The Derivative Project

Consumer Federation’s “Oath” Hides IRA True Legal Transparency

Consumer Federation’s “Oath” Hides IRA True Legal Transparency

Consumer Federation’s “Oath” Hides IRA True Legal Transparency

Is Consumer Federation of America Using Social Media, Twitter, to Fight True Fiduciary Legal Transparency?

Washington DC Advocate Better Markets, tweeted yesterday,  “The Document that You Should Insist that Your Advisor Sign”.  by Micah Hauptman, Financial Services Counsel for the Consumer Federation of America, a December 15, 2015 Opinion “Blog” at the Wall Street Journal.

The Derivative Project viewed this Tweet and found it very misrepresentative and potentially harmful to the retirement investor, presenting a false sense of legal protection, without asking the more appropriate questions if one is to employ an intermediary to select investment product — what are the ranges of fiduciaries available and the real questions to ask to ensure “legal” protections, given existing law.

Mr. Hauptman deemed Not On My Nickel’s Blog Post, written for the average retirement investor, without legalese, “wrong in too many ways..”  We agree this is a very, very complex issue, but simple “Oaths” are the most misleading, condescending attitude to the retail retirement investor. To not provide readers true transparency that this “Oath” is utterly meaningless in any court of law or FINRA arbitration is unconscionable.  To not provide readers the real questions to ask of a “fiduciary” is unconscionable, in light of current legal rights for IRA investors.

The bulk of assets under discussion for an ERISA fiduciary standard, are brokerage account IRA’s and pending rollovers to such accounts held by at brokerage firms.

Disparaging Comments on Social Media by a so-called Consumer Advocate Raise Many Unanswered Questions

Twitter Exchange with CFA


Here is CFA’s Proposed Fiduciary Oath for a “Stock Broker”/RIA Promoted by Micah Hauptman, CFA Counsel

“The fiduciary oath is a simple but powerful document that carries legal significance. By signing his or her name, the financial adviser is legally committing to adhere to duties of care and loyalty, which are central to protecting and serving an investor’s interests. The oath states:

I will always put your best interests first.
I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.
I will avoid conflicts of interest.
I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.”

The Derivative Project questions what “legal significance” or status this piece of paper would have in a FINRA arbitration.

In the interest of protection of investors, The Derivative Project requests Micah Hauptman define the “legal significance” for an IRA investor in obtaining such an oath.

Specifically, please define how this “oath” would be deemed in a  FINRA arbitration involving a SEC registered investment adviser, who is also a “stock broker”, a “dual registrant” or just an “RIA.”  What protections and legal recourse does it provide?

The Derivative Project has legal documentation, provided in a bona fide FINRA arbitration, where a SEC Registered Investment Advisor, who is indeed subject to the fiduciary standard of the Investment Advisers Act of 1940, who is also a broker, provided regular investment advice for a fee.  He was employed by one of the largest asset managers/broker dealers in the United States, with a “stellar reputation.”  This RIA was indeed subject to the fiduciary standard of the Investment Advisers Act of 1940.  However, fine print disclosures, the IRS five part test, a non-discretionary account, would clearly alter the “legal significance” of this “oath”, as Mr. Hauptman is well aware.  It would have no legal standing in a FINRA arbitration.

Let’s review for the Wall Street Journal and for every IRA investor reading Mr. Hauptman’s blog why the proposed “oath” presents a false sense of security on how FINRA views a fiduciary, for an IRA today. The Derivative Project, does not present views as an attorney.  Our views are from the standpoint of a retail retirement investor, a capital markets analyst, a former OTC derivatives counterparty credit risk analyst, with first hand experience in FINRA arbitrations, concerning enforcement of the fiduciary duty for a SEC registered investment advisor, selling/selecting investment product for an IRA for an ongoing annual “advice” fee.

Most IRA’s are held in brokerage accounts and thus are subject to mandatory arbitration by the industry.  FINRA makes the rules and “enforces” the rules,” with clear intent to benefit Wall Street, to the detriment of the IRA investor.  Further, FINRA Panels carry an immunity, which makes it impossible for the average IRA investor to have any right to due process or to question the clear “kangaroo court” status as clearly outlined in Mr. Doyle’s book:  In Bed with Wall Street.

Most significantly, FINRA has not yet been given power by Congress to enforce breaches under the Investment Advisers Act of 1940, specifically a fiduciary breach.  Thus, what process does Mr. Hauptman present as to how such an “Oath” would be adjudicated?

In simple English, an IRA investor would suffer a “fiduciary breach” under such an “Oath” and be forced to go to FINRA to receive compensatory or punitive damages.  FINRA has no authority to enforce such an “oath”.  Please define such an oath’s “legal significance” to an IRA investor in plain English, and to whom such an investor would turn for damages if one has been harmed.

FINRA Arbitration Panel Has No Authority to Award Damages for any breach of 206 of the IAA

Facts from an actual FINRA arbitration for breach of fiduciary duty by a RIA:

In this FINRA arbitration, the SEC registered Investment Advisor (RIA) received .75%  of AUM, annually for their “investment recommendations.” The Wall Street firm responds to the Panel:  “Claimants allege in this case that XXXX breached its fiduciary duty owed to them under 206 of the IAA and that they are entitled to both compensatory and punitive damages as a result of that breach.  The RIA’s counsel continues to the Panel, “In the Transamerica case, however the United States Supreme Court ruled that a private plaintiff cannot bring a cause of action against a registered investment advisor.  The Court stated that 206 proscribes certain conduct and ones cannot create any civil liabilities.  The Court held that federal law enforcement and the Securities and Exchange Commission can seek monetary damages for violations of 206.  The FINRA arbitration panel, therefore,  has no authority to award compensatory or punitive damage to Claimants for any alleged breach of 206 of the IAA.”

A brokerage firm would most certainly respond to such a “fiduciary oath”, as they did in writing to the FINRA panel in a claim for breach of “fiduciary duty” by a SEC registered investment advisor, dual registrant, which carries far greater legal status than the proposed “oath.”  Further, since there is no private right of action for an IRA investor, the SEC today does not in general have the funds to prosecute small IRA cases.  There is no legal due process today for an IRA investor when there has been a fiduciary breach.

Explain to All IRA Investors the Distinction between a Non-Discretionary and Discretionary Account

Most clients of the “fiduciaries” that would sign such an oath, broker or RIA, have no understanding if their IRA is in a non-discretionary or discretionary account.  Most IRA investors believe when they pay a RIA a quarterly fee for investment selection, that this “advisor” has an ongoing duty to monitor their accounts.  The fine print agreement, that the IRA investor signs today typically states, despite paying an annual fee for “investment advice”:

“You are responsible for monitoring your accounts and determining when and if to buy, hold or sell securities.  You may rely on information and advice that you obtain independently from XXXX, and all trading decisions are your own.  Further, by providing information, analysis or advice, XXXX does not assume any obligation to monitor your accounts.”

In plain English, this statement by a RIA firm to a FINRA panel is the most signifiant issue today.  IRA investors are paying an annual fee to a RIA/ dual registrant with the understanding that this “advisor” has an ongoing duty to monitor their accounts for the fee that they are receiving. These fees are worthless.  The client pays an RIA a fee for investment selection, believes it is for ongoing monitoring.  The account falls apart, no one is watching it.  It is the IRA investors’ problem, the RIA/broker has no ongoing duty, despite the annual fee received.

IRS Five Part Test – Mutual Agreement that there is an Ongoing Duty to Monitor

To determine based on the IRS rules set-up for IRA’s in 1974, if one pays a regular fee for investment advice, for their IRA, for example, if this is deemed “advice”, one has to read the fine print of their Agreement, as to “legal” responsibilities for a fiduciary.

Most IRA agreements with RIA & brokers will state in the fine print: “You acknowledge and understand that this is not a mutual agreement between you and XXX broker/RIA under which XXXX provides recommendations on a regular basis, individualized for your IRA or other retirement plan that serve as a primary basis for the plan’s investment decisions.

The most interesting point is the IRS five-part test takes precedence over the fiduciary duty of a SEC registered investment advisor in an IRA.  Fine print language relating to such a “mutual understanding” neuters a federal law put in place by Congress to protect retirement investors, under the IAA of 1940.

The Department of Labor and the Consumer Federation of America have both raised these most concerning issues, without success to enact change in Congress.  However, to promote meaningless solutions that offer no protections, given existing laws, is more harmful to retirement investors.

To represent to the average IRA investor that a “fiduciary oath” would have any legal standing at the SEC or in a FINRA arbitration is clear cut misrepresentation, that benefits the financial services industry, not the IRA investor.

What is Bona Fide Protection Today for the IRA Investor Given Lack of any Legal Due Process for Fiduciary Breaches?

Transparency is the only protection for IRA investors today.  Keeping IRA investors in the dark as to their legal rights is continuing the nonsense of FINRA kangaroo courts, leading to billions of dollars lost by IRA investors by redundant intermediaries that cannot be prosecuted by the average IRA investor when there is a fiduciary breach.

The number one question to ask a registered investment adviser is “Do you have five year audited returns?

Follow up that with: Do you file them with the SEC, if not, why not?  Help me understand your investment philosophy and has it changed over the past five years, if so why?  What is your portfolio turnover?  Who is your custodian?  How long have they been in business?  Who audits your custodian?  Who audits you?  Can you justify my paying you an intermediary fee, in addition to an investment management fee, after all fees and expenses?

The Derivative Project believes in helping retirement investors understand the difference between what bona fide fiduciary standards were established in the early 1940′s for investor protection and nonsensical “oaths.”  We believe in helping IRA investors seek immediate protection from this lack of transparency, FINRA mandatory arbitration and IRS five-part test, by ongoing education and alternatives, that do have legal standing in the courts today.

The Derivative Project continues to support transparency and the retention of the dichotomy established by the Investment Advisers Act of 1940 for salesman and fiduciary, as we petitioned the SEC in April 2012. A true fiduciary standard, as Congress envisioned under the Investment Company Act of 1940 and Investment Advisers Act of 1940 has been interpreted and enforced by the Courts as providing real protection.

The answer today is to (1) maintain the high standard of  IAA Act of ’40, (2) eliminate the IRS five-part test, (3) eliminate mandatory arbitration in all retail retirement plan brokerage accounts and (4) provide every IRA investor a private right of action.  If that cannot happen, eliminate all confusing representations to IRA investors as to their legal rights.  Provide truth and transparency, not vague promises of protection, based on an “oath” that has no legal avenue for enforcement in an IRA brokerage account.

In closing, Mr. Hauptman, please define the “legal significance” of such an “oath” and the step by step actions an IRA investor would take when there is a fiduciary breach to receive just compensation.  It does not have to be in a Tweet, but you may tweet your detailed response for every IRA investor to understand their legal rights and avenues for redress today, given current rule of law.