Elizabeth Warren knows how to argue.

Photographer: Chip Somodevilla/Getty Images

A Senator Doesn't Like It When Companies Lie to Government

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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The U.S. Department of Labor will probably soon finalize a proposed rule requiring brokers who provide retirement advice to put the best interests of their clients ahead of their own interests. It seems reasonable to expect that this will cause some unpleasantness for those brokers. (If it wouldn't, why aren't they doing it already?) And so some brokerage firms have pushed back against the rule, trying to get the Labor Department to revise or abandon it. The way you do this, in our modern administrative state, is that you submit comment letters on the proposed rule, saying that if it's adopted as proposed, it will be a disaster for the retirement-advice industry: Costs will go up, retirees will lose access to investing advice, brokerages will go out of business and the Earth will crash into the sun.

On the other hand, some of those brokerages are also public companies, and their shareholders have questions. Questions like: If this rule is, as expected, adopted, will that be a disaster for the retirement-advice industry? How much will your costs go up? Will you go out of business? Will the Earth crash into the sun? And the way you answer those questions, in our modern age of financial capitalism, is by saying, hush hush, we have an excellent plan to adapt to new regulations, we will be fine, and we'll probably even take market share from our less adaptable competitors.

This is all very standard and not at all unique to the particular controversy over the Labor Department rule ; you can see a similar duality in reactions to all sorts of post-crisis financial regulations. For the most part, nobody wants to be more regulated, so they argue against regulation by playing up the bad consequences of the regulation. But nobody wants to panic their shareholders, either, so they play down those bad consequences when talking to the shareholders.

Is that ... is that dishonest? Is it fraud? I mean, the comments to the regulators and the comments to the shareholders are both contingent predictions about the unknowable future, so you can't really hold anyone responsible if they turn out to be wrong. And nobody actually makes different unconditional quantified falsifiable predictions to the two different audiences -- no one says to the regulators "this rule will definitely cost us $100 million a year no matter what we do in response," while also telling the shareholders "this rule won't affect our bottom line at all no matter what." They make vague, conditional predictions; they stress the problems to the regulators and the solutions to the shareholders.

Still it is at least a little bit embarrassing to see the predictions side by side. For instance:

In July 2015, Dennis Glass, the president and CEO of Lincoln National said in his comment letter that the proposed rule was "immensely burdensome" and "extremely intrusive," and would be "so burdensome and unworkable that financial advisors and firms will not be able to use it."; while two months earlier, Mr. Glass told investors that he didn't "see [the proposed rule] as a significant hurdle for continuing to grow that business."

None of those are unconditional quantified falsifiable predictions; they are just adjectives. But the tone is different, sure. Or:

In July 2015, the president of Jackson National Life Insurance Company said in his DOL comment letter that the proposed rule would "be very difficult, if not impossible for financial professional and firms to comply" with; then, in August 2015, the president of Jackson's parent company told investors that a similar rule in the United Kingdom actually led to an increase in retail sales and that the company was positioned to "build whatever product is appropriate under that set and adapt faster and more effectively than competitors."

Again "very difficult, if not impossible" and "adapt faster and more effectively than competitors" do not directly contradict each other, but, sure, the semantic overlap is narrow.

Those quotes come from a letter that Senator Elizabeth Warren sent to Securities and Exchange Commission Chairman Mary Jo White today. (Here is her press release.) Warren -- here, and generally -- takes a somewhat broader and less humorous view of what is fraud than I do, and she thinks those contradictions might be fraud :

Both sets of industry claims - that the proposed rule will harm them and their business model, and that the proposed rule will not harm them and their business model - cannot possibly be true. And if one these public statements is materially false, it would appear to violate long-standing interpretations of our securities laws.

So she has asked White, as the head securities regulator, to take a look.

Now obviously one part of what Warren is doing here is embarrassing the brokerages by putting their positive and negative comments side by side in a very public way. And that's great! There are few rhetorical moves that are more effective than refuting an opponent with his own words. Page 2 of her letter -- with all the quotes -- is a delight, and a model for how people should argue about financial regulation.

But the other part of what Warren is doing -- the stated purpose of her letter to White -- is trying to enlist the power of a securities regulator to punish people who have disagreed with her on a policy matter. That is much less great! That is, I would go so far as to say, Not a Good Look.

On Page 1 of her letter, Warren writes: "Corporate interests have become accustomed to saying whatever they want about Washington policy debates, with little accountability when their predictions prove to be inaccurate." You know who else has become accustomed to saying whatever they want about Washington policy debates, with little accountability when their predictions prove to be inaccurate? Every single person who has ever had any involvement in Washington policy debates. As I have mentioned before, the very First Amendment to the U.S. Constitution protects every citizen's right to lie about policy debates, and our politicians and political candidates take advantage of that protection with gleeful gusto.  Numerous columnists and pundits are actually paid to say exactly what they want about Washington policy debates, with famously little accountability for inaccuracy. I could say whatever dumb thing I want about the Labor Department's fiduciary rule in this column, and Mary Jo White could do nothing to stop me.  Donald Trump is literally running for president right now.

This ... has its bad points. But on the other hand, it would also be very bad if the government -- in the form of the unelected head of a quasi-independent regulatory commission -- could punish citizens for saying wrong things in the course of policy debates. For one thing, it might lead to a form of debate by intimidation, in which instead of refuting her opponent's arguments on the merits, a powerful senator could accuse those opponents of lying, and refer them to the regulatory commission for punishment. 

But, as I have also mentioned before, public corporations are different from you and me and Elizabeth Warren and Donald Trump. They have shareholders, and when they communicate with those shareholders, they are subject to the securities laws, and the securities laws take a notably dim view of lying about matters that are material to shareholders. And lots of matters of public policy, it turns out, are material to shareholders. 

And so, in a world of dysfunctional government and pervasive financial capitalism, more and more of our politics is contested in the form of securities regulation. Disagreements about climate change and gun control have become matters of securities law; problems like income inequality and blood diamonds have been addressed through securities-law disclosure requirements. Volkswagen's cheating on emissions tests might somehow be bank fraud. At least Warren's fight here is, more or less, actually about securities regulation: The proposed Department of Labor rule, after all, regulates the selling of investments, so there is at least some vague subject-matter appropriateness in using the securities laws to fight misstatements about that rule.

But there is something weird about a politics that works this way. Certainly it is alarming that politicians can use the securities laws to intimidate and punish people who disagree with them, not for a substantive violation of the law, but specifically for their disagreement. Warren isn't going after Lincoln National for cheating retirees, and New York Attorney General Eric Schneiderman isn't going after Exxon Mobil for polluting. They are going after those companies for their speech, because it is speech that Warren and Schneiderman think is wrong.  

More than that, though, the, um, securitization of American law undermines respect for the law. The law should make sense; it should address itself to the actual problems that we want to solve. If people do bad things, they should be punished for doing those bad things, not for lying about them to shareholders.  Trying to fit unrelated violations and disagreements into the securities laws turns the law into a game, a puzzle; prosecutors and politicians compete to see who can be most creative in applying securities law to surprising issues. But creativity and surprise are not entirely attractive features in law enforcement. When the government treats the law as a pliable instrument to be used creatively, it tends to encourage citizens to treat it the same way.

Most of all, I find all of this so weird because of how it elevates finance. When Eric Schneiderman goes after Exxon for disclosure violations, or when the Justice Department investigates Volkswagen for bank fraud, they imply that we are not entitled to be protected from pollution as citizens, or as humans. When Elizabeth Warren refers Lincoln National to the SEC, she implies that we are not entitled to be told the truth as citizens. (Which: is true!) Rather, in each case, we are only entitled to be protected from lies as shareholders. The great harm of pollution, or of political dishonesty, is that it might lower the share prices of the companies we own. Our government's duty to its citizens is mediated by their ownership of our public companies. As a vision of government, it is pretty unattractive.

  1. Not that it matters, but if you care at all, I have a sort of weakly held position in favor of the rule, which I've discussed here and here and here and here. I kind of want someone to talk me into opposing it, because that position seems more amusing, and because I find many of the arguments in favor of the rule sort of simplistic and over-moralizing. But so far I find most of the arguments against it even more unconvincing.

    That said, I tend to think that the rule's critics are right that it will, at the margins, drive small investors away from getting retirement advice. (Because it will make it harder to charge hidden fees and kickbacks, and once the costs are disclosed, small investors may not want to pay them.) I do not myself place much value on retirement advice; I invest my own money, mostly in index funds, and don't do much with it. I'd be fine with a robo-adviser, or honestly a mattress. But I hesitate to generalize from my experience. Perhaps a real need for retirement advice will go unmet once retirement advisers can't charge hidden fees. But meeting that need through trickery just seems so unsavory.

  2. The other quotes are, I think, even less self-contradictory, but here they are:

    In July 2015, the president and CEO of Transamerica' s Investment and Retirement Division said in a comment letter that the proposed rule was "unworkable"; then, a month later, the president of Transamerica's parent company told investors that the company had "shown ... flexibility and ... expect[ed], with that flexibility, [to] remain very strongly positioned in a market that is providing products that millions of customers in the U.S. continue to need."

    In July 2015, Prudential Financial's Executive Vice President and General Counsel wrote in a comment letter that some of the proposed rule's provisions posed a "significant challenge" that "will significantly increase" the firm's servicing expenses; that same month, another Prudential Financial official told investors that the proposed rule would not stop the company from "mak[ing] these offerings available on terms that work for everybody."

  3. Not that it matters, but if you care at all, I think she is plainly wrong, at least on the strength of the vague and qualified statements that she quoted (which are presumably the best ones she found). But even if these specific statements don't by themselves violate the securities laws, that doesn't mean that she is wrong to call for an investigation: They certainly suggest that the executives have been saying different things to different audiences, and perhaps the SEC could dig up some starker, more actionable contradictions.

  4. Warren herself has even stronger protections: As a sitting senator, the Constitution (Article I, Section 6) protects her from even being questioned about what she says about policy debates. Sort of:

    The Senators and Representatives shall receive a compensation for their services, to be ascertained by law, and paid out of the treasury of the United States. They shall in all cases, except treason, felony and breach of the peace, be privileged from arrest during their attendance at the session of their respective Houses, and in going to and returning from the same; and for any speech or debate in either House, they shall not be questioned in any other place.

  5. Not legal advice, to me or anyone else. Not investment advice either. Which reminds me! One amazing thing about the proposed Labor Department fiduciary rule is that it might actually restrict what pundits are allowed to say publicly about stocks. John Berlau wrote about this at Forbes in February, discussing financial radio show host Dave Ramsey as well as people like Jim Cramer and Suze Orman:

    “Under the proposed regulation, investment advice from a radio host to a caller regarding the caller’s own investment issues would appear to be fiduciary advice if the advice addresses specific investments,” Mason said in an email. It doesn’t matter that Ramsey and other hosts aren’t compensated by listeners, he adds, as the DOL rule explicitly covers those who give investment advice and receive compensation “from any source.” Mason agrees with Markey that the compensation Ramsey receives from radio stations that carry his show and from book sales are enough to define Ramsey as a “fiduciary” under the rule.

    Though the rule does contain an exemption for “recommendations made to the general public,” this wouldn’t protect Ramsey and other radio and television personalities if they gave specific answers to callers or audience members, argue both Mason and Markey.

    I should say that Helaine Olen disagrees, and in any case I'd be surprised to see the rule enforced against pundits even if it technically could be. Fortunately I never give any sort of advice to anyone, so I should be safe. But that is again, not any sort of advice to me or anyone else.

  6. Or even when they communicate with someone else, but where the shareholders can hear them. Part of Warren's argument is that, even if the brokerages' statements to shareholders (that things will be fine) are accurate, their statements to regulators (that things won't be fine) could be securities fraud, because shareholders can read those (public) statements and be misled by them.

  7. Similarly, consider yesterday's Wall Street Journal story about the Financial Crisis Inquiry Commission's recommendations that the Justice Department consider criminal charges against various senior bankers for fraud relating to the global financial crisis. You might say: Aha! Finally, someone who cared about justice, who wanted to punish the people whose fraud caused the crisis. But those referrals weren't that, not at all. Rather they were all about securities fraud, and not the kind where you lie to investors about what's in mortgage-backed securities. Rather, they were about kind of fraud where people (allegedly) weren't honest enough with shareholders about how bad their companies' exposures were. E.g.:

    Former Chief Executive Stanley O’Neal and former finance chief Jeffrey Edwards may have violated federal securities laws by making misleading representations to investors about the firm’s exposure to holdings related to mortgages and the value of those positions, the panel said. The panel said both men may have made misstatements on earnings calls in 2007.

    Look, misstatements to Merrill Lynch shareholders didn't cause the financial crisis. By the time these alleged misstatements happened, the problems were already enormous. (That's what makes the misstatements material!) That doesn't mean that they were OK, or that the executives shouldn't have been punished, or whatever. It just means that regulating everything based on disclosure to shareholders doesn't get to the heart of the issue; it focuses you on secondary effects rather than the real misconduct. As pseudonymous financial tweeter "modest proposal" put it:

    Everyone is bloodthirsty for heads to roll after the GFC and the answer is jail people on misleading statements made on earnings calls? It's not that Citi didn't alert the world to the $55B in CDO exposures, it's that they may have waited a month after they found out. Would the GFC still have happened if Citi or Merrill or AIG had been honest a bit quicker? Of course.

  8. You may not care because you agree with Warren and Schneiderman about the specific speech. But of course public companies speak out on a range of topics, and on some of those topics they tend to be a progressive force. Consider the companies speaking out against North Carolina's anti-anti-discrimination law. Would you want an intrepid North Carolina prosecutor to argue that their claim that "such laws are bad for our employees and bad for business" is factually wrong, and bring securities fraud charges against them?

  9. As I said about Volkswagen:

    Obviously Volkswagen's intention wasn't to defraud lenders, and that was nowhere near the main harm that it did. The harm to auto lenders is a weird tangent, a minor third-order effect that we are only talking about because it gives prosecutors more jurisdiction and more power. That's not how the law should work! The law should make sense! If you lie to customers in a way that harms them and damages the environment, you should be punished for that. You shouldn't be punished for reducing the credit quality of those customers' car loans. I know that this has been a minority view ever since Al Capone was sent away for tax fraud, but it seems to me that Volkswagen's essential problem was that it treated the law -- the emissions-testing regime -- as a game to be played, a puzzle to be solved as aggressively as possible, rather than a moral obligation. The Justice Department does too.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net