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Has the U.S. Got it All Wrong?

January 23, 2014

As my colleagues and I were plowing through the SEC’s latest set of rules—concerning the need for municipal securities advisors to register—it hit me once again. Why does everything in the U.S. need to be so complex…and does this complexity truly serve the best interests of the financial services industry, its customers and the U.S. public?

 

New rules requiring the registration of a “municipal advisor” are the latest “blockbuster.” At the risk of oversimplifying, a firm may need to register as a municipal advisor if (i) it provides advice to municipal entities or those who provide financial support for municipal securities offerings and (ii) the advice concerns the issuance of municipal securities or investing their proceeds and the like. “Providing advice” includes providing advice indirectly, such as advising a fund which has allocations from a municipal entity or an entity that provides financial support for a municipal project. However, activity-based exemptions may be available. The SEC provides more than 600 pages with numerous exceptions, explanations and permutations, many of which do not seem all that intuitive or clear-cut. 

 

Ok, so determining whether a firm needs to register as a municipal advisor will take some effort, but what about the rest of the U.S. landscape?

 

If advising on securities, a firm may need to register with the SEC or a state regulator as an investment adviser…or maybe just file notice with certain authorities, or maybe do nothing. Advising on futures and options? Consider the need to register with the CFTC and the NFA in multiple capacities—unless the firm can fit within an exemption. Investing in swaps? Certain types of swaps (but not all) are considered commodities and could trigger CFTC registration. Other swaps are the SEC’s jurisdiction.

 

As far as I know, no other country in the world has this regulatory maze. In China, without prior licenses from the China Securities Regulatory Commission, no entity can provide advice on securities or futures investments. The same situation generally exists in Brazil, in Canada, and in other countries around the world. A license may permit advice on all financial instruments. In those few countries where commodities and securities regulators are split, combining the regulators may be under consideration. For example, it is reported India is working on a proposal to merge its securities and commodities regulators to improve oversight.

So why does the U.S. make it so complex? 

 

Sadly, my guess is two factors. First, power. Every regulator likes power, as does every legislator, and no one is going to give up an inch of turf—even if it improves the process or better protects investors. Second, many in the financial services industry seemingly believe that multiple regulators provide leverage; there is always the chance that if firms structure their operations correctly and jump through the hoops, they can avoid a regulator altogether. Or, if not, the mastery of a complex regulatory landscape provides a competitive advantage. Is it any wonder that it’s getting harder than ever to launch a firm?

 

Where does this all leave us? It leaves the U.S. with a fractured and complex structure that may, during the next crisis which surely will occur, place more emphasis than ever on the one regulator that brings it all together—the FSOC. 

 

Until then, firms active in the U.S. are subjected to a web of overlapping regulatory regimes that go far beyond those addressed in this post. RFG helps managers and investors succeed in this environment through a holistic approach that simplifies the process of understanding and staying on top of these regulations.

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