Thursday, January 27, 2011

Broker, Adviser, What's the Difference?

What's the difference? Probably more than you think.

"Investment advisers and stockbrokers should be subject to the same fiduciary standard of conduct -- putting a customer's interests above their own -- rather than the different governance regimes that currently apply to the two groups, the Securities and Exchange Commission recommended," according to a report published in the New York Times's "Dealbook" on Monday, and in an article by Edward Wyatt published Sunday.

You didn't know that there was a different standard? Neither do a lot of people.

As Timothy Noah reported in Slate, the distinction between brokers and investment advisers might have made sense back in the New Deal day when the SEC was created, but these days it's hard to tell the difference. And while "investment advisers" must act in their clients' best interests, "brokers" only have to "make sure that the products that they sell are suitable for their clients", as Wyatt termed it.

So... is the guy who's "managing" your investments a broker or an adviser? I don't know about mine, and you probably don't know about yours. But all of a sudden... it makes a difference, doesn't it?

The SEC's staff, in preparing the recommendation, said that "retail investors" (as Noah put it, that's "suckers like you and me") are "generally not aware" that there are different standards. And why should we be? From our perspective, advisers and brokers basically do the same thing -- tell us where, other than under the mattress, we should put our hardly-earned dollars.

Wyatt noted that the "five S.E.C. commissioners did not vote on whether to adopt the study’s recommendations, but the two Republicans issued a statement criticizing the study, saying it 'fails to adequately justify its recommendation' and 'lacks a basis' to conclude that a uniform standard would enhance investor protection."

I don't know how one would "adequately justify" this recommendation better. There are obviously lots of corporate ethical lapses that bother me, or why would I keep posting to this blog? But the ones that bother me that most, I think, are those that rely on a disconnect between what customers reasonably expect and what the corporation figures it can legally get away with.

And in this case, the disconnect is big enough to drive a fleet of New York City snowplows through it.

Thursday, January 13, 2011

When is a Recall Not a Recall?

When you call it an "audit", of course.

In 2010, I wrote four posts about Johnson & Johnson's problems (most recently, here). At that time, I noted that J&J had issued nine product recalls over the course of the year, and that investment bankers were starting to wonder whether there was a systemic problem at J&J, and consumers were starting to wonder if there was any reason for paying a premium for a branded product.

And here we are, back again, talking about J&J.

Today's New York Times carries an article by Natasha Singer and Reed Abelson reporting on a suit filed by the state of Oregon against a "phantom recall" conducted by McNeil Consumer Healthcare in early 2009.

McNeil apparently "hired outside contractors to buy back vials of Motrin ... because the pills failed to dissolve properly, a problem that could diminish the product's effectiveness."

Note that McNeil did not initiate a public recall, but gave contractors the following instructions: "Do not communicate to store personnel any information about this product. Just purchase all available product. If you are questioned by store personnel, simply advise that you have been asked to perform an audit."

Oregon attorney general John R. Kroger said that the point of the suit is "to send a message to pharmaceutical companies and other companies that make medical products that they have to do proper recalls that give consumers real notice."

McNeil did eventually complete a formal recall of eight-count vials of Motrin in July 2009, after the FDA inquired into the matter. A recall of 24-count vials was announced in February 2010.

I think we are well past the point of saying that there's a quality problem at McNeil. There is clearly a systemic problem, and McNeil has made it clearer than any other division at J&J (as Singer and Abelson note, "McNeil recalled more than 200 million product units last year, including different kinds of Tylenol, Motrin, and Rolaids." Emphasis added.). That's not to say that it's a McNeil problem alone. As the parent company, J&J is responsible for setting the overall standards -- and for seeing to it that subsidiaries consistently meet those standards.

Here's hoping that 2011 will be a quality year.