On March 31, Treasury Secretary Henry Paulson released the Treasury's "Blueprint for a Modernized Financial Regulatory Structure."
The report was prepared over the course of the past year and isn't some hastily drafted response to the credit market meltdown and growing crisis of investor confidence in financial markets. It is a serious document intended to be the basis for comprehensive regulatory reform.
Unfortunately, it is comprehensive only if the interests of investors are deemed to be ancillary to the competitiveness of American financial institutions in global financial markets. It has precious little to do with the role of regulators in assuring that those same institutions meet their fiduciary obligations to the people who entrust their money to them.
Perhaps this should come as no surprise given that the Paulson report originates from a conference on capital market competitiveness convened by the Treasury.
I read this tome and came away with a sick feeling in my stomach that Mr. Paulson views investors as factors of production rather than as clients to be served. I couldn't re-member more than a passing reference to the word "fiduciary" in the entire document.
A quick search confirmed my suspicion: only five mentions among the nearly 85,000 words!
As a political science and economics major in college, I prepared my senior thesis on the topic of sustainable management of New England fisheries and commercial fishing enterprises. The Paulson blueprint re-minds me of the same principles I encountered then.
To capture a limited resource in a highly competitive market each competitor is looking for an edge. If one country accepts low regulatory standards, others are pressured to do the same in order to help the companies operating under their flag maximize their take. Regulators' concern for the fate of the resource is only relevant in the context of being a necessary factor of production for the industry.
The problem with this regulatory paradigm for financial services is that people aren't analogous to fish. The financial services industry exists to serve investors, not the other way around.
When the blueprint speaks in terms of consumer protection rather than of meeting fiduciary obligations, it is tantamount to the perils of overfishing: If you get too greedy, you might wipe out the source of your livelihood.
The correct regulatory paradigm is founded on principles of professionalism. Investors must rely upon people and institutions they can trust.
People trust those who are bound by an obligation to subordinate their own financial interests to those of their clients. Of course, not all financial service entities are fiduciaries held to such high standards of responsibility, but certainly those who provide financial advice or take discretion over client assets are.
These professionals are heavily relied upon by investors to help select non-fiduciary providers. They are much better equipped to decipher complicated disclosures and unravel conflicted affiliations than are most end investors.
The brief segment of the blueprint that substantively addresses fiduciary standards of care includes the following statement: "Broker-dealers, while subject to strong standards of conduct and 'suitability' requirements, generally are not fiduciaries of their clients and thus are
perceived by some as having weaker obligations to customers." [Emphasis added.] The idea that the fiduciary standard of care is the highest known to law is well beyond the realm of theory; it is an absolute, indisputable fact!
The blueprint calls for investment advisers to be "subject to a self-regulatory regime similar to that of broker-dealers." This despite an earlier acknowledgement that "self-regulation is ... susceptible to a wide range of conflicts of interest, including the potential that the SRO may have a financial interest in its members or their business activities."
So, for the sake of efficiency, the Treasury secretary is willing to sacrifice truly independent regulatory oversight. This is further evidence that the best interests of investors are deemed to be subordinate to those of the industry.
In the end, what if the blueprint's model, which treats investors as an exploitable resource, is adopted and proves inadequate to the task of protecting investors' interests? The financial services industry will suffer right along with investors.
But financial services firms will have less to fear than investors because recent events and the perspective reflected in the blueprint suggest that the government will come to the aid of the industry by tapping into another exploitable resource — taxpayers.
Blaine F. Aikin is president and chief executive of Fiduciary 360 LP in Sewickley, Pa.
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