Boosting Investor Protection with Financial Reform Act

What is Financial Reform Act?

It is an act that will assist investors in understanding the kind of recommendation investment advisers and broker-dealers can provide. It also requires hedge funds to report to the Securities and Exchange Commission for investors to put off systemic risk. In addition, it covers new reforms and market upheaval, which will keep more jaded investors from credit unions.

While many consumers are overwhelmed and not thrilled with this recent enacted legislation targeting the financial services’ overhaul, there are advocates thinking that the modifications will work to their advantage.

According to Jim Metz, CUNA Mutual Group’s senior vice president for asset management, the bill is written in more than 20,000 pages. He believes that it’s going to consume months or even years before consumers fully become aware of the impact of the legislation.

Understanding the Consumer Protection Act of 2010 and the landmark Dodd-Frank Wall Street Reform, consumers will realize that there are a number of areas of scrutiny that tackle investor protection reform, from licensing requirements to issues or conflicts of interest with credit rating companies. However, the SEC firmly stands that the new law establishes a fresh and more efficient regulatory structure, filling several regulatory gaps and furnishing great market accountability as well as public transparency to the current financial system.

As mandated by the act, the SEC is asking for feedback from consumers as it performs a study that will recognize if retail investors truly know that there are various standards of care relative to dealers, brokers, and even investment advisers. Members of a credit union may seek assistance from a financial professional not knowing that there is distinction between an adviser and a broker and they may be assisted differently for instance on stock spam, depending on who they are receiving the advice from.

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Segments of Transformation

The SEC will fundamentally maintain broker-dealers to a fiduciary standard the same with the investment adviser’s standard. Metz connoted that the standard presently applied to financial advisers is suitability, wherein every time an investor ventures in an investment, the standard of care granted fits the needs of the client along with his or her timeline. Implementing a fiduciary standard necessitates an adviser to work on things broadly and consider the investor’s best interests over lengthened period of time.

Metz thinks that the act is deemed as a good change from the consumer’s perspective since the advisers are necessitated to look at client-adviser relationship deeper. They are switching from just transaction-focused scheme to something that is relationship driven.

Investment advisers are required to keep specific licenses to stay eligible in giving out investment advice. However, with the new fiduciary standard, Metz explained that there will be new series required. Advisers from the CUNA Brokerages at present have the necessary licenses. These people earned the licenses and additional registrations when the turmoil in the market arose. For many, though, getting the fiduciary standard will be vital.

Another segment of transformation under this legislation is that hedge funds as well as private equity funds containing $150 million in assets will be mandated to register as investment advisers with the SEC. Thus, regulators will have better means to monitor the market risk. Metz believes that this strengthens the control of the consumers and such will impact a considerable number of funds.

The act also eradicates the 15 client rule that permits advisers to steer clear of registration while administering huge amounts of assets and representing several investors. Furthermore, it allows the SEC to oblige registered advisers to keep sufficient records and then file reports concerning the private funds they recommend.

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Agencies associated with credit rating reports will be observed differently under the new act. The SEC conveyed that the policies and methodologies to be implemented will be linked with ratings and every rating will come with a form disclosing the complete range of quantitative and qualitative information. The disclosure is essential since as Schapiro discussed, the over-reliance on credit rating firms led considerably to the growth as well as harsh contraction of the market of securitization. She quoted a government report that showed 93% of the subprime mortgage-backed AAA-rated securities issued in 2006 are currently rated in default or at junk-bond level.

The other aspects of transformation include over-the-counter derivatives market and corporate disclosure requirements about compensation to closely monitor stock market scams. The SEC promised that in the next 18 months, it will peel back every area covering its regulatory scope. They will carry out dozens of studies and ask for feedback from consumers in line with the implementation.

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