Each fall, the Securities Industry and Financial Markets Association (SIFMA) holds its annual meeting at which they gather leading voices in capital markets regulation and engage them in short, one-on-one conversations and expert panel discussions. Leading MorganFranklin and Vaco Financial Service resources attended this year and have highlighted some of the key topics that were covered.

Prudential Regulation of Capital Markets: The View from Former Officials

Regulators are looking for a more diverse set of market participants to mitigate risk regarding prudential regulations (safety and soundness) and market regulation (efficient markets).

No one knows from where the next crisis will come, so the need for a continued push toward principle as opposed to rules-based regulation will help prevent future catastrophes.

Dodd-Frank was enacted based on the theory that regulations failed. It is more than 2,000-pages long and its potential effectiveness is dependent on how you measure risk. Will the next crisis be about balance-sheet risk? Market risk? Liquidity risk? A move toward activity-based regulation may be a more prudent measure.

The U.S. continues to be the world’s reserve currency because it maintains the deepest and most liquid markets, which need to be defended through transparency and regulation. This must be maintained in the face of changing instruments, including digital assets that may eventually lead to the creation of a digital dollar.

No Commitment on Interest Rate Path

According to John Williams, president of the Federal Reserve Bank of New York, “The economy is in a very good place,” although he also noted that the Fed is not committed to any particular policy path in the months ahead. His remarks echo the wait-and-see stance the Fed has previously taken, but Fed officials also have said they would consider cutting rates again if there was a “material reassessment” of their current outlook for moderate growth and a strong labor market.

Regulation Best Interest (“Reg BI”) and the Preservation of Choice

Reg BI establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make recommendations to retail customers of any securities transactions or investment strategies involving securities. During a question and answer session, SEC Chairman Jay Clayton stated, “I want to know: Have we preserved choice? Choice in a way that provides investors the choice and protection that they deserve and expect?” The fee-for-service model may be right for some people while a transaction-based model may be right for others.

Implementing the Consolidated Audit Trail (“CAT”)

CAT is coming, so get ready. Despite persistent concerns about data privacy and potential cybersecurity breaches of information, Clayton encouraged broker-dealers to prepare with connectivity testing expected to start in the third quarter of 2020.

In response to the flash crash of May 2010, which saw up to $1 trillion in the value of U.S. stocks erased in a matter of minutes, CAT is a single, comprehensive database expected to store an unprecedented amount of sensitive trade data and personally identifiable information (PII). It will house each investor’s name, address, date of birth and Social Security number or Individual Taxpayer Identification number, as well as orders, cancellations, modifications, executions and quotes for the equities and options markets. CAT will take in 58 billion records daily and maintain data for more than 100 million customer accounts and their unique customer information.

CAT also will allow the SEC and SROs the ability to monitor, analyze and investigate trading activities in the equities and options markets on a consolidated basis to better protect investors.

The Burden of Sustainable Investing

Panelists openly discussed objective criteria for what constitutes a sustainable investment and agreed that whatever regimen is used should both allow flexibility and steer clear of overly burdensome rules.

The need for a globalized taxonomy of standards and disclosures is important for sustainable investing to prevent green arbitrage, which could shift resources to areas in which there are less-stringent requirements. Setting policies to expand the investment universe will need to involve linking taxonomies to subsidies, tax breaks and carbon pricing.

The panel further discussed if regulators are able to verify the sustainability of investments and if auditing and credit-rating firms might be needed to help address that gap.

Opportunity Zones

Work on additional rules regarding qualified Opportunity Zone funds continues with the goal of providing greater regulatory clarity to encourage further investment, said Sen. Tim Scott (R-S.C.). In a move toward this goal, a proposed IRS reporting form would gather information about such funds in order to better assess “exactly how well (they) are performing.”

The program Scott said, has driven $60 billion to more than 8,700 distressed communities, with property values increasing about 20% and wage growth as much as 8%, compared with 3% nationwide. The program “allows for a more even spread of investors’ resources” compared to current venture-capital investment allocation, which is primarily focused on New York City, Boston and Silicon Valley.

Government and Corporate Leaders Think Trump’s American First Policy is Good Business

“If (government and corporate leaders) believe Trump is helping us get stronger, it gives investors around the world a sense of safety,” said Mark Mobius, founding partner of Mobius Capital Partners. Many countries also are moving toward unilateral agreements and away from multilateral trade agreements due to the belief that they provide a more equitable measure of treatment to all parties.

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Authored by: Ken Fick