More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
"Crying in the wilderness. Raging against the machine. Call it what you will, but Peter Wallison has been warning of the Freddie and Fannie meltdown for 10 years," we wrote in Boomer Market Advisor's December 2008 cover story on five forward-thinking individuals in the advisor industry. Unfortunately, little has changed with the mortgage giants since then (an understatement, since things have actually gotten much worse).
As we noted then, Wallison was largely dismissed as "obsessed" with the mortgage giants by pundits and politicians alike in the run-up to the meltdown. But the former Reagan White House counsel and current American Enterprise Institute fellow is in demand now, and chances are in any given week you'll catch him on cable news or read one of his Op-Eds in the Wall Street Journal. People are listening as he explains how we got to this point, and what needs to happen to ensure it doesn't happen again.
Wallison was co-chair of the 2009 Financial Reform Task Force and a member of the Congressional Financial Crisis Inquiry Commission. In 2007 and 2008, he was a member of the SEC's Advisory Committee on Improvements to Financial Reporting.
Q. Any end in sight to the Fannie and Freddie woes?
Peter Wallison: No, it's a mess. Fannie Mae announced its 11th consecutive quarterly loss of $11.5 billion and asked the Treasury for another $8.4 billion. The total is now close to $145 billion. But the CBO puts the total cost to taxpayers at $380 billion. On Christmas Eve of last year, the Treasury Department lifted the $400 billion cap on the amount of money it would provide to Fannie and Freddie, so it will probably go over that amount. If you look at these numbers, it would appear we're not even half way there.
Q. The blame for the crisis falls largely along partisan lines. What's your opinion on how it all came to this?
Wallison: Two narratives seem to be forming to describe the underlying causes of the financial crisis. One, as outlined in a New York Times front-page story in December 2008, is that President Bush excessively promoted growth in homeownership without sufficiently regulating the banks and other mortgage lenders that made the bad loans. The result was a banking system suffused with junk mortgages, the continuing losses on which are dragging down the banks and the economy.
The other narrative is that government policy over many years--particularly the use of the CRA and Fannie Mae and Freddie Mac to distort the housing credit system--underlies the current crisis.
Q. So how do we fix it?
Wallison: The stakes in the competing narratives are high. The diagnosis determines the prescription. If the Times diagnosis prevails, the prescription is more regulation of the financial system; if government policy is to blame instead, the prescription is to terminate those government policies that distort mortgage lending.
Q. Which do you think will happen?
Wallison: There really is not any question of which approach is factually correct: right on the front page of the Times edition of December 21 is a chart that shows the growth of homeownership in the United States since 1990. In 1993, it was 63%; by the end of the Clinton administration, it was 68%. The growth during the Bush administration was about 1%. The Times itself reported in 1999 that Fannie Mae and Freddie Mac were under pressure from the Clinton administration to increase lending to minorities and low-income home buyers--a policy that necessarily entailed higher risks. The fact is that neither political party, and no Administration, is blameless; the honest answer is that government policy over many years caused this problem. The regulators, in both the Clinton and Bush Administrations, were the enforcers of the reduced lending standards that were essential to the growth in homeownership, and ultimately, the housing bubble.
Q. What would you like to see happen?
Wallison: Privatization is the only viable way to protect the taxpayers and the economy against the consequences of major financial difficulties like these. I've actually written a book on the subject, Privatizing Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (http://www.amazon.com/Privatizing-Fannie-Freddie-Federal-Banks/dp/0844741906).
John Sullivan is editor-in-chief of Boomer Market Advisor and AdvisorBiz.com, part of Summit Business Media's Advisor Media Group.