More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Books and Records Rule Thorough and complete books and records enable RIAs to demonstrate that they have fulfilled their fiduciary obligations to clients and complied with applicable rules and regulations.
As a result of the financial meltdown of 2008, Congress felt the need for a “fiduciary standard” of care to remain in place under the terms of the Investment Advisers Act of 1940 (IAA). The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 brought on heavy debate—still ongoing as I write— as to whether the brokerage industry should also be held to this higher standard of conduct, since ultimately both are involved in managing OPM – “Other People’s Money.” That being said, I find it ironic that those same congressional officials are not held to a fiduciary standard themselves. Yet I strongly believe they should be, since they’re also responsible for managing OPM – and lots of it!
I believe the American public would benefit greatly if those in Congress were mandated to live by the five core principles of fiduciary advocacy put forth by The Committee for the Fiduciary Standard, which is seeking to keep the fiduciary standard under the IAA from being watered down by the possibility of a new fiduciary standard for only the brokerage industry.
Let’s see how these five principles would apply in the congressional setting:
Reason (Principle) #1: Put the client’s best interest first
Have you ever thought about the fact that every citizen has some form of representative in Congress acting on his or her behalf? (At least that’s the expectation.) So doesn’t that make us citizens collectively “clients” of that elected public official? And isn’t that official paid out of tax revenue collected from citizens? Lastly, doesn’t that congressman have the ability to vote on how tax revenues are actually managed?
Therefore, all congressional officials are actually acting as fiduciaries on behalf of the citizens, and should be required to put their client’s best interest first at all times. Some would argue, depending on whether they are Democrat or Republican, that each official should only represent their party’s best interest. I beg to differ; because once an official is elected, they are the representative of the whole electorate of their district or state and should act in the best interest of all their clients, not just their party.
Reason (Principle) #2: Act with prudence; that is with skill, care, diligence and the good judgment of a professional
Shouldn’t our elected officials be viewed as professionals? Certainly, the job they do is professional in nature, especially if they are required to be fiduciaries. Most of what I see in Congress today is more of a lack of prudence, skill, care, due diligence and good judgment, without regard to the clients they represent.
For example, why is it that our officials always wait till the last minute to get major legislation completed – e.g., the current debt ceiling issues, the past tax law extensions, Obamacare? Where was the prudence, skill, care, due diligence and good judgment that our congressional officials should have had to manage those situations long before the 11th hour of legislative termination? How many congressional officials actually read the entire Obamacare legislation before voting on it? Is that acting with prudence, care and due diligence for the benefit of all the citizens?
Reason (Principle) #3: Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts
Are fiduciary investment advisors allowed to mislead clients with regard to investing their assets in the stock market? No! Well, then, shouldn’t it be inappropriate for our congressional officials to mislead the American citizens
So is it right for our congressional officials to mislead Americans by twisting the data in a conspicuous manner just to push their own agenda? Or should they be required to fully and fairly disclose all the details and the data to back up their statements and beliefs?
Reason (Principle) #4: Avoid conflicts of interest
As investment advisors under the IAA, each fiduciary is required to disclose all conflicts of interest he or she may have to the client. When an investment advisor operates under a fee-only arrangement, she is definitely limiting the conflicts of interest regarding her compensation and investment advice provided, as her compensation doesn’t change based on the recommendations made to the client. Shouldn’t we have our congressional members operate in a similar manner, to completely eliminate any conflicts of interest with regard to their compensation or re-election?
I find that many of the debates today in Congress are based solely on decisions that will be most beneficial to the party or the representative’s reelection. I believe most officials are more worried about how their votes will affect their reelection chances, rather than the economic impact that may come as a result. That type of conflict of interest breeds an inadequate decision-making process, based on issues outside the real issues at hand. Therefore, I also believe a one-term limit for congressional officials would definitely help reduce the conflicts of interest, and the government’s clients would indirectly get better legislation.
Reason (Principle) #5: Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts
Congressional officials should be held to a higher standard than any other profession within our economic system. Full disclosure on all decisions made on behalf of the clients they represent should always be in the client’s best interest/favor, and completely clear of any conflicts of interest. I also believe any congressional official should not be allowed to invest or direct his or her own investable assets through any such means other than
Public Service Requires the Highest Standard of Conduct
Some will say that’s too extreme. I believe it’s an honor to serve our country, and we should require the utmost transparency as well as the highest standard of conduct—“the fiduciary standard”—through means that don’t allow elected officials the right to manipulate their client’s best interest for their own ultimate prosperity or gain. It should be about the
clients every day, all the time, and there should be a sacrifice that any elected official is expected to make in order to serve our country.
The fiduciary standard is one of integrity, honesty and putting the interests of others before your own. Until we enforce that type of standard in Congress, our country will never manage itself to the highest prosperity, maximum economic production potential or even come close to reducing the gap between the haves and have-nots within our society. It’s time to employ the fiduciary standard as the benchmark of conduct for all elected congressional officials and to limit their time served to one term. This will indirectly result in fewer conflicts of interest as they relate to an official’s legislative decision-making process because there is no re-election at stake. The fiduciary standard is the only answer, and if it is so important in our public financial arena, it should be equally so—if not more important—in the legislative arena.
Andrew D. Rice, CPA, AIF, CTS, WMS, is vice president of Money Management Services, Inc., an independent RIA firm in Birmingham, Ala. He is a Certified Public Accountant, an Accredited Investment Fiduciary, a Certified Tax Specialist and Wealth Management Specialist. He can be reached at firstname.lastname@example.org.