Darryll Bolduc, a former Charlotte bond trader who became a whistleblower long before there were riches to be had from the practice, was among the people I proudly represented when I worked in PR. Bolduc was fired after alerting NationsBank (which merged with Bank of America) of what he believed were accounting irregularities, but the bank promptly settled with him after the Wall Street Journal reported on his suspicions.

Bolduc was not only blackballed from Wall Street, he found it difficult to find a North Carolina lawyer willing to take his case because Charlotte’s legal fraternity didn’t want to alienate the old boy network of southern banks.  Bolduc got a law degree and opened a securities and labor arbitration practice to fill a much-needed void. When I last spoke with him, Bolduc’s practice was thriving, and he took great pride taking on the North Carolina establishment. He died mysteriously in 2007 when he was 46-years-old.

Darryll Bolduc

The SEC never acted on Bolduc’s allegations, but he wasn’t bitter. He said the agency didn’t have the resources or the legal firepower to take on major financial institutions. The big banks retained high powered lawyers who could bury ill-matched SEC staffers with filings, arguments, and other maneuvers that made winning any big cases almost impossible. SEC lawyers coveted positions with the firms they were negotiating settlements with, so there was an incentive to tread lightly. Bolduc said the SEC could only effectively go after small fry, who didn’t have the financial and legal resources to fight back.

I’ve been thinking of Bolduc a lot in recent weeks as it’s become apparent that the SEC under the Trump Administration has become so ineffective that its existence is harmful to retail investors because it gives them a false sense the government agency is looking to protect their interests.  Underscoring the SEC’s irrelevance, I had to look up the name of the current SEC chairman, but I could name you many of his predecessors over the past decade or so. (The current head is Jay Clayton.)

Jay Clayton

The SEC’s Regulation Best Interest rule introduced earlier this month is an example of how the agency is a pawn of the big brokerage houses. Whereas Registered Investment Advisors are required to adhere to a fiduciary standard and always put the financial interests of their clients first, the SEC has proposed that stockbrokers be held to a “suitability” standard, which makes it more legally defensible for the glorified salespeople to peddle higher commission products.

SEC Commissioner Hester Peirce dismissed the higher fiduciary standard as an “advertising slogan” and argued that the suitability standard is “in many ways, similar to the fiduciary standard.” Peirce said she’s hoping the SEC will publish a “side-by-side” comparison “so that people will be able to get a quick overview of what they are.” Hopefully the chart will be color coded so it will be more readily understandable to those of us lacking Peirce’s Yale law degree.  

Hester Peirce

The SEC should be putting out rules and regulations that make it unambiguously clear there is no wiggle room when it comes to putting the interests of clients first. As Barry Ritholtz argued in Bloomberg, “it makes perfect sense that the people who buy financial services want a level of care closer to what a lawyer provides than a used-car salesman.”

Major Wall Street firms are experiencing an exodus of top producing brokers going independent or joining considerably smaller firms. Public comments from some of these brokers should give pause to clients of these companies. Bill Gold, who recently left UBS to join Steward Partners Global Advisory, said in a news release, “I’ve always believed clients should come first, and after meeting with Steward it was immediately clear that the team here shares those same values.”

Bill Gold: “Clients Should Come First”

It’s alarming how much openly questionable activity the SEC ignores. Barron’s this week identified 28 companies where Wall Street analysts have “Buy” ratings on companies with price targets below their current trading levels. The publication says “many” money managers are skeptical that stock price targets are “anything more than a marketing tool for the brokerage industry to generate interest in a stock.” The SEC’s mandate is to ensure the integrity of publicly issued information and statements.

Facebook doesn’t appear to take SEC concerns all that seriously. The social media company’s Libra cryptocurrency initiative is very similar to plans of a small company the SEC has sued to stop.  Tesla founder Elon Musk also has a low regard for the SEC, having dismissed the agency in a tweet as the “Shortseller Enrichment Commission.” The agency can’t be effective if it commands so little respect in the industry it regulates.

The SEC’s proposed amendments to its whistleblower program have also faced considerable criticism, including Republican Chuck Grassley.

The SEC was founded in 1934 to protect investors from fraudulent and manipulative practices. But the agency wasn’t responsible for exposing or even limiting the 10 biggest frauds in recent history. The agency has a budget of $1.7 billion yet most of what it does is busywork that accomplishes little.

Investors would be better off if the SEC was simply dismantled, putting them on alert that they need to do their own rigorous due diligence before acting on advice from brokers, wealth advisors, or anyone else peddling securities or other investments. If investors want to heed advice about sustainable investing from a firm alleged to have facilitated money laundering and tax cheating they must accept the consequences.

Studded Snow Tire: Not Available in Ontario

I’d liken a move to dismantle the SEC to a decision Canada’s Ontario province made in the 1960s to ban studded snow tires that were causing significant road damage. The Ontario government gambled correctly that motorists would drive considerably more cautiously if they lost the protection of studded tires, which reduced sliding on icy roads.

Ice related accidents in Ontario declined after the ban took effect.

R.I.P. Darryl Bolduc. You are not forgotten.

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