Monthly Archives: March 2013

NASAA Outlines Legislative Agenda, Announces ”Aggressive Advocacy Agenda”

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The North American Securities Administrators Association (“NASAA”) announced an “aggressive advocacy agenda” calling for affirmative Congressional action to promote investor confidence. 

During a news conference at the National Press Club, NASAA President and Arkansas Securities Commissioner Heath Abshure, and Steve Irwin, NASAA President-elect and Pennsylvania Banking and Securities Commissioner, outlined the following five specific areas in which they will seek Congressional action in the 113th Congress:

1. Promote Sustained Investor Confidence by Ensuring Market Transparency, Enhancing Investor Education, and Imposing Strong Penalties:  Under this category, NASAA cited goals as diverse as regulating hedge funds and high-frequency trading, on the one hand, and protecting seniors, on the other. 

2. Policies Intended to Spur Capital Formation Must Balance the Need to Maintain Investor Protection:  This is essentially to reverse or limit the JOBS Act.

3. Support Strong and Complete Implementation of Investor Protections in the Dodd-Frank Act by the Conclusion of the 113th Congress: The principal focus of this item is to impose a fiduciary standard on broker-dealers.

4. Regulation of Investment Advisers Is an Inherently Public Function That Should Be Performed by Government Regulators, Not Outsourced to an Industry Self-Regulatory Organization: NASAA does not want a FINRA-type SRO for Investment Advisers and it suggests a means to fund the regulation of advisers.

5. State Authority Should Not Be Preempted, and Should Instead Be Expanded:  NASAA suggests that the states should have greater authority to regulate small offerings.

NASAA indicated that it will actively seek legislation in various areas, including legislation to:

  • authorize the SEC’s Office of Compliance Inspections and Examinations to collect user fees from the investment advisers it examines;

  • permit reasonable civil recovery for fraud associated with crowdfunding and other small offerings;

  • strengthen investor protection provisions weakened by the JOBS Act to minimize the Act’s enormous potential for abuse; and

  • empower state regulators to curtail the use of mandatory pre-dispute arbitration clauses in contracts between state-registered investment advisers and their clients.

Lofchie Comment:  If there is a theme to the NASAA agenda, it is “more.”  There should be more power granted to the states, there should be more regulation by more regulators (52 regulators, by NASAA’s reckoning), and the federal government should regulate more vigorously. 

In defense of the NASAA position, I am sure that the federal government does not have enough resources to attend to the protection of all retail investors, particularly those who are the victims of small-scale crimes resolution of which will not generate attention.

In defense of market participants, I don’t know how it is possible to operate a national financial business if one is to be subject to 52 sets of rules in addition to national rules.  At some point, the financial system simply breaks under the weight of the diversity of regulation and the number of regulators, each with its own agenda.  In fact, the financial system is not really able to keep up with the new rules being imposed by the federal government (which are not limited to the rules under Dodd-Frank); it is hard for me to imagine how the system were able to work if each state could regulate without national coordination.

Certainly, it makes sense for there to be an examination of the proper boundaries between federal and state powers, and how those boundaries should apply as to the various parts of the financial industry: securities, banking, futures, swaps, and insurance.  But if the outcome of the examination were that every jurisdiction could go its own way in making rules, there would be a much smaller and weaker national financial system left to regulate. 

Click here to view NASAA’s legislative agenda in full (links externally to NASAA website). 
See also: NASAA’s Executive Summary.

FDIC Chairman Martin Gruenberg’s Remarks to the Annual Washington Conference of the Institute of International Bankers

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FDIC Chairman Martin J. Gruenberg gave a speech at the Institute of International Bankers’ Annual Washington Conference reviewing U.S. and international regulatory efforts to develop a framework governing the orderly resolution of systemically important financial institutions (“SIFIs”), particularly those with extensive cross-border operations.  In terms of progress in the U.S., Chairman Gruenberg stated that the FDIC and Federal Reserve are currently in the process of reviewing the first round of “living wills” submitted by large bank holding companies and foreign banking organizations pursuant to Title I of the Dodd-Frank Act. Chairman Gruenberg then discussed the FDIC’s multilateral work with the Financial Stability Board of the G-20 Countries, as well as bilateral work with certain counterpart jurisdictions. He noted that, as part of this bilateral work, U.S. and U.K. regulators have discovered “a significant commonality” in their basic approach to a SIFI resolution. He summarized this approach as involving taking control of the failing institution at the parent company level, imposing losses on shareholders and creditors, replacing culpable management, and allowing solvent subsidiaries to remain open and operating to minimize disruption to the wider financial system.

Click here to view speech in full (links externally to FDIC website).
See also:  Governor Powell Speech at IIB Annual Conference on Too Big to Fail

IOSCO Publishes Principles of Liquidity Risk Management for Collective Investment Schemes

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The International Organization of Securities Commissions (“IOSCO”) published its final report of guiding principles for managing liquidity risk in a collective investment scheme (“CIS”).  The report suggests ways in which a CIS can create, implement and monitor liquidity policies to ensure that the CIS meets its general redemption obligations. Specifically, the report makes the following recommendations:

  1. When creating a new CIS, its sponsor must be able to demonstrate to its regulator that it can comply with applicable local liquidity rules (if they exist);
  2. Where the CIS intends to invest in a high proportion of illiquid assets, it should be required to construct and implement a more rigorous liquidity management program;
  3. The CIS should set liquidity limits that are proportionate to its redemption policies (e.g., a CIS with daily redemptions should hold fewer illiquid assets than a CIS with monthly redemptions);
  4. Where no local liquidity law exists, the CIS’s redemption policy should be consistent with its investment objectives and approach;
  5. If a CIS intends to use tools to limit redemptions (e.g., gates, lockups, or side letters), how these tools will affect investors must be clearly disclosed in the offering documents;
  6. In performing its liquidity risk management process, the CIS should consider its investment strategy, liquidity profile, and redemption policy on an ongoing basis to determine its effectiveness;
  7. Finally, before investing, particularly into new asset classes, a CIS should consider the liquidity profile of the assets and their effect on the overall liquidity of the CIS.

View report in full here (links externally to IOSCO website).
See also: Press Release.

Comptroller of the Currency Curry’s Speech before IIB Conference on AML

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Comptroller of the Currency Thomas J. Curry gave a speech at the Institute of International Bankers’ Annual Washington Conference discussing the increasing attention that the OCC has paid recently toward operational risk in large banks, including with respect to debt collection practices, trading operations, the Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) compliance, and mortgage servicing. In particular, Comptroller Curry highlighted the operational risk that arises from a failure to maintain adequate BSA and AML compliance programs. By way of example, Comptroller Curry cited several “large, sophisticated banks” that have fallen short of BSA compliance in recent years. He went on to lay out several “areas of concern” for both regulators and banks with respect to AML/BSA compliance:

  • Lack of compliance resources, especially in light of staff and/or resource reductions made after the financial crisis;
  • International activities that some banks have not managed effectively, such as foreign correspondent banking, cross-border funds transfers, bulk crash repatriation, remote deposit capture and embassy banking;
  • Third-party relationships and payment processors;
  • New technologies and evolving payment activities, the compliance risks of which banks may not yet fully understand; and
  • The potential migration of such high-risk activities to smaller banks that may lack the resources and personnel necessary to successfully manage the corresponding risk.

View speech in full here (links externally to OCC website).

Governor Powell Speech at IIB Annual Conference on Too Big to Fail

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Federal Reserve Governor Jerome H. Powell gave a speech at the Institute of International Bankers’ Annual Washington Conference assessing U.S. and global regulatory efforts to end “too big to fail.”  Governor Powell stated that such efforts must involve waging a “two-front war”: First, there must be enhanced regulation to make large financial institution failures much less likely and, second, there must be a credible mechanism to manage the failure of large firms without causing or amplifying a systemic crisis. Governor Powell went on to survey existing efforts on both of these fronts, including the Basel III reforms and the “living wills” process established by the Dodd-Frank Act. He states that such efforts are “generally on the right track,” and that, in his view, the framework of current reforms is promising and “should be given time to work.”

View speech in full here (links externally to Federal Reserve website).

Survey of Buy-Side Market Participants Shows Lack of Enthusiasm for the CFTC’s SEF Proposal

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SIFMA, ISDA and the MFA released a joint survey of buy-side members on the CFTC’s proposed Swap Execution Facility (“SEF”) rule. The rule, as proposed, requires buyers to submit a request for a price quote (RFQ) from a minimum of five sellers. Timothy Cameron, head of SIFMA’s Asset Management Group, stated the CFTC’s proposed rule was too restrictive, removing discretion from asset managers and decreasing liquidity in SEF swaps.

The results of the survey include the following:

  • 84% of respondents indicated that the RFQ rule would result in increased transactions costs;
  • 82% anticipated spread widening;
  • 76% thought the rule would have a negative effect on liquidity;
  • 70% stated they would move trading into different markets; and
  • 68% noted that they would look to trade instruments that are not required to be SEF-traded.

Lofchie Comment:  Two of my (many) complaints against Dodd-Frank are that we are (i) building a market that no one will want to trade in and (ii) the new market will work less well than the old market.  If the great majority of buy-side participants think that the new market will have wider spreads and increased costs, and a majority of them will look to move away from the swaps markets, that means that volume and liquidity will decrease.  This leads to a vicious cycle, where decreasing volume increases spreads, which decreases volume still further, and so on. 

As negative as the results of the industry survey in regard to the CFTC’s proposal were, I would guess that a similar survey conducted outside the United States would show an even more worrisome result: that non-U.S. customers do not intend to trade in the U.S. market. 

The great thing that this survey shows, however, is that the U.S. regulators do not have to rely on the perceptions of individuals (or even on surveys by the trade associations) to gauge the perception of market participants to its proposed rules.  In fact, the U.S. regulators can obtain this information themselves (most likely by hiring a market research firm).  If the results of the survey were to show that we are in fact building a market that major participants inside and outside the United States are finding unattractive, then perhaps we should rethink our approach.

View Survey in full here (links externally to SIFMA website).
See also: Joint Press Release.

SEC Survey on Obligations of Broker-Dealers and Investment Advisers to Retail Customers

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The SEC published a request for data and other information to assist it in determining whether to make new rules as to the standards of conduct and regulatory obligations for broker-dealers and investment advisers when they provide personalized investment advice about securities to retail customers, e.g., should broker-dealers be under a fiduciary obligation in providing advice to retail customers.

Among the specific topics as to which the SEC has requested information are the following:

  1. Types of retail customers who use broker-dealers for advice vs. those who use investment advisers.

  2. Types of services and information and types of service providers available to retail customers.

  3. Costs of providing services to retail customers, particularly personalized services.

  4. Information regarding principal transactions with customers and other conflicts of interests with customers.

  5. Profitability of doing business with retail customers.

  6. Ability of customers to sue a broker-dealer or investment adviser.

  7. Information as to disclosures provided to customers.

 Lofchie Comment:  The questions the SEC asked in the survey seem fair, genuinely intended to elicit as much information as possible on an important issue (as opposed to questions directed towards a simplistic finding that broker-dealers should have a fiduciary duty any time that they make a recommendation to a customer).

The really important question is not so much whether broker-dealers should owe a fiduciary duty to customers, but rather what services can be made reasonably available to retail customers in a way that those customers understand the level of service being provided.  If we end up with a legal standard where it is effectively illegal to provide any advice to a retail customer other than as part of a full-blown, full service investment advisory relationship, then many customers will simply be priced out of obtaining any personalized service. (Perhaps that is a good result, if one believes that the advice that customers receive is inherently and systematically flawed.  However, the regulators should not pretend that the level of attention available to a customer with a $50,000 portfolio can be made the same – by operation of law – as that available to a customer with a $10 million portfolio.)

View Press Release in full here (links externally to SEC website).
View:  SEC Request for Data on the Duties of Broker-Dealers and Investment Advisers
See also: Investor and Industry Perspective on Broker-Dealers and Investment Advisers (2006)

New UK Banks to Benefit from Lower Capital Requirements

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Lord Turner, Chairman of the Financial Services Authority, has told the Parliamentary Commission on Banking Standards that new banks in the UK will be allowed to operate with lower capital requirements than existing banking institutions.

The move, which is part of a greater regulatory effort to encourage competition in UK domestic banking, could allow startups to open with core capital of just 4.5% of their assets, adjusted for risk. Dominant banks in the UK currently require a core capital ratio of 9-10%.

The reforms in banking capital are also expected to form part of a larger package aimed at lowering barriers to entry in the banking sector, which will also include an acceleration of the authorization process.