American Banker: Protect the Financial Industry by Protecting Investors


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American Banker: Protect the Financial Industry by Protecting Investors

  1. 1.    Protect the Financial Industry byProtecting InvestorsJennifer OpenshawAPR 5, 2013 9:00am ETFriday marks the first anniversary of the Jumpstart Our BusinessStartups Act. As the industry awaits overdue Securities andExchange Commission guidance on some of its provisions, consumeradvocates rightly worry individual investors will get burned again.You may know of someone – a relative, a neighbor, a colleague –who sold a house and now technically meets the "accreditedinvestor" rule with a net worth exceeding $1 million.But does that mean he or she is sophisticated – ready and able to make decisions about investing in privateplacements?Inexperienced and even unaccredited investors, including many clients of the wealth management andfinancial advisory arms of commercial banks, are likely to find themselves evaluating such choices as aresult of the JOBS Act. Among other things, it calls for the SEC to amend Regulation D to allow thealternative investment industry to market and communicate to the broader public about private placementsand other products.In todays world of low yields, the individual investor is hungry for alternatives. Rather than settle for 2percent on a long-term CD – or nothing if theyre among those still sitting on the sidelines of the stockmarket – he or she may jump at a new product, especially if its marketed by someone calling himself afinancial advisor.There are some benefits for investors, such as access to information that sectors of our industry have beenproviding for decades to the privileged few. Those who might not have had access to better-performingproducts could more easily find them now – even if those investors are not a part of the old boys network.But investors could also be hurt. Private placements are complicated products, but unlike mutual fundstheyve been exempt from regulation under the Securities Act of 1933.So private placements have often lured unwary investors whose portfolios suffered. In the past three yearsalone, a number of broker/dealers have folded as a result of ensuing litigation; some of those affected arewell-known names.  
  2. 2. Some names are well-known. In 2011 Ameriprise Financial sold its Securities America division overfailures related to fraudulent private placements that its brokers marketed. Financial advisors like DavidLerner have been sanctioned by the industry. In Lerners case, FINRA last fall levied a $14 million fine andsuspended Lerner for a year, accusing the firm of selling a complicated non-traded REIT to unsophisticatedand elderly clients.If we have bad actors selling products fraudulently or investor complaints about unsuitablerecommendations that blew up their retirements, you can be sure it will lead regulators to eventually wieldtheir hammers more heavily.Dodd-Frank and other legislation have emerged from the wreckage of the 2008 crash. Often the outcomecan be extreme – and it can make operating a financial business more challenging.What can we do?For one thing, target the right investor. This takes on a higher level of importance as unsophisticatedinvestors consider products that might carry greater risks. Consumer advocates already are demandingmore investor protections around the SECs Reg D revisions, with some hinting at litigation against theSEC if they believe its guidance falls short. Defined wealth for accredited investors ought to be higher; onecall for minimum income of $400,000 and net worth of $2.5 million is a good benchmark. Financial firmsought to embrace this definition unilaterally; if they dont act to ensure fair play, you can bet thatregulatory-minded congressmen in Washington will move to do so.Second, take greater care. JOBS requires that securities issuers take merely "reasonable steps" to verify thatbuyers are sufficiently wealthy; a more vigorous process is warranted.Finally, standardize disclosures. Yes, these are complicated products, but theres no reason we cant bringuniformity, at a minimum, to make the decision-making process easier. The Consumer Financial ProtectionBureau simplified mortgage statements and has created model disclosure forms for the credit card andcollege financing industries that explain critical loan elements—interest rates, fees, and total costs—in away that is meaningful to borrowers. Investors, too, are entitled to similar treatment with alternativeinvestments – related to performance and fees – so they can evaluate possible gains and losses in volatilemarkets with their eyes wide open.With financial crises eroding investor trust, the industry needs to lead now. By focusing on whats best forinvestors, financial managers can ensure their own future as well.Jennifer Openshaw is the president of Finect, an online network for the financial advisory industry, thefounder of Womens Financial Network, now a division of Siebert Financial, and the author of TheMillionaire Zone (Hyperion).© 2013 SourceMedia. All rights reserved.