More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
“I was expecting the William Tell overture as my introduction music,” former congressman Barney Frank said to laughter at the TD Ameritrade 2013 Elite Summit in Palm Beach, Fla., on Wednesday morning.
The legendary curmudgeon and bane of political opponents was well-received by the advisors in attendance as he described the reasoning behind the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as his views on the fiduciary standard.
The 16-term congressman and former chairman of the House Financial Services Committee began by noting the “two important systems” on which the country runs, the private and the public.
“The private system creates wealth and innovation,” he noted as a way to introduce his explanation of Dodd-Frank. “The public system sets the rules by which the private sector conducts itself, as well as doing the things the private sector can’t, but which citizens still demand.”
Frank said that during congressional hearings into the causes of the 2008 financial crisis, “I kept hearing over and over again how financial services firms had to do what they did because of competition.” He specifically noted former Citigroup CEO Chuck Prince’s explanation for using structured debt because “not to would put Citigroup at a competitive disadvantage to Goldman Sachs.”
“At some point innovation in society reaches critical mass, and a sea change occurs,” Frank said. “Because it’s all completely new there are no rules to govern it.”
Such was the case with innovation coming from Wall Street, he argued.
“In 1850, there were no large, national enterprises in this country. By 1890, there was coal, railroads and manufacturing, among others. But it wasn’t until the Sherman Antitrust Act and really the Roosevelt administration that rules were established.”
The same can be said of what happened more recently with securitization, according to Frank.
“It used to be that there was a strict lender-borrower relationship; the person who lent the money expected to get paid back. With securitization, loans were made by institutions with no expectation of being paid back. It actually encouraged bad loans because they could collect transaction fees before the loans were sold.”
Calling rating agencies the “worst” performers of the crisis, he noted “they didn’t even sample the loans they were rating, they just had an equation they’d use.”
With Dodd-Frank, he said, “we did not fix prices, like some people wanted me to do with limiting credit card interest rates. We wanted to put risk back on the lender."
Referring to a recent article in The Wall Street Journal, a news outlet he said could hardly be accused of being in his favor, he noted that the majority of derivatives transactions, a major cause of the crisis, are now performed on an exchange between a buyer and seller.
“I believe TARP will go down in history as one of the most wildly successful and wildly unpopular things that government has ever done,” he said.
He said he disagrees with critics that said the crisis came about as a result of government deregulation of the banking industry, arguing it was the opposite, and referring to his earlier argument that there were no rules in place for something completely new.
His support of Fannie Mae and Freddie Mac was “really about multifamily renting,” he said, and added that he believes the government-sponsored enterprises won’t end up costing “the American public a dime within a year or two.”
In answer to a question posed by Skip Schweiss, TDAI’s managing director of advisor advocacy, about “too big to fail,” Frank said that Sarah Palin was “half right.”
“In the original bill, we did have death panels,” Frank responded. “But they were for big banks, not for old ladies.”
The discussion concluded with a question from the audience about the fiduciary standard.
“Investors have different levels of service demand," Frank said, "and regulation must match those different levels."
When pressed by Schweiss about the current standard being debated, that it’s “not the ’40 Act but no less stringent than the ’40 Act,” and how regulators might have trouble implementing it, Frank said that “by stringent we mean appropriate to what’s going on.”
Read TD’s Schweiss Keeps Tabs on Hot-Button Regulatory Issues on AdvisorOne.