The Times Editorial, Fiduciary Duty and the Levitt Rule

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The New York Times editorial, “Want to Buy a Mutual Fund?” aptly chose the nation’s 236th birthday on July 4 to underscore the vital role of fiduciary law in American history. It did so by reminding its readers that the SEC’s efforts to apply the fiduciary standard to brokers “have been stymied by financial-industry opposition and weak Congressional support.” True enough.   

This pro-fiduciary editorial came on the heels of a Times news article that reported on JPMorgan’s successful and profitable efforts to promote its own proprietary mutual funds ahead of non-proprietary funds. The story notes, “It is a controversial practice, and many companies have backed away from offering their own funds because of the perceived conflicts,” but that JPMorgan defends its program. The defense is not, according JPMorgan, that brokers are not required in law to put clients’ interests first, but that its in-house expertise is impressive and that customers want access to in-house funds. 

So far, so good. 

But then, apparently, JPMorgan’s legal team goes overboard, and proceeds to put the bank in an entirely untenable position. The Times story quotes a spokesman: “We always place our clients first in every decision,” said Melissa Shuffield. 

In March, when twelve-year Goldman Sachs veteran Greg Smith resigned from the firm in a Times Op-Ed and a flurry of commentary ensued, a similarly awkward circumstance and self-inflicted wound developed. Therein was born the Levitt Rule, named for Arthur Levitt, Jr., former SEC Chairman, and who is a current advisor to, among others, Goldman Sachs. 

On March 29, Levitt opined to Bloomberg News that Goldman should cease and desist in boldly claiming that clients or customers interests’ always come first. The rationale for this recommendation seems straightforward enough. It’s the truth. It’s the truth that sometimes customers’ interests do not come first. As Levitt explained to his (somewhat stunned) Bloomberg interviewer, there is a “natural tension” between the buyer of a product and the seller of a product that cannot be talked away or smoothed over with careful word-smithing. 

There is nothing unlawful in a broker-dealer meeting fair dealing suitability rules and selling proprietary products. There is nothing unethical in the same broker-dealer performing the same transaction, if the broker clearly informs the customer of the conflicts, their implications and their costs to the customer, and the customer then provides consent that is informed and independent. 

What is unethical is the same broker-dealer just meeting fair-dealing suitability rules, while simultaneously telling investors that “We always place our clients first.” What is unethical and should be considered unlawful is a broker-dealer intentionally and unequivocally implying a fiduciary standard of conduct that in a common brokerage transaction does not exist and is not intended to exist. What is unethical, and only deepens the quagmire of investor mistrust, is violating the Levitt Rule.

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