By Cyril Tuohy
In the world of fiduciary duty, it has been a busy few weeks indeed. On the legislative-regulatory side of the aisle, interest groups for and against broadening fiduciary standards have been preparing position papers to present to the Securities and Exchange Commission (SEC) and the U.S. Department of Labor (DOL).
Organizations in favor of fiduciary standards for a broader swath of distributors of financial products and services say it can only benefit the end client, the retail and institutional investor, both of whom deserve no less than to have their best interest at the core of every financial transaction.
Opponents say that while this may be true in the abstract, a lower standard is suitable, particularly if it comes at much lower cost. Some professional advice is always better than no professional advice at all, they say.
Switching over to the criminal justice side of the fiduciary duty aisle, those very same regulatory agencies, SEC and DOL, have been just as busy filing complaints against financial advisors for breach of fiduciary duty in connection with raiding pension funds for private gain.
The latest salvo comes from the SEC, which sued MayfieldGentry Realty Advisors and its principals and employees Chauncey C. Mayfield, Blair D. Ackman, Marsha Bass, W. Emery Matthews and Alicia M. Diaz. The suit was in connection with the alleged theft of money from a Detroit police and firefighters pension fund to buy California shopping malls in violation of two counts of the Investment Advisors Act of 1940.
If found guilty, they wouldn’t be the first advisors to have committed grave misdeeds, no matter what level of fiduciary duty they owed their Detroit pension fund client. The SEC has announced 65 legal actions so far in the second quarter alone against companies or individuals.
The alleged violations run the gamut from participating in shady penny-stock trading schemes to insider trading violations to pump-and-dump stock scams to illegal kickbacks from foreign banks to ignoring internal controls to acting as an unregistered broker-dealer.
For its part, DOL also has been active. On May 30, it sued six trustees and financial advisors in connection with the misappropriation of $4.9 million from two defined benefit plans belonging to an Iowa foundry and a Michigan manufacturer.
Pension money was used to buy and lease company property, for illegal asset transfers, to pay for “excessive fees” and to keep retirement plan participants in the dark about plan assets, DOL alleges.
Not only is DOL asking the court to restore any plan losses, but the agency is seeking to bar the defendants from serving as fiduciaries or service providers in the future to any plan covered under the federal Employee Retirement Income Security Act (ERISA), and to remove them as plan fiduciaries.
In fiscal year 2012, the Employee Benefits Security Administration closed 318 criminal investigations with the help of other law enforcement agencies, DOL statistics show. The investigations led to the indictment of 117 people — including plan officials, corporate officers and service providers — for offenses related to employee benefit plans, according to DOL.
Statistics kept by the Financial Industry Regulatory Authority (FINRA) show 294 people barred from the financial services industry in 2012, down from 329 in 2011. A total of 549 people were suspended last year, up from 475 in 2011, FINRA statistics show.
There were 1,541 new disciplinary actions last year, up 3 percent from the 1,488 disciplinary actions in 2011, according to FINRA.
Not every legal action sought by the SEC and DOL involves financial advisors. Some complaints target major institutions and their executives who often serve multiple masters — shareholders, customers and employees, for instance.
But it’s the cases where people have an explicit duty to protect the interest of their clients that do the most damage to an otherwise respectable calling, and where proponents of the fiduciary standard say investors and the industry at large can only benefit.
No one yet knows if broadening the fiduciary standard would lead to fewer enforcement actions against financial advisors, but those who favor applying the standard more broadly know that they would rather be safe than sorry.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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