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Regulatory Wire: The public is depressed about financial reform and an exemption for auto dealers is just a warm-up

John Q Public doesn't know beans about financial reform -- except that it doesn't go far enough

Friday, June 25, 2010 – 3:27 AM by Brian O'Connell
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Tom Harkin: “No-one has lost their money – period,”

Brooke’s note: Amid the hoopla over decisions regarding the fiduciary standard, other important outcomes get lost in the shuffle. This article gets you up to date.

After a week of jaw-boning between House and Senate conferees, it looks like a final version of the financial reform bill is imminent. By posting time, the conference committee had already made a key decision on the fiduciary standard.

See: Improbable win for fiduciary standard: Congress set to hand SEC power to impose fiduciary duty on broker-dealers

Said House Banking Committee Chairman Barney Frank (D-Mass.) on June 23, on Thursday’s the 24th’s session, “we’ll stay until we’re finished”.

The heat is on, deadline-wise, as both Frank and Sen. Finance Committee Chairman Christopher Dodd are under pressure to wrap negotiations up before Congress adjourns for the July 4th weekend (they want to bring good news home to constituents) and because the White House could use a boost as President Obama heads into this weekend’s G-20 summit in Toronto.

If all goes well, the final vote could take place next week, right before the July 4th holiday weekend.

Here’s a rundown of the latest news coming out of the committee:

New home for consumer bureau – The Consumer Financial Protection Bureau will be housed at the Federal Reserve. That decision has the backing of committee leader Frank, who faced some opposition among his own party – Democrats want to plant a wall between the Federal Reserve and the consumer protection agency. That’s why Dem’s want the consumer protection agency as an independent agency – and not set up anywhere near the Fed. But the Senate has a fractious coalition of votes that are expected to hold financial reform together – and more than a few senators don’t want any part of an independent agency attached to the Consumer Financial Protection Bureau.

Liberal Harkin takes conservative stance on equity-index annuities

State regulation of equity-index annuities – Maybe it’s a coincidence that Sen. Tom Harkin (D-Iowa) and American Equity Investment Life Holding Company both share an address in Des Moines, Iowa, And maybe it’s not. But you have to wonder after the liberal Harkin’s conservative stance on tighter regulations on equity index annuity regulations resulted in a new amendment that would keep regulation of such annuities cordoned off on the state level. Harkin won the amendment on an 8-4 vote on the Senate side of the House-Senate reform conference on June 23. Said Harkin, in explaining his unlikely support with pro-business Republicans, who sided with him on the vote; “This is an insurance product,” he said. “It always has been and still is today. The SEC’s got a lot of other things to do than regulate what is now an insurance market.”
“No-one has lost their money – period,” he added.

Harkin has some court among the judicial branch. Earlier in 2010, the U.S. District Court of Appeals for the District of Columbia ruled that the SEC does not have authority to regulate the annuities. Multiple insurance companies had brought the suit against the SEC in response to its Rule 151A, that placed annuities under SEC jurisdiction.

Trading rules – Reuters is reporting (on June 24) that Frank and his Democratic allies look like they’ll hold the line on retaining restrictions on trading and investment activities by banks that financial institutions claim could lower revenues by billions of dollars. But another Democratic-led initiative led by Sen. Blanche Lincoln (S-Ark.) to require banks to spin off swaps-dealing operations into separately capitalized units. Insiders tell Reuters that “at least 81 Democrats have objected to that measure and could vote against the final bill if the plan is included”. A last minute provision that would have banks only spin off deals in highly-structure swaps found its way onto the bargaining table in Thursday’s session, with no outcome either way by the end of the afternoon.

Frank backs Brownback on auto dealer exemption – You can’t swing a dead omnibus bill without hitting a powerful business sector that’s somehow escaping the regulatory clutches of Uncle Sam. Now it’s auto dealers exempted from the Consumer Financial Protection Bureau. That after Frank threw his support to Sen. Sam Brownback (R-KS) who wants auto dealers exempted from the CFPB. The White House supports having auto dealers included in the CFPB’s regulatory orbit, but could back down if Frank and Brownback hold strong.

Public not backing financial reform

A new Washington Post/ABC News poll is out, and it demonstrates Americans’ skepticism over potential new regulations over the financial services industry. A clear majority of survey respondents see the financial reform bill as being “too weak” instead of “too strong”

Overall, 35% said the proposals currently being debated by Congress and the Obama administration “don’t go far enough in regulating banks and other financial institutions”, vs. 20% who said the reform effort “goes too far”. The other 39%, rated it about right.

Another June, 2010 poll – this one by the Associated Press, also expresses flagging support – or at least low confidence – that financial reform can make a difference.

The Associated Press-GfK Poll reports that 64% of survey respondents “aren’t confident” that a financial regulation overhaul before Congress will avert another meltdown.

The AP survey also says that Americans are spreading the blame around for the nation’s ongoing struggles, with Wall Street (barely) garnering most of the blame (from the poll):

  • 8 in 10 blame banks for the crisis
  • 7 in 10 blame the government.
  • 6 in 10 blame people who borrowed money that they couldn’t afford to repay
  • 2.5% blame President Barack Obama, who came into office after the meltdown.

SEC Aims For New “Pay-to-Play” Rules

The Securities and Exchange Commission (SEC) is set to act on a new proposal that would prohibit investment advisors from using “middleman” leverage in getting first crack at the lucrative government pension fund business.

Currently, the public retirement fund industry is valued at $2.4 trillion, according to the SEC.

The move stems from a Financial Industry Regulatory Authority review of the state of New York’s $110 billion pension fund, where investment firm’s allegedly doled out millions in “commission” fees to agents. There, the state’s attorney general’s office engineered a $12 million payback from a private equity firm that paid kickbacks to a New York political insider to get the inside track as investment advisor to a state retirement fund.

That helped fuel the move toward a June 30 vote by the SEC aimed at banning hedge fund and private equity firms from getting too close to government pension officials. The SEC has already approved (but not implemented) a minimum two-year period of time during which investment advisors whose employees or “covered associates” made campaign contributions of over $250 would not be eligible to receive and investment from the pension fund.

The vote on June 30 will prohibit investment advisors from using placement agents to run interference on behalf of investment advisors looking for access to pension fund contracts.

Walling off advisors

Not every big political decision-maker is on board with the proposed ban on placement agents. Senate Banking Committee Chairman Christopher Dodd told the SEC in February that walling off advisors from so-called placement agents “risked eliminating the only “cost- effective way for smaller funds” to compete with bigger rivals in winning contracts to manage pension-fund assets.

Dodd, and other critics of the proposed ban on agent, note that larger financial services companies have greater access to pension fund administrators. Smaller firms usually don’t have that kind of access. “I think the proposal’s a bit draconian, particularly on banning placement agents,” said Steven Kaplan, a professor of finance at the University of Chicago.

According to a January, 2010 study by Calpers, the largest pension fund in the U.S., investment advisory firms paid placement agents more than $125 million in fees to win business at Calpers, including about $59 million to an investment advisor firm led by a former Calper’s board member.

To-do list for advisors

The Association of Corporate Council is out with a “to-do” list for investment advisors in the event that new pay-to-play rules become reality via an SEC vote. While the ACC notes that every situation is unique, the following steps may well apply.

  • Stay aware. New regulations are being debated and passed, and many of them apply immediately to pre-existing investments.
  • Assess your investments. How much of the money that you manage came from public pension and retirement plans or from other government entities? When were those investments made? Can you demonstrate how much you received, from whom, and how long ago, to ensure that you can calculate and demonstrate the effect of any ban on compensation?
  • Assess your use of placement agents. Do you need them? What disclosure has already been made? Are you using placement agents to solicit business from any pension plans that do not know your identity, the placement agent’s identity and any compensation arrangements with the agent and/or plan?
  • Assess your political contributions. Do you have a policy limiting, prohibiting or permitting the political contributions by your employees and officers? Do you have recordkeeping requirements for those contributions? Is your firm regularly solicited by others – clients, prospective clients, important colleagues – to participate in group or bundled political contributions? Do you solicit such contributions yourself?
  • Assess your hiring practices. When you hire a new employee or officer, do you ask her to tell you what political contributions she has made in the past two years?
  • In effect, the ACC is telling advisors to take matters into their own hands – before the government does it for them.


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