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The SEC Needs to Realign Priorities

How will new financial regulations wending their way through Congress affect individual retail financial advisors and broker/dealers, independent or otherwise?

How will new financial regulations wending their way through Congress affect individual retail financial advisors and broker/dealers, independent or otherwise? Will any new regulations affect registered investment advisors (RIAs) and their investment advisor reps (IARs)?

Mary Schapiro's SEC seems to want anyone calling himself a financial advisor to adhere to the fiduciary standard that IARs of RIAs must follow (as per the Investment Advisers Act of 1940). Also, Schapiro's SEC has indicated that it would like 12(b)-1 fees to go away. In short, the entire financial regulatory system could be overhauled — and the structure of multibillion-dollar companies with it. The SEC and Congress are undoubtedly under siege by industry lobbyists right now. After all, a fiduciary status might really upset the present status quo at b/ds, especially, since many engage in non-fiduciary businesses, such as investment banking, proprietary trading and so forth. Whatever happens, one thing is probable: There will likely be a blizzard of new regulations and costs associated with meeting the new regulations. (Or not? Will the industry successfully win exemptions and etc.?)

In short, we should be hearing more from Congress and the SEC about this. There is this blanket of the unknown hanging over the financial system right now. And yet, in late January, the SEC spent precious time by holding an open meeting, telling the companies that it regulates that: While we don't want to “opine” about the existence of global warming, public companies must disclose climate risk to its shareholders and the investing public. How stupid is that, issuing an “interpretive guidance” directive for public companies to help them disclose any legal, um, er, I can't even understand the SEC announcement on this subject. Really. Go read the directive on the SEC's website. I mean, aren't publicly traded companies already required to issue public announcements about “material” events affecting their businesses, such as a big lawsuit, hurricane damage or other material changes to its businesses? Gosh, the SEC sure sounds stupid on this one.

On the same day in late January, the SEC also “reformed” money market funds — to supposedly make them safer for you and me. But, thanks to Schapiro, if your clients' money market funds are threatening to break the buck (as happened in 2008 during the depths of the crisis), the board of the fund may elect to suspend redemptions by investors. Okay, so now the SEC can decide when your client may take his or her money out of an investment? (Think of this as auction-rate-securites rulings in reverse — the ones that SEC made that forced brokerages to disgorge frozen ARS assets to retail investors.)

As a CFP who runs an RIA told me, “This is a big deal.”

Schapiro said in her opening statement, “The new rules will permit the board of a money market fund to halt redemptions if the fund ‘breaks the buck.’ The halting of redemptions will stem the motivation for runs. It also will eliminate the need for a failing fund to sell securities into a potentially de-stabilized market and further drive down prices, which could impact other money market funds holding the same securities. Our rules also will require money market funds to be able to process transactions at prices other than $1.00. This will avoid unnecessary processing delays should a fund break the buck.”

I realize the government regulates everything, including the financial system, and, especially back in the 1930s, did all sorts of things (declaring bank holidays, for example) in the name of the public good. But the entire money market system seems to me to be designed to help so-called “first movers” (which asset class isn't?). After all, big institutions watch carefully, and pull money out quickly if they think a fund will break the buck, leaving the poor hapless retail investors to bear the loss. Once a fund halts redemptions and reopens, you can bet there will be another run.

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