The agency also wants to modify the rule so that the changes would not be retroactive-RIAs would not be required to renegotiate terms of arrangements that were permissible when the parties entered into them.
"This won't have any impact on advisors with higher end clients because they weren't trying to squeeze people into that type of fee arrangement," says Patrick Burns, president of Advanced Regulatory Compliance Inc. in Beverly Hills, Calif. "But this could impact other advisors who were trying to be more creative by including people whose house was a major part of their wealth."
The SEC is requesting comments on these amendments to rule 205-3 by July 11. Comments can be made by using the SEC's Internet comment form (www.sec.gov/rules/proposed.shtml); by sending e-mail to [email protected] with "File Number S7-17-11" on the subject line; or by using the Federal eRulemaking Portal (www.regulations.gov).
Life Imitating Art
When Harvard-educated International Monetary Fund economist Rex Ghosh shopped around his novel about financial terrorists causing a global financial crash, publishers took a pass because they found the premise implausible. After the 2008 financial crisis, Ghosh's book Nineteenth Street NW didn't seem so far-fetched after all. Ghosh eventually found an American publisher (Greenleaf Book Group Press), and his novel has garnered praise from the likes of former Federal Reserve Chairman Paul Volcker. Ghosh says the U.S. financial system nearly ruined itself, and it still has lessons to learn to prevent another crash.
FA: How would you describe the current culture of the U.S. financial sector?
RG: For starters, these are my own views, not those of the IMF. The U.S. financial sector has forgotten its basic purpose, which is to intermediate real savings for real investment. There's too much churning and making money on highly leveraged, very exotic financial instruments that frankly neither the purchasers or sellers understand how they'll behave. We really need to get back to basics. My message is we can take away lessons from the crisis, which I broadly categorize as lessons for the Fed, banks and regulators.
FA: What lessons are there for the Fed?
RG: Central banks such as the Fed need to look at asset prices, such as the stock market and housing sectors, when assessing inflation. It also needs to be more mindful of lending and credit booms, especially in the face of weakening credit standards. That's what paved the road to hell three years ago. Traditional monetary policy tools, like the Fed's interest rate, may need to be bolstered by countercyclical capital requirements such as requiring banks to hold more capital in boom times.
FA: What lessons can be learned by the banks?
RG: Banks used to know who they were lending to, but the proliferation of packaged securities made it hard for banks to know who their ultimate borrower is. In turn, that meant they had to rely on the credit rating agencies. The more banks have gotten away from traditional lending, the more risk we have.
FA: Should there be more regulation of the financial sector?