April 2012
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Deregulation
When The CPA Journal went to press this month, the U.S. Senate was considering a bill that had been overwhelmingly passed by the House (H.R. 3606). This bill, paradoxically named the JOBS (Jumpstart Our Business Startups) Act, is anything but job-creating legislation. In an effort to reduce red tape for “small” businesses seeking to raise capital, H.R. 3606 would exempt businesses with up to $1 billion in annual revenue from many of the reporting, disclosure, and governance rules established after the Enron and WorldCom frauds. But playing fast and loose with investor protections is a sure way to destroy investor confidence. And history has shown us that if investors lose confidence in the integrity of our financial system because of fraud risks, they will demand a higher rate of return and, consequently, the cost of capital will increase. A higher cost of capital impedes the growth of the very businesses this bill is seeking to help.
A written statement by SEC Commissioner Luis A. Aguilar on March 16, 2012, aptly pointed out that “nothing in the bill requires or even incentivizes issuers to use any capital that may be raised to expand their businesses or create jobs in the U.S.”
And It Gets Worse
If enacted, H.R. 3606 would eliminate the rules that enforce the separation between research analysts and investment bankers in the same financial institution. This separation requirement was originally established to prevent conflicts of interest, such as investment bankers offering prospective clients favorable research coverage in exchange for additional underwriting business.
Another provision of the bill could cause potential investors to be misled by inaccurate research reports that are not subject to the same scrutiny and accountability of current offering prospectuses.
A third proposal in the bill, known as “crowdfunding,” would permit unlimited offers and sales of securities to “accredited investors.” Solicitation and advertising could be conducted over the Internet and could bypass registration requirements under the Securities Act of 1933. Those with fraudulent intentions could act with virtual impunity beyond the reach of law enforcement. As SEC Commissioner Aguilar stated, “this provision of H.R. 3606 would be a boon to boiler room operators, Ponzi schemers, bucket shops, and garden variety fraudsters, by enabling them to cast a wider net, and making securities law enforcement much more difficult.”
Unless there is proper oversight of the gatekeepers who facilitate these offerings and sales, as well as protections of investor funds and securities—such as requiring a bank custodian or broker-dealer—this is a scandal waiting to happen.
It seems that we still haven't learned from history and, consequently, keep repeating the same mistakes.
History Lesson
It seems that we still haven't learned from history and, consequently, keep repeating the same mistakes. Can our memories of the latest financial crisis really be that short? It feels like only yesterday that our nation's financial structure was shaken to its core by the 2008 global financial crisis.
The seeds of that crisis were sown when we began loosening the restrictions imposed by the Glass-Steagall Act of 1933 on commercial banks and allowed them to underwrite securities. The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999, dealt the mortal blow by ending the ban on combining commercial and investment banking. This cleared the way for the consolidation of the banking industry and the creation of the “too-big-to-fail” financial institutions that needed taxpayer-funded bailouts in 2008 and 2009. Shortly thereafter, the Commodity Futures Modernization Act of 2000 permitted a volatile and unregulated expansion of the over-the-counter derivatives market.
This pattern suggests an innate tendency to chip away at regulations intended to protect the public until they are so ineffectual as to be rendered useless—at which point they are discarded in the name of market competitiveness or job creation, or some other fictitious excuse for a dearly held economic principle.
The lobbying clout of our financial institutions; the corruption and conflicts of interest for some of our legislators; and the incestuous relationships among our regulators, legislators, and financial institutions may begin to explain some of the bad judgment behind prior legislative decisions.
Our financial services industry and our legislators need to learn that it is the interests of the American people they should serve first, not their own.
As always, I welcome your comments.
The opinions expressed here are my own and do not reflect those of the NYSSCPA, its management, or its staff.