GUEST BLOG: This Way to Financial Services Reform

February 6, 2017

This Way to Financial Services Reform

This week it became clearer that the new administration intends to vacate or otherwise rollback the fiduciary rule that the Department of Labor proposed, considered and promulgated under President Obama.  The new president is now taking steps to halt the further implementation of that rule and turn the entire process over to the Securities and Exchange Commission (SEC) in order to provide for a uniform and far simpler rule.  

Just so we don't forget how we got here in the first place, under Dodd Frank, the SEC was supposed to have considered and proposed its own fiduciary rule that would have covered all "financial advisers" that touch retail customers, not just investment managers of retirement accounts.  That review was supposed to have considered whether broker dealers who service retail customers should be held to the same fiduciary standard as investment advisers.  But due to partisan squabbling, the SEC was never able to get anything done.   President Obama then ordered his Labor Department to move ahead separately from the SEC mandate so that at least the retirement assets of Moms and Pops would be subject to the higher fiduciary standard.  Dodd Frank cynically suggests that some brokers only care about generating commissions for themselves and do not always have the best interests of the client at heart.

The recent action by the new administration was announced at or around the same time as another Executive Order was signed that would require two rules to be eliminated for every new one that is adopted.  This two for one math will ostensibly be measured by economic impact.  So, if we are eliminating regulations, ameliorating the adverse economic impact of rules and (in the case of the SEC) adopting or amending rules that will accelerate economic growth and capital formation, I have a few suggestions for the incoming chairman of the SEC.

In no particular order or priority, I would suggest:

1. The Level Playing Jungle. Registration for all investment advisers that provide investment advice solely to institutional clients should be eliminated immediately.  There is no need for parties with equal bargaining power to rely on government approval and oversight. The due diligence process and the market generally will weed out those investment advisers that do not provide good value or who engage in activities that are detrimental to advisory clients. Fiduciary rules under Section 206 of the Advisers Act should not apply to these unregistered advisers as compliance is expensive and unnecessary, and in some cases unconstitutional. The "pay to play" rule is an interference with each state's right to decide whether they want to allow public officials to monetize their positions by accepting payments from fund managers to direct pension or other state assets to particular investment managers. Pursuant to the Tenth Amendment, the definition of corruption or undue influence peddling should be left for each state to decide.

2. Promote Self-Reliance in the Investing Public. The "accredited investor" standard, as defined in Regulation D under the Securities Act should be eliminated. Under the JOBS Act , we have already permitted "general solicitation" of private offerings, thereby making information about private offerings available to average or non-institutional investors. To then restrict investment by certain individuals based on net worth or income is arbitrary and capricious. Any investor should be able to deem him/her/itself a sophisticated, and therefore an institutional investor at their own choosing.  It is not the government's role to decide whether a particular investor should be considered sophisticated enough to make a particular investment.  

3. Provide for Wider Choices for Investors.  The restrictions that apply to the number of investors a private investment fund may have should be eliminated.  Additionally, registration of mutual funds should be at the option of the fund manager.  If all or most investors deem themselves to be "sophisticated," then there is no need for the protections provided in the registration process.  Fund offerings of all types would adhere to marketplace standards, not those imposed by burdensome rules and regulations that impose expensive compliance burdens.   Fund managers should still be able to register securities if they want to, but they should also be able to go directly to market without registration.

4. Everyone Can be a Broker.  Registration of broker dealers that deal solely with institutional investors should be eliminated, with the new definition of "sophistication" to apply here.  There is no institutional exception for broker dealer registration, yet anyone who puts a buyer and seller of a securities transaction together for a fee must be registered.  This inhibits capital formation by requiring people who participate in the capital raising process to take tests and obtain licenses, maintain capital based on types of activities, make reports to regulators, and to be subject to examination and enforcement.  None of these requirements is consistent with the acceleration of growth and ease of capital formation. Additionally, everyone should be able to monetize their contacts by selling securities and participating in the capital raising process.  Otherwise, what is the point of social media?

5. Un-regulate Me.  The SEC's Office of Compliance, Inspections and Examinations can be substantially reduced or perhaps even eliminated along with most of the Enforcement Division.  The marketplace will determine who is suited to provide the services over which these groups now have oversight.  They might maintain some oversight and responsibility for "registered offerings" and "registered advisers," but there is no need to examine or inspect advisers or investment companies even if they provide services to non-institutional clients. The marketplace will punish any of the non-performers over time.

Once the SEC has implemented these ideas, capital markets will operate as smoothly and efficiently as they did prior to Dodd Frank.  Trust me.


Winston & Strawn LLP
Co-Chair, Financial Services Corporate Practice

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35th Floor
San Francisco, CA 94111-5840

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Jay Gould is a partner in the Corporate Department in Winston & Strawn LLP's San Francisco and New York offices, and serves as co-chair of the firm's Financial Services Practice. Mr. Gould concentrates his practice on investment funds and investment management, and counsels clients involved in all aspects of the financial services industry. Mr. Gould represents: U.S. registered investment companies; hedge funds; offshore investment companies; investment advisers; retail and institutional broker-dealers; and municipal bond underwriters. He has extensive experience in drafting private placement memoranda, partnership and limited liability company agreements, subscription agreements, registration statements, proxy statements, periodic reports, no-action letters, applications for exemptive relief, and other documents for filing with the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and other regulatory agencies.

Mr. Gould advises investment companies, investment advisers, and broker-dealers on mergers and acquisitions. He also provides counsel on matters involving: corporate governance and Sarbanes-Oxley compliance; mortgage securitizations and sales; collateralized debt offers; joint ventures and strategic relations; and retail, institutional, and offshore securities distribution strategies and regulatory considerations.

Prior to joining the firm, Mr. Gould served as chief counsel for E*TRADE Global Asset Management, Inc., vice president with TransAmerica Life Companies, senior counsel to Bank of America NT&SA, and as an attorney with the SEC and four other major international law firms.

Mr. Gould received a B.A. from the University of Washington in 1978, and a J.D. from The Catholic University of America, Columbus School of Law in 1983.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.