Federal Financial Regulators to Ban Misleading Metaphors to Protect Investors
A memo was issued today by the financial consultancy the Horsesmouth warning that the Securities and Exchange Commission and the Financial Industry Regulatory Authority are cracking down on the use of metaphors when advisors talk to clients:
SEC, FINRA Ban Investment Metaphors By Sean Ball
Government regulators announced today that financial professionals would be barred from using metaphors when speaking about the markets and investments.
In a joint release, the SEC and FINRA said new neuroscience research demonstrated conclusively that metaphors are actual things that exist inside people's brains.
"We can't have advisors just putting things inside people's brains," said SEC chair Mary Schapiro.
Under the proposed regulations, expected to take effect after a short comment period, advisors will have to immediately stop using a wide range of metaphors, including the long-standing favorite references to "bull" and "bear" markets.
Schapiro said the SEC and FINRA convened an unusual joint briefing with neuroscientists from Stanford and MIT to review recent research based on a new imaging technology, nanomagnetic resonance imaging (nMRI).
Scientists explained that images of the brain now display actual locations where specific thoughts and ideas exists, and that repeated use of certain words, phrases, and concepts literally grow and strengthen these regions of the brain.
"Metaphors are the equivalent of untested food additives," said Schapiro.
"It's clear from the research that any discussion of the market and its direction is totally metaphorical. The market is not a thing. We've got to stop talking about it vaulting, slipping, inching, bouncing, pushing, resisting, rebounding, rallying, and clawing. This is a sober business, not a Las Vegas cage fight."
She also said markets cannot "flirt" with anything.
Schapiro said FINRA will take the lead in offering guidance to advisors on how best to implement the new set of rules, called the CleanMind regs.
FINRA is expected to hire 50,000 new compliance officers who will act as "metaphor minders" and will spend their days sitting in meetings with advisors and their clients to ensure metaphor-less conversations.
"It's still fine for advisors to shoot the breeze with clients," Schapiro said. "But when it comes to actually discussing the markets and investments, they'll need to clean up their act. The metaphor minders will be there to help them bite the bullet on these poisonous phrases. It's a bitter pill but necessary."
Metaphor ban means far-reaching changes
Schapiro said the metaphor research has clear implications for the way markets operate, and especially their influence on pricing.
Most metaphors have a built-in bias in favor of a future expectation that prices will continue to go up. In order to dampen "expectation bias" in the investment process, Schapiro said she expected new market pricing reforms as part of the metaphor clean-up program.
Investments will be priced only once a day, at 9:30 a.m., and their prices will be totally random, thereby erasing price-rising market metaphors such as "momentum," "demand," "strength," and "weakness."
"Research is clear now. There really is no single 'market' out there. It's really a collection of totally separate companies with few actual connections. So the whole 'market' metaphor must go, and with it we'll lose other nasty metaphors such as 'crash,' 'swings,' and 'dips.'That's a good thing."
She added, "The only real 'invisible hand of the market' is what goes on underneath the anchor desk at CNBC."
Schapiro said that even though the metaphor-cleansing program is aimed at stemming undue influence over investors, there is a concern among FINRA officials that some advisors may also need help.
She pointed to "modern portfolio theory" as one deeply ingrained, problematic metaphor.
"You know, I'm not sure what's 'modern' about it, and as far as theories go, well, the flat Earth was a theory, too. So the compliance metaphor minders will certainly be looking at that one."
And you thought that Dodd-Frank was onerous! Enjoy your April lst.
Hat tip to Pamela Friedman.