Skip to Content

Investor Protection Takes a Major Hit Under Trump

April 5, 2017 Blog

It appears that the Trump administration is determined to roll back regulations across the board; from lowering industrial standards for pollution to increasing the risks faced by Mom and Pop investors.

There are two areas of concern for the average investor.

First, the Department of Labor – DOL has delayed and will likely kill a proposed fiduciary duty rule, which was set to go live next Monday but has just been pushed back. The so called Fiduciary Duty Rule simply requires that Wall Street brokers put their customers’ interests first when working with their tax deferred retirement accounts.

The Fiduciary Duty Rule means that conservative middle class investors saving for retirement should not be sold risky, high-fee proprietary complex financial products. Wall Street brokers commonly peddle such products to gin up underwriting fees and sales commissions at the expense of their customers.

The Fiduciary Duty Rule would simply require stock brokers to ask whether the product being sold is in the best interest of the customer. Under the current industry rules, many brokers and bankers ask what high fee product they can sell to meet sales quotas and buy that new Maserati.

In other words, the customer does not come first under current industry rules.

Of course, the Wall Street spin machine has been out in force arguing against the rule. The brokerage industry has argued that compliance with the rule is costly and that if the rule is implemented they won’t be able to offer the little guy exotic products such as nontraded REITs and private placements.

By challenging the Fiduciary Duty Rule, Wall Street does not want to be held accountable in any way for its actions. And it looks like the bankers and brokers on Wall Street – not Mom and Pop on Main Street – are getting their way in the new Trump Administration.

Just this week, the DOL released a different rule that approved pushing the Fiduciary Duty Rule’s implementation from April 10 to June 9.

A second attack on investor protection seems to be coming from the Securities Exchange Commission, whose mission is to protect investors, not Wall Street.

The acting SEC Chair, Michael Piwowar, recently said that he wants to scrap the accredited investor rule, which is also designed to protect investors from risky investments and loss of retirement and life savings.

Investors who buy high risk private placements need to be deemed “accredited investors”. The SEC currently requires individuals to have at least $200,000 in annual income, $300,000 in annual income for married couples, or a net worth of $1 million, excluding residences, to qualify.

That financial standard is designed to reduce the pool of accredited investors and to protect those who are less wealthy from getting fleeced by brokers peddling risky private investments.

Having such roadblocks in place is somehow harming investors, according to the acting SEC Chair, Michael Piwowar.

He suggested in a speech in February that attempting to distinguish accredited investors “who can fend for themselves from those who cannot is a line-drawing exercise fraught with peril.”

Piwowar further contended that Regulation D, which exempts securities offerings from the registration requirements of the Securities Act, only deprives non-accredited investors of access to “high-risk, high-return securities available only to the Davos jet-set.”

He argued that the accredited investor regulatory regime likely causes more harm than good to non-accredited investors by creating a “blanket prohibition on their earning the very highest expected returns.”

What nonsense.

The accredited investor rule has served investors well for several decades.  It has kept them from being sold high-risk, speculative investments, which very rarely pan out and very often result in catastrophic losses.

Mom and Pop investors are simply not clamoring to buy expensive, high commission and high risk private placements. Indeed, investors with lower incomes and a net worth of less than $1 million have sufficient investment options, such as stocks, bonds and mutual funds.

Trust me, no one is suffering because some slick broker can’t pitch them speculative derivative products, risky start-ups and other private investments which often go bust.

President Trump won the election by winning the hearts and minds of the working-class voters in the Midwest, often affectionately referred to as the Heartland of America.

The Administration would be well served to protect those individuals from the onslaught of hustling brokers pitching speculative high-fee products that would be unleashed if the discussed changes to securities laws were to take place.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.