While other trade groups responded with muted criticism last week to the Department of Labor’s final fiduciary rule, the newly formed Equity Dealers of America came out with guns blazing, calling for Congress to review the rule and for the industry to consider a legal challenge.
The EDA, which represents mid-market firms, was created in February alongside a related umbrella group, the American Securities Association (ASA). The ASA incorporates the EDA into an older sister organization, the Bond Dealers of America (BDA). Wrap them all up, and you’ve got a new, beefed-up organization for regional firms. At least that’s the idea.
Founding ASA members include Piper Jaffray, Raymond James Financial, Robert W. Baird and Stifel Nicolaus, among others. All the CEOs of those named firms sit on the ASA board.
The mid-market firms want to give more heft to their lobbying efforts and expand their influence beyond just fixed-income related issues. And they have never felt completely at home within the Securities Industry and Financial Markets Association (SIFMA), which is seen as being dominated by the major global banks.
The initial broadside delivered by the EDA against the DOL’s final rule fits with the new group’s belief that many regulations disproportionately hurt smaller players.
The DOL rule will impose a heavier burden on smaller firms, which have more transactional accounts of modest size, said Chris Iacovella, executive director of the Equity Dealers of America.
“This really hurts individuals with small balances,” he said. “If the costs are too high, you’re forced to move to a fee-based model. I don’t know if that’s feasible for everyone.”
“It looks like a freight train coming at us,” adds Curt Bradbury, chief operating officer of Stephens Inc., and the inaugural chair of the ASA.
Creating systems to cope with new rules is easier for firms with scale, Bradbury says. “Most mid-market firms are not scale-based players. We’re relationship-based.”
That’s why, early on, Stephens made the determination not to dump small accounts as a result of the DOL’s rulemaking.
“When we did the math, we found a lot of these small IRAs are sons and daughters of older clients, so we’re not going to run ‘em off,” Bradbury said.
Regarding the DOL rule, the ASA is pretty much in line with SIFMA and the Financial Services Institute. All the trade groups are worried about possible unintended consequences, especially with smaller accounts.
Nevertheless, the regional firms behind the ASA feel strongly that they need their own trade group. In fact, that was the genesis of the Bond Dealers Association of America, which was as a spin-off from SIFMA (then the Securities Industry Association) in 2008 after the old Bond Market Association (BMA) was acquired by the SIA.
“I felt like we were not being represented” by the BMA being part of the SIA, recalls Noe Hinojosa, president and CEO of Estrada Hinojosa and an ASA board member.
SIFMA’s focus “is rightly more global in nature” given the interests of its large-firm members, he says.
Three-quarters of SIFMA members are small and regional firms, counters Kenneth E. Bentsen, Jr., SIFMA president and CEO, in an email. “Our agenda demonstrates SIFMA’s broad range of priorities are in the interests of all our members.”
“I’m not critical of SIFMA,” Bradbury says. He and other ASA members are on the SIFMA board, in fact, and plan to remain. “But it has occurred to us that, over the years, there are occasions where legislative and regulatory strategies differ from firm to firm, particularly based on size.”
In other words, the smaller guys shouldn’t be punished for the wayward actions and failures of the too-big-to-fail players.
A case in point is the SEC’s ongoing enforcement actions against municipal underwriting firms for selling bonds from issuers that hadn’t met disclosure obligations. The agency’s Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, a voluntary program begun in 2014, has so far led to charges and settlements with 72 underwriters who self-reported violations.
The problem as ASA members see it, is that while MCDC fines are based on the size of a firm, they’re capped at $500,000––an amount a number of the mid-market firms paid along with the big boys. (Firms had the option of contesting the charges.)
“We attempted to talk the SEC into some sort of a more proportionate [fine], but they insisted on doing a [per-filing penalty] and a $500,000 limit,” Bradbury said.
An SEC spokesperson declined to comment for this story.
Setting The Agenda
The big Wall Street banks do have an ally in the ASA, though, at least on some issues. Mid-market firms do not support the idea of breaking up the too-big-to-fail institutions, a topic popularized by presidential candidate Bernie Sanders.
Breaking up big banks isn’t feasible, Bradbury says. The better approach is requiring large institutions to carry more capital under the global Basel III agreement, then let the big banks themselves determine where they want to commit capital or how much to downsize.
“Higher capital solves a lot of problems,” Bradbury said. “We think we need to complete Basel III, then think about how much higher we need to go.”
Another issue closer to home is mutual-fund breakpoints. Firms have been hit with a number of fines for missing the correct discounts, but Bradbury says the complexity of calculating breakpoints makes the task near impossible, with multiple funds, share classes and schedules, and with broker-dealers not always aware of updated schedules.
“We need to address this with mutual fund companies … and simplify that whole task,” Bradbury said.
ASA members also have concerns about implementation of the JOBS Act, and the impacts of high-frequency trading on the markets.
Can they make a difference?
The BDA has been effective, ASA members say, and they hope that by creating the EDA and getting C-level executives involved, the ASA will have a larger impact than the BDA acting alone.
Bradbury senses an opening. “There’s growing recognition that there is a disparate impact” on smaller firms, he said. “We are encouraged that now on Capital Hill you hear more discussions about Dodd-Frank and [the impact on small] community and commercial banks.”
ASA members hope to bring that same sensibility to those who regulate the securities industry.