By Cyril Tuohy
Securities and Exchange Commission (SEC) Chairman Mary Jo White was sworn into office a year ago and over the past several weeks she’s made no secret of her desire to protect the retail investor.
The SEC, White said in a speech to the Consumer Federation of America, plays an advocacy role with regard to retail investors, she said. “Protecting investors underlies everything we do,” White said.
To protect investors, the agency sees its role as one of educating investors, enforcing laws designed to protect investors and coming up with new rules governing the duties and behavior of financial advisors and broker/dealers, she said.
In February, for example, the SEC named Rick A. Fleming as the first head of the agency’s Office of the Investor Advocate.
Fleming’s role is to help retail investors deal with the SEC and self-regulatory organizations, and find areas where investors could benefit from changes to rules and regulations. Between 1996 and 2011, Fleming represented Kansas in proceedings against broker/dealers and financial advisors, and testified before state lawmakers on matters of investor protection.
The SEC has also taken a special interest in educating investors about variable annuities (VAs), in an investor bulletin titled “Variable Annuities—An Introduction,” issued in February by the agency’s Office of Investor Education and Advocacy.
VAs, defined as an “investment product with insurance features,” have become more popular among financial advisors seeking higher returns from their client portfolios at a time when interest rates are low, but stock market returns are soaring.
A week before White delivered her talk to the Consumer Federation, the SEC announced charges against brokers and financial advisors in connection with a variable annuities scheme to profit from the imminent death of terminally ill patients in nursing homes and hospice care.
The SEC named seven people and an advisory firm, BDL Manager, as part of a scheme to sell VA contracts from which investors, not the contract holder, could receive death benefit payouts and other credits upon the death of the annuitant.
Settlements are expected to exceed $4.5 million in the case, the SEC said.
Critics say she’s yet another example of the revolving door between Washington and Wall Street, and that she’s even used her influence to protect CEOs from prosecution.
In the broader context of protecting retail investors, though, few would question White’s resolve as the SEC looks to implement key aspects of the Dodd-Frank Act.
The sweeping law, passed in the wake of the financial crisis, is aimed at protecting Main Street investors by curbing the huge risks that Wall Street seems all too willing to take — often with other people’s money.
In the rule-making department, for instance, White announced that uniform fiduciary standards for broker-dealers and investment advisors were “an immediate and high priority,” as outlined under Section 913 of the Dodd-Frank Act.
“I have made this a priority because it is very important and we need to move forward to a decision,” she said.
When advising retail investors, broker/dealers are only required to meet a “suitability” threshold as a standard. Investment advisors are required to meet a fiduciary standard, which is considered a higher standard of care.
Investors, though, often don’t know the difference between suitability and a fiduciary standard, much less that such a distinction even exists. Critics of the financial advisory industry point to the conflicts of interest inherent in the lower suitability standards threshold.
Last year, White also announced that the agency was raising the bar on which defendants would be allowed to settle cases “without admitting or denying what they did wrong or admitting to facts that showed that they broke the law.”
Known as the “no admit/no deny” settlement protocol, the enforcement strategy has for years allowed the SEC to speed up the return of ill-gotten gains. It has even allowed the SEC to obtain the equivalent or higher penalties through the settlement than if the matter had been brought to court.
But under White, the SEC last summer toughened the no admit/no deny standard. Accused parties are required to admit fault in cases where violations are “particularly egregious,” or where many investors were harmed or placed at high risk.
White said the change was necessary to “achieve greater public accountability and bolster the public’s confidence in the safety of our markets.”
In 2013, the SEC’s Enforcement Division obtained orders to return $3.4 billion in penalties, the highest level in the agency’s history, the SEC said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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