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Regulation and Compliance > Federal Regulation

At Morningstar Conference, Vanguard's McNabb on Restoring Trust

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Speaking at a luncheon session to the 1,300 attendees of the Morningstar Investment Conference on Thursday, June 24, in Chicago, Vanguard CEO Bill McNabb laid out the three main building blocks for restoring both investor and advisor trust in the markets, and presented the Vanguard line on the pending financial services reform package.

“Trust levels,” McNabb said, “are at all time lows,” pointing out that “It’s not just individual and institutional investors, but advisors” as well whose trust has been shaken.

He said those three building blocks of trust, the “essential ingredient” in the investing and advice business, are:

? Simplicity, which he said is exemplified by the “Five-minute rule” first coined by Richard Ennis of the pension consulting firm Ennis, Knupp: “If you don’t understand the thesis underlying an investment in five minutes or less, take a pass.”

? Transparency, which he said mutual funds like Vanguard’s already offer, but with many other investing vehicles, that’s not the case.

? Candor, which he said meant “being out front, being up front, and being honest to a ‘T.’ It’s tempting when things are going bad to stick your head in the sand, but you have to acknowledge when things are bad.”

As for the financial services reform bill, McNabb predicted that a law would be passed by President Obama’s July 4 deadline, saying that any final law, regardless of its specific tenets, would “be a good thing–there are basics in the financial services reform bills that are necessary to restore trust.”

Those basics include:

? Dealing with systemic risk. “We’re big fans of some form of systemic risk council, but we have to have the right regulators on the council, and there has to be in-depth sharing of information–we have to break down the barriers among regulators.”

? Derivatives regulation. McNabb said this is “probably the most polarizing part” of reform, but cautioned that Congress should be careful in how they regulate derivatives: “They’re an incredibly essential tool we all use to manage risk.”

? Swaps. He said they “need to be centrally cleared; that will mean more transparency.”

? Too big to fail. McNabb said “one of the good steps in reform is some sort of Resolution Authority,” which would control “how you unwind a firm after it fails.”

At a “higher level,” McNabb said “the existing regulators need better resources and a more comprehensive approach to regulation.” The debate in Washington mistakenly pitted too much regulation versus too little: “It’s not a question of more or less regulation, but the right regulation.”

In a brief Q&A session after his prepared remarks, here are the questions asked and McNabb’s responses.

Q. Should Fannie or Freddie be part of the bill?

A. “We should address them, and decide whether they should be government owned or truly private–but that won’t be part of the first phase of reform and will be addressed in the future.”

Q. Should there be a broader fiduciary standard?

A. “In a perfect world, we’d have the same standard applied to all advisors–having a level playing field would be a good thing.” It would particularly be “a really good thing for investors to know that everyone is following the same set of standards.”

Q. Should there be regulation of high frequency trading in the bill?

A. It’s “unlikely it will be part of this bill,” but remember that such traders “are the knitting that holds the whole trading system together. They add liquidity to the markets, but where were they during the Flash Crash?

Q. John Bogle (Vanguard’s founder) has suggested a penny tax on all trades to discourage such high-frequency trading.

A. “Such a ‘token tax’ won’t curb speculative trading but will drive it to places where the tax doesn’t exist. So if you’re going to do it, it would have to be worldwide.”

Read about Vanguard founder John Bogle’s prescriptions for financial services reform from the archives of


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