Financial Reform Newsletter
May 15, 2014
Current Newsletter (Past Newsletters):
Should Wall Street police itself? That’s what it did before the 2008 crash and that will cost the U.S. between $13 and $40 trillion, in addition to the massive suffering from coast to coast that is still hurting families and communities today. It is past time to fully fund the CFTC, the derivatives cops on the Wall Street beat.The CFTC oversees most of the $650 trillion swaps and futures markets, where the last crisis was incubated and spread throughout the world. Yet, it only has a budget of a little more than $200 million. That is grossly inadequate, leaves Main Street at the mercy of Wall Street again, and sets the agency up for failure, as the Acting CFTC Chairman detailed in Congressional testimony yesterday.
Everyone, including the industry, should find this situation totally unacceptable, as the Chairman of CME Group Terry Duffy testified at the Senate Agriculture Committee hearing earlier this week, calling for increased and more stable funding while making a point every responsible market participant should agree with: “I don’t believe the CME has a credible business if we don’t have a credible regulator. So I want to make sure that they are the envy of the world as far as regulation goes.” That requires adequate funding and a $200 million budget to police a $650 trillion market is a disservice to the American people, our markets and our economy.
A simple, fair and cost-effective alternative to inadequate taxpayer funding is to require the financial industry to fund the CFTC through a de minimus user fee. This funding mechanism is already used by many federal agencies including all other financial regulators. Better Markets has done analysis on derivatives market data which shows that a CFTC user fee required to fully fund the CFTC would be extremely small. In fact, market participants would barely notice the difference. Yet for taxpayers, market participants and our economy, the benefits would be huge: a properly funded Wall Street watchdog that could effectively monitor risky behavior and impose penalties for reckless and illegal conduct. Indeed, if the CFTC has the funds to do its job, then the risk of another financial crisis and more bailouts of Wall Street will be much lower.
You, your family, neighbors and friends trying to save some amount of hard-earned money for retirement probably don’t know that financial advisors are NOT required to act in your best interests. Worse, they often have undisclosed conflicts of interest that result in hidden fees, higher costs and poorly performing products, all of which siphon off money that should be available for retirement. Registered investment advisors are legally required to act in your best interests, not in their own interests – this is referred to as a “fiduciary duty,” which we call the “client first” rule. But, investment advisors with a fiduciary duty to act in your best interests are only a very small percentage people giving investment and retirement advice.
That is why the Department of Labor (DOL) and the SEC must pass fiduciary rules requiring everyone giving investment and retirement advice to act in their clients’ best interests, as Better Markets stated in a letter last week to President Obama. Unfortunately, the SEC has failed to enact a fiduciary duty rule that would protect all investors receiving advice, and it doesn’t plan to act any time soon, as recent comments from the SEC Chair made clear. This is inexcusable from an agency whose primary purpose is to protect investors.
However, DOL is about to update and broaden its fiduciary standard, which has not changed for almost 40 years, i.e., before 401ks and IRAs even existed. There are hopeful signs that the new rule will provide more comprehensive protections against conflicts of interest for the benefit of tens of millions of workers and retirees saving for retirement. Every day, 10,000 baby boomers reach the age of 65, and unless they receive investment advice free of conflicts of interest and hidden fees, many of them will have much less money to live on than they expect and should have. The DOL’s revised rule is expected to be proposed this summer and will be open for public comment.
Asset managers must get much more active in the policy and rulemaking processes to protect their investors and the global financial system. In a recent speech, Better Markets Senior Fellow Bob Jenkins discussed the immense size of the global financial system and the dangers it poses to financial stability around the world. Jenkins sent out the rallying cry to the investment management industry, which has been remarkably silent on the issues facing the financial system, and urged them to meaningfully engage with regulators and policy makers on the key issues that contribute to the ongoing unsafe financial environment.
Upcoming Event: Critiquing Cost-Benefit Analysis of Financial Regulation. One of the favorite tactics of those fighting financial reform is to claim that new rules and regulations to prevent another financial crash from devastating the country impose crushing burdens on industry. This is a baseless claim that industry has raised about regulations for more than 100 years now, and history has proved them false. This is no more than an attempt to change the debate and distract the public and policymakers away from the real costs of the financial crisis and the overdue need to regulate Wall Street to prevent it from causing another crash
Articles of Interest:
CFTC Reviewing U.S. Banks’ Overseas Trading for Possible Evasion: Bloomberg by Silla Brush 5/14/2014
Is High Frequency Trading Wall Street’s Dirtiest Battle?: Value Walk by Mark Melin 5/14/2014
U.S., British Regulators Fine London Brokerage for Rate Rigging: The Wall Street Journal by David Enrich 5/14/2014
Citi Fires 11 More in Mexico Over Fraud: The New York Times by Michael Corkery and Elisabeth Malkin 5/14/2014
Exclusive: Regulators scrutinize financial risk-modeling firms: Reuters by Sarah N. Lynch 5/14/2014
Top banking jobs are turning into hot seats: Financial Times by Martin Arnold 5/12/2014
High-Speed Traders Need Oversight, Ex-CFTC Economist Says: Bloomberg by SIlla Brush 5/13/2014
Vacancies Pose Threat to the Fed: The New York Times by Binyamin Appelbaum 5/12/2014
Tim Geithner: More Banker Than the Bankers: New Republic by Noam Scheiber 5/12/2014
Exclusive: Credit Suisse deal with U.S. authorities could top $2 billion – sources: Reuters by Karen Freifeld and Aruna Viswanatha 5/12/2014
CEO Pay: Bank Size Trumps Results: The Wall Street Journal
Why Designating Funds as SIFIs Could Hurt Retirees: American Banker by Paul Schott Stevens 5/14/2014
J.P. Morgan Is Reviewing U.S. Correspondent-Bank Relationships: The Wall Street Journal
Dinged-up JPMorgan CEO may seek exit: analysts: New York Post by John Aidan Byrne 5/11/2014