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Industry Spotlight > Broker Dealers

Listen to Chuck

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When Chuck Schwab talks do people listen? They ought to–even when he is off base, as he was in an August 19 opinion piece, “Brokers Aren’t Responsible for Bad Bets,” in The Wall Street Journal. In it, he seems to argue that Schwab brokers should be allowed to make allegedly misleading statements about core product features as they guide self-directed investors.

The opinion piece was in response to a suit brought against Schwab by New York Attorney General Andrew Cuomo. Cuomo alleges that Schwab brokers “engaged in fraudulent and deceptive conduct in the sale of hundreds of millions of dollars of auction rate securities,” in 2007 and early 2008.

How does Schwab reply to the Attorney General’s suit? By making these points: The benefits of 30 years of innovations that have sharply reduced investor costs, and increased investor choice, are at risk in today’s “extraordinary” political environment. At risk because, Schwab claims, regulators expect his firm and others to guarantee individual success, and make clients whole when, as was the case with auction rate securities, the markets froze. He continues, “The implication of this lawsuit is that firms like ours should have known that the market would fail.” And the meaning of this? “The issue at stake here is whether independent investors should be allowed the freedom to choose what they are allowed to buy, sell or hold.”

Schwab’s message is clear. Investors’ freedom to participate in the capital markets is at serious risk because New York State insists Schwab brokers should be trained to make appropriate disclosures.

If the facts are accurately set out in the lawsuit (we’ll see), it appears there may be violations of key requirements of the broker/dealer regulatory scheme. Chief among them: principles of just and fair practices (fair dealing) and “fair and balanced” product disclosures.

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Here’s another take on the suit and the Schwab reply: The passage of the Consumer Financial Protection Agency (CFPA) is imminent and loathed by Wall Street. A public battle with Andrew Cuomo, regardless its lack of merit, raises the profile of Wall Street’s public enemy number one, and, probably some PAC and lobbying dollars to boot.

Schwab has a gloried past. It wasn’t that long ago that Schwab execs talked as though they understood what is required after a financial crisis. In an article in Investment Advisor,The New Meaning of Trust,” by Melanie Waddell, one Schwab exec said, “Trust…is a competitive differentiator…” The article continues: “Investors, [the executive] said, want more ‘direct evidence’ that they can trust the companies and people handling their money.” Waddell reports, “Schwab has been devising its own plan to win back individual investors.” As the Schwab exec quipped, “We have to actively work to restore it [trust].”

November 2008? March 2009? Nope. It’s from December 2002, after the last Street debacle.

Knut A. Rostad ([email protected]) is the regulatory and compliance officer at Rembert Pendleton Jackson (RPJ), a registered investment advisor in Falls Church, Virginia, and chairman of The Committee for the Fiduciary Standard. The views expressed here are his own and do not necessarily reflect views of the Committee.