The Regulators’ Conflicts of Interest – ValueWalk Premium

The Regulators’ Conflicts of Interest

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Q1 2020 hedge fund letters, conferences and more


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A new SEC rule (Regulation Best Interest or “Reg BI”) that takes effect June 30 will encourage the acceptance and transmission of conflicts of interest. This rulemaking is a historic, giant step backwards in securities regulation. It turns principles of advice in the client’s best interest on its head. It is certain to undermine trust in financial advisors.

Trust and honesty are crucial not only in finance, but to any relationship in which one party (dependent) entrusts to another party (trustee) power over the dependent party itself or over its interests.

Conflicts of interest by the trustee corrode this trust relationship and reliance, in which dependents must rely on another. If the dependent suspects that the trustee has conflicting interests, they might withdraw from the relationship. However, in many cases the dependents do not know of the conflicts of interest that caused their loss and may discover the cause too late. The dependents’ loss can affect not only their well-being but the fortunes of the country.

Every trustee may be faced with conflicting interests – those of the dependent party and those of his or her own. The holders of entrusted power can be a government official, judge, lawyer, physician, teacher (who has the power to grade) or a financial adviser or broker. All can be exposed to conflicting interests. Conflicts can range from personal sympathy to the financial interests of the entrusted person. Hidden conflicting interests can arise in many situations. For example, a broker, who receives from a lucrative client an order to sell certain stock, which is too volatile, may try and persuade another, less lucrative, client to buy the stock, even though the other client, as well, is concerned, but less knowledgeable, about volatility.

Carlo V. di Florio was the director of the Securities and Exchange Commission (SEC) Office of Compliance Inspection and Examination. In 2012 he gave a speech in which he explained his definition of conflicts of interest.1 He warned that “conflicts of interest . . . are a leading indicator of significant regulatory issues for individual firms, and sometimes even systemic risk for the entire financial system.”2 Mr. di Florio defined conflicts of interest to include the following situations:

  • (i) “where a persons or firm has an incentive to serve one interest at the expense of another interest of obligation.”
  • (ii) “serving the interest of the firm over other clients or an employee or group of employees serving their own interests over those of the firm or its clients.”

Read the full article here by Tamar Frankel, Advisor Perspectives

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