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Library Home Street Smart Report Home BEING STREET SMART by Sy Harding WALL STREET VERSUS MAIN STREET! June 19, 2009. The
Administration has provided Congress with a proposed overhaul of financial
industry regulations that is sweeping in its coverage to say the least, the most
serious attempt to protect investors since the 1930's, but guaranteed to have
Wall Street and its powerful friends taking up arms against it. And
there's more than enough in it to have Wall Street fighting back - much as they
did with the reforms proposed in the 1930's, after the 1929 crash. (Before
the Securities and Exchange Act was finally passed in 1934, Sam Rayburn,
Chairman of the Interstate Commerce Committee at the time, and as such heavily
involved in creation of the bill, said that Richard Whitney, president of the
NYSE at the time, mounted “the most powerful lobbying effort ever organized
against a bill.”) The bill did pass, but in a watered-down version, which will
no doubt also be the outcome this time. But
if only part of the proposed overhaul survives to become law, it could be the
most important improvements in investor protection ever. Just
to touch on a few of the many proposed changes: Hedge
funds, private-equity funds, and venture-capital firms would be required to
register with the SEC, keep SEC approved records, and make periodic disclosure
reports in much the same manner that has been required of mutual funds and
money-management firms for decades. The disclosures would include their debt
levels and the amount of leverage they are employing in their strategies. It
would subject any financial firm large enough to be a risk to the financial
system to a greater degree of regulatory oversight than others, including
periodic 'stress tests'. It
would replace the Office of Thrift Supervision with a National Bank Supervisory
Agency that would have the power to oversee Federal Reserve branch banks and
U.S. branches of foreign banks. It
would bring markets for over-the-counter derivatives under the regulatory
umbrella, more seriously regulate derivatives dealers, and force derivative
trades to be executed in public view, such as on exchanges. It would also
provide controls to protect "unsophisticated parties" from investing
in derivatives "inappropriately". A
new Consumer Financial Protection Agency would be created, with authority over
consumer-oriented financial products, which are now only loosely regulated,
including mortgages and credit-card offerings. The new agency would also have
"a leading role" in informing and educating consumers, to make sure
they are aware of the types of risks and pitfalls in various financial areas. Brokers
and non-registered financial planners providing investment recommendations to
customers would be held to the same 'fiduciary' standards as registered
money-managers and financial advisors. (A fiduciary is required to place his
client's interests ahead of his own, a standard not currently required of
brokers unless they are also registered with the SEC as a financial advisor).
That would likely result in changes in the types of products offered by
brokerage firms and mutual funds, as well as the methods by which brokers and
commission-based financial planners are compensated. It would be difficult for
them to put a client in a front-end load mutual fund or annuity for which they
receive part of the load as a sales commission, if similar and suitable no-load
funds and annuities are available at lower cost for the client. It would also be
more difficult to 'churn' client accounts to produce more commission income. The
penalties are potentially severe. A fiduciary who violates fiduciary duties when
involved with the assets of others can be sued not only for any financial
damages, but also punitive damages. One
section of the proposals likely to run into particularly serious opposition in
Congress is the proposed broad expansion of the authority of the Federal
Reserve. The agency that could have done the most to prevent the stock market
bubble in the late 1990's (then Federal Reserve Chairman Greenspan even coining
the phrase "irrational exuberance" to describe what was going on, but
doing nothing about it), and the housing bubble in 2006, would be given
substantial additional responsibilities to control the 'too big to fail'
financial institutions? But
don't expect regulatory reform of the financial industry anytime soon anyway, or
for the final bill to look anything like the proposals. There will be months of
lobbying, angry debates, compromises, and concessions. Then we'll see what comes
out the other end of the process. However,
given the mood of the country toward Wall Street and the financial industry, and
the serious damage done to so many, some good things could eventually come out
of the proposals that will provide more investor protection in the future.
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