In just 58 days (on September 9th) summer officially ends and the world begins anew. That is the day defending Super Bowl Champs, the New Orleans Saints, take on the Minnesota Vikings for the season opener. The NFL’s 2010 season roughly parallels with the SEC’s study of investment advisor and broker obligations and this will likely be considered coincidental. Perhaps, it shouldn’t be. Lessons from the merger–or harmonization–of the old NFL and AFL are apt.
Since the Wall Street reform legislation passed in conference committee shortly after 5:00 AM EST June 25, concerns from the some leaders in the brokerage industry may be interpreted to mean the fiduciary standard should change. A standard for brokers must “take into account the many ways that clients work with full service brokers,” according the SIFMA Chairman-elect, John Taft. Also, Taft notes, “You’ve got to change it. It has to be tailored to different activities.”
Duties of due care, utmost good faith, and loyalty set out the key fiduciary requirements for investment professionals. Issues surrounding the duty of loyalty have received, it appears, the greatest attention by the industry. Loyalty is generally agreed to require that client’s best interests come first, before the advisor’s, conflicts must either be avoided or effectively disclosed and managed, transactions where a conflict exists may only be completed if doing so is still fairly deemed, based on the facts and circumstances, to be in the client’s best interest, irrespective the conflict.
The merger of the “old” NFL and AFL, consummated forty years ago, changed–many might say hugely strengthened–professional football. Football executives in the years leading up to the merger struggled to stop the bitter and harmful infighting between the rival teams and leagues and, instead, address issues large and small to “harmonize” the leagues. The congressionally approved antitrust exemption was key, as was the realignment of some old NFL teams into the new AFC, and the growth of the league to its present 32 teams. Also, the AFL introduced numerous changes that remain in tack today. These vary from putting players’ names on the jerseys and the official time on the scoreboard clock, to using multiple and mobile cameras for TV broadcasts, as opposed to the old NFL practice of using a single camera fixed at the 50-yard line.
As significant, is what did not change with this harmonization of the leagues. The fundamental framework–the principles–of the game remain unchanged, not only though the merger, but to this day. Regular playing time remains 60 minutes; a first down requires moving the ball ten yards; the field remains 100 yards long, the goal lines remain at either ends of the field, and crossing the goal lines (or two field goals) remains required to score six points.
The essential framework of the NFL today still entails crossing the goal line to get six points. If advisors concerned about applying the fiduciary standard in a brokerage setting agree that the challenge is finding new ways to get across the goal line (as opposed to moving the goal line) that are consistent with the fiduciary standard, differing views can be successfully reconciled.
A key question then, concerns the meaning of loyalty. Should the definition be changed? If so, how should it change? Should advisors be required to demonstrate a higher standard of loyalty? Or, to the contrary, should advisors be allowed to practice at a lower standard of loyalty? Should they be permitted, for example, to be loyal just “sometimes” or just “infrequently?”
The change that is needed is fresh thinking about how any advisor can manage conflicts and put the interests of fallible investors from all walks of life first, irrespective of the advisor’s or distribution system’s method of compensation. Or, as the language in Section 913 of the legislation notes, “without regard to the financial or other interests” of the intermediary.
The harmonized or merged NFL has proven to be one of the most successful professional sports ventures in history, by retaining the essential principles of the game while also adapting to changing times. A harmonized standard of conduct for investment professionals, and the profession itself, will only be as successful by doing likewise.
Knut A. Rostad (firstname.lastname@example.org) 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.