March Madness!

It seems very fitting that during this month of college basketball showdowns, the financial services industry had a confrontation of its own; one that will end with two teams facing off (though not by the end of the month). If you knew that I was talking about the Department of Labor’s fiduciary rule, please move to the front of the class.

The other week, the 5^th Circuit Court of Appeals ruled against the fiduciary standard and in favor of brokers (salespeople) and insurance agents. The court ruled that the entire rule should be vacated, which considering the industry opposition, isn’t really a surprise. What is surprising, is the court’s rationale. Major opposition to the fiduciary rule stemmed from the industry’s argument that the “average” consumer can’t afford fiduciary advice and therefore, people should be allowed to pay commissions to get said advice. No one really made the argument that brokers shouldn’t be held to a fiduciary standard because…well, they aren’t fiduciaries! Well, no one but me. While I have been generally supportive of the fiduciary standard as a concept, I have been opposed to this specific standard. I saw the DOL rule as more of a step in the right direction rather than a balm for the industry. Read more about that here.

Now, the interesting part. To read the entire ruling, visit this page. Ultimately, the court ruled that brokers and insurance salespeople shouldn’t be held to a fiduciary standard because, they aren’t actually serving as “trusted advisors”:

“one-time IRA rollover or annuity transactions… it is ordinarily inconceivable that financial salespeople or insurance agents will have an intimate relationship of trust and confidence with prospective purchasers.”

Huh.

The plot thickens. The 10^th Circuit Court of Appeals ruled in favor of the Department of Labor’s Fiduciary rule! This means that it is increasingly likely that the rule will end up before the Supreme Court for a final ruling. Of course, at President Trump’s direction, the DOL may choose to use the 5^th District Court’s decision to redraft a new standard that would work in tandem with the SEC’s rule.

The SEC Rule

The Journal had a lot to say about the fiduciary rule, too. The SEC has hinted that it will require more disclosures from brokers and potentially even push them towards a fiduciary relationship. While the DOL Rule only applied to retirement accounts, the SEC rule would apply to all investment account relationships.

Personally, I think that the most important change is that brokers would potentially no longer be allowed to call themselves “advisors.”

“Money managers, also known as investment advisers, have to comply with different regulatory standards than brokers do, even though they sometimes provide similar services to investors. Investment advisers have complained for years that the rules for brokers are too permissive and that, by using titles such as ‘financial adviser,’ they confuse clients who don’t understand the difference between the two professions.”

There isn’t enough information available to definitely know, but it seems like the industry will face a choice: either hold themselves to a higher standard of governance or forgo the title “advisor.” I think this is the best possible step forward. Shoehorning brokers into a complex and conflicted “fiduciary” relationship only confuses the issue.

Crypto

Well, this happened. In what can only be described as the best possible metaphor for the cryptocurrency industry, hosts of the Crypto Sanctum fed their attendees an incredible amount of marijuana by not really telling said attendees the food had marijuana in it.

“The Crypto Sanctum’s menu, viewed by WIRED, subtly noted that some of the condiments served were ‘infused.’ But some attendees said they did not see the menu or understand its message. A few menu items explicitly stated that they contain cannabis—cocktails, cannabis-marinated olives, and sugar for coffee and tea—but others simply say ‘infused’ without explaining what the infusion is.”

Now, when I say “an incredible amount” I am sort of guessing and that guess is mostly based on the idea that if the sugar cubes for the coffee had weed in them just imagine how much weed was in the “magical Ponzu sauce” on the sushi. Plus, stuff like this:

“At one point, an attendee passed out on a couch.”

and,

“The (attendee) remembers walking home, but doesn’t remember the route she took.”

There’s more, so check it out. I say this is a good metaphor for crypto in general as the SEC takes time to point out that crypto exchanges that trade coins like currency are probably against the law. This comes on the heels of the Praetorian coin offering, which is an ICO (initial coin offering) and is also registered with the SEC as a security (the first of its kind!). Until now, all cryptocurrencies were not registered with the SEC and were sold to investors with the implicit explanation that they were not securities and therefore didn’t need to be registered. And it was true, until it wasn’t. Eventually, coin offerors acknowledged that they were securities, but then they only offered them to accredited investors to avoid registration. However, this is problematic if you want your coin to be widely traded on an exchange. So now, while crypto traders knew their coins were infused with something, it turns out they were full of securities…or weed, or whatever, I hate crypto.

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