Financial Advisers Want to Rip Off Small Investors. Trump Wants to Help Them Do It.
One of the most important investor protections in decades took
effect on June 9. The new rule, issued by the Department of Labor, sets
in motion a seemingly commonsense requirement that those who advise on
retirement investments must put their clients’ interests ahead of their
own. Yet it marks a revolution in retirement security, the result of an
epic seven-year battle between consumer advocates and the financial
industry that sunk millions of dollars into white shoe lobbying firms,
industry-sponsored studies, congressional campaign contributions, and
major lawsuits in an effort to block the rule.
“Investment advisers shouldn’t be able to steer retirees, workers,
small businesses, and others into investments that benefit the advisers
at the expense of their clients,” Assistant Labor Secretary Phyllis
Borzi, who developed the rule, said in 2011. “The consumer’s retirement
security must come first.”
The rule, finalized in April 2016, was scheduled to take effect a
year later in order to give firms time to comply. It only survived till
now thanks to a veto by President Obama of legislation that would have
permanently blocked its implementation; Rep. Paul Ryan, who led the
charge in Congress, had tarred the rule as “Obamacare for financial
planning.”
Since the rule was already final when President Trump took office, it
was invulnerable to his day one directive freezing all pending rule
making. Nevertheless, within two weeks Trump signed a memo directing the
DOL to review the rule and potentially rescind it. In March, before
Trump’s labor secretary had even been confirmed, the Department of Labor
issued a proposed rule delaying implementation for 60 days — bringing
us to June 9 of this year.
In April, Sen. Elizabeth Warren joined consumer groups and the
AFL-CIO to unveil a “Retirement Ripoff Counter,” a digital projection
tallying the costs to retirement savers of delaying implementation of
the rule — which they calculated at $46 million a day.
And in late May,
Alexander Acosta, Trump’s newly minted labor secretary,
announced
in the pages of the Wall Street Journal that the administration had
exhausted every “principled legal basis” for further delaying the rule.
And so it was that key portions of the fiduciary rule finally went into
effect last month.
Whether the rule will survive the Trump administration’s deregulatory campaign is an open question.
Like the dozen or so others gathered for the chicken noodle
casserole at Johnny’s CharHouse that cold day in January 2007, Stephen
Wingate, then 59, had received an invitation in the mail to learn more
about financial planning for retirees. “I was interested in trying to
get my affairs in order because I was getting closer to retirement,”
said Wingate, who’d begun putting away money in 1986 when he was a
supervisor at Ideal Industries, a local company that manufactures wire
connectors, hand tools, and other equipment. “I’d been saving 10 percent
of my income right along.”
He liked what he heard from Jack W. Teboda that evening in Sycamore,
Illinois. A handout described Teboda as an adviser who employed
conservative strategies and chose investments “that are best suited for
my clients.” His two-page bio ended on a personal note. His wife of 30
years had been his high school sweetheart, and they attended the Harvest
Bible Chapel in nearby Elgin. “Our relationship with God is the most
important aspect of our lives,” it read.
But it was Teboda’s seemingly prudent investment strategy that
attracted Wingate most. “What he basically promised was safety,” he
said. “He said he could offer us financial peace of mind.”
Sitting beside his wife in Teboda’s office later that month, Wingate
moved his entire retirement account of $282,000 from IRAs that had been
invested in plain-vanilla Vanguard and Janus mutual funds into two
risky, real-estate investment trusts, known as REITs, that invested in
and operated commercial properties.
The funds that Wingate liquidated had annual fees of less than
one-half of 1 percent. Andrew Stoltmann, the Chicago lawyer who will
represent Wingate in an upcoming arbitration against Teboda and the
broker-dealer he is registered with, said that the REITs that replaced
them, which were highly illiquid and not publicly traded, offered Teboda
a 7 percent commission off the top, immediately zapping more than
$20,000 from Wingate’s savings.
As he signed the stack of documents, Wingate says he asked about a
disclosure that said he could lose some or all of his money, but Teboda
was reassuring. “He said, ‘Don’t pay attention to that because they all
say that,’” said Wingate. In one of the documents that Wingate signed,
Teboda had written that one reason the REITs had been chosen was to
“minimize risk.”
It didn’t turn out that way.
Wingate was thunderstruck three years later by news that the private
market value of one of the REITs, Behringer Harvard REIT I, had dropped
from $10 to $4.25 a share.
He fired off an email to Teboda. “How do I recommend your company to
others when I am totally disappointed with what you have done with my
account?” he wrote on June 28, 2010. “These are my life savings in your
hands.”
Teboda said to hang tight, but Behringer Harvard didn’t rebound. Last
year, after consulting with a new adviser, Wingate sold both REITs at a
loss of $147,000, half the original value of his retirement account.
Like other securities linked to real estate, Wingate’s REITs lost value
during the collapse of real estate prices during the financial crisis.
But even under the best of circumstances, these products were too risky
for anyone approaching retirement. A Vanguard stock index fund, by
contrast, had almost completely recovered its pre-crash value by the end
of 2010.
Wingate’s personal financial crisis was part of a larger public one. According to a 2015 White House
report,
Americans lose $17 billion a year from their retirement accounts as the
result of advice compromised by conflicts of interest. And such advice
has always been perfectly legal for financial advisers who were not
specifically charged by regulators to put their clients’ interests ahead
of their own, a level of care known as a “fiduciary duty.” Many
retirement advisers skated by under a lower standard that investment
need only be “suitable.”
The Dodd-Frank reforms passed in 2010 tackled some of the blatant
investment risks to average Americans. In addition to measures designed
to rein in too-big-to-fail banks, the law sought to protect consumers by
mandating the creation of a Consumer Financial Protection Bureau,
putting new restrictions on the packagers of asset-backed securities,
and directing the Securities and Exchange Commission to study whether
stockbrokers should be held to a “fiduciary” standard. But it did not
target the excessive fees that cut into the returns of the nation’s
retirement savers.
The same year that Dodd-Frank was signed into law, the Department of
Labor, which has jurisdiction over retirement accounts, unveiled its own
draft fiduciary rule. While the SEC dragged its heels, the DOL doggedly
pushed its proposal through the federal rule-making process.
Experts say that advice like Teboda’s would have been a violation
under the DOL’s new rule. “I don’t see how non-traded REITs as they are
currently structured and sold would ever comply with the new DOL rule,”
said Micah Hauptmann, financial services counsel at the Consumer
Federation of America. Craig McCann, a former economist at the
Securities and Exchange Commission who has studied the poor performance
and conflicts related to non-traded REITs, said in a 2014 blog post that
“No investors should buy these illiquid, high-commissioned, poorly
diversified non-traded REITs and no un-conflicted broker would recommend
them.”
In July 2009, an outspoken former House staffer and public
health professor was taking her seat at a daily staff meeting on the
fifth floor of DOL headquarters in Washington, D.C. Phyllis Borzi, who
had just been sworn in as assistant secretary, charged with running the
Employee Benefits Security Administration, had asked her nine office
directors to come prepared with a list of their top priorities, the
issues they would want on the agency’s agenda if they had her job.
As Borzi listened, most of the directors singled out the same
concern: Retirement accounts were hemorrhaging money because of high
fees and inappropriate investments, but the agency had limited legal
tools to hold the offenders accountable.
The law at the time typically put the fiduciary onus on sponsors of
retirement plans, often small employers struggling to set up 401(k)s for
their workers. Many of those sponsors, Borzi’s team suggested, were
making bad decisions based on the advice of financial experts, resulting
in avoidable losses for participants.
“So the employer in many cases was as much a victim of the broker as
the employees were,” she said. “They’d paid money to a broker and
followed their advice.”
Many of these advisers were free from any fiduciary obligation to
their clients thanks to loopholes in the Employee Retirement Income
Security Act. That law, known as ERISA, only covered advisers who were
giving advice on a regular basis and who had a “mutual understanding”
with their client that their advice would serve as the driving force
behind investment decisions. One-time consultants advising on which
mutual funds to offer in a 401(k) did not have to act as fiduciaries.
When their faulty advice blew up, Borzi said, advisers could simply tell
her investigators, “‘Yeah, I gave advice, but how could I know they
would rely on it?’”
For years, those loopholes hadn’t mattered much, as Americans had
relied on employer pensions that provided a steady stream of income in
retirement. But by 2013, after decades of corporate cost-cutting,
pensions constituted only 35 percent of retirement assets; more than
half were in so-called defined contribution plans such as and IRAs and
401(k)s.
Just as investors faced the new challenge of managing their own
retirement money, the financial industry was adding complex products
like REITs to retirement offerings.
Savers like Wingate, trying to sort
through the dizzying options, turned to brokers and advisers for help.
“I knew I needed a very knowledgeable person handling our retirement
money,” Wingate said. “I wasn’t qualified to do that.”
Brokers had an irresistible opportunity to steer naïve clients to
opaque products that offered the biggest commissions, said Sarasota
investment adviser Raul Elizalde. They were also legally permitted to
choose funds whose annual fees were higher than equivalent investments.
“The model of the financial industry under the suitability rule is to
take it little by little – and many times,” he said.
Perhaps most perilous for the burgeoning ranks of small investors was
a shift in the industry’s marketing strategy: Stockbrokers, once
understood as salespeople, began to call themselves “advisers,” a title
that had been used previously only by so-called registered investment
advisers who were required to operate as fiduciaries.
In a rule published in 2005, the Securities and Exchange Commission
conceded that investors were confused about the titles that advisers
were using and the obligations they were under. Six out of 10 investors
had come to the wrongheaded conclusion that brokers had a fiduciary
responsibility, the SEC said, citing research by a brokerage firm. The
confusion, the SEC said, raised “difficult questions.”
That year the SEC ordered up focus groups of investors. In a typical
response, one Baltimore participant said that he regularly received
invitations to free dinners from financial people but was clueless as to
what their titles meant. “I don’t know if they’re a financial
consultant, financial adviser or financial planners,” he said. “How
would I even know the difference?”
Despite the conclusions of its own research, the SEC chose to do
nothing about the misleading titles. “We are concerned that any list of
proscribed names we develop could lead to the development of new ones
with similar connotations,” it wrote at the time.
By October 2010, just after Dodd-Frank was signed into law,
Borzi and her team had designed a proposed fiduciary rule that would
shut down ERISA’s loopholes and introduce a new definition of fiduciary
advice. But her first stab at a rule was met by ferocious attacks in
comment letters and public statements from the securities industry,
afraid it would undermine its commission business, and the insurance
industry, concerned the rule would make it harder to sell lucrative
annuity products. In the year following the release of the proposed
rule, not a single consumer group registered to lobby in support of the
rule. But the Chamber of Commerce; industry lobby groups including the
Securities Industry and Financial Markets Association (SIFMA) and the
Financial Services Roundtable; major firms that offer mutual funds and
annuities such as Fidelity Investments and Prudential Financial; and
major financial firms including JPMorgan Chase, Charles Schwab, and
Blackrock sent lobbyists to quash various aspects of it — altogether 37
organizations that cumulatively spent more than $61 million on lobbying
that included the fiduciary issue during that period.
“They have more money than God,” Borzi said. “For every 15 or 20
meetings we had with opponents, we would have one conference call or
meeting with supporters, and that’s probably overstating the number of
supporter meetings.”
By September 2011, the DOL had withdrawn the rule, and she and her
staff had regrouped to work on a new version. “We have said all along,”
Borzi said in a press release, “that we will take the time to get this
right.”
Dodd-Frank had required the SEC to study a possible fiduciary
standard, too. As part of that process, the SEC solicited public comment
and held sit-down meetings with industry and consumer groups. Of the
111 meetings the SEC held between August 2010 and October 2012, only 31
were with groups promoting stronger fiduciary requirements.
The SEC’s 80
meetings with industry included 15 with SIFMA, which represents
security firms and banks; eight with the Financial Services Institute,
which represents brokers; and 14 with insurance companies and trade
groups. After producing a study that recommended establishing a
fiduciary standard, the SEC’s efforts stalled. “They had been ‘studying’
the issue for years but never took the next step and actually proposed
something,” said the Consumer Federation’s Hauptman.
In the years that followed, Borzi said, as she oversaw the
development of a new rule, the disproportionate influence of the
financial industry was constantly an issue. As the DOL moved toward a
final rule in 2016, the number of organizations registered to lobby
against it multiplied. Throughout, consumer advocates, who universally
support the rule, have been outflanked.
Of the 98 organizations that declared they lobbied the Senate on the
fiduciary rule in 2016, only 11 were unambiguously in favor of the rule.
Members of the financial industry prefaced many of their public
comments with vague endorsements of a best-interest standard, but these
letters typically went on to complain about portions of the rule that
didn’t serve their interests.
Those lobbying in favor, including the AARP, the American Association
of Justice, which represents trial attorneys, and the AFL-CIO, spent a
total of $23.9 million on lobbying during the quarters when they were
active on the rule.
By comparison, those who lobbied against the rule, including the U.S.
Chamber of Commerce, SIFMA, the Financial Services Roundtable, the
American Bankers Association, the Investment Company Institute,
Nationwide, Allstate, and Americans for Prosperity, collectively spent
$187.3 million in the quarters when they were registered to lobby on the
rule. (The filings don’t break down how much was spent lobbying on the
fiduciary rule in particular.)
Along with its big spending on lobbyists, the financial industry has
also splashed its largesse directly to lawmakers. In a study released in
March based on public filings, Americans for Financial Reform found
that the financial sector was by far the biggest business category
contributing to federal candidates for office and their leadership PACs
during the 2015-16 election cycle, spending $1.1 billion.
Among the top 20 contributors? The American Bankers Association,
SIFMA, Wells Fargo, New York Life Insurance, and the Investment Company
Institute, the trade group for the mutual fund industry — all of which
have filed comment letters opposed to the DOL’s rule.
The brokerage industry argues that since the new rule discourages use
of the commission-based accounts that are common among small investors,
it will effectively cut off average retirement savers from access to
investment advice. The insurance industry claims that the rule will
impede access to products, including annuities, which provide investors
with guaranteed income.
The stakes, apparently, are high. The consulting firm A.T. Kearney
calculated last year that it will cost the financial industry as much as
$20 billion in lost revenue by 2020 to comply with the rule, in part
because it will dramatically reduce the fees the industry collects from
investors.
While hearings about the rule were in progress in August 2015, a
coalition of insurance companies called Americans to Protect Family
Security aired a classic scare-tactic television ad that featured a
couple heading home in the car after dropping their daughter off at
college.
When the wife says that government bureaucrats want to “make it
really hard” to get advice from “Ann,” their financial adviser, her
husband is indignant. “We’re gonna call our senators,” he says with
resolve.
In another ad that month, this one sponsored by the conservative
group American Action Network, an investor who can’t get through to a
human at his brokerage firm hears the doorbell ring only to discover a
drone hovering at his front door. Hanging from the drone is a sign that
reads “NOTICE: NO PERSONAL SERVICE FOR
YOUR IRA.” The group,
founded by Fred Malek, a former assistant to Presidents Richard Nixon
and George H.W. Bush, spent $5.6 million during the 2016 federal
elections, according to OpenSecrets.
More recently, the U.S. Chamber of Commerce released a slick 20-page
report
featuring cartoon graphics depicting “Jane,” an investor with a small
account, whose broker “Steve” was dumping her because the oppressive new
rule would make it uneconomical to advise her. “Sadly,” the caption
reads, “Steve’s company no longer allows him to serve accounts less than
$25K.” Chamber spokesperson Stacy Day declined to comment, but referred
me to an article in which a Chamber executive said small investors will
be “dumped from their plans” or subject to high fees “that may not be
the right option for them.”
The research behind these claims is sometimes thin. The Investment
Company Institute, the mutual fund trade group, filed a comment letter
to the DOL this year in opposition to the rule, claiming that it had
“informally surveyed” its mutual fund members and discovered that 31 out
of 32 funds had either received “orphaned” accounts from brokerage
firms or gotten notice about accounts that would be orphaned by the
firms that previously held them. An ICI spokesperson said in an email
that this would be harmful to investors because they would lose access
to financial advice and the convenience of having a single financial
institution hold all their funds in one place.
“A lot of the pushback is a little bit too hysterical,” said Charles
Rotblut, vice president at the Chicago-based American Association of
Individual Investors, a nonprofit that educates investors on how to
manage their money. “These are accounts that the investor has likely
forgotten about. The loss of access to financial advice is a weak
argument because the investor probably wasn’t using the advice anyway.”
As for the risk of modest investors losing access to a brokers’
advice? “I’m not so sure at the end of the day that that’s bad for the
investor,” Rotblut said. “In fact, quite the opposite – some of these
so-called advisers are just glorified salespeople who’ve passed a
regulatory exam.” He recommends that investors consult with an hourly
financial adviser instead.
The Chamber of Commerce report, issued in May, outlined “new
information” about a wave of class-action litigation expected in
response to a provision of the rule that allows investors to bring
class-action lawsuits for systemic abuses. The Chamber cited a February
report by Morningstar, Inc. in claiming that the wealth management
industry would pay between $70 million and $150 million annually in new
legal costs. The Chamber never mentioned that the same Morningstar
report said the risk of litigation could serve as an incentive for firms
“to create and adhere to prudent policies and procedures that protect
retirement investors’ best interests.”
Michael Wong, the Morningstar senior equity analyst who authored the
report, said in an interview that his estimates could actually be too
high. “If no investors are harmed, there is no basis for class lawsuits
and class settlements,” he said. “Through many lenses, it looks like the
benefits outweigh the costs of this rule.”
The Chamber report also referred to a
post
by Meghan Milloy, director of financial services policy at the
conservative American Action Forum, in which she suggests that most
consumer claims are baseless. Citing Milloy, the report said that
consumers filed nearly 4,000 arbitration cases last year with FINRA, the
Financial Industry Regulatory Authority, alleging wrongdoing by
brokers, but that only 158 — about 4 percent — of those cases were
decided in favor of the consumer.
But Milloy’s denominator was off by a factor of 10. Only 389 cases
were decided by arbitrators in 2016, meaning that those 158 customer
wins represented 41 percent of the cases decided by arbitrators. The
reference to the 158 customer wins appeared on a FINRA chart which
clearly shows that customers had won 41 percent of the cases they
brought, out of 389 cases decided, not Milloy’s “nearly 4,000.”
In a telephone interview, Milloy initially said that the FINRA
arbitration statistics were evidence of the prevalence of “baseless
claims” by investors. When I pointed out her substantial error, she
responded that it was “still less than a majority” of cases decided in
favor of consumers. She has not corrected her original post, which on
June 29 was cited in a letter to the SEC from lobbyist Kent A. Mason of
the Washington, D.C., law firm Davis & Harman on behalf of an
unnamed “group of firm clients.” Mason told the agency that its role
protecting IRA investors would be “reduced dramatically” under the rule.
To boost its claim that the fiduciary rule will hurt average
Americans, the Chamber features on its website small business owners who
express deep concern over the new standard. The government watchdog
group
Public Citizen got in touch with some of those businesspeople, only to learn that several had little knowledge of the rule.
One business owner, Richard Schneider of Ellisville, Missouri, was
quoted on the Chamber’s website saying that the rule would mean more
paperwork and hurt his employees. “The Labor Department should just fix
this rule already,” he said. When contacted by Public Citizen to hear
more about his views, though, Schneider said he didn’t follow the rule
closely.
Another person featured on the Chamber’s site, Jim Dower, runs a
nonprofit in Chicago. The Chamber quoted him as saying that the “DOL may
have the right intention … but I’m worried they’ll still get it wrong
in the end.” When Public Citizen emailed him about his comment, Dower
responded, “Who do I call to get this down?” The Chamber has since
removed him from its site.
In a March 16 letter to the DOL on behalf of unnamed clients,
lobbyist Mason slammed the agency for taking “the stunning position that
selling is advising.” Yet a study earlier this year by the Consumer
Federation of America demonstrates that is precisely the message that
the financial industry has been delivering to the public.
Even as securities firms assailed the fiduciary rule in the lead-up
to its June 9 effective date, they continued to deliver marketing
messages suggesting they already were serving clients at the elevated
standard. On their websites, firms large and small pledge to variations
on the themes of “clients first” and advice given “with our clients’
best interests in mind,” despite allowing brokers to pitch
high-commission products or illiquid investments, like the non-traded
REITs sold to Wingate, that are ill advised for all but the wealthiest
investors.
In a study of 81 non-traded REITs published in 2015, McCann, the
former SEC economist, found that REIT investors over the past 25 years
would have earned as much or more by investing in U.S. Treasury
securities. More than half their underperformance, he found, resulted
from the upfront fees charged to investors, which largely went to
brokers.
“The entire industry is built around practices that would be a
crystal clear violation of a fiduciary duty,” said Wingate’s lawyer,
Stoltmann. “There is no faster way to clean up the securities industry
than imposing a mandatory fiduciary rule.”
Opponents of the DOL rule suggest that improved disclosure would
solve many of the problems the rule was designed to fix. But Anthony
Pratkanis, a professor of psychology at the University of California,
Santa Cruz, who has studied the characteristics of financial fraud
victims, said that’s nonsense: “Consumers and investors do not read
disclosures. Period.” Multiple studies have shown that even the people
who do read them don’t understand them, he said.
A 2012
report
from the SEC found that investors often don’t even understand the
information they get from brokers about their trades: Only 53 percent of
respondents in an online survey of 1,200 investors could correctly
identify a trade confirmation as having been for a stock purchase.
Nevertheless, President Trump’s new secretary of labor, Alexander
Acosta, has publicly opposed the rule based on an argument that the
government should trust in investors’ “ability to decide what’s best for
them.”
White House National Economic Council Director Gary Cohn, one of
Trump’s closest advisers, has gone further. “We think it is a bad rule,”
he
told the Wall Street Journal
. “This
is like putting only healthy food on the menu, because unhealthy food
tastes good but you still shouldn’t eat it because you might die
younger.”
After five more years, four more days of public hearings,
thousands of comment letters, and hundreds of meetings, mostly with
industry representatives, the DOL finally published its new rule on
April 8, 2016. It took the U.S. Chamber of Commerce and eight other
business organizations less than two months to file suit against the
agency, saying it had exceeded its authority.
In February, a Dallas federal judge ripped apart their arguments in
an 81-page opinion denying summary judgment. To a complaint that the DOL
had violated the freedom of speech of insurance agents and brokers,
Chief Judge Barbara M.G. Lynn of the Northern District of Texas said,
“At worst, the only speech the rules even arguably regulate is
misleading advice.” The Chamber and the other litigants have appealed.
Just days before that ruling, on February 3, President Trump signed
his memo in the Oval Office directing the DOL to review the rule. He
then handed his pen to Rep. Ann Wagner, the Republican from Missouri,
standing just to his right, and suggested she say a few words. Wagner
isn’t the top recipient of Wall Street money in Congress, but support
from the sector looms large for her, and she has returned the favor,
sponsoring bills to rein in the power of the DOL and the SEC. According
to the online publication
Investment News,
in a 2015 speech to insurance professionals, Wagner said that if
efforts to kill the rule fail, “By God we’ll just defund them.”
In a draft bill in early July, Wagner proposed that the rule be
eliminated and replaced with a new standard of conduct that would
require investment recommendations to “be in the retail customer’s best
interest.” But Wagner’s bill lacks the protections of the DOL rule and
fails to adequately address the “complex web of toxic financial
incentives” that lead to bad advice, according to a July 11 letter to
members of the House Financial Services subcommittee from the Consumer
Federation of America.
In the 2015-16 election cycle, insurance companies, securities firms,
and commercial banks were the top three industries backing Wagner’s
campaign, donating more than $549,000. The two firms that gave the most
were Jones Financial Companies, a brokerage firm, and the insurance
company Northwestern Mutual. Both wrote to the DOL to oppose the rule.
Over the last two election cycles, the financial industry contributed
more than $1.1 million to her campaigns.
There in the Oval Office, she referred to the executive order as “my
baby,” claiming that the edict would help “low- and middle-income
investors and retirees.” It was, she said, a “big moment” for Americans
who invest and save. A Wagner spokesperson did not respond to requests
for comment.
Three months later, in a May 22 Wall Street Journal op-ed, Acosta
said
that the DOL should examine ways to revise the rule and open up yet
another comment period. Acosta’s arguments, said Barbara Roper, director
of investor protection at the Consumer Federation of America, were
“straight from the talking points of industry.” A DOL spokesperson
declined to comment.
Acosta’s op-ed appeared just weeks before the House Financial
Services Committee passed the Financial CHOICE Act, an omnibus bill
designed to roll back many of the Dodd-Frank reforms. The bill would
repeal the DOL’s fiduciary rule and block the DOL from promulgating a
new one until at least 60 days after the SEC issues a final fiduciary
rule of its own.
On June 1, shortly before the CHOICE Act passed the full House, the
SEC suddenly woke up from its slumber. Trump’s new SEC chairman, Jay
Clayton, released a request for public comment about the standards of
conduct expected of investment advisers and brokers, asking for feedback
about possible investor confusion over “the type of professional or
firm that is providing them with investment advice.”
“The timing of the request is troubling,” said Stephen W. Hall, legal
director at Better Markets, a nonprofit that promotes financial reform.
“It appeared after years and years of SEC inaction, but just as the DOL
rule came under fresh scrutiny by the new administration.”
In his request for comment letters, Clayton noted that Acosta wanted
the two agencies to work together to analyze the standards of conduct
for brokers and investment advisers.
Ben Edwards, associate professor of law at the University of Nevada,
Las Vegas, said that a new fiduciary rule from the SEC could give Acosta
the legal ammunition he needs to scrap the DOL’s rule. “An SEC rule
would materially change the regulatory environment,” he said, because it
could provide “a basis to question the need” for a DOL rule. That would
be a win for the insurance industry in particular, Edwards said,
because the SEC’s authority “does not ordinarily extend to insurance
products.”
Judith Burns, an SEC spokesperson, declined to comment.
Lisa Donner, executive director at the consumer advocacy group
Americans for Financial Reform, worries that the DOL rule, just weeks
after taking effect, is already “in danger of being undone.” On June 29,
the undoing began, with a request for comment from the DOL asking
whether the remaining aspects of the rule, which as of January 2018
would require legally enforceable contracts between clients and any
brokers who receive commissions, should be further delayed.
Wingate, now retired, said the catastrophic loss to his retirement
account has been “really rough” on his wife, who at 69 continues to work
as a nurse to compensate for the lost savings. To make ends meet, they
sold the family vacation condo in Florida earlier this year. “It was a
real strain on our marriage,” Wingate said.
On Saturday mornings at 7 a.m., Wingate’s former adviser, Teboda, has
a radio show on Chicago’s AM 560. On a recent Saturday, Wingate said he
listened in frustration as he heard the adviser describe himself as a
fiduciary who had clients’ best interests at heart. “My wife said, ‘I
can’t take it anymore, so please turn it off.’” On Teboda’s June 17
show, he similarly referred to his “fiduciary firm” several times,
noting that he worked in clients’ “best interest.”
Wingate and his lawyer, Andrew Stoltmann, say they will face off in
November against Teboda and the broker-dealer he was formerly registered
with, ProEquities, at a FINRA arbitration hearing. ProEquities
spokesperson Eva T. Robertson and Teboda declined to comment, but
ProEquities said in its answer to Wingate’s complaint that he is a
sophisticated investor who was able to “talk intelligently” with Teboda.
While they await their day in Finra’s closed-door court, the battle
over the kind of advice Teboda got will go on. “It’s a profoundly broken
system,” said Donner of Americans for Financial Reform. “If there
wasn’t so much money at stake for people making money off the broken
system, it would not have taken seven years to get this rule done.”
This article was produced in partnership with The Investigative Fund at The Nation Institute.
