July 20, 2018
While I appreciate the fact that the SEC recognizes the need to address the fiduciary issue, I have concerns about whether the SEC is sincere about adopting a meaningful fiduciary standard that will provide the protection that investors need, or just putting on a show that will result in a watered down version of FINRA's "suitability" standard.
The SEC's mission statement clearly indicates that protection of investors is a primary purpose. Judicial decisions involving the agency have clearly stated that it is the SEC's duty to protect investors, not the investment industry.
In Norris Hirshberg v. SEC (177 F.2d 228), the court rejected the defendant's suggestion that the securities laws were intended to protect the investment industry, stating that
"to accept it would be to adopt the fallacious theory that Congress enacted existing securities legislation for the protection of the broker-dealer rather than for the protection of the public. On the contrary, it has long been recognized by the federal courts that the investing and usually naive public need special protection in this specialized field." (at 233)
In Archer v. SEC (133 F.2d 795), the court echoed those same concerns, stating that
"the business of trading in securities is one in which opportunities for dishonesty are of constant recurrence and ever present....The Congress has seen fit to regulate this business."
Any suggestion that a "suitability," or "just OK," standard provides the same protection that a true fiduciary, or "best interest at all times," standard is disingenuous and a blatant violation of the agency's mission statement and the very purpose for which the agency was formed.
The need for a meaningful fiduciary standard for anyone financial services to the public can also be seen in the investment firms retreating from being held to any fiduciary duties in connection with 401(k) plans, arguably in order to engage in the same abusive marketing strategies that led to the DOL's fiduciary standard in the first place.
In FINRA Regulatory Notice 12-25, FINRA stated that the suitability standard and the best interest standard are "inextricably intertwined." If one accepts that as true, then the SEC should have no objection to clearly defining the legal duty owed to investors as a "fiduciary" duty and defining the duty using the term fiduciary and the terms set out in the '40 Act, since the best interest standard requires a higher standard of conduct(fiduciary)than the suitability standard just OK).
The late General Norman Schwarzkopf once stated that "the truth is, we all know the right thing to do. The hard part is doing it." For the sake of American investors, follow the court's admonition in Norris Hirshberg and do the right thing and properly protect American investors instead of the investment industry by adopting a meaningful fiduciary standard.