FINANCIAL LIFE | WINTER 2009/2010 EFFECTWill Regulation Save Us?
by Jean WolfeCurrently we are all experiencing the immensely challenging economic and investment climate brought about by mismanaged risk, excessive greed, and stupid economic policy. It was a combination of circumstances that no one wants to see repeated. Investors and financial consumers are asking, “What do we do now?” and “Who do we trust?” Many ask if the government can provide the safety nets and boundaries we need to rebuild confidence. Currently, Congress is in the final stages of reviewing and fine-tuning President Obama’s financial regulatory reform for presentation as a final bill in the coming weeks.
From my perspective as a professional advisor, the scrutiny and regulation of our industry has never been as challenging as it has in the past 10 years. After 9/11, the Patriot Act introduced rules to address money laundering and the review and registration of clients. We also witnessed a host of regulations that accompanied the passage of the Sarbanes-Oxley Act. But unfortunately, even with the many regulatory additions, 2008 gave us more financial product disasters (credit default swaps, mortgages), misleading packaging (target date funds, hedge funds), and blatant fraud (Bernard Madoff and others). Combine these with the large market value losses in most stocks and even more notable—bonds—and if you weren’t skeptical as an investor in early 2008, you probably are in late 2009.
Although the global recession and extraordinary banking crisis reduced the value of many investments, many are already recovering as Congress considers substantial reform in a new set of regulatory standards. President Obama’s plan will attempt to address several major issues. It will attempt to provide the government with the tools it needs to manage financial crises and to improve international regulatory standards and cooperation. The plan will also address the supervision of financial firms, the regulation of financial markets, and the protection of consumers and investors.
Many of these elements will affect us indirectly, but the changes regarding the protection of consumers and investors will have a notable impact on our daily financial lives.
The changes regarding the protection of consumers and investors will have a notable impact on our daily
financial lives.
The first area of consumer/investor reform will probably be the creation of a new consumer financial protection agency with far-reaching jurisdiction across a variety of financial service providers. For most practitioners, this seems like an excellent idea to make sure rules and approaches to investor and client management follow a similar path of oversight. In the past, there have been special rules for insurance, banking, and brokerage. The change should bring similar rules of engagement to all areas.
The second set of consumer/investor protection reforms is aimed at encouraging transparency, simplicity, fairness, and access to financial services (lending, banking, etc.). For instance, greater simplicity in financial products should make it easier for consumers to understand their investment risks. Improved credit monitoring may result in less access in some cases, but it may also prevent consumers from being taken advantage of. The greater emphasis on simplicity in general, whether in mortgage documentation, credit applications, or investment strategies, should be a noticeable change.
The third focus area intends to strengthen investor protection. Expanding the authority of the Securities and Exchange Commission (SEC) should help promote greater transparency in investor disclosures. The SEC will also encourage a better understanding of the fiduciary duty of investment advisors and broker/dealers providing investment advice. More support and protection for whistle blowers and non-binding shareholder votes on executive pay plans may be addressed as well.
The fourth and fifth areas focus on greater coordination of federal and state consumer protection agencies. Currently, states have different rules governing insurance and other financial disclosure requirements. The reform bill will encourage one simple and high standard across all state lines. It may take many years to achieve, but eventually, moving to a new state would no longer involve different documentation and compliance requirements.
Unfortunately this new law may also bring greater piles of documentation and consumer/investor validation. Even so, if this bill becomes law, I can only support it. The Great Depression prompted the first attempt at regulation in 1935 and helped stabilize and rebuild the credibility of our financial system. I hope this reform does as well.
The information in this article should not be taken as advice, as each person’s situation is different. Tax laws are subject to change. Please consult with a professional regarding your specific circumstances. Investments entail risk, including potential loss of principal. Past performance is no guarantee of future results. This material may not be republished in any format without prior consent.