Incite: Why a fiduciary study is meaningless

When it comes to protecting investors, the 'landmark' legislation is little more than a game of kick the can

Jun 29, 2010 @ 10:23 am

By Susan Antilla, Bloomberg News

At 2,315 pages, the Dodd-Frank Conference Report of proposals to fix U.S. financial regulations isn't the stuff of summer beach reading.

It is, though, a starting point to understanding just how messed up financial regulations had become by the time the economy all but collapsed in 2008. And it gives great hints as to how serious lawmakers are about helping everyday, mere mortal investors who don't worry about life-and-death issues like whether they will pocket a gazillion dollars in bonuses.

If you work outside of finance and count your fortunes in figures that have just one comma, here are the highlights and lowlights of the package that politicians will be voting on in the days ahead:

Fiduciary standard

Should stockbrokers should act in your interest? Amazing as it sounds, there is no law that says they have to.

People who are licensed as investment advisers are stuck with a mandate to put their customers' interests ahead of their own. Sometimes they don't, and if they're caught, their liability is measured by the high standard of “customers first.”

Brokers who similarly give advice to customers need only recommend stuff that is suitable. Investor advocates pushed to force everyone to place the customer first, and a 2008 Rand Corp. study for the Securities and Exchange Commission has already determined that, as far as investors can tell, brokers and advisers do the same thing.

Bottom line in the reform package: wimp lawmakers are telling the SEC to do yet another study before addressing the issue.

Broker Conflicts

Whether brokers who sell only their own brand-name products -- say, the Acme Brokerage Firm that sells Acme Mutual Funds -- should make sure clients are aware of the conflict of interest when potentially less expensive, better products aren't considered or recommended.

Lawmakers are properly suggesting that the SEC might want to write a rule on this. Let's face it, the financial supermarket doesn't work like the supermarket where you buy eggs and canned tomatoes. The generic brand from your stockbroker can be an expensive choice.

Client arbitration

The financial reform bill empowers the SEC, if the agency so chooses, to establish a rule that forbids or imposes limitations on brokers' mandatory arbitration contracts -- those coercive agreements that force clients to use industry-run, private courts in the event of a dispute.

Such clauses have kept brokerage-firm abuses under wraps for decades. The SEC can establish a rule on arbitration if it finds the contracts aren't in the public interest, the bill says. Let's see if the agency has the guts to favor investors over brokers, and allow a choice between public and closed-door courts.

Banning banned advisers

Should sleazebags who get caught breaking investment-adviser rules be allowed to slide on over to jobs as stockbrokers?

The new bill suggests such permissiveness isn't a great idea, proposing a “collateral bar” that would mean if you break the rules in one financial forum overseen by the SEC, you would be blacklisted from all the others, too.

In a similar vein, lawmakers are suggesting that felons and securities lawbreakers not be allowed to offer securities under Regulation D, the loosey-goosey rule that lets some companies sell securities without first registering with the SEC. Stand by for the outraged press releases from the Friends of Reg D Felons Association.

Failed-firm fund

Should financial firms pay more for insurance?

Lawmakers are saying brokers should cough up additional money into the fund that reimburses investors when firms go under. The legislation suggests that members of the Securities Investor Protection Corp., or SIPC, pay 0.02 percent of their gross revenue each year into the fund to make investors whole when a firm fails. As of now, SIPC firms pay -- are you ready for this? -- $150 a year. Not even Loehmann's has ever boasted a better bargain.

Regulating the regulators

How about checking up on how well the SEC is doing its job?

Proving, perhaps, that they at least have a sense of humor, creators of the Dodd-Frank bill have suggested that the comptroller general of the U.S. submit a report to Congress every three years detailing the competence of the staff of the SEC and telling what the agency has done about employees “who have failed to perform their duties.”

It can only be left to the imagination how one measures job performance of rogue staffers caught running personal businesses and perusing porn on the job. The comptroller would also track how well SEC-supervised associations like the Financial Industry Regulatory Authority do at things like managing their own funds.

Indeed, let's hope the Comptroller General can explain how it was that Finra bailed out of millions of dollars of its own auction-rate securities before they collapsed in 2007, while the poor-schmo investors Finra was supposed to protect were meanwhile being sold similar, doomed securities by many of Finra's members.

More studies = punting

To be fair, investors were considered, and sometimes helped, in the proposed legislation. But the bad smell of lobbyist tinkering wafts in too often. Studies provide helpful fodder for idle columnists but mean nothing to neglected investors who need action, not stall tactics, to move ahead, post-crisis.

(Susan Antilla is a Bloomberg News columnist. The opinions expressed are her own.)


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