Law360, New York (April 07, 2015, 9:51 AM) -- On March 25, the Public Investors Arbitration Bar Association issued a self-described “review”[1] or “study”[2] (the report) finding that, in their advertising, brokerage firms have implied that they have a fiduciary duty but, in arbitrations, brokerage firms have taken an altogether different stance that they have no such duty. The report engages in a bizarre form of name-calling, accusing brokerage firms of “advertising like doctors, arbitrating like used car salesmen.”[3]

The report was promoted through a press release,[4] generated a news conference[5] and sparked articles, including an article in this publication.[6] If nothing else, the report enabled PIABA to steer the public fiduciary duty debate. Only, PIABA’s “study” amounts to a mistaken notion and nothing more. Its authors cobbled together entirely innocuous facts that simply fail to support its premise. In publishing and promoting the report, PIABA misdirected the public debate.

PIABA’s Report Amounts to Speculation

The report’s problems start with its title. Although titled “Major Investor Losses Due To Conflicted Advice,”[7] the report actually has nothing to say regarding investor losses, conflicted advice or their relationship to each other. Instead, the report merely cites a recent report by the White House Council of Economic Advisors (CEA)[8], which came up with an estimated “aggregate annual cost of conflicted advice,” [9] and then multiplies the CEA’s number by 4.6 — the number of years since passage of Dodd-Frank.[10] That is the extent of the report’s analysis of its title subject. The CEA’s numbers have been called into question,[11] and the report does nothing to support the CEA’s findings, but the report’s arithmetic leaves little room for criticism.[12]

The bulk of the report, however, deals with an entirely different topic. In its authors’ words, the report is:

A review ... of the advertising and arbitration stances of nine major brokerage firms … find[ing] that all nine advertise in a fashion that is designed to lull investors into the belief that they are being offered the services of a fiduciary.[13]

These findings result from an — at best — opaque methodology.

First, the authors never describe how they chose the “nine major brokerage firms” they included in their study. That omission leaves nothing to counter the possibility that the authors simply chose whatever brokerage firms among the more than 4,000 registered at the Financial Industry Regulatory Authority[14] that might fit their predetermined conclusions — ending their search before they could reach 10. Without such disclosure, there is little value to the authors’ statement that “all nine” of the brokerage firms studied met the authors’ criteria — much less the broader conclusion that “[f]irms routinely advertise themselves as giving personalized, ongoing, non-conflicted advice that puts the customer first.”[15] A potentially nonrandomized sample of nine among more than 4,000 firms is an insufficient basis for stating that anything is done “routinely.”

Indeed, although a subtitle of the report claims that “Misleading Ads Fuel Confusion,” the report does nothing to support its claim that the ads have caused any confusion at all. The report never ties the advertising that it details to any investor confusion. Even the lone customer cited, Ethel Sprouse,[16] is never identified as having read firm advertising, much less been confused by it into believing her firm had a fiduciary duty to her.[17]

The Report’s Premises are Flawed

Regardless of its methodology, the report suffers more fundamental problems. In essence, the authors have taken two innocuous facts — (1) that firms’ advertisements sometimes endorse the quality of the services they provide and (2) that firms’ legal briefs sometimes state, correctly, that brokers are not normally fiduciaries — put them side-by-side, and declared the results “striking.”[18] PIABA has declared this a “huge disconnect.”[19] The alarm is disingenuous. Nothing about either of these “findings” is striking or improper.

Brokerage Firms are Correct in Noting the Lack of a Fiduciary Duty

To address the second premise first, when a brokerage firm is sued, it is allowed to accurately cite the law in its defense. This may seem obvious, but the report blames firms for doing exactly that. The report admits that there is no fiduciary duty for brokerage firms. The report’s first sentence states, “No national standard exists today requiring brokerage firms to put their clients’ interests first by avoiding making profits from conflicted advice.”[20] The report’s last sentence is a call to action for the implementation of a fiduciary duty.[21] Nevertheless, the report blames brokerage firms because they “litigate like they have no such duty.”[22] The authors overlook the possibility that perhaps brokerage firms litigate “like they have no such duty” because — as the authors admit — they have no such duty.

Indeed, although the report blames brokerage firms for “advertising like” doctors, [23] comparing brokerage firms’ legal duties to those of doctors is instructive. Certainly, doctors are generally deemed to have duties of confidentiality,[24] but that duty is not unlike the confidentiality restrictions imposed on brokers through the Gramm-Leach-Bliley Act and Regulation S-P. Doctors are not, however, legally bound to avoid all potential conflicts of interest. To see evidence of that, simply look at pharmaceutical brands on the pens used to write prescriptions or pharmaceutical companies’ paying doctors to conduct clinical trials or give presentations on medicines they prescribe.

Brokerage Firms’ Advertising is Proper and in Line with Other Industries

The report’s first premise — “brokerage industry advertising creates the illusion of a fiduciary duty”[25] — is likewise off-base. To begin with the obvious, none of the advertising cited by the report claims that any firm has a fiduciary duty to its customers. No advertisement even mentions fiduciary duties or, for that matter, any legal duties at all.

More fundamentally, if a firm’s advertisements state that, for instance, the firm’s investors are “in good hands,”[26] the truth of that statement does not depend on whether or not the firm is legally bound by a fiduciary duty. The truth depends on whether the firm, in fact, leaves its customers in good hands. Customers have every right to hold their firms to the standards set forth in their advertising. If customers feel that the firm is not providing the level of service advertised, they can transfer out their assets.

Is it wrong for upstanding firms to advertise that they can be trusted? No. Undoubtedly, each firm stands behind the statements in its advertisements. Indeed, even without a fiduciary standard, those firms are still obligated by regulation to know their customer,[27] to recommend only suitable investments,[28] and to observe high standards of commercial honor.[29] Importantly, all brokerage firms are subject to regulations requiring their advertising to be fair and balanced, not misleading, and based on principals of fair dealing and good faith[30] — all of which are subject to review by regulators.[31]

In the absence of any data showing that brokerage firms’ advertising actually creates customer confusion regarding the fiduciary duties, it is instructive to compare brokerage firm advertising to that of other industries. Is brokerage firm advertising different in a way that would create expectations of legal duties that are not created elsewhere? In that regard, perhaps the most useful starting point would be PIABA’s own exemplar of an industry not bound by any legal duty to put its customers’ interests first: “used-car salesmen.”[32] A “study” of companies selling used cars[33] results in the less-than-striking result that many claim to put their customers first:

• “Come out and test drive one of our new or used cars, SUVs or trucks. Gay Buick GMC has an outstanding reputation because we put the customer first.”[34]

• “The reason our success has been long-standing because we always put the customer first, as our focus isn't putting people in just any car, but putting every customer in the right car.”[35]

• “The Chapman family of used-car dealerships has been a central Texas tradition for over 50 years. … The Chapman family has always put our customers first.”[36]

• “San Antonio Chevrolet Fans Trust Cavender … Cavender Chevrolet has an outstanding reputation because we put the customer first.”[37]

• “We always have competitive pricing on all of our new and used vehicles, and we always put the customer first.”[38]

Used-car salesmen are not alone in these claims. Similar claims can be found among barbers,[39] grocers,[40] car washers,[41] taxi drivers,[42] house cleaners,[43] undertakers,[44] pet toy makers,[45] tattoo artists,[46] pawn brokers[47] and online casinos.[48] Does that mean the public is being misled to believe that there is a fiduciary obligation underlying all of those industries? There is no less evidence to support that dubious claim than PIABA provides to support its claim that the “brokerage industry creates the illusion of a fiduciary duty.”[49]

Advocacy for Uniform Fiduciary Duty is Not Improper

The report takes a speculative step further, right off the edge of reason, when it claims that, “[a]dding to the confusion is the fact that five of the eight brokerage firms … have publicly stated that they support a fiduciary standard.”[50] In other words, PIABA blames brokerage firms for “confusing” the public by agreeing with PIABA. How these stances in support of a fiduciary duty could confuse the public is left unexplained. Investors who know that their brokerage firm has called for implementation of a fiduciary duty must know — by logical necessity — that there is not one now.

The report implies an inconsistency between advocating for additional rules and noting their absence in legal documents.[51] The implication is absurd. A person who advocates for reducing the maximum speed limit to 55 miles per hour is not hypocritical for pointing out that the speed limit is 65 when contesting a speeding ticket.

Can We Take It Down a Notch?

Given that most of the brokerage firms subjected to PIABA’s “study” have already publicly agreed with PIABA’s call for a uniform fiduciary duty, the purpose behind PIABA’s unsupported name-calling remains elusive. Indeed, the Securities Industry and Financial Markets Association and the Financial Services Institute, for example, have both long advocated for a uniform fiduciary standard to be applied to brokerage firms.

As the U.S. Securities and Exchange Commission and the U.S. Department of Justice — with input from many stakeholders — determine the best way forward on possible universal fiduciary duty rules, there are certainly valid areas for debate. That debate, however, is not furthered by alarmist headlines, hyperbolic claims and ill-founded accusations.

—By Bryan M. Ward, Sutherland Asbill & Brennan LLP

_________________________
1] Joseph C. Peiffer and Christine Lazaro, MAJOR INVESTOR LOSSES DUE TO CONFLICTED ADVICE: BROKERAGE INDUSTRY ADVERTISING CREATES THE ILLUSION OF A FIDUCIARY DUTY (the “report”), https://piaba.org/system/files/pdfs/PIABA%20Conflicted%20Advice%20Report.pdf, at 1 (Posted March 25, 2015).

[2] Id. at 2.

[3] FEDERAL ACTION NEEDED TO STOP U.S. BROKERAGE FIRMS MISLEADING INVESTORS ABOUT ROLE AS FIDUCIARIES, WHICH FIRMS DENY TO BLOCK ARBITRATION CLAIMS, PIABA (“Press Release”), https://piaba.org/system/files/pdfs/PIABA%20Fiduciary%20Study%20News%20Release.pdf (Posted March 25, 2015).

[4] FEDERAL ACTION NEEDED TO STOP U.S. BROKERAGE FIRMS MISLEADING INVESTORS ABOUT ROLE AS FIDUCIARIES, WHICH FIRMS DENY TO BLOCK ARBITRATION CLAIMS, PIABA (“Press Release”), https://piaba.org/system/files/pdfs/PIABA%20Fiduciary%20Study%20News%20Release.pdf (Posted March 25, 2015).

[5] See http://www.hastingsgroupmedia.com/PIABA/conflictedadvicereport032515.mp3

[6] See Law360, “Brokers Are Two-Faced On Fiduciary Duty, Bar Group Says” (posted March 25, 2015) http://www.law360.com/securities/articles/635721?nl_pk=e543cdbe-87ba-45c6-8d70-3492554f13e8&utm_source=newsletter&utm_medium=email&utm_campaign=securities

[7] Report at title page. The report also has two subtitles.

[8] White House Council of Economic Advisors, The Effects of Conflicted Investment Advice on Retirement Savings, (dated “February 2015”) https://www.whitehouse.gov/sites/default/files/docs/cea_coi_report_final.pdf

[9] Id. at 2.

[10] Report at 2 n.2.

[11] See, e.g., Dr. Jeremy Berkowitz, Dr. Renzo Comolli, and Dr. Patrick Conroy, Review of the White House Report Titled “The Effects of Conflicted Investment Advice on Retirement Savings,” http://www.nera.com/content/dam/nera/publications/2015/PUB_WH_Report_Conflicted_Advice_Retirement_Savings_0315.pdf (last visited March 31, 2015).

[12] Nevertheless, the arithmetic appears off. The report presents its analysis as follows: “$17 billion times 4.6 years since the passage of Dodd-Frank equals $79.22 billion.” Report at 2 n.2. Even if we assume the accuracy of the CEA’s estimate and assume it remains constant across time, $17 billion times 4.6 actually equals $78.2 billion.

[13] Report at 1.

[14] FINRA, About FINRA, http://www.finra.org/about

[15] Report at 3.

[16] Id.

[17] Moreover, despite the fact that the authors imply that they have found the purpose behind the firms’ advertising — “designed to lull investors into a belief …” — they cite no evidence of how the advertising campaigns were designed.

[18] Report at 3.

[19] Press Release.

[20] Report at 1. See also id. at 4 (“Brokers, instead of a fiduciary standard, must adhere to a suitability standard ….”)

[21] Id. at 18 (“SEC and DOL action for a strong, national fiduciary standard is the only way to protect investors’ hard-earned retirement savings by holding firms to the image they themselves present.”)

[22] Id. at 3.

[23] Report at 1.

[24] See, e.g., Langbehn v. Public Health Trust, 661 F. Supp. 2d 1326, 1347 (S.D. Fla. 2009) (“The Florida Supreme Court has recognized that there is a fiduciary relationship between a doctor and his patient, such that the doctor breaches his fiduciary duty if he discloses confidential information or conceals facts known about harm done to the patient. The alleged breaches set forth in the amended complaint, however, do not come close to these scenarios, and Ms. Pond's Estate has not cited any cases (from anywhere in the country) which hold that a doctor breaches his fiduciary duty to a trauma patient by failing to allow visitation by spouses, partners, children, or relatives.”) (internal citations and quotations omitted).

[25] Id. at title page.

[26] Id. at 8.

[27] See FINRA Rule 2090.

[28] See FINRA Rule 2011.

[29] See FINRA Rule 2010.

[30] See FINRA Rule 2210(d).

[31] See FINRA Rule 2210(b) – (c).

[32] Report at 1. (Last visited April 1, 2015).

[33] The author’s methodology was simple and unscientific: The author Googled “used cars put the customer first” and noted useful examples.

[34] http://www.gaybuickgmc.com/.

[35] http://www.bobbrownchevy.com/.

[36] http://www.chapmanmotorsales.com/about.cfml.

[37] http://www.cavenderchevrolet.com/.

[38] http://www.shrewsburyvw.com/aboutus.aspx.

[39] (“[W]e never forget to keep the customer first.”), http://www.renegadebarbershop.com/about/.

[40] (“We truly put our customers first and know that their success is a key to our success.”), http://www.laurelgrocery.com/#!company/c160e.

[41](“At Mike’s Auto Spa, we put our customers first.”), http://www.carwashcolorado.net/About-Mikes-Auto-Spa.htm.

[42] (“We Put Customers First: At Towne Taxi, we value your satisfaction above all else, and we understand that your transportation needs and preferences are unique.”), http://www.townetaxiinc.com/service.php.

[43] (“We have personally chosen/selected, well-trained and qualified maids and we put the needs and wants of our customers first … .”), https://maidsailors.com/house-cleaning-service.

[44] (“Morleys Funerals are committed to continuing their exceptionally high standard of Funeral Care. Our commitment to you: To always put the customer first.”), http://www.morleys.net.au/at_your_service.htm.

[45] (“We embrace the philosophy, The Customer Comes First, and we are guided by the following principles: To put the customer first, always.”), http://www.irisusainc.com/t-about-philosophies.aspx.

[46] (“Ray's tattoo has always put the customer first … .”), http://journalstar.com/places/offers/ray-s-tattoo-of-lincoln-ne-is-the-place-to/article_5abfa7e8-22f2-11e4-b12c-001a4bcf887a.html.

[47] (“The family has decades of pawnbroking experience, gemological training and will always put the customer first.”), http://www.sparkspawn.com/about-us.html.

[48] (“Founded by industry professionals with extensive knowledge in the online gaming industry we have learned to put the customer first.”), http://www.liberty-slots.com/.

[49] Report at title page.

[50] Id. at 2.

[51] Id. at 2 (“But these firms are every bit as vociferous as the other four brokerages in denying that they have any fiduciary obligation when push comes to shove in an arbitration case filed by investors who have lost some or all of their nest egg due to conflicted advice.”)

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