Mary Schapiro has a problem. Sure, as President Obama’s appointee to chair the SEC she headed the list of the most influential women in wealth management by editor-in-chief Kate McBride in the April issue of our sister publication, Wealth Manager, but surprisingly that may not help with her current challenge: It seems that Congress, as part of its frenzied, ongoing efforts to deflect any blame for the subprime meltdown, recently filleted her SEC staff over its handling (or non-handling) of the Bernie Madoff Ponzi scheme.
True, Congressional spankings are close to business as usual for the SEC staff, but the Commission’s loss of face over the Madoff mess couldn’t have come at worse time for Schapiro. Predictably true to form, Congress and the Obama Administration are currently focusing most of their efforts on measures to “solve” our economic woes, and at the same time, reregulate the financial services industry so “this can’t ever happen again.” Of course, both are worthy goals, but the wisdom of undertaking either before we’ve had any cogent discussion about what actually caused the meltdown escapes me. Moreover, undertaking “reregulation” at Treasury Secretary Tim Geithner’s instigation before the crisis shows clear signs of waning seems premature, at best.
But financial services reregulation appears to be what we’re facing, coming at a time when the SEC’s political juice is at its lowest point since the dot.com crash. “The days of ‘light touch’ regulation are over,” chairman of the House Financial Services Committee Barney Frank told the Wall Street Journal. But, as befits her status as a preeminent Washington financial services insider (her resume includes stints as an SEC commissioner, chair of Commodity Futures Trading Association, CEO of FINRA, and now head of the SEC), Ms. Schapiro has a plan to get out of the Congressional doghouse, which she revealed to Ms. McBride in an interview:
“The [SEC] has been defined over the past year not for what it’s done, but for what it’s missed–both in fact and in perception,” said Schapiro. “We need to change that perception, but we also need to change the reality. We need to make sure that we are really recommitting ourselves here to protecting investors and being their advocate.”
Mom and Apple Pie
Ah, yes indeed: “Protecting investors” is to the financial services industry what “for the children, baby seals, and polar bears” are to the Green movement. And for good reason: Who’s going to argue that either isn’t right up there with mom and apple pie? And who in our media-centric Congress is going to oppose Schapiro as she repositions the SEC on the side of the angels? Whether this is good news or not for independent financial advisors and financial consumers is, as yet, unclear. But with the reregulation of financial advice clearly on the table for the first time since 1940, now’s the time for the advisory profession to elbow its way into a front row seat, and out-represent other interests as the advocate for financial consumers.
For her part, in her compelling interview with Ms. McBride, Mary Schapiro said all the right things (as I said, she’s a real pro). When asked whether this crisis might be the catalyst for a fiduciary standard for all advisors, she responded: “I think it’s entirely possible. I’ve said for a long time that it’s really a flaw in our system that investors get different standards of care and different standards of regulatory protection depending on whether they’re going to an investment advisor, a registered rep, an insurance agent, or an unregulated advisor of some sort. And it’s not fair for us to leave it to investors to figure out what protections they’re entitled to depending on which regulatory regime just happens to capture the person they’re dealing with.”
Music to my old ears, to be sure. But call me cynical (it wouldn’t be the first time): Wasn’t Ms. Schapiro the CEO of FINRA, the organization of, and regulator for (don’t get me started), the broker/dealers who are the very source of consumer confusion about what “protection” they get? And wasn’t Merrill Lynch, one of the leading FINRA firms, the subject of the FPA’s suit over the application of the 40s Act “broker exemption” to fee-paid asset management? Maybe I missed it, but I don’t remember Ms. Schapiro’s or FINRA’s amicus curiae brief to the Federal Court in support of the FPA. And wasn’t the SEC the defendant in that case for writing its “Merrill Lynch” rule? (Yes, that was before Schapiro’s watch, but it’s the same old SEC.)
So, pardon my skepticism about Ms. Schapiro donning the “consumer advocate” mantle. She’s a little late to the game, especially without revealing a road-to-Damascus, now-I-see-the-light conversion. I could be wrong here–and I hope I am–but if history means anything, I’m just saying that despite her rhetoric, maybe independent advisors and/or financial consumers shouldn’t bet the farm on getting much tangible support from Ms. Schapiro’s SEC at the reregulation bargaining table.
The good news is that what’s left of Wall Street now has even less political juice than the SEC. Having just lost their kiesters, their firms, and tanking the world economy by failing to accurately assess the risk in CMOs (collateralized mortgage obligations) that they were repackaging and selling to investors, it’s possible that even Congress and the media will see through any claims they make about being “advocates for financial consumers.” Since AIG has made headlines a few times in the past year or so, insurers may not carry a lot of clout, either.
All of which means that for the first time in a long, long time, the playing field on Capitol Hill may be wide open for independent advisors to convincingly argue that they are among the only true advocates for financial consumers. Unfortunately, the independent advisory community hasn’t made much progress toward either speaking with a unified voice or making a convincing argument that they are, in fact, true consumer advocates.