Subscribe to this BlogObama's financial reforms: Too much or too little?
Ever since President Barack Obama proposed his wide-ranging financial reforms last month, investors have been wondering how hard he will push for his plans. So far the White House has kept up the pressure, but opposition is mounting. And it's far from clear that Obama is prepared to fight what increasingly looks to be a two-front battle.
First, the progress update. On July 10 the Treasury Department sent legislation to Congress that would turn Obama's investor protection proposals into law. Here are the key changes the White House is seeking:
- Give the SEC power to regulate broker compensation. Right now, brokers are overseen by FINRA, a self-regulatory agency funded by the brokerage industry. This reform would ban brokers from selling high-commission products that make money for the brokerage firm, but not for customers.
- Require brokers to adopt the same fiduciary standards as investment advisers. That means brokers would have to act in the best interests of their clients. Currently brokers are only required to make recommendations that are "suitable" for their customers, even if there are less costly options available. By contrast, investment advisers, who are regulated by the SEC or the states, follow fiduciary standards.
- Restrict or limit mandatory arbitration. Brokerage customers typically must waive their right to sue in the event of a dispute. Instead, any conflicts must be resolved through arbitration — a process that investor advocates say is biased in favor of brokerage firms.
- Improve fee disclosure. Brokers would be required to provide more information about fees before selling a product. Right now most disclosures are not given to investors until after the sale is completed.
One early victory sign: a leading industry group, the Securities Industry and Financial Markets Association has announced it will support a fiduciary standard for brokers.
The White House is also putting its weight behind a new Consumer Financial Protection Agency, which would regulate mortgages, credit cards and other loan products. On  Tuesday assistant Treasury Secretary Michael Barr testified before the Senate Banking Committee in support of the agency. "There are too many agencies with consumer protection responsibilities, their authorities are too divided, and their primary missions are too distant from consumer protection," Barr said. "There is only one solution to these deep structural flaws: one regulator with one market with one mission — to protect consumers."
Other financial services industry lobbyists seeking to defend the status quo, as well as conservatives who oppose more government regulation, are pushing back hard. Edward Yingling, head of the American Bankers Association, testified before the Senate Banking Committee that  a consumer protection agency "will chill efforts to innovate and respond to consumer demand." And Peter Wallison of the American Enterprise Institute argued that the agency "reflects a paternalistic desire on the part of elites to control and limit others’ choices while leaving themselves unaffected." Â
On the other side of the philosophical divide, some critics say that the White House isn't working hard enough to overcome opposition resistance to a new consumer protection agency, while investor advocates are calling for even stronger fiduciary protection. Â
And on Wednesday, an investor coalition that includes two former SEC chairmen, former chair of the Commodity Futures Trading Commission Brooksley Born, and money managers Bill Miller and Jeremy Grantham, issued a report that attacked Obama's plan to reorganize federal agencies on several counts, including awarding risk oversight to the Federal Reserve. As the report put it, the Fed's credibility has been "tarnished" by its "easy credit policies" and "lax regulatory oversight." Instead, the group recommends establishing a Systematic Risk Oversight Regulator, which would have a staff appointed by the president and confirmed by the Senate.
It looks to be a long, hot summer in Washington.
What do you think of Obama's financial reform proposals — will they make life better for consumers and investors?
Let's look at it this way. After Ronald Reagan and his team of economists were able to pass bills deregulating the financial markets, the US economy grew an unprecidented amount during the past 25 years. That administration learned that for each dollar in taxes, or in government spending, it removes 3 dollars from our economy. Time has shown that the best spender of taxpayer money is the taxpayer themself, not the government. If the Obama administration feels that they can continue government spending at these levels, then we are in for many years of a stagnant economy. Someone needs to tell President Obama to let us spend our own money.
Until we learn over time that self discipline,and ethical behavior must be learned, practiced and re-inforced by a moral philosophy and belief system that clearly distinguishes right from wrong and then rewards moral behavior instead of the opposite; we will have a morally bankrupt system with more con artists posing as business leaders along with a welcoming community of investors seeking an edge.
How far should we go? Unless the middle class flourishes we won't have the economic democracy which is the goal of equality and human inalienable rights described in our constitution.
Certainly neither political party has a monopoly on good ideas but under our form of government the will of the people is carried out by electing our representatives and senators and our President.
Everbody wants to have their cake and eat it too. Well thats where we are now. Madoff like ponzi schemers all over the place. A complete lack of respect for their fellow man. The Rape and pillage mentality. That is why Obama's regulatory programs are attempting to define limits to compensation, (over consumption and greed) This is necessary only because there is no capacity to self regulate or have imposed limits. The laws must closer define them and the people in the agencies (SEC, etc.) must have the courage to enforce them. That's what a democray does.
We will eventually get where we want to be but only because we have the courage to self regulate our behavior.
Where we really need more regulation is in the government itself. With the current economic environment, people often point their fingers at corporate greed as the problem. However, government intervention is the reason we are here. With the Bush administration pushing for everyone in the US to own a home and Alan Greenspan keeping interest rates artifically low, we saw a huge movement in the mortgage industry. Then with congress passing laws to create fairness in lending by forcing lenders to give loans to high risk candidates created this collapse. It was predicted to fail back in the mid 90s but as the economy was booming back then, it never got the media coverage. Now, with the Obama administration regulating the financial and automotive industires, and spending huge amounts of money on low value stimulus, things will only get worse. Through all of this useless stimulus, we will be left with no choice but to raise taxes, forcing more jobs and business out of the US and into "Tax Havens." Which, by the way, the so called "Tax Haven" is really only a county with a lower corporate tax rate than our own, which is every country in the world with the exception of Japan.
Wall Street screaming for the status quo and other defending "freedom" and "capitalism" should pipe down. They nothing to show for themselves over the last 10 years. This is born out by nothing else except the markets themselves, which have wiped out 10 years of gains tripping over the very stupidity of the so called best and brightest they now worry they won't be able to recruit if they can't charge 30% interest rates on credit cards or create carried interested in hedge funds. Those of you who defend their "rights" need to think about what you're standing up for. I agree with those of you who say we need less government in many areas, but this is one where perhaps we need a few more watching eyes and to eliminate some practises which benefit nobody except those who dream them up. Financial Engineering has gone too far.
These are good reforms but they only address a small part of the issue. Fundamentally people are greedy and the temptation for riches will always bring out the worst in people. Brokers and fund managers need to be required to publish more details of their books and SEC needs to do more spot checking to ensure that they are not lying.
Apart from this, though, a more fundamental issue is that the rise of mutual funds and the disconnection of individual investors from the companies they own has created a culture where corporate management and fund managers no longer feel as accountable as they did in the mid 20th century (hence the outrageous bonuses and such). In this regard the free market is not working. The way mutual funds are organized and the way people buy into them needs to be reworked (i.e. no amount of regulation will solve this; managers fundamentally have to believe that they will lose money and their jobs if they do not make their businesses profitable to their investors).
Government needs to stay the H*ll out of everything and concetrate on the real problems that's sent us here in the first place.
We are a country of only 300m people and our tax rates "Highest in the world" have forced companies to outsource most of their work, there goes the jobs and that's why we are here. Concentrate on that and national security and get out of everyones business. We do not want you in our business. You do not run this country, we do. Without us your scr*wed and your either to naive to see that or "That's the Plan" and you know it. If it's the second option it should be criminal and why are we allowing the government to put us here. We the people have got to stop fighting with each other "Like they want us to do" and start working together to get these crooks out of office.
A) Honest Brokers always work for the best interests of the Client-or else they would not have clients.
B)SEC with more power is stupid, they couldn't catch Madoff. Sure give them more to do-
C)Arbitration-Obama is supporting his Lawyer buddies with this one-Bring more cases to arbitration will slow everything down and in 95% of the cases the brokerage did the right thing anyway.
D)Fee's -this maybe the ONLY good thing of this bill
When exactly will this idiot President get it through his fat head that over regulation will impede the financial services market from function properly. We need LESS Government not more. Mr. Obama please go run your two new Auto makers and leave the rest of the USA alone.
The reforms are not far-reaching enough to correct the corruption. It is quite clear now, that the corruption is already returning to the banking industry, the moment that they can pay off the government.
Further, the corruption in Corporate America overall, and even more so, in global corporations, is of great concern.
There must be some stringent controls enacted, to return to stability in business, and to sensibility, for certain.
Will the past problems from the SEC get swept under the rug when the new regulators take over? If so, that will not make me want to invest more. The SEC drags out settlements from investors by creating many website addresses for investors to comment on but the problem never gets settled such as in the CMKX (over 50,000 shareholders) case where investors have been waiting over 5 years for thier settlement. There needs to be a time frame the new regulators have to fix the problems without dragging things out over years where nothing ever gets settled.
Many of these issues are simply political power grabs by one part of the financial community (RIAs) to tarnish another (BDs) to improve business.
If RIAs are true fiduciaries, and the client holds a lot of cash or trades infrequently, clients would pay a lot less with a broker than with an RIA. Fiduciary law says that RIAs should refer the client down the road to the brokers. Do they? – Well you know the answer to that.
As long as advisors of all types fight each other as opposed to focusing on what's best for the clients, the only winner will be self-service firms like online brokers.
The single biggest problem with the free market is when people find a way to pass their costs to unwilling participents. Otherwise known as taking advantage of others for your own profit. When this is done on a large enough scale it makes people start to question the value of the free market at all since only the least ethical are profiting!
I think as a country we generally consider it to be the role of government to make unethical activity less profitable than fair market activity where two willing participents exchange goods or services.
Frankly, I don't want to have to hire a private detective every time I do business with a company to make sure they are not trying to steal from me. A government that sets resonable standards of business conduct – enforcing contracts, preventing theft & property damage, preventing fraud, preventing environmental damage (ie dumping costs on others) etc. makes sense to me and is worth a certain amount of taxation.
The mantra of no regulation no matter what just isn't realistic unless you yourself plan to dump costs on other unwilling participants on a larger scale then you think they will be able to do to you.
I'm not sure I agree with A – regulating compensation doesn't really serve any purpose in a fair, free market. B sounds good in theory – ethical standards should encourage market activity more than they restrain them. C is a huge handout to lawyers, but it will probably be the only way to make it all work. D sounds like a good idea even consdiering the added burden on firms and the SEC -waiting until after a sale to disclose informtion sounds like fraud to me.