The Only Crisis is Lack of Accountability

In my State of the Union wrap-up, I mentioned that one of the things which most annoyed me was Bush’s ability, in pitching his Social Security reform proposal, to make claims about the market that a licensed financial representative would not be able to make (nor would any responsible professional think to make). The NASD has specific rules and regulations governing financial reps’ communications with the public, and tonight, I looked them up, to see exactly what the NASD would have to say about Bush’s claims.

According to rule 2210-(a)-(5), any licensed financial representative who communicates with the public through a public appearance, defined as “participation in a seminar, forum (including an interactive electronic forum), radio or television interview, or other public appearance or public speaking activity,” is subject to the rules governing communications with the public. I think a nationally televised address before Congress and the whole of the American electorate applies.

The applicable standards regarding such communications include the following (2210-(d)-(1)-(A, B and D)):

All member communications with the public shall be based on principles of fair dealing and good faith, must be fair and balanced, and must provide a sound basis for evaluating the facts in regard to any particular security or type of security, industry, or service. No member may omit any material fact or qualification if the omission, in the light of the context of the material presented, would cause the communications to be misleading.

I don’t think any elucidation on how that applies is really necessary. (I wonder if Fox News knows that the NASD is using “Fair and Balanced” though? Hope Fox doesn’t sue them.)

No member may make any false, exaggerated, unwarranted or misleading statement or claim in any communication with the public. No member may publish, circulate or distribute any public communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.

In Bush’s address, he said, “And best of all, the money in the account is yours, and the government can never take it away.” While technically true, if he is referring strictly to the capital gains earned in the account over and above 3% (which is not explicitly stated), as Demosthenes pointed out in his earlier post, the rest of it gets deducted from the government-issued benefit. (And, by the way, if you have losses, you pay them, not the government.) Misleading at best.

He also said:

The goal here is greater security in retirement, so we will set careful guidelines for personal accounts. We will make sure the money can only go into a conservative mix of bonds and stock funds.

Well, that’s nice, but even exclusively conservative investing does not necessarily guarantee greater security. A look at the Dow Jones Industrial Average, a composite index of the top 30 most conservative US stocks, from 9/5/01 to 9/21/01, shows a more than 15% drop in the two weeks surrounding 9/11. Even a conservative mix is subject to big market swings.

Communications with the public may not predict or project performance, imply that past performance will recur or make any exaggerated or unwarranted claim, opinion or forecast. A hypothetical illustration of mathematical principles is permitted, provided that it does not predict or project the performance of an investment or investment strategy.

Here comes the real fumble. In his address, Bush stated:

Your money will grow, over time, at a greater rate than anything the current system can deliver - and your account will provide money for retirement over and above the check you will receive from Social Security.

No one, but no one, can accurately predict market performance. For Bush to assert that private accounts will grow at a greater rate than what the current system can deliver is patently absurd, unless when he speaks to Jesus, Jesus speaks back…and gives him stock tips. To wit: another look at the Dow Jones Industrial Average, this time from 1/1/70 to 1/1/82, reveals an almost negligible return over that 11-year span, demonstrating that no one can (or should) make guarantees that investment in personal accounts will outperform treasuries (in which Social Security funds are currently invested).

Clearly, if Bush were a licensed financial advisor, he would have been in violation of the NASD rules. Instead he gets away on a technicality—he’s not a financial professional presenting a potential investment to a client; he’s just the President of the United States, trying to convince the American public to buy into his radical plan for their collective financial future.