Originally posted on Advisor Perspectives.
On September 24, the specter of impeachment became a reality, as the House began its official inquiry. The case for impeachment may involve whether the president breached his fiduciary duties, so it is appropriate to reflect on the relationship to the advisory profession.
Fiduciary duties seek to prevent abuses of power in relationships of trust and confidence of unequal parties, in both private relationships and public service.
Boston University Professor of Law Emeritus Tamar Frankel, a noted scholar of fiduciary practices, says trust requires speaking truthfully and doing what you say you will do. In her book, Fiduciary Law, she noted parallel duties in the private and public sectors, “The Founders were acquainted with standards of fiduciary law (and) the United States Constitution is the fiduciary duty of public power and that private sector fiduciaries and government officials have much in common.”
Abuses of power have been all too commonplace in 2019. Prominent universities were caught in an admissions scandal. The halls of power in Washington are under siege with serious allegations.
The SEC says new rulemakings and interpretations, including Reg BI, “enhance protections and preserve choice for retail investors.” Yet these measures were widely panned with negative reviews from scholars, advisor groups, state securities administrators and consumer groups.
In SEC roundtables and survey research, investors openly and emphatically expressed concerns and disagreement with the SEC’s views. A key takeaway: Investors know what they want; this rulemaking doesn’t deliver. No wonder trust and confidence seem beyond reach.
It’s not always been like this. The July 1969 Moon landing, “a giant leap for mankind,” as Neil Armstrong said, was re-lived this summer. That achievement was a reminder of an epic event that inspired hope, optimism and trust in institutions, government, science and technology.
Two-thirds of today’s adult population probably recalls a time when trust prevailed. The Gallup Poll has recorded trust over decades. In 1979, 60% expressed trust in banks and 30% do now; 80% in medicine and 36% today; 43% in Congress and just 11% today. Those dismal trust levels matter, but are hardly discussed.
Frankel says of trust, “A rich country’s culture is built on justified trust. Gullibility and mistrust produce a destitute country, in which leaders and citizens cheat. Every breach of trust produces followers and victims.”
Trust is essential to the market economy and a democratic republic. Fiduciary duties are trust builders. The process and discussion of impeaching a president should be, in part, a fiduciary tutorial, irrespective one’s views on its wisdom and merits. Issues of loyalty, care and utmost good faith take center stage. Success demands the public believe a prudent process drives the proceedings, and that the players are not partisan. As the Journal’s Peggy Noonan wrote, “it’s a political (act) one that requires public support.”
This historic backdrop towers over the SEC rulemaking on fiduciary duties. The details have been well examined. The larger picture has not. The rulemaking is widely viewed as weakening advisor standards and – at best – only minimally raising broker standards.
The rulemaking culminates a 10-year broker-dealer campaign. The campaign set out to neuter fiduciary duties and then get brokers’ suitability standard branded “best interest” or “fiduciary-like.” The strategy was audacious in that it sought to change the very meaning of conflicts. Conflicts were redefined from being so inherently harmful to require avoidance – to being so ubiquitous and hard to avoid to be acceptable.
Audacity won. The campaign succeeded.
This BD “success” means “best interest” has been turned on its head. It now includes a duty to preserve essentially bad “brokerage products and services” choices; that is, balancing competing “goals” of mitigating conflicts and preserving conflicted recommendations.
The SEC’s interpretation of the Investment Advisers Act of 1940 (IAA) drew the attention of 12 concerned law professors. Those 12 concluded the SEC, “has moved in a direction that is both contrary to its past practice and harmful to the interests of investors.”
Those concerned 12 also noted the SEC now, “largely requires only that the investment adviser make a full disclosure of any conflicts.” Thereby, effectively ignoring the Supreme Court lesson in SEC versus Capital Gains, that the advisor must “seek to avoid” conflicts.
The rulemaking was criticized because it’s substantively deficient. As SEC Commissioner Robert Jackson said, “Rather than requiring Wall Street to put investors first, today’s rules retain a muddled standard that exposes millions of Americans to the costs of conflicted advice.”
Conflicts of interest are central in the impeachment inquiry and consensus will be hard. The transcript of the Trump July telephone challenges us to judge the substance of that conflict. The New York Times says it is a mandate to impeach; the Wall Street Journal says the opposite.
Public opinion becomes the jury and the tie-breaker and whether fiduciary duties regain stature and whether rebuilding justified trust is possible.
The impeachment inquiry will build public trust if it passes muster. Right or wrong, the public will act as a jury and focus more on procedure than substance. The public will reward a prudent process and serious actors. It will penalize a process it views as partisan.
The fiduciary duty of care requires a prudent process. The impeachment inquiry challenges policy makers to deliver one.
