Mary Schapiro, chairman of the Securities and Exchange Commission, is correct: Fiduciary standards for all who give investment advice won't be sufficient to deter fraud.
High standards are never enough. Consider that every state and municipality has traffic laws and speed limits that are posted and widely known. Yet the same jurisdictions also have police forces to enforce the laws and a jail to house those who violate them.
In most fields of endeavor, there are a few people who violate or try to game the rules and regulations for their own advantage. The investment advisory field is no exception, as the Madoff scandal and other recent cases of fraud have reminded us.
In fact, as reported in
InvestmentNews last week, about a third of the 26 actions that the SEC has brought against Ponzi-type schemes since January involved investment advisory firms subject to fiduciary standards.
Simply declaring that all who provide investment advice must adhere to a fiduciary standard and act in the best interests of the client won't make them do so.
That is why President Obama's regulatory reform outline, put forward by Treasury Secretary Timothy Geithner almost two weeks ago, is merely a first step.
If Congress includes that fiduciary standard in any reform bill it passes — which by no means is a sure thing, given the intensive lobbying that will no doubt accompany the drafting of the law — it must also give the body assigned to regulate investment advisers the additional manpower and resources to enforce the standard.
That is true whether the authority and responsibility are assigned to the SEC, which now oversees investment advisory firms with at least $25 million in assets, the
Financial Industry Regulatory Authority Inc. of New York and Washington, which oversees the brokerage industry, or the Washington-based Certified Financial Planner Board of Standards Inc., which is angling for the oversight role.
The SEC has the staff and structure, but needs more of both to properly oversee and enforce fiduciary standards at thousands of small independent advisory firms.
Likewise, Finra has some of the staff and some of the tools it would need for the task, but it would need more of both, and the staff would have to be trained in a new mindset.
The CFP Board would need to build the necessary staff and systems almost from scratch, which wouldn't necessarily be a bad thing because the new staff wouldn't have anything to unlearn.
Firms whose employees or affiliates give investment advice, whether
financial planning firms, investment advisers or brokers, will have to adjust to a new regime. This new world no doubt will include different, probably more intrusive, and possibly more frequent audits — the cost of which will be borne by all financial advice givers.
Whichever institution receives a congressional mandate to enforce a fiduciary standard, it will have to conduct new and different audits to catch rule breakers in the act.
Just as traffic police in many jurisdictions use radar traps and sobriety checkpoints to catch speeders and drunk drivers, the responsible financial agency will have to be proactive in seeking signs of fraud. It can't wait for bad times to reveal the crooks who prospered in good times.
Doing so inflicts too much financial harm on too many investors and damages the integrity of the investment advisory profession and the capital markets.
Just as the sight of a police car parked on a highway shoulder deters speeders, so too will the presence of proactive overseers deter financial fraud.
