Financial advisors and investment managers operate under a variety of different business models and job titles. Some advisors are paid commissions based on product sales, and some charge flat fees for paid advice. Cardinal Point utilizes an “assets under management” (AUM) fee structure where our fees vary based on the amount of assets we are managing. It is a graduated fee schedule, so the more assets we are managing the less the effective fee rate will be. We also operate on a “fee-based” basis which means we do not accept commissions or any other type of outside compensation.
Summary and Takeaways
Financial advisors and stock brokers are required by law to exercise fiduciary responsibility on behalf of their clients. If they violate that duty or engage in insider trading, there are severe consequences. Shouldn’t lawmakers with decision-making authority and access to privileged non-public information be held to the same or even a higher standard? Banning them from investing in individual stocks would remove potential conflicts of interest and restore ethical integrity and fairness.
- U.S. lawmakers are required to publicly disclose any stock trade made by them, their spouses, or their dependent children within 45 days of the transaction.
- But 57 members of Congress violated the rule (the STOCK Act) in 2021 alone.
- The average penalty for such illicit conduct is a mere $200, and even that paltry sum is often completely waived.
- Canadian lawmakers must abide by the much stronger Conflict of Interest Act prohibiting federal reporting public office holders (RPOHs) from acquiring and holding controlled assets during the term of their office.
- Shouldn’t legislators operate as fiduciaries for their constituents, who are the taxpayers funding governments and paying the salaries of public officials?
- Strict regulations prohibiting insider trading would help restore public trust – and should apply to all public officials with decision-making authority.
The reason we choose to operate on a fee-based basis is because we feel it is important to function as a fiduciary for our clients. We always want to put our clients’ interests before our own, and one of the best ways to do that is to remove as many conflicts of interest as possible. Being paid commissions based on which product you sell or which investment vehicle you invest your clients in is a huge conflict of interest. This article is not meant to be political, and we are not in favor of every new regulation that is proposed, but financial services is one area where we do favor more regulation so that every person holding themselves out as a financial advisor or investment manager is required to uphold a fiduciary standard.
Legislators, particularly ones on committees, have advanced access to nonpublic and often classified information that will inevitably affect the values of public corporations. Sometimes this is in the form of contracts that are to be awarded to contractors or worldwide pandemics that have not yet been announced. Lawmakers from both parties have been accused of insider trading, either themselves or through their spouses or family members.
We also believe legislators should strive to operate as fiduciaries for their constituents. In the U.S., new bills are expected to be introduced in Congress to ban legislators from trading individual stocks. This is not to say they cannot invest in the stock market; they can still invest in pooled investment funds like mutual funds (MFs) and exchange traded funds (ETFs). There is still the possibility of profiting from classified and nonpublic information through MFs and ETFs as many concentrate on specific sectors or geographical regions, allowing investors to place sector bets.
For example, if a senator knew about the Coronavirus pandemic before it was officially announced, they could make sector bets by going long (buying) the tech sector and shorting (selling) the hospitality sector. Similarly, if a senator became aware that a specific automaker would be awarded a large government contract to replace all government vehicles, that senator could profit immensely if he could buy that specific stock before the information was made public. In contrast, it would be much more difficult for them to profit from MFs or ETFs because they hold many stocks and would make it difficult to target that specific company. The senator could still purchase the mutual fund or ETF that had the highest relative holding of that company, but it would require much more work to research the holdings of all applicable MFs and ETFs, and there may be other holdings within each fund that are undesirable or mitigate the potential profits.
Banning legislators from investing in individual stocks will not prevent all insider trading, but it will remove a potential conflict of interest. Currently, U.S. lawmakers are required to comply with the Stop Trading on Congressional Knowledge Act of 2012. The STOCK Act was passed to combat congressional insider trading. A key provision of the law mandates lawmakers to publicly disclose any stock trade made by themselves, a spouse, or a dependent child within 45 days of the transaction.
In 2021, 57 members of Congress violated the STOCK Act. There have been similar allegations of trading on material nonpublic information made against various Federal Reserve Board members. They are also setting policy that will have a significant impact on stocks. Likewise, governors, mayors, state legislators, and city council members may also have significant power over local policy, government spending, lockdown regulations, and contract awards. Regulations regarding insider trading and market integrity should apply to all public officials with decision-making authority.
Ironically, employees of Cardinal Point have a requirement to obtain approval from a compliance officer before any trades are placed on outside managed accounts. We do not have access to nonpublic information, nor do we have the power to influence policy that could affect the stock of companies we trade in, so we do not have any sympathy for legislators who fail to report their trades before the deadline. In fact, we believe regulations on lawmakers should be stricter to ensure they are not unfairly influencing markets.
Canada has legislation in place that provides more direction on how to prevent insider trading by lawmakers. The Conflict of Interest Act prohibits federal reporting public office holders (RPOHs) from acquiring and holding controlled assets during the term of their office. Within 120 days of becoming a public office holder, a federal RPOH must divest his or her controlled assets by either selling them in an arm’s-length transaction or placing them in a blind trust.
Federal RPOHs include:
- The Prime Minister
- Cabinet Ministers
- Ministers of State
- Parliamentary Secretaries
- Full-time and salaried Cabinet appointees, including deputy ministers and various heads of agencies
- Ministerial advisers and
- Ministerial staff who work more than 15 hours per week
Controlled assets are those assets whose value could be directly or indirectly affected by government decisions or policy. They include, but are not limited to:
- Publicly traded securities
- Self-administered RRSPs and RESPs
- RIFFS composed of at least one asset that would be considered controlled if held outside the plan or fund
- Commodities, futures, and foreign currencies and
- Stock options, warrants and rights
It is important to note that MPs and their staffs are not federal RPOHs and, as such, they are not obligated under the Conflict of Interest Act to divest their financial holdings by selling them or placing them in a blind trust. The Conflict of Interest Code for Members of the House of Commons also does not have a divestment requirement for MPs.
However, if the Conflict of Interest Commissioner is of the opinion that an MP’s holding in a publicly traded company is so significant that it may affect their obligations under the Code, the Member of Parliament can remain in compliance with the Code by placing these securities in a blind trust.
MPs may also request an opinion from the federal Conflict of Interest Commissioner regarding their obligations under the Code, including as they relate to their investments. Reports of abuse are not as common in Canada as they are in the U.S.
Members of Congress are some of the most powerful and influential people in the world. Those who swear an oath to serve the electorate should be held to a higher standard. Banning congressional stock trades is one way to ensure fairness and uphold market integrity. Sufficient oversight should be applied to ensure lawmakers are abiding by the laws they pass, and increased penalties should be assessed to those lawmakers who break the law. The average fee for members of congress who fail to comply with the STOCK Act is only $200; often it is waived completely. As fee-based fiduciary financial planners and wealth managers, we are in favor of any law or regulation that will help prevent market manipulation and fraud.
Cardinal Point Wealth Management and Cardinal Point Capital Management are industry leaders in Canada-U.S. wealth management services. We offer comprehensive financial planning, tax planning, and individualized investment management services for high-net- worth individuals and families. Contact us today to discuss how cross-border tax planning and wealth management can be beneficial for you and your loved ones.