Considering More and/or Better Regulation at SIFMA’s Annual Meeting
By Melissa J. Anderson (New York City)
On Tuesday, October 27, the Securities Industry and Financial Markets Association (SIFMA) held its annual meeting in New York. While speakers covered a range of topics, foremost on the conference agenda was the coming changes in regulation, their potential effects, and whether more and/or better regulation is the right direction for the industry.
“We are by no means out of the woods, and even if we were, it would be irresponsible to forget” past events and the practices that have led to the current economic situation said keynote speaker Securities and Exchange Commission Chairman Mary Schapiro. Schapiro opened the conference with a strong call for new regulation, and explained its necessity.
The right questions had not been asked in the past, Schapiro said, and the SEC intended to change that. In fact, the SEC now receives hundreds of thousands of tips each year, and the agency is working to develop a new tracking system to better identify promising leads.
“Furthermore,” she continued, “as long as new financial products are introduced into the marketplace, we will need to have a system to determine the risks posed to investors and to the financial system as a whole.”
Schapiro said the SEC would be focusing on the needs of investors by ensuring financial advisors were looking after their best interests. “Investors simply want their financial advisor to put their interests before their own,” she explained. The “road to investor confidence” will involve “filling the regulatory gaps that have revealed themselves” over the past few years.
New regulations will involve a move toward greater transparency, disclosure, and a “stronger, more robust framework.” The regulations are aimed at rebuilding investor confidence, but, as Schapiro said, the industry has a long way to go before that confidence is restored.
Responding to questions concerning the “regulatory pendulum,” Schapiro said that the new regulations have actually been “on the list” for the agency to accomplish for quite some time, but the economic crisis prevented the SEC from approaching them immediately. Before the crisis, the industry had been more concerned with bolstering global competitiveness rather than preventing bubbles and other weaknesses in the market. Now was the opportunity to “take a deep breath” and move new regulations to the front burner. Additionally, she said, in terms of maintaining global competitiveness, the agency is working hard to coordinate regulations with European and world markets.
Financial Industry Regulatory Authority (FINRA) chairman and CEO Richard G. Ketchum reiterated Schapiro’s sentiment about learning from the recent economic crisis. “We must push ourselves to ask what lessons we have learned,” he said.
The “severe erosion in confidence in financial system” means that “fundamental strategies have been threatened” or at least subject to question, said Ketchum. For this reason, the industry must work toward “an architecture in which regulation can adapt to the inevitability of change” in the financial system. For example, as the line between broker-dealer and investment advisor becomes increasingly blurred, agencies need a better model for regulating these segments of the industry, which historically have been subject to different rules.
Ketchum echoed Schapiro’s sentiment regarding suitability. Financial advisors need to ask themselves not only about legality but whether a product is truly “in the best interest of the customer.” He stressed the need for firms to “reexamine old practices,” ensuring that they were not just following “the letter of the law” but keeping in the spirit of the law as well.
As the burden of risk shifts from institutions to individual investors, Ketchum was particularly concerned with the products aimed at seniors, such as variable annuities or life settlement products. Seniors are dealing with “an amount of money they haven’t seen before and asking questions they haven’t had to ask before,” and advisors need to be cognizant of that.
Finally, Ketchum mentioned his desire for a stronger, single regulator rather than multiple industry regulators – both a “significant undertaking and a baby step.” Additionally, he called for building relationships and gaining information on market entities that are currently unregulated such as hedge funds and other unregistered entities.
Contrasting Ketchum and Schapiro’s focus on the industry, U.S. Secretary of the Treasury Timothy Geithner concentrated his discussion on the big picture economic situation. We’re seeing “just early signs of recovery,” he explained. In fact, he said, we’ve “achieved initial signs of recovery more quickly than expected and more quickly than have been achieved in the past.”
Geithner’s main concern is now an overcorrection. As the market becomes too risk averse, individuals and small businesses have a harder time securing credit from banks, so capital availability needs to be maintained. “The biggest imperative is the imperative of growth,” he said.
In keeping with the theme of the conference, Geithner called for a better organized and more even regulatory structure. “We had a crazy regulatory system,” he explained. Some structures were regulated to heavily, and some were not regulated enough, and this allowed risk to migrate to where there was little regulation, creating an imbalance in the marketplace. This meant “well-run conservative institutions were losing business to firms with less regulation.”
Prefacing his remarks by saying that he doesn’t like using military metaphors, Geithner joked that regulation is “a war of necessity, not a war of choice. But, it is a just war—a necessary and fair thing to do.”
