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OpenMarket: Financial Regulation

  • How Department of Labor's "Fiduciary" Rule Could Cripple IRA Choices

    March 3, 2015 12:38 PM

    Last week, President Obama called on the Department of Labor to “update the rules and requirements that retirement advisors put the best interests of their clients above their own financial interests.” At a speech at the American Association of Retired Persons, the president proclaimed, “You want to give financial advice, you’ve got to put your client’s interests first. “

    Yet, if the regulation the DOL is set to introduce at the president’s behest is anything like the “fiduciary” rule it proposed in 2010—and withdrew upon a groundswell of protest the next year—the government’s definition of “best interest” will likely not be in the best interest of individuals who wish to pursue alternative assets from gold to peer-to-peer loans to crowdfunding in their IRAs.

    The last time around, the DOL tried to reclassify a broad swath of financial professionals and business as “fiduciaries” even if they did not provide regular investment advice. Not only were broker-dealers covered, but so were directed custodians of IRAs, even self-directed IRAs in which investors don’t rely on any “fiduciary” advice. Once again, the freedom of self-directed IRA holders to invest in assets of their choosing, including crowdfunding ventures, may be at risk.

    Self-directed IRAs can invest in a wide range of assets. As worries about monetary policy have been on the rise, gold and silver have found popularity as IRA holdings. Real estate has long been a staple as well. The growth of peer-to-peer lending has stemmed in part from the ability to put the loans created by Prosper and Lending Club into IRAs.

    And as CrowdFund Beat and others have reported, self-directed IRAs serving accredited investors now have access to crowdfunded startups available through SEC Rule 506(c), which legalized general advertising of investment of non-public companies in 2013 pursuant to the Jumpstart Our Business Startups (JOBS) Act. When Title III of the JOBS Act or new congressional legislation legalizing equity crowdfunding for ordinary investors is finally implemented—and hopefully that will be soon—there should be no barriers to self-directed IRAs serving the masses providing access to these exciting new investments.

    Yet, much of this progress in lifting barriers to crowdfunding could be short-circuited if a broad, restrictive “fiduciary” rule comes to fruition. Last time, the proposal specifically included “appraisers” in its definition of fiduciaries, a category that included directed custodians of IRAs.

    Tom Anderson, board manager of Pensco Trust, a San Francisco-based IRA custodian that is now one of the leaders in offering crowdfunding options, wrote in comments to the DOL in 2011 that imposing a fiduciary standard “would result in higher costs and potentially fewer service providers to self-directed IRAs,” which “in turn, could result in fewer investment choices.” Anderson’s comments were written on behalf the Retirement Industry Trust Association, a trade group for custodians of self-directed IRAs, who helped successfully shelve the first DOL rule.

  • Harvard Study Confirms Dodd-Frank's Harm to Main Street

    February 10, 2015 7:31 AM

    Literally since the day the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama, my Competitive Enterprise Institute colleagues and I have predicted its harshest effects would fall on community banks. “While the bill claims to crack down on excesses on Wall Street, its harshest impact will likely be on Main Street businesses that had nothing to do with the crisis,” I wrote on FoxNews.com on July 15, 2010, the day President Obama signed the bill.

    Since then, numerous studies, as well as testimonials from community bank officials, have proven this prediction correct. Yet much of the media and politicians still peddle the myth that Dodd-Frank only hurts Wall Street, and thus, repealing or easing sections of Dodd-Frank would benefit “big banks” at the expense of Main Street.

    But maybe a new confirmation of Dodd-Frank’s harm to community banks will get attention because of its unlikely source: the John F. Kennedy School of Government at Harvard University. Two researchers at the Kennedy School’s Mossavar-Rahmani Center for Business and Government have just produced a study concluding that Dodd-Frank accelerated the decline of America’s community banks.

    While acknowledging that community banks’ share of financial assets has been falling since 1994, authors Marshall Lux and Robert Greene find that “since the second quarter of 2010—around the time of the passage of the Dodd-Frank Act—their share of U.S. commercial banking assets has declined at a rate almost double that between the second quarters of 2006 and 2010.”

  • Main Street Fights Dodd-Frank's Chipping Away at the Constitution

    January 30, 2015 3:31 PM

    “Wall Street Chips Away at Dodd-Frank,” blared a recent front-page headline in The New York Times about bipartisan measures that have passed the U.S. House of Representatives and/or been signed into law that ever-so-slightly lighten the burden of the so-called financial reform rammed through Congress in 2010. “GOP Pushes More Perks For Wall Street...” reads the home page of The Huffington Post under the picture of establishment pillar, Jamie Dimon, CEO of JP Morgan Chase.

    Yet, what these articles don’t say is that the firms putting their resources on the line to challenge Dodd-Frank in court are the furthest thing from Wall Street high rollers. They are decades-old firms selling stable, time-tested financial products to everyday consumers.

    At first glance, the national insurance firm MetLife and the Texas community bank State National Bank of Big Spring might seem to have little in common. But they both are solid financial firms that never took a bailout and never had their hand in the toxic mortgages—spurred on by the government-sponsored enterprises Fannie Mae and Freddie Mac and mandates of the Community Reinvestment Act—that caused the financial crisis.

    And now, the firms are both doing their customers and all Americans a favor by bringing suit against Dodd-Frank’s Financial Stability Oversight Council (FSOC), one of the many opaque entities in Dodd-Frank that lack accountability to Congress and the public.

    In its lawsuit brought this month, MetLife raised many of the same constitutional issues as did State National Bank in its pending legal challenge brought in 2012 in collaboration with the Competitive Enterprise Institute, at which I work. CEI and the conservative seniors group 60 Plus Association are co-plaintiffs with the bank, and CEI attorneys are working with the esteemed C. Boyden Gray—the former White House Counsel—in providing representation to the parties.

    In an open letter to its customers that ran in full-page ads in The New York TimesWashington Post, and Wall Street Journal, MetLife CEO Steven Kandarian explained his objections to the firm being designated as a “systemically important financial institution,” or SIFI, by FSOC. “We do not believe MetLife poses systemic risk, and we are concerned that our designation will harm competition among life insurers and lead to higher prices and less choice for consumers.” In that sense, a court victory for MetLife would greatly benefit the public as well.

    To its credit, MetLife is rejecting  not only the burdens of being designated a SIFI but also the benefits—benefits that seem to eagerly embraced by both MetLife’s competitors (such as the infamous AIG) as well as the biggest banks. Being designated a SIFI means the federal government considers MetLife to be “too big to fail,” making it subject to the same Dodd-Frank bailout regime set up for big Wall Street banks like Goldman Sachs and JPMorgan Chase.

    As CEI, 60 Plus Association, and the State National Bank argue in our legal challenge to the Dodd-Frank Act, the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail.

    We argue that the tiny State National Bank “is injured by the FSOC’s official designation of systemically important  nonbank financial companies, because each additional designation will require the Bank to compete with yet another financial company—i.e., a newly designated nonbank financial company—that is able to attract scarce, fungible investment capital at artificially low cost.”

  • FDIC Retreats from Operation Choke Point

    January 28, 2015 3:34 PM

    In a partial victory for all those campaigning against the abuse of power known as Operation Choke Point (see our comprehensive study here), the Federal Deposit Insurance Corporation (FDIC) has issued guidance to its supervisory staff that restricts some of the methods used to advance Choke Point.

    Operation Choke Point is a Department of Justice initiative aimed at “choking off” the financial oxygen of businesses the administration disapproves of, with a special focus on payday lending. It threatens banks that do business with these industries with burdensome investigations and subpoenas, which has led to banks closing accounts with legal businesses that have had a perfect banking record.

    One of the ways Choke Point has proceeded has been via supervisors issuing veiled threats or direct but unwritten comments that suggest a banking institution should stop doing business with a client. As a result, there has been no paper trail within the administration directly linking the closure of bank accounts with Operation Choke Point.

    This new memorandum purports to put a stop to that. It tells its staff that recommendations for closure of bank accounts should not be made through informal comments, and that banks should not be informally criticized for their relationships. All such recommendations now need to be put in writing.

    Furthermore, “reputational risk” alone is no longer to be considered grounds for recommending the termination of a banking relationship. Previous FDIC guidance on “reputational risk” was the source of the much-talked about list of industries targeted by Operation Choke Point. The withdrawal of the list by FDIC several months ago may have led to an even broader interpretation of “reputational risk,” with suggestions that even coal mines have been the target in some areas.

    That these two guidelines had to be put in writing is an implicit admission by FDIC that its staff has been guilty of these practices. The instruction to cease such arbitrary behavior is a victory for campaigners against executive abuse, and in particular for Rep. Blaine Luetkemeyer (R-Mo.), a former banking examiner who took his complaints directly to the head of the FDIC.

    FDIC, however, is only half the battle. The investigating attorneys at the Department of Justice who began the Operation still retain the power to issue subpoenas that can cause havoc to any bank that receives one. That threat remains, and banks will still be wary of doing business with companies that might possibly attract one. Until the DOJ is brought in line, Operation Choke Point will likely continue.

  • Obama Should Help Borrowers by Shedding Dodd-Frank, Not Pumping FHA

    January 8, 2015 12:24 PM

    “If it keeps moving, regulate it. And if it stops moving, subsidize it.” So said Ronald Reagan in 1986.

    Reagan was describing the unintended effects of government policy. But for the Obama administration, this formula seems to be the modus operandi of its policy making.

    Take mortgages, for instance. After the Dodd-Frank financial overhaul was rammed through the Democrat-controlled Congress in 2010, the Consumer Financial Protection Bureau—a bureaucracy created by the Dodd-Frank to be unaccountable almost by design—implemented the law’s “qualified mortgage” (QM) provisions.

    The QM provisions were so costly and complex that community banks and credit unions—as far away as one could get from the causes of financial crises—sharply decreased or even abandoned altogether the creation of new mortgages. The U.S. House of Representative responded last year by passing overwhelmingly bipartisan legislation to scale back Dodd-Frank’s QM, but the bill became one of over 400 that never moved from then-Senate Majority Leader Harry Reid’s desk.

    Yet today, in a much-heralded speech on housing in Phoenix, President Obama is expected not to join the bipartisan effort to take on the Dodd-Frank regulations keeping mortgages from moving, but to create new subsidies that not only may be ineffective at moving the housing market but would be harmful to the nation’s fiscal health, as they bulk up the government-backed housing agencies that fueled the housing crisis.

    According to press reports, the administration’s plan consists of cutting premiums borrowers pay for mortgage insurance for mortgages backed by the Federal Housing Administration (FHA) by 50 basis points. This move comes despite the FHA’s insurance reserves being already below required levels.

    Not only did the FHA have to get a direct $1.7 billion public bailout from the Treasury last year, it has received—according to a new Politico investigation—an estimated $73 billion in hidden bailouts through budget “reestimates” that don’t require official action.  In the Politico expose of the FHA and other government credit program, reporter Michael Grunwald explains that “reestimates don’t require a public announcement or a congressional appropriation; agencies just use what’s known as their ‘permanent indefinite authority’ to stick the shortfalls on the government’s tab.”

  • Lame Duck Quacks Needed Dodd-Frank Relief

    December 12, 2014 10:29 AM

    Waaaah! That’s the sound of former House Financial Services Committee Chairman Barney Frank (D-Mass.) crying about stinging, bipartisan rebukes to his legacy of the Dodd-Frank financial regulatory monstrosity rammed through the Democrat-controlled Congress in 2010.

    And it must be all the more painful to Frank that enough members of his own party had turned against provisions of the legislation that a couple much-needed rollback are on the verge of being signed into law in this month’s “lame duck” session.

    According to the Boston Globe, Frank called some of these rollbacks “the road map for stealthily undoing all this in the future.” We can only hope this is the case! Because even liberal Democrats are now discovering that Dodd-Frank did nothing to lessen the problem of too-big-to-fail banks and instead punishes “Main Street” business, investors, and consumers who had nothing to do with the crisis.

    As this is being written, it looks like three modest but significant measures of relief from Dodd-Frank are on the verge of passing; one by itself in a separate bill and two will be the proverbial “ponies” in the manure of subsidized terrorism insurance and “crominbus” spending bills.

    There is a fight brewing with measure of derivatives relief in the cromnibus, with progressive Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio), leading the charge against it. This is a good modestly deregulatory measure and will be discussed in a follow-up blog.

  • Rep. Leutkemeyer Moves to Choke off Operation Choke Point

    December 10, 2014 3:38 PM

    The release this week of a new House Oversight and Government Reform Committee staff report into Operation Choke Point provides another opportunity to underline just how egregious the behavior of executive agencies has been in this matter. As I outline in my in-depth report from earlier this year, Operation Choke Point has been a freelance operation by rogue members of staff at the Justice Department and the Federal Deposit Insurance Corporation (FDIC) in particular aimed at killing off industries they suspect might have high levels of fraud, on the grounds that they present “reputational risk” to financial institutions they do business with. It represents an end-run around all established legislative and judicial processes required by the constitution. As such it should be terminated immediately.

    The new report focuses particularly on the actions of FDIC officials, as revealed in their own words through e-mails obtained by the committee. For instance, the report found that, “Personal animus towards payday lending is apparent throughout the documents produced to the Committee. Emails reveal that FDIC’s senior-most bank examiners “literally cannot stand payday,” and effectively ordered banks to terminate all relationships with the industry.”

    The actions of FDIC officials also violated basic ethical standards. As the report found, “In a particularly egregious example, a senior official in the Division of Depositor and Consumer Protection insisted that FDIC Chairman Martin Gruenberg’s letters to Congress and talking points always mention pornography when discussing payday lenders and other industries, in an effort to convey a ‘good picture regarding the unsavory nature of the businesses at issue.’”

  • Liberals and Conservatives Challenge Overreach of Dodd-Frank's FSOC on MetLife

    November 18, 2014 2:18 PM

    As CEI brings suit before the D.C. Circuit Court of Appeals tomorrow challenging the constitutionality of unaccountable bureaucracies created by the Dodd-Frank “financial reform” law of 2010, it looks like we may have some high-profile company in litigation against Dodd-Frank’s Financial Stability Oversight Council (FSOC).

    The FSOC is a secretive, unaccountable task force of financial bureaucrats of various agencies created to designate banks and other financial firms “systemically important,” or too-big-to-fail. In September, the FSOC preliminarily decreed insurer MetLife a “systemically important financial institution,” or SIFI.

    As CEI argues in our legal challenge to the Dodd-Frank Act (including the FSOC’s role of identifying risk), the SIFI designation confers on a firm a strong competitive advantage, as investors and creditors know the government won’t let it fail. That’s why big banks and MetLife competitor American International Group (AIG), which have already received billions in taxpayer bailouts, have eagerly embraced their SIFI status.

    But MetLife, to its credit, has publicly stated that it is not too big to fail and does not want the special privileges that come with SIFI status, nor the regulatory costs. MetLife chairman and CEO Steven A. Kandarian declared last year, “I do not believe that MetLife is a systemically important financial institution.”

    Now, The Wall Street Journal reports that “MetLife Inc. doesn’t want to be tagged as “systemically important” and is preparing to possibly take the U.S. government to court to avoid it, people familiar with the matter said.” The insurance firm has hired Eugene Scalia, attorney with Gibson, Dunn & Crutcher, who has put forth successful suits against other provisions of Dodd-Frank.

  • Crowdfunding Is Entrepreneurship’s History and its Future

    November 18, 2014 9:03 AM

    In America and around the world, aspiring entrepreneurs are meeting their colleagues and their mentors in official and unofficial sessions of Global Entrepreneurship Week. Created in 2007 by the Kansas City-based Kauffman Foundation and British organizations, Global Entrepreneurship Week, as stated on its website, “inspires people everywhere through local, national and global activities designed to help them explore their potential as self-starters and innovators.”

    And this year, enabling entrepreneurship through crowdfunding will be a huge focus. To coincide with Global Entrepreneurship Week’s events, the recently formed Crowdfund Intermediary Regulatory Advocates (CFIRA) is having its 2nd Annual Regulatory and Advocacy Summit on Capitol Hill on Friday, November 21. For more details on the public events, go here.

    And the Competitive Enterprise Institute is celebrating Global Entrepreneurship Week by release a paper by me entitled, “Declaration of Crowdfunding Independence: Finance of the People, by the People, and for the People.”

    Key points of the my report include:

    • Technology did not create crowdfunding, but it has widely broadened the size of the crowds and increased the potential of both charitable and entrepreneurial ventures to find funding.
    • Crowdfunding has positive effects on job growth, revenue for entrepreneurs, and follow-on interest from institutional investors. Firms that met their goals in crowdfunding campaigns hired, on average, two new employees by the end of the campaign. This is all the more remarkable considering that the firms had, on average, only one or two employees before the crowdfunding campaigns began.
    • The most potential comes from equity (ownership interest) and debt (specific rate of return)-based crowdfunding, both of which are either banned or heavily restricted in the United States due to arcane securities laws.
    • Due to fear of running afoul of arcane or vague SEC rules, there is frequently a de facto “millionaires only” rule for investment in new business that limits entrepreneurs’ capital-raising ability and deprives average investors the opportunity to grow wealthy through early-stage investment in a company.
    • While the U.S. leads the world in crowdfunding campaigns on popular sites like Kickstarter and IndieGogo, these campaigns are overwhelmingly donations- and rewards-based. The donors get nothing more than recognition, souvenirs like T-shirts, and or a sample of the product produced.
    • The Jumpstart Our Business Startups (JOBS) Act of 2012 was supposed to alleviate some of those problems, but the SEC has yet to implement provisions to allow crowdfunding offers of $1 million or less.
  • CFPBs Prepaid Debit Card Rules Will Harm Low-Income Consumers

    November 13, 2014 4:07 PM

    Today’s action by the Consumer Financial Protection Bureau to issue unprecedented burdens on providers of prepaid debit cards shows why the bureau needs to be held accountable to our elected representatives. This lack of constitutional accountability is why CEI, in partnership with the 60 Plus  Association seniors group and the tiny Texas community bank the State National Bank of Big Spring, is challenging the structure of the bureau created in the Dodd-Frank legislation of 2010 in a lawsuit to be heard before the D.C. Circuit on November 19.

    Though the CFPB says and many of the fawning headlines say the regulations are simply about consumer disclosure, the CFPB proposal—set to go into effect after a brief 90-day comment period—actually would subject prepaid cards to more stringent rules than checking accounts. It takes the very radical step of treating overdraft features on a prepaid card as an “extension of credit.”

    Under the new rules, as described by the CFPB proposal, ”prepaid cards that access overdraft services or credit features for a fee would generally be credit cards.” But, as noted in news articles on the proposal, most of the lower-income consumers are getting prepaid credit cards in place of debit cards and checking accounts. As Time notes, “almost 80% of unbanked households with prepaid cards used them to make everyday purchases, pay bills, or receive payments.”

    But under the CFPB, an express “ability to pay” rule would be added that is absent from checking accounts with overdraft features. This means another option lost by many of the unbanked.

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