Bogle calls on institutional money managers to heed fiduciary duty

Investment advisers at large mutual fund companies and other financial institutions often operate with conflicts of interest, John Bogle, founder and former chief executive of The Vanguard Group Inc., told Securities and Exchange Commission Chairman Mary Schapiro on Tuesday.

Mr. Bogle and two other representatives of The Institute for the Fiduciary Standard met with Ms. Schapiro to urge the commission to propose a rule that would require anyone providing retail investment advice to act in the best interests of their clients. Such a regulation would make brokers adhere to the fiduciary duty that investment advisers meet. Currently, they are governed by a less stringent suitability rule.

Even though the Dodd-Frank financial reform law gave the SEC the authority to proceed with a universal-fiduciary-duty rule that focuses on retail investment advisers, Mr. Bogle said that the commission should re-emphasize that mutual fund advisers must operate under the same standard of care.

The giant financial conglomerates who own 38 of the 42 largest investment funds do what’s best for themselves, rather than shareholders, according to Mr. Bogle.

“They put their own interests first,” Mr. Bogle told reporters. “They are holding the reins. They run those funds. Their wish, their will, will be done. That’s a powerful conflict of interest. The fact is that a fiduciary standard must include advisers to registered investment companies.”

The Investment Company Act of 1940 requires that mutual funds be organized and managed in the interest of shareholders, rather than their managers or directors, according to Mr. Bogle. But the spirit of the law is violated in practice, he said.

“The standard is there in the ’40 Act, but it’s not enforced,” said Mr. Bogle, whose book “The Clash of Cultures: Investment Versus Speculation,” was published last month. “Conflicts of interest are inherent in that institutional ownership.”

A spokeswoman for the Investment Company Institute declined to respond directly to Mr. Bogle’s comments but said that the fiduciary standard has protected investors.

“This standard, which the U.S. Supreme Court articulated nearly half a century ago, puts the interests of advisory clients and customers above those of their adviser,” ICI spokeswoman Ianthe Zabel said in a statement. “We believe this higher fiduciary standard should be applied to advisers, brokers, and other intermediaries who provide personalized investment advice.”

While in their meeting with Ms. Schapiro, Mr. Bogle, Knut Rostad, president of the Institute for the Fiduciary Standard, and Tamar Frankel, professor of law at Boston University, presented her with what they call the Fiduciary Declaration.

The document calls on the SEC to move forward with a fiduciary-duty regulation to address documented confusion among investors about differences between the standards of care under which investment adviser and brokers operate. An investment adviser is bound to put the best interests of a client before his or her own; brokers, who usually take a commission when selling investment products, can recommend any product so long as it is appropriate for the investor’s goals.

“This regulatory gap means investors do not receive equal protection under the law,” the declaration states. “Stringent fiduciary duties must prevail in rule making to meet the risk retail clients and retirement plan sponsors face from brokers who put their own interests first.”

The declaration also urges the Labor Department to complete work on a regulation that would bring anyone providing any type of investment advice to retirement plans under the fiduciary umbrella.

“Chairman Schapiro has been a longtime supporter of the fiduciary duty rule and successfully advocated for the issue to be a part of the Dodd-Frank legislation,” SEC spokesman John Nester said in a statement. “She continues to believe that the duty should be no less stringent than the 1940 [Investment Advisers] Act standard and she continues to push the issue forward within the agency.”

Fiduciary skeptics warn that flawed rules would increase regulatory costs and litigation threats for brokers, forcing them to raise fees, potentially pricing middle-income investors out of the advice market.
In addition to Mr. Bogle and Ms. Frankel, 10 other luminaries in the financial world signed the Fiduciary Declaration, including former Federal Reserve Chairman Paul Volcker, former SEC Chairman Arthur Levitt, Nobel Prize economist Daniel Kahneman and Sheila Bair, former chairwoman of the Federal Deposit Insurance Corp.

The fiduciary duty rule has been stalled at the SEC for more than a year. The agency will first conduct a cost-benefit analysis of a potential rule, but it has not yet sent out a request for data.

In an interview last week with InvestmentNews, Ms. Schapiro said that she continues to champion a fiduciary-duty rule.

“I still think this is a really important thing for the SEC to do for investors,” Ms. Schapiro said. “There’s a fair amount of work going forward inside the building. I would like to see it happen.”
In the meeting Tuesday, Mr. Rostad cautioned her not to proceed with a rule that is less rigorous than the standard of care that investment advisers must meet.

“A rule that weakens the standard, in our view, is worse than no rule at all,” he said.