Progress Report from the Disinformation and Lobbying Committee to the Wall Street and SIFMA Executive Team:
Gentlemen: Im happy to report another successful year in our efforts to defeat meaningful protection of consumers and protect what may be the most lucrative revenue model in the history of capitalism. Last years remarkable bonus extravaganza is not only a testament to our efforts, but a sober reminder of what were defending.
Item 1: Our remarkably successful efforts to bring the SEC under full control.
Our hats go off to Commissioner Dan Gallagher, whose public speeches have reliably followed the SIFMA lobbying script: Brokers are actually more tightly regulated than fiduciary advisors; fee-compensated advisors (we prefer the term unregulated rogue brokers) are more likely to be rule-breakers than our sales agents; a broker-dealer SRO (hint: FINRA) should examine investment advisors; and individuals who earn more than $200,000 a year dont need any additional consumer protections plus general opposition to the [expletive deleted] Dodd-Frank legislation.
Mr. Gallagher is a reliable ally in our effort to preserve financial consumers right to choose between somebody who will put their interests first and a salesperson slyly masquerading as an advisor.
But our achievements with the SEC have been much broader and deeper. A recent report by the independent Project on Government Oversight found that, over a 10-year period, more than 400 former SEC staffers filed almost 2,000 disclosure forms saying they planned to represent an employer or a client before the agency.
Great work! As long as SEC staffers believe that, if they play ball, they have a fair chance of earning seven-figure salaries when they leave, well continue to own their decision-making and regulatory activities.
Item 2: Emasculating the centuries-old fiduciary standard.
We continue to enjoy great success with our push here. Hats off to the creatives in our lobbying department who came up with the term harmonized. This has become our preferred term to describe the essential evisceration of the consumer protection elements of the fiduciary standard which our legal team tells us were the whole point of the standard by replacing key elements with the sales regulations we currently operate under.
Meanwhile, the fact fabrication team earned a solid bonus in 2014. At first, our lobbyists were highly skeptical about the idea of claiming that SIFMA and the brokerage community have always supported a fiduciary standard. Werent the authors of Dodd-Frank on the record as saying they were astonished at the violence of our opposition to a fiduciary standard as the law was crafted in 2009?
But key members of the press now seem to believe that SIFMA has been a frustrated fiduciary champion for years. Even lawmakers are developing a convenient case of amnesia albeit after receiving generous campaign contributions.
Item 3: FINRAs inexplicable fascination with its CARDS proposal.
The Comprehensive Automated Risk Data System poses a significant challenge. CARDS would monitor all investment recommendations made to all of our clients, in real time, and instantly identify situations where our brokers are crossing ethical boundaries.
I dont think I have to spell out how, if implemented, CARDS would pose a grave threat to one of our core revenue models: encouraging the creative elements of our vast Wall Street empire to hatch investment schemes that, in retrospect, prove to be comically unethical.
Under our current operating environment, our executive teams are able to plead ignorance about these terribly unfortunate (but lucrative) initiatives after theyre discovered. And thanks to our clout with the SEC and FINRA, these firms usually pay back only a portion of the ill-gotten revenues in the form of fines.
Better yet, most of the fines are paid to FINRA, which is able to use those funds to lobby on behalf of its members effectively turning our penalties into lobbying investments.
It would be an understatement to say we are lobbying vigorously against proactive monitoring and prevention of illegal activities in real time. Weve objected that CARDS would represent a breach of privacy, even though no actual consumer data would be collected and maintained. We objected that it would be costly to implement when, in fact, all it would require is FINRA access to our trading systems.
We have even released a poll that indicates that investors and consumers are strongly opposed to the proposal which required a certain amount of courage, since the only possible rationale for implementing CARDS is to protect investors and consumers from mistreatment and loss of their nest eggs.
Item 4: Overreach from an accidental regulator.
The CARDS proposal points to a bigger problem that should be addressed ASAP: It appears that FINRA CEO Richard Ketchum is starting to regard himself as a real regulator, rather than a convenient shill for the industry. Where he got this idea, none of us can figure out, unless perhaps hes been listening to our lobbying conversations where we claim that FINRA is a more effective regulator than the SEC. Does he not realize that he works for us?
Several possible solutions have been proposed. Our public relations team tells us that removing Mr. Ketchum for attempting to function as a regulator might be difficult to explain to key members of the press, no matter how reliably credulous theyve been in the past.
A better option may be to strengthen our hold on FINRAs board of governors. Currently, FINRAs 22-member board comprising 10 industry members and 12 public members who include a retired chief investment officer of Travelers (Bill Heyman), a retired former senior executive at Morgan Stanley (Robert Scully), a former managing director at Deutsche Bank (Joshua Levine), a former director and career executive at Donaldson Lufkin & Jenrette (Richard Pechter), the former head of technology at JP Morgan Chase (John Schmidlin), a former vice president of J.P. Morgan (Leslie Seidman) and a retired former FINRA vice president (Elisse Walter).
So: Seven out of 12 public members actually have close ties to the securities industry. Should we raise that to a full 12? Do you think that would get Mr. Ketchums attention and show him whos running things?
Item 5: Marketplace challenges.
This is our biggest concern going forward. Even though our member firms enjoy an overwhelming advantage in marketing and advertising budgets, we continue to leak market share to independent advisors. The latest Cerulli Associates report tells us that wirehouse market share of managed assets slipped to 41% from 42% in the past year, while RIAs raised their share to 13% from 12%. Project that out over 30 years, and were looking at an extinction event.
How do we stop this trend? According to our marketing committee, the migration of consumers closely tracks the number of consumers who are learning the difference between our suitability standard and their fiduciary standard either firsthand, because they were churned-and-burned by some of our more aggressive vice presidents of investments, or through these execrable fiduciary pledges that some advisors have begun circulating among their clients.
Closing point to ponder: Would it be possible to enact legislation requiring individuals who have been abused by vice presidents of investments to remain silent about their losses, and include a provision banning fiduciary pledges and other voluntary efforts to sit on the same side of the table as the customer?
Lets think about that, and come up with a suitable lobbying budget for the next election cycle. We need to act before the idea of acting in the best interests of the client starts getting out of hand.
Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisors. Follow him on Twitter at @BobVeres.
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