Broker-dealers' new power tactic -- threatening to quit states altogether -- to thwart local fiduciary rules for advisors sure looks like blatant misuse of power
SIFMA, FSI and Morgan Stanley made overt threats to Nevada and New Jersey and CFP Board that have more than a whiff of conspiracy to restrain trade
Brooke's Note: Desperate times call for even more desperate measures. Threats by Morgan Stanley and their cohorts and lobbyists to pick up their toys and go home if states seek to impose on them a higher standard of fiduciary care are not being made from strength. That said, they certainly are flexing their muscles -- perhaps illegally, according to Ron Rhoades, director of the personal financial planning program at Western Kentucky University. Still, it's hard to imagine that the brokerage industry holds many cards here. What if Nevada, New Jersey or Massachusetts calls their bluff and says, in effect, don't let the door hit you in your posterior on the way out? Some of those deactivated brokers might become RIAs or join a new brokerage firm with hardly a consumer complaint.
In early 2019 broker-dealer Morgan Stanley threatened to stop doing business in Nevada if the state securities division proceeded with plans to adopt a local fiduciary rule for financial advisers.
“Absent substantial changes to the proposal, Morgan Stanley will be unable to provide brokerage services to residents of the state of Nevada,” said the Wall Street bank in a statement.
The New York City wirehouse is the nation's largest broker-dealer with about 15,500 brokers, advising about $2 trillion in assets. It has four branch offices in Nevada, including one each in Reno, Stateline and two in Las Vegas. It has 500 offices worldwide.
Nearly contemporaneously, other firms, including Wells Fargo & Co., Charles Schwab & Co. Inc., and Edward D. Jones & Co. were reported to be considering terminating some of their own brokerage offerings in the state.
Even the Securities and Financial Markets Association (SIFMA), one of two main broker-dealer lobbying associations, appeared to threaten Nevada, stating in its comment letter that some of its member firms might be compelled to “discontinue service to B-D accounts in Nevada.”
More recently, in its June 14 comment letter to the New Jersey Bureau of Securities, the Financial Services Institute (“FSI”), the other main broker-dealer lobbying organization, appeared to threaten that its members would cease doing business in the state, if New Jersey went through with its proposal to apply fiduciary standards.
Robin M. Traxler, FSI's senior vice president and deputy general counsel, stated in FSI’s comment letter:
“If FSI members are held to a unique standard of care ... these financial advisors may have to cease doing business with, or cut back on financial services provided to, retail investors in New Jersey. This would undoubtedly have a negative impact on New Jersey investors, particularly those [who are] low- to middle-income retail investors.”
Similarly, at least one broker-dealer recently wrote to the Certified Financial Planner (CFP) Board of Standards, Inc., to the effect that it and other broker-dealer firms, acting in coordination with their trade association, may meet and determine whether to require their registered representatives to surrender their CFP certifications should the CFP Board proceed to implement its fiduciary standard upon CFPs, effective Oct. 1 this year.
These actual or implied threats beg the question: Are broker-dealers conspiring, either with each other directly, or via their trade associations, to violate federal antitrust and/or trade practices laws?
Section 1 of the Sherman Act states, “Every contract, combination… or conspiracy in restraint of trade or commerce… is declared to be illegal.”
Section 5 of the Federal Trade Commission (FTC) Act prohibits “unfair or deceptive acts or practices in or affecting commerce.”
Generally, group boycotts are generally impermissible under the law. As stated by the Federal Trade Commission: “Any company may, on its own, refuse to do business with another firm, but an agreement among competitors not to do business with targeted individuals or businesses may be an illegal boycott, especially if the group of competitors working together has market power.”
The statements made to Nevada and New Jersey might be interpreted by some to imply that the broker-dealer firms seek to maintain the ability to sell investment securities and insurance products that pay its members higher levels of compensation than the compensation that might be available to them under a fiduciary standard (which generally prohibits compensation which is in excess of what is reasonable under the circumstances).
In prior judicial proceedings, similar threats have been held to be illegal. For example, the FTC successfully challenged the group boycott of an association of competing trial lawyers that stopped providing legal services to the District of Columbia for indigent criminal defendants until the District increased the fees it paid for those services.
The Supreme Court upheld the FTC’s ruling in FTC v. Superior Court Trial Lawyers Assn., 493 U.S. 411 (1990), stating that the “boycott constituted a classic restraint of trade within the meaning of Section 1 of the Sherman Act" and that “it also violated the prohibition against unfair methods of competition in 5 of the FTC Act.”
While the broker-dealer trade associations and their members may argue that they are only exercising their free speech rights, the U.S. Supreme Court may likely disagree, It has held that “every concerted effort that is genuinely intended to influence governmental action” is not protected from antitrust concerns.
Indeed, the U.S. Supreme Court has stated: “Horizontal conspiracies or boycotts designed to exact higher prices or other economic advantages from the government would be immunized on the ground that they are genuinely intended to influence the government to agree to the conspirators' terms.” See: FTC v. Superior Court Trial Lawyers Assn., 493 U.S. 411 (1990).
Trade associations, such as SIFMA and FSI, can serve important purposes. But they must be careful in their activities, especially if such activities would, as a result, restrain trade or serve to promote unfair trade practices.
Group boycotts of a state, or of a standards-setting organization such as the CFP Board of Standards, Inc., can and should face a high degree of scrutiny.
I urge the Federal Trade Commission, and the various state trade commissions, to explore the recent activities undertaken by broker-dealers and their trade associations as described above.
These regulatory bodies should examine the conduct to ascertain if the line – between broker-dealers (and their trade associations) providing information to government regulators or standards-setting bodies lawfully, versus engaging in actions that may serve to restrain trade – has been crossed.
Ron A. Rhoades serves as Director of the Personal Financial Planning Program at Western Kentucky University. This article reflects his own views, and are not those of his employer nor any firm, organization, institution, or cult to which he now or has ever belonged or been kicked out of.
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