One of the top men at Baird, the US wealth management house, recently spoke to FWR about his thoughts on what the Securities and Exchange Commission's new boss means for wealth managers and the regulatory landscape.
The arrival of Gary Gensler as Wall Street’s “top cop” has certainly caught the attention of wealth managers. The latest Securities and Exchange Commission chairman means to have an impact.
Much has changed since the Trump adminstration, where the regime made a point of retiring two regulations for every new one enacted. Gensler does appear to favor a more activist role for the SEC. If there is one consistent theme since Gensler took up office in April this year, it is that he’s determined to push for more transparency over fees and costs, go after conflicts of interest, and push back against financial market activity that he considers to detract from the wider economy. The pace of activity in terms of speeches, commentaries and consultations has been brisk. For example, a few days ago Gensler said that the SEC was taking a closer look at retail trading apps such as Robinhood and the red-hot sector of special purpose acquisition companies (SPACs).
With all this activity there is a risk that the regulatory net can become overly restrictive and stifle beneficial innovation, John Taft, vice chairman of wealth management and financial services group Baird, told Family Wealth Report in a recent call. He talked about “the single most aggressive regulatory agenda from the SEC in decades.”
“The SEC Chair has been sending very clear signals on his priorities, and the list is a long one that includes climate disclosures, human capital disclosures, payment for order flow, crypto regulation, digital engagement practices, ‘greenwashing,’ Regulation Best Interest enforcement, and on and on. It would not be surprising to see some new disclosure metrics and requirements released before the end of the year, with a wave of additional updates to follow in early 2022,” Taft said. (See here and here for articles about Regulation Best Interest.)
“There is a risk that the Biden administration compromises economic growth by making it harder for the industry to do what it is to supposed to do – to facilitate growth. Of course, there are areas where there are clear excesses that need to be reined in,” Taft continued. “Never before have core financial services cost as little as they have today. Costs have declined in every decade.” Taft urged critics of the sector to take some historical perspective.
Family offices, fiduciary rules and transparency
To some extent, the kind of campaign Gensler is driving is inevitable, given how wealth inequality, and perceived practices of modern finance, are hot-button political issues – not just on the Left. More than a decade of ultra-low interest rates from central banks such as the Federal Reserve has encouraged a chase after yield, jacking up asset prices and arguably encouraging speculative froth over the patient pursuit of profit. The Dodd-Frank legislative measures enacted by the Obama administration a decade ago were designed to suppress undue risk-taking and bolster the strength of financial institutions against future shocks. However, the GameStop saga, and the volatile behavior of bitcoin - to give just two examples - suggests that problems remain.
The Dodd-Frank architecture of rules have been criticized for being too onerous, or for not going far enough. For example, one change after the financial crisis was how the “family office rule,” as it is generally called, enables family offices to avoid registering under the 1940 Advisers Act, and the associated costs of doing so. As a result, a number of hedge fund firms, such as those of George Soros, for example, converted into family offices by ceasing to take in third-party funds. The demise of New York-based Archegos earlier in 2021 prompted calls for family offices to be regulated because Archegos was structured as such an office. (See here for a discussion.)
Baird’s Taft said that whatever happens, investors and industry practitioners will not be in for an easy ride. Asked about recent calls to widen the regulatory net to family offices, Taft said that already there are moves to require more disclosure on the use of swaps of the sort that were involved in the recent Archegos case.
“Transparency, efficiency and competition are the watchwords of the Gensler regime,” he said.
“We are going to see some aggressive enforcement and rule-making, with the idea of reducing what investors pay for financial services. This [Gensler] worldview is going to inform much of what the SEC will be doing,” Taft said.
One point that has received considerable media coverage is payment-for-order-flow, totaling $2.7 billion last year and a business model used by discount brokerages and other players such as Schwab and most famously, Robinhood. “They have gone to zero-cost commissions. If that [order flow payment] is constrained they may have to reconsider their business models,” Taft said.
“Chairman Gensler also intends to rein in fees in private equity, where he thinks their practices are opaque, with inadequate disclosure. He also believes different classes of shareholder in such funds are treated differently (inappropriately so) by the same funds,” Taft said.
What will the SEC regime mean for a firm such as Baird?
“Our firm is squarely in the middle of the fairway when it comes to our business model: the advisory proposition to investors, the services we provide to all manner of clients. The Gensler agenda will affect us but not in a way that is dramatic,” Taft replied.
“We are compliant with Reg. BI in the way that the SEC has told us to be,” he said.
A problem that all SEC leaders face, Taft said, is that at a societal level, it is not clear that the US has worked out the right balance between regulation on the one hand and the need to have strong economic growth, on the other.
Even before the financial crash of 2008, it was understood in the industry and in Washington that the 1930s-era regulations needed to be updated. Dodd-Frank legislation addressed that need in a dramatic fashion after the financial crisis, Taft said.
“My personal view is that one of the great success stories we can point to is the way government, regulators and the private sector worked together to restructure the financial services industry so it is safer, sounder and more secure.”
In terms of leverage and capital buffers, major banks in the US are much more robust than was the case before the financial crash, he said.
Since then, there has been oscillation between the way different administrations – Obama, Trump and now Biden – have thought about regulation. Under Trump, the perception was clearly that overzealous regulation needed to be dialed back. The Trump administration oversaw the demise of the DOL Fiduciary Standard and its replacement with Reg BI. “Now Gensler is going to enforce it more aggressively – to the letter,” Taft said.