Financial Reform For the Retail Investor
In politics, questions are rarely as simple as they appear. As such, it should hardly come as a surprise that one of the more contentious issues in the financial reform debate has assumed the disguise of a seemingly unassuming query: Should broker-dealers be required to act in the best interests of their clients?
For the wide array of retail investors who saw their nest eggs vanish during the recession, the answer is an overwhelming "yes." The same goes for a number of congressmen. "This is not rocket science that we're dealing with here," says Rep.
Not so fast, say a number of concerned financial industry representatives. Currently, the debate is centered around the difference between broker-dealers and registered investment advisors. As their title suggests, RIAs' main duty is to advise investors about securities. Broker-dealers, on the other hand, actually sell the securities. RIAs have a fiduciary duty to their clients, which means that they must act in their clients' best interests. For their part, broker-dealers don't have to sell the best products that are available to their clients. Instead, their responsibility is to sell products that are deemed to be "suitable."
So far, both the
As members of the House and
Nothing really has been fundamentally done in the last few years since the crisis of confidence occurred in the marketplace. And we're now in the process of writing the material to rebuild confidence and trust in the market. This issue goes directly to the retail market. Right now, most people, if you ask them, would think that there is a fiduciary relationship or a standard owed to a customer by a broker-dealer. They don't realize that there isn't. ... This is a good opportunity to say, "Look ... customers should be protected and know that there are no conflicts of interest out there, no adverse positions out there, that people, whether they're wearing the hat of a broker-dealer or whether they're wearing the hat of a financial planner, owe their customer a fiduciary duty.
What about the
That's a problem. This is not rocket science that we're dealing with here. This is pretty rudimentary stuff. I don't know what kind of a study it would be ... I think we have all now considered this. This is a singular time, and I think [acting] would be a lot better than putting it off or delaying it.
If it's so basic, why has the measure been so controversial?
Nobody likes change. ... The world changes around you, and at a point you wake up one day and say, "I don't want one more change in life, because if it happens, my head is going to blow apart." That's the way people are: They get used to existing with the way things are. And there's nothing wrong with that, actually. And particularly if you're dealing with fully sophisticated people, you don't even need a fiduciary relationship. We're really talking about retail business here, customers who are not too terribly sophisticated in financial dealings and broker dealers and financial planners who are on a much broader scale and better scale: better schooled, better educated in the areas they're dealing in. There's a decided disadvantage.
So institutional investors can be treated differently?
That's a whole different thing. Those folks, they're used to [all this]. I have a friend who runs a mutual fund in
Does that mean you have less sympathy for the institutional investors who claim to have been misled by
No, but there is a little disappointment on our part. What we've done very often--and you can really see it in securitization--we've allowed a situation to occur where these very competent professionals sort of got together and lined up all the benefits on one side of the transaction. ... They proved that you can frustrate the market from really working. The only justification for a free market, and I'm a supporter of a free market, is that you can take government out of the role of regulator because ... for every guy working on one side of the transaction, you have an equally competent person working on the other side of the transaction. And they keep each other honest. And that's the way the system is supposed to work.
But if you line everyone up on one side of the transaction and they all make a profit off of it and they don't have to give a damn about the other side of the transaction--and that's what happened with subprime mortgage securitization--you get to the end and it's the last guy that's holding the skunk, if you will. He gets screwed and screws all of his customers, but everyone else made money. And people readily saw that happening, but nobody wanted to break the game. It was a great game, and it lasted for 10 or 15 years, and finally it blew up in all of our faces. It was a frustration of the real free market. We've got to structure this reform bill to try to not allow that to happen again in the future.
How do you feel about the idea of a self-funded
I'm a very big supporter of the self-funding of the
We want to send the message to them and to the general public that we want the best, finest
What does all of this say about the government's ability to effectively police
I see this fight as the final war, if you will, or disagreement, between government and big multinational corporations. And we've got to find a way now that the government, representing the interests of the people, is going to be on an equal status with the multinational corporations that are so powerful now and so pervasive in getting their way because they can move outside of nationalistic boundaries to accomplish things and they can play one nation off against another--"If you won't do it
How can the U.S. government catch up?
It's very difficult. I think this is our last opportunity. If we don't find a way to contain these organizations that have become too large to fail--and that's why I've been working on that issue--what will happen is they will rule the regulators, they will rule the nations that they participate in, because effectively they will be bigger than we are.
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