Regulation Run Amok
For every action, there is a reaction. Very often, it turns into an overreaction.
If one goes back to 2001 and 2002 and remembers
hearing on a daily basis about brazen fraud in Internet stocks, Wall
Street research and financial reporting, it shouldn't be surprising how
we got here from there. Nobody who lived through the 1990s should be
During the late 1990s, long before Enron and Worldcom, companies found themselves forced to restate their earnings at an unprecedented rate. SEC Chairman Arthur Levitt tried to tighten accounting standards but Congress, well lubricated with money from the Big Few, wasn't buying. Levitt's successor, Harvey Pitt, turned out to be the worst SEC chief in history, sending all the wrong signals about a kinder, gentler SEC at just the wrong time. Indeed, the reaction to Pitt's ineffectuality probably greased the skids for the swing to excessive regulation we are experiencing today.
Try as it might, Congress is never going to legislate honesty and integrity. There's plenty of blame to go around both sides of the aisle. During the time of the Enron scandal, no senator voiced more pious and sanctimonious outrage than Connecticut's Joe Lieberman. Yet the moral-values Democrat was one of the leaders in the 1990s to repeatedly short-circuit Levitt's efforts to reform financial reporting.
Fast forward to 2005. If you haven't read a letter to SEC Chairman William Donaldson from Rep. Michael Oxley, an Ohio Republican whose name now resides on top of a highly popular law, you should. The March 17 letter addresses the exemption from RIA regulation that the SEC just granted brokers and specifically the Financial Planning Association's lawsuit.
"In our view, this litigation can best be understood as an effort to have the courts protect financial planners from competition in the marketplace," Oxley writes. "Of course, this is competition that, we might add, benefits investors."
An uneven playing field is this congressman's definition of competition. When the situation suits them, big brokerage firms are very adroit at shirking any fiduciary responsibility in arbitration and saying they were just sales people. "This is why we need a PAC," says one advisor with experience in how Washington works.
In passing the exemption, the SEC seemed to recognize this, though its efforts to have things both ways forces it into some contorted logic. For instance, in the same release in which it says any advice brokers give must be solely incidental, the SEC acknowledges brokers have been giving advice since 1940.
Frustrating as all this equivocation and hypocrisy may be, the truth eventually manages to surface. Even if the FPA ends up losing or dropping its lawsuit, the association already has shined a lot of light on the subject and earned much favorable publicity.
There are several possible outcomes. One is that the next time a wave of scandals arises out of brokers' exemption, some folks will be there to remind the SEC and Rep. Oxley just where they stood in 2005 when they get on their high horses and start pontificating in the pompous, sanctimonious manner of Sen. Lieberman in 2002, when he was so shocked to discover cooked books.
But there's another market-based outcome that's increasingly probable. A growing number of registered reps at the nation's largest brokerages already view themselves as fiduciaries with serious responsibilities to their clients. If their firms persist in trying to keep them down on the product-peddling plantation, they may just start walking with their feet.