Jim, I share your concerns, and have held similar opinions for many years. Though many may not realize it, SEC regulations for more than half a century have required investment advisors to state publicly any business interest in firms they are monitoring. I've never heard of a single case where the SEC ever enforced this regulation.
Part of the problem is that regulators (and legislators as well) fail to make a distinction between professional opinions reached through independent research and simple advertising, which much of the opinion from investment firms has degenerated into. Another part of that problem is that opinion is considered free speech under the First Amendment, and is not subject to court challenges.
I think it would help to draw a more precise distinction between ordinary advertising and professional opinion arrived at through analysis of timely, accurate data. A firm which advertises stock opinions in order to gain some sort of profit, either in the stock price or in future business from the firm, should state its business interest so that the public will know that it is a form of advertising, and not necessarily a professional opinion. Confusing the two leads investors astray.
Second, if there were a more precise distinction drawn between advertising (i.e., touting stocks) and professional opinion, it would be easier to prosecute firms and their advisors for making false or deceptive advertising, which is a violation already covered by the Lanham Act. Investment firms and analysts could (and should) be subject to civil liability for false advertising, including financial liability for causing harm to unsuspecting investors.
Note that very often (particularly for investing), there are already laws on the books that could handle a problem, if only the laws were enforced. What Eliot Spitzer has done, whether it has any long term effect or not, is to bring actions against firms under a New York statute, known as the Martin Act. He has used this act as leverage to obtain settlements that hopefully will discourage the kinds of behavior we are trying to get rid of. The Martin Act is very powerful because it subjects wrong doers to criminal prosecution. Companies have shown a distinct willingness to settle when their executives are subject to a jail sentence if convicted. Of course, one of the real problems is that the execs are also willing to settle by paying out shareholder money instead of their own.
Investors also face many barriers to bringing actions themselves against advisors or corporate officials who mislead them into poor investments. The chief barrier is the cost of bringing an action and the resulting uncertainty over whether the investor can recover ANY portion of that cost. If you win, you get something, assuming lawyers don't get most of it first. If you lose, you get nothing, and frequently your personal costs (even if a case is taken under contingency agreement) are not covered. If a case goes to arbitration, the cards are frequently stacked against the investor by an arbitrator that tends to favor investment firms over individuals.
One possible solution to this dilemma would be to provide at least some compensation to an investor bringing an action, even if resolution of the action shows no wrongdoing. Here the criteria for covering at least a portion of investor costs would be a showing that the action was not frivolous (without basis in fact or in law). That is, a legitimate cause of action should be rewarded with at least partial covering of costs. Why? Because it would send a message to corporations and investment firms to be scrupulously honest with investors--or else. And it might also allow an action to proceed even if there were no contingency agreement, in which the investors typically pays his or her lawyer about a third of anything recovered. Often this means the law firm gets some of its money back, if not all of it, but the investor gets almost nothing. Furthermore, it forces class actions so that total compensation (for the law firm) will be worthwhile, even though the end result for the individual investor may be little or nothing.
These are some of my thoughts on how to make the markets safer for investing.
Art |
