The Anti-State Blog

Have you ever tried to understand even one area of federal legislation? It is impossible. The rules are often vague and contradictory. For example, consider the regulation of investment advisors. If you want to learn about it, visit John Stark’s website–he is a top guy at the SEC (securities and exchange  commission).

The laws are complicated and it is often difficult to understand when a certain person is covered as an ‘investment advisor’. But the key question is why we need these laws in the first place? I propose that almost every single person or corporation prosecuted by the SEC under these laws could have been successfully prosecuted under much simpler laws. The others did nothing unethical or harmful and should not have been prosecuted.

For some concrete examples, I point you to the website of the Missouri State equivalent of the SEC.  Peruse their successful consent orders. In the vast majority of the cases, whether or not securities laws were violated, outright fraud was committed, with the tortfeasors (wrong-doers, in legal speak) lying about what they would do with the money, lying about their credentials, or lying about the risks or the likelihood of gains of their investment proposals. In some cases the wrong-doing involved simple theft of a client’s assets. In all of these cases (probably 70% of all enforcement actions by the SEC and its state equivalents), the wrong-doers could have easily been punished in a libertarian society with only one law: “do not harm another’s property”. Theft violates this, as does fraud, because it is implicit theft.

What about the other cases? 20% seem to involve investment advisors or brokers having violated the requirement that (in the case of brokers) they act in a suitable manner with clients’ funds, or that (in the case of investment advisors) they act in a fiduciary manner with clients funds (acting in the best interest of the client). In a libertarian world these would also be illegal. Why? They break the contract between a client and investment advisor or broker. Even if no actual contract is signed, there is an implied contract–no one would entrust their money with someone if they did not want that person to act in their own best interest. So there exists an implied fiduciary duty, for a broker or advisor to act in the client’s best interest. Because current law does not require brokers to act as fiduciaries, repeal of the law would actually result in  greater protection for investors.

Perhaps you have a problem with an implied contract? It can be difficult for people who are not familiar with the law, but implied contracts are quite prevalent in the common law. For example, if I own an apartment building and rent out an apartment, even if the lease says nothing (or if there is no lease), there is an implied guarantee of habitability and an implied guarantee of peace and quiet enjoyment. This is because no one would logically enter a contract without such guarantees, so they are presumed in all such contracts. This same logic should apply to investment advisors.

And what of the last 10% of SEC and state security regulators’ enforcement actions? Simply put, they are bogus and unethical. In these cases ‘investment advisors’ are prosecuted solely for failing to ‘register’ or follow a variety of other picky regulations. In other words, there are no investors harmed. The SEC has even gone so far as to try to impinge upon the 1st amendment right to free speech with respect to stocks–luckily the Supreme Court has not yet given in to the SEC in all respects (see, for example, Lowe v. SEC).