Let’s take a look at what some scholars are saying about President Bush’s financial services agenda for his second term. Then let’s move on to some thoughts and complaints that industry officials have about Securities & Exchange Commission rules–specifically the e-mail retention rule–that advisors will have to comply with this year.
The Shadow Financial Regulatory Committee, a group of politically influential business scholars from prestigious schools like the University of Pennsylvania and Emory and Columbia universities, meets regularly to discuss banking, insurance, and securities policy. The members got together in December to hash over what they believe will be the most pressing issues on the President’s financial services agenda. They include Bush’s proposed personal retirement accounts, the shabby state of the Pension Benefit Guaranty Corp. (PBGC), the insurance brokerage scandal, and the future of Fannie Mae and Freddie Mac.
While the committee’s name suggests it works in the shadows, in truth this is a bunch of heavyweights who pull considerable weight with Congress. The panel’s co-chairmen are both finance profs: George Kaufman of Loyola University in Chicago and Richard Herring of the University of Pennsylvania’s Wharton School. They were joined a few months ago by John Hawke, a former comptroller of the currency who’s now with the law firm of Arnold & Porter in Washington. He reminded me that among the panel’s legislative successes were getting Congress in the 1990s to adopt its approach to bank supervision called “Prompt Corrective Action.”
The Administration has floated the idea of using personal retirement accounts as part of a Social Security reform plan. If this occurs, the Shadow Committee says the Administration “should avoid a situation similar to what happened with the savings and loan associations, and is happening with the Pension Benefit Guaranty Corporation, namely a taxpayer bailout of investments that perform poorly.” The committee also urged the Administration to be careful about the number and types of investment choices available to individuals in the accounts. For instance, “individuals might be allowed to choose from a limited number of different stock and bond indexes and broadly diversified funds. Competition among portfolio management firms to be chosen for the approved [investment] list, as well as the reopening of the approved list from time to time, would be desirable,” the Committee says. Recordkeeping “could be centralized in the government in order to hold down costs and assure continuity. Portfolio management, however, should be carried out by private professional firms.”
The PBGC’s deficit, meanwhile, has hit an all-time high, and the Shadow Committee believes the situation is only going to worsen. In November, the PBGC said that its fiscal year-end deficit on single-employer plans jumped to $23.3 billion from $11.2 billion in 2003. The Committee predicts that more corporations will try to buy off employees asking for raises by “promising higher pensions, letting them know that their pensions are guaranteed by the PBGC.” Other firms will “increasingly declare bankruptcy to shift their obligation” to the federal agency.
The Committee believes that as the PBGC deficit increases, it will be forced to increase premiums. This could cause more corporations with fully funded plans to convert them to defined contribution plans so they don’t have to buy insurance from the PBGC. If this happens, the committee says, the PBGC will be “left with very weak corporations that have very weak plans,” causing the PBGC to become insolvent and making a taxpayer bailout inevitable.
This disastrous outcome can be avoided, or so the panel believes. First, it recommends that the Administration and Congress should force corporations to fully fund their plans “with assets that can be and are revalued at least quarterly at market prices.” It also says they should measure their pension liabilities by “discounting actuarially determined pension obligations by the relevant discount rate,” e.g., the rate on long-term U.S. Treasuries, swaps, or their equivalent. The PGBC should also refuse to fund any new pension guarantees, but continue to back the pensions of plans it has already taken over. The PBGC should also increase premiums to help fund its current deficit. Finally, the committee argues, “since the Administration and Congress are unlikely to allow employees of bankrupt companies to lose their pensions when the PBGC legally becomes insolvent, the amount of taxpayers’ funds that will be required to meet the PBGC’s obligations should be estimated and budgeted for.”
As for the bid rigging and unethical compensation practices by brokers and insurers that were uncovered by New York Attorney General Eliot Spitzer, the Committee says insurance producers should be forced to “disclose to prospective customers whether they represent the customer, one or more insurers, or both the customer and insurer, so that customers can consider the potential conflicts.”
E-Mail Retention Rules