The drive to protect incompetent traders continues:
U.S. prosecutors have joined regulators’ investigation into whether some high-speed traders are manipulating markets by posting and immediately canceling waves of rapid-fire orders, two officials said.
Justice Department investigators are “working closely” with the Securities and Exchange Commission to review practices “that are potentially manipulative, like quote-stuffing,” Marc Berger, chief of the Securities and Commodities Task Force at the U.S. Attorney’s Office for the Southern District of New York, said today at an event in New York.
While regulators previously said they were probing possibly abusive algorithmic trading practices, the attention of criminal authorities ramps up the stakes.
While researching something else, I ran across an opinion piece by Ed Waitzer titled New IIROC plan avoids putting duty on advisors to act in clients’ interest that illustrates the complete inability of professional regulators to analyze the simplest transaction. In talking about the “fiduciary responsibility” issue, he states:
To understand the difference between a “suitability” and “best-interest” standard, think of a student seeking advice at an electronics store about her need for a laptop. The salesperson recommends a highly priced unit with an expensive extended warranty — all designed to generate the highest commission. The laptop is suitable — it will satisfy the student’s needs. It clearly isn’t the best solution and a disclosure obligation isn’t likely to stand in the way of a motivated salesperson. If the salesperson had been bound by a “best-interest” standard, he would recommend a simpler, more reliable and affordable unit.
What utter balderdash. If the salesperson was bound by the “best-interest” standard and was being paid on commission, he would simply ensure that he had a plausible rationale for recommending the more profitable product as being in the student’s best interest. “What if it breaks? You’re on a tight budget! It might break at a bad time! You’re better off buying the extended warranty and fixing your costs. Then you can concentrate on your studies, instead of worrying about malfunctions in your machine.” No purpose would be served by a “best-interest” standard in the presence of commissioned sales except for the – very important, with respect to the employment prospects of some – generation of paperwork and checklists for the electronic consumer goods’ salesmen’s regulator.
I get hate mail whenever I write about the fiduciary responsibility issue – such as January 24 – so all I can suggest is: if you want a fiduciary, hire one. I’m a Portfolio Manager, for instance. I get paid for Assets Under Management, not for transactions. I’m a fiduciary – in fact, I’m legally (OSC) and ethically (CFA) required to be. If you don’t want a fiduciary, don’t hire a Portfolio Manager – hire a stockbroker or mutual fund salesman. It’s really quite simple.
It looks like Berkshire Hathaway has been stung by recent criticism and is now attempting to worm its way back into the good graces of morons by criticisizing investment banks:
Charles Munger, whose Berkshire Hathaway Inc. (BRK/A) holds $5 billion of options on Goldman Sachs Group Inc. (GS) stock, said the role of investment bankers in helping to mask Greece’s financial troubles was “perfectly disgusting.”
“Wall Street to some extent is deliberately trying to profit from sin, and I think it’s a mistake,” Munger told reporters yesterday after Berkshire’s annual press conference in Omaha, Nebraska. “Why should an investment banker go to Greece to teach them how to pretend their finances are different from what they really are? Why isn’t that a perfectly disgusting bit of human behavior?”
Goldman’s conduct with respect to Greece was discussed on PrefBlog when the issue became fashionable (see, for example, March 1, 2010). I eagerly await Munger’s next pronouncement, which may be on the topic of whether lawyers should represent Bad People. Still, I can’t blame him for chanting the slogan of the ‘finance as a cooperative game’ crowd – the Berkshire / Buffett / Munger mystique is worth what? 10%? 20% of their stock price? Who wants to guess?
The US Administration recently announced drastic measures against a Public Enemy. You know who I mean:
Citing an epidemic of childhood obesity, regulators are taking aim at a range of tactics used to market foods high in sugar, fat or salt to children, including the use of cartoon characters like Toucan Sam, the brightly colored Froot Loops pitchman, who appears in television commercials and online games as well as on cereal boxes.
Regulators are asking food makers and restaurant companies to make a choice: make your products healthier or stop advertising them to youngsters.
“Toucan Sam can sell healthy food or junk food,” said Dale Kunkel, a communications professor at the University of Arizona who studies the marketing of children’s food. “This forces Toucan Sam to be associated with healthier products.”
Walk the plank, Cap’n!
It was another mixed day for the Canadian preferred share market, with DeemedRetractibles bouncing back (a little, anyway) from a sub-par month of April: PerpetualDiscounts lost 1bp, FixedResets gained 13bp and DeemedRetractibles won 31bp. The badly beaten up DeemedRetractibles from insurers were prominent on the performance highlights table. Volume was good. And now it’s time to watch the election news…
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.5562 % | 2,438.2 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.5562 % | 3,667.0 |
| Floater | 2.47 % | 2.26 % | 38,192 | 21.62 | 4 | 0.5562 % | 2,632.6 |
| OpRet | 4.91 % | 3.20 % | 59,032 | 2.04 | 8 | 0.0626 % | 2,416.4 |
| SplitShare | 5.21 % | -2.23 % | 77,671 | 0.62 | 6 | 0.0750 % | 2,497.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0626 % | 2,209.6 |
| Perpetual-Premium | 5.78 % | 5.65 % | 116,502 | 1.11 | 8 | 0.0149 % | 2,054.6 |
| Perpetual-Discount | 5.57 % | 5.58 % | 147,548 | 14.40 | 16 | -0.0119 % | 2,126.6 |
| FixedReset | 5.17 % | 3.44 % | 218,609 | 2.89 | 57 | 0.1330 % | 2,295.7 |
| Deemed-Retractible | 5.22 % | 5.04 % | 314,948 | 8.12 | 53 | 0.3083 % | 2,100.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| GWO.PR.I | Deemed-Retractible | 1.00 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.13 Bid-YTW : 6.62 % |
| SLF.PR.B | Deemed-Retractible | 1.06 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.94 Bid-YTW : 5.93 % |
| TD.PR.C | FixedReset | 1.10 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-02 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 3.10 % |
| SLF.PR.E | Deemed-Retractible | 1.14 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.36 Bid-YTW : 6.49 % |
| SLF.PR.D | Deemed-Retractible | 1.14 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.26 Bid-YTW : 6.49 % |
| BNS.PR.O | Deemed-Retractible | 1.21 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-26 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 4.88 % |
| SLF.PR.C | Deemed-Retractible | 1.24 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.30 Bid-YTW : 6.47 % |
| PWF.PR.A | Floater | 1.25 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-05-02 Maturity Price : 23.19 Evaluated at bid price : 23.49 Bid-YTW : 2.20 % |
| MFC.PR.C | Deemed-Retractible | 1.28 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.37 Bid-YTW : 6.50 % |
| BAM.PR.O | OpRet | 1.44 % | YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.05 Bid-YTW : 3.20 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.O | Deemed-Retractible | 81,675 | Nesbitt crossed 50,000 at 26.01. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-26 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 4.88 % |
| BMO.PR.L | Deemed-Retractible | 69,173 | Nesbitt crossed 60,000 at 25.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-24 Maturity Price : 25.00 Evaluated at bid price : 25.76 Bid-YTW : 5.18 % |
| TRP.PR.C | FixedReset | 36,135 | Scotia crossed 25,000 at 25.54. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-02-29 Maturity Price : 25.00 Evaluated at bid price : 25.55 Bid-YTW : 3.90 % |
| TD.PR.G | FixedReset | 35,911 | RBC crossed 25,000 at 27.25. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 27.16 Bid-YTW : 3.36 % |
| HSB.PR.E | FixedReset | 35,406 | RBC crossed 25,000 at 27.35. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-30 Maturity Price : 25.00 Evaluated at bid price : 27.35 Bid-YTW : 3.76 % |
| BMO.PR.Q | FixedReset | 31,060 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.02 Bid-YTW : 3.85 % |
| There were 37 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| TRI.PR.B | Floater | Quote: 23.05 – 23.72 Spot Rate : 0.6700 Average : 0.4321 YTW SCENARIO |
| FTS.PR.G | FixedReset | Quote: 26.26 – 26.73 Spot Rate : 0.4700 Average : 0.3457 YTW SCENARIO |
| BAM.PR.X | FixedReset | Quote: 24.63 – 24.96 Spot Rate : 0.3300 Average : 0.2165 YTW SCENARIO |
| NA.PR.N | FixedReset | Quote: 26.15 – 26.50 Spot Rate : 0.3500 Average : 0.2617 YTW SCENARIO |
| CIU.PR.B | FixedReset | Quote: 27.68 – 27.94 Spot Rate : 0.2600 Average : 0.1733 YTW SCENARIO |
| NA.PR.P | FixedReset | Quote: 27.75 – 28.05 Spot Rate : 0.3000 Average : 0.2141 YTW SCENARIO |
James,
I’m having trouble following the logic of your point about subjecting salespeople who represent themselves as being advisers to a fiduciary standard. Your argument appears to be that “No purpose would be served by a “best-interest” standard” because the people subject to it would find some way to breach it. That, I’m sure you will agree, is a logically fallacious argument, as it amount to conflating how things are with how they should be. So I’m guessing you meant to say something else. What was it?
On a related point, you assume that it would be the regulators that would enforce the fiduciary standard, and we all know well what you think of regulators. I think much the same of them, which is precisely why I’d like to see such a standard imposed, because a fiduciary standard is a common law standard, and therefore one that the courts are perfectly equipped to deal with. So, if your commissioned salesperson conducted himself they way you suggest he will, I’d be happy to sue his ass off. A few successful lawsuits resulting in bankrupted salespersons and damaged brokerage firms would surely suffice to whip the industry into the shape the regulators could never do with the suitability standard.
I don’t agree that the argument is logically fallacious. What I am saying is that a regulatory standard which cannot possibly be enforced should not be enacted. It will serve no useful purpose other than, as I say, the generation of paperwork.
You cannot legislate morality. Especially not when the pecuniary interest is going the other way.
As for private remedies in civil courts … well, I’m no expert on the subject, but investment themes are are such a totally subjective matter that I suspect such enforcement would be an absoute nightmare, with the judiciary requiring a very high standard of proof.
If a salesman states – as does one salesman I know – that the financial crisis, European sovereign defaults and QE2 spell the end of fiat money and therefore the only reasonable investment is gold bullion, I may disagree. I may think he’s a fool. But I can’t prove it.
That’s a different matter from fiduciary duty, of course, but it’s a good illustration of the point. And it’s the same with the example discussed in the post.
Say your client is the student and is claiming (probably well after the fact) that the salesman breached fiduciary duty. The salesman’s defence is that he has decreased risk (an unexpected repair bill) at the expense of return (a higher up-front cost). Can you prove he’s breached fiduciary duty? You might well be able to prove he made a bad decision, but for any risk/return model you present in court, he will be able to choose a risk-aversion parameter that makes the extended warranty a logical decision.
Of course it’s fallacious, because it’s the equivalent of arguing that because you’ll always have some people who murder we should not have laws that penalize such activities: it does not follow that because X is the case that X should be the case.
This also goes to your point that you can’t legislate morality – we do it all the time, and our new government is building bigger prisons ostensibly so that we can do a better job of enforcing that morality. Securities regulation is founded on the premise that brokers cannot be trusted to conduct themselves properly – laws must exist to force them to do so. So too in the case of lawyers, where various legislation exists to ensure proper conduct; and directors and officers of corporations, where corporate law enforces certain standards; and so on and so on.
I agree that a standard should not be established that “cannot possibly be enforced”. But you provide no argument in support of the proposition that a “best interests” standard cannot possibly be enforced. What you argue is that a salesperson will have defences and any regulator or plaintiff alleging a breach will have the burden of proving his or her case. That’s obviously true. It’s also true of any allegation that the suitability standard has been breached, and an allegation that you as a PM have breached the best interests standard. But that’s not to say that it “cannot possibly” be enforced. Courts enforce fiduciary standards all the time, be it against directors of corporations, portfolio managers or trustees.
As lawyer, I charge my clients on an hourly basis. I therefore have an incentive, much like your example of a commissioned salesperson, to do work that my client does not necessarily need, to sell them services that may not be in their best interests. By your argument, because my compensation structure is such that I have an incentive to overcharge my clients by selling them services they don’t need, I should not have to act in their best interests. Or perhaps you’re arguing that because you’ll have a tough time proving that I failed to act in your best interests as my client I should not be required to act in your best interests. Those appear to be your arguments, and both seem to me to be wholly without merit.
it’s the equivalent of arguing that because you’ll always have some people who murder we should not have laws that penalize such activities:
Murder is relatively easy to prove, since it’s a matter of past fact. Securities selection is always a case of future judgment. The difficulty of proving malfeasance in the two examples is rather different.
various legislation exists to ensure proper conduct; and directors and officers of corporations, where corporate law enforces certain standards; and so on and so on.
Which all depend on some breach of these principles based on past fact. It is fairly easy to see – now – that Nortel’s management made some very poor errors of judgment in expanding so recklessly at the peak of the tech boom. This etherial expansion gave them more power, more pay, more everything; but they have not been charged with breach of fiduciary responsibility because of this. Any charges laid have been for much more mundane, easy to prove matters.
Courts enforce fiduciary standards all the time, be it against directors of corporations, portfolio managers or trustees
All the cases I have every seen – and, of course, it is not simply the case that I am not a specialist in fiduciary law, it is also the case that I’m not even a lawyer in the first place – have involved some pretty glaring misconduct: looting an estate, for instance, or borrowing from trust funds.
By your argument, because my compensation structure is such that I have an incentive to overcharge my clients by selling them services they don’t need, I should not have to act in their best interests.
I’ve had many professionals – lawyers and accountants – try to sell me services I don’t need. Of course, since I, like 99% of the population, consider myself a pretty smart cookie and tough negotiator, I’ve turned down a lot of the offers, but I feel quite sure that there have been many good laughs at my expense at the Lawyers & Accountants Club.
Your argument is predicated not simply on the idea that fiduciary duty as it relates to securities selection is enforcable in the absolute sense, but also on the idea that such enforcement is available to those whom you are ostensibly trying to protect.
This seems to be a rather dubious notion. Access to civil justice in Canada – and the rest of the developed world – is restricted to the rich. When regulators speak of fiduciary duty in terms of stockbrokers, they are talking about those who service Granny Oakum, who has a $100,000 investment portfolio which has been put in an equity fund with a 4% MER rather than a 1% MER index fund or a 0.25% ETF. So Granny, if she ever wises up, might get a little upset and ask you if you will represent her in court. Will you counsel her to commence litigation to recover her $3,500 when you know the defense will say that in his best judgment, he really thought the outstanding security selection and market-timing ability of Very Big MER Corp. was worth the money?
Additionally, you are bringing in lots of generalities and my post was about the example of the electronics salesman. Given the facts as described and the defense I suggested, what is your view on the likelihood of success for a lawsuit?