOL move forward with its own rulemaking as it is the expert agency."

(See Appendix A, below, for the main text of the bill, as it was passed out of the House Financial Services Committee today.)

THE COMMITTEE'S VOTE - WAS IT BI-PARTISAN?

Observe that the House Financial Services Committee is packed with 33 Republicans and 28 Democrats. H.R. 2374, the Retail Investor Protection Act, was agreed to, as amended, by a recorded vote of 44 ayes and 13 nays. In other words, about one-half of the Democratic U.S. Representatives on the Committee voted for the bill, and all or nearly all of the Republicans."

However, it should be noted that House Democratic leadership packed the House Financial Services Committee with "Corporate Democrats." As explained in a recent news article: "A group of 21 House lawmakers—including eight Democrats—is pushing seven separate bills that would dramatically scale back financial reform ... 'The default position of many members of Congress is to do what Wall Street wants. They are a main source of funding,' says Bartlett Naylor, a financial-policy expert at the consumer advocacy group Public Citizen .... the problem with the Democrats is the so-called corporate Democrats, those who often represented marginal or red districts / states." See "The Definition of Insanity: Democrats Working to Undermine Financial Regulation" (April 4, 2013) available at http://notesonatheory.wordpress.com/2013/04/03/the-definition-of-insanity-democrats-working-to-undermine-financial-regulation/.

As better explained in a 2009 Bill Moyers interview by economist Robert Kuttner: "[The] corporate Democrats ... were put on that committee because Rahm Emanuel [former White House Chief of Staff under Obama] felt that there's no better place than the House Financial Services Committee if you want to shake down Wall Street, to put it bluntly."

So, ask yourself this question. Is this a small group of Democrats, placed on the House Financial Services Committee to secure sizable donations from Wall Street? Or is this a bi-partisan vote, as many anti-fiduciary advocates will portray it?

WALL STREET'S CONTROL OVER CONGRESS: COMPELLING EVIDENCE

The New York Times reported that Jeff Connaughton, a former lobbyist and former congressional staffer, said that Wall Street has so much influence on the Hill that it “skews the thinking of Congress.” Eric Lipton and Ben Protess, "Banks’ Lobbyists Help in Drafting Financial Bills" (New York Times, May 23, 2013), available at http://dealbook.nytimes.com/2013/05/23/banks-lobbyists-help-in-drafting-financial-bills/.

The New York Times further relayed this quote: “It’s appalling, it’s disgusting, it’s wasteful and it opens the possibility of conflicts of interest and corruption,” Rep. Jim Himes, a top recipient of Wall Street donations and a former banker at Goldman Sachs, told the Times, admitting his own faults. “It’s unfortunately the world we live in.” See MapLight, "Rep. Jim Himes Thrives in "Disgusting" Fundraising System, Co-Introduced Amendment to Weaken Dodd-Frank" (June 9, 2013), available at http://www.natlawreview.com/article/rep-jim-himes-thrives-disgusting-fundraising-system-co-introduced-amendment-to-weake.

I doubt we have seen what Wall Street can really do, in terms of monetary influence. Let's revisit history. "[W]hen Wall Street launched the final drive to repeal Glass-Steagall in the late 1990s ... the financial services sector ... kicked in $350 million to buy enough votes to kill the 1933 FDR legislation that protected the commercial banking sector for 66 years ... Needless to say, the lion's share of the money was directed at members of the relevant House and Senate committees with oversight over the financial sector ... Breaking that figure down on a per capita basis, with 435 Members of the House of Representatives and 100 Members of the Senate, Wall Street shelled out an average $654,205.61 on each and every Member. Given the massive taxpayer-backed looting operations that took place over the next seven years, before the bubble finally blew on the biggest gambling binge in history, from Wall Street's standpoint, it was money well spent." "Wall Street Spent $350 Million To Buy Congressional Repeal of Glass-Steagall" (March 20, 2013), available at http://larouchepac.com/node/25915.

FEELING DOWN

In recent weeks, since the end of the academic year, I've been conferring with colleagues and have visited with officials in Washington, seeking to push forward the DOL's rule-making efforts. And I've been crafting a lengthy reply to the SEC's Request for Information (comments to the SEC are due July 5, 2013).

Along the way I've discovered that the DOL's re-proposal of its "Definition of Fiduciary" rule must, as with all administrative rules, pass through the White House Office of Management and Budget (OMB). Even though the DOL's proposal has not yet been submitted to OMB, Wall Street's lobbyists have been visiting OMB in earnest. Yet, what about the pro-fiduciary advocates ... are they also visiting OMB? NONE HAVE.

(I, myself, several weeks ago, scheduled a visit to OMB for early June. Yet, one business day before my visit was to occur, the OMB e-mailed me to cancel my visit, with not even an offer to re-schedule. It appears the OMB doesn't even want to hear of the substantial economic rationale for imposition of the fiduciary standard; they may already be convinced by the arguments advanced by Wall Street's lobbyists.)

In essence, without fervent action by pro-fiduciary, pro-consumer groups, there exists a reasonable chance that DOL's re-proposed rule may never see the light of day.

I've also discovered that Wall Street lobbyists are hard at work in both the House and Senate. That should come as no surprise. What is surprising is that Wall Street has apparently convinced key lawmakers of its perspectives, such as: "The fiduciary standard will mean that investors will lose access to investment advice." And a host of other, similar arguments, long since discredited.

Last week I had the pleasure, at TD Ameritrade's Fiduciary Summit, of speaking with Consumer Federation of America's Barbara Roper, the most knowledgeable and effective advocate on fiduciary rule-making. I remember telling her (after reading a recent article about her views on the prospects for fiduciary regulation) that she should not be so pessimistic about the chances for the fiduciary standard for personalized investment advice becoming finalized through rule-making. Perhaps she knew, at the time, more than I do. For now, after today, I feel the same pessimism. Perhaps it feels more like "despair."

WHAT CAN BE DONE?

Simply this. Here's a question for each and every reader of this blog:

Are you concerned about the adoption of the fiduciary standard, the need for all financial advisors to become true professionals, the substantial negative drain on capital markets returns through Wall Street's excessive rent-taking, the diminished trust in financial services, and the negative effects of all of the foregoing on the prospects for future U.S. economic formation, America's economic growth, and the retirement security of all of our fellow Americans?

If you are, contact your members of Congress today - both of your Senators and your U.S. Representative. Fax them a letter. (Go to their web sites for the fax numbers.) Then call their local offices or ask their legislative aides to schedule a meeting with members of Congress when they return to their home districts or states this summer. Let them know that the fiduciary standard is important - for all of us. Let them know the truth.

The only thing that can possibly counter the disproportionate and substantial influence over Congress that Wall Street's money possesses is through personal voter contacts - by each and every one of you - to members of Congress. Let them know you care. Let them know that they should care.

Thank you.

APPENDIX: THE BILL TEXT

(THE DOL MUST WAIT ON THE SEC, WITH REGARD TO FIDUCIARY RULE-MAKING.) 

"After the date of enactment of this Act, the Secretary of Labor shall not prescribe any regulation under the Employee Retirement Income Security Act of 1974 ... defining the circumstances under which an individual is considered a fiduciary until the date that is 60 days after the Securities and Exchange Commission issues a final rule relating to standards of conduct for brokers and dealers pursuant to the second subsection (k) of section 15 of the Securities Exchange Act of 1934."

(THE SEC MUST JUMP THROUGH AN EXTRAORDINARY RULE-MAKING EFFORT TO EVEN ADOPT A FIDUCIARY RULE)

"The [SEC] shall not promulgate a rule ... before— 

     (A) identifying if retail customers (and such other customers as the Commission may by rule provide) are being systematically harmed or disadvantaged due to brokers or dealers operating under different standards of conduct than those standards that apply to investment advisors under section 211 of the Investment Advisers Act of 1940; 

    (B) identifying whether the adoption of a uniform fiduciary standard of care for brokers or dealers and investment advisors would adversely impact retail investor access to personalized investment advice, recommendations about securities, or the availability of such advice and recommendations ...

    The Commission shall publish in the Federal Register alongside the rule promulgated [above] formal findings that such rule would reduce the confusion of a retail customer (and such other customers as the Commission may by rule provide) about standards of conduct applicable to brokers, dealers, and investment advisors.

    In proposing rules ... for brokers or dealers, the Commission shall consider the differences in the registration, supervision, and examination requirements applicable to brokers, dealers, and investment advisors."