This time of the year brings to mind Lehman Brothers, which collapsed in the fall of 2008. That moment, a domino in tandem with the fall of Bear Stearns, Washington Mutual and others, began the most significant financial disruption to developed world economies since the Great Depression. In 2019, we seem to have forgotten the Global Financial Crisis (GFC). And now, with rumblings of another recession, I can’t help but wonder: Do we remember what we learned?
Time heals all wounds and fades all memories. The financial crisis regulatory response was designed to help mitigate and even prevent some of the occurrences of too-big-to-fail enterprises like excessive leverage and rampant market speculation. These seem almost out of fashion now.
Despite the tumult caused by the financial crisis, employment in the financial services industry is robust. As college graduates flock to be private equity analysts or investment bankers, few of the next generation workforce remember the darker days of 2008. Financial markets globally stand near record highs, and trust in the financial services industry has made a tempered comeback.
Today, we dance on the grave of the financial crisis. There are plenty of examples of this. Commercial banking, finance and investment industry interests attempt, and sometimes succeed, to gut many of the regulatory protections put in place to protect the interest of investors and the integrity of public markets, some preceding the financial crisis and the Dodd-Frank legislation. These are only five recent intrusions on investor rights that should give us pause.
Systemically Important Financial Institutions. An entire three-volume set of rules regarding bank solvency, derivatives trading, stress testing and plans to resolve distressed institutions was proposed, implemented and ... has now been rolled-back over the course of just ten years. Memories have been particularly short on the distress caused by such institution’s derivatives exposures, proprietary trading activities, capital adequacy ratios and banking reserves designed to protect against a run.
Regulation Best Interest. After decades of discussion, the Securities and Exchange Commission (SEC) failed to follow Dodd-Frank and fix the problem of mis-selling investment products to retail investors. The simple objective was to clarify for a retail customer who they were dealing with, whether a fiduciary or a conflicted salesperson. The regulation is a hodge-podge of shifting duties, disclosures and conflict rules that still leaves investors vulnerable and confused.
Internal Controls. Earlier this year, the SEC released a proposal allowing a very large number of public companies to no longer have an outside auditor look at their internal financial reporting controls, citing a compliance burden. This requirement harkens back to the Sarbanes Oxley Act to ensure that a public company complies with its own policies for financial reporting. Elimination of an auditor’s opinion substantially lessens investor protections in place for nearly two decades.
Corporate Governance and No-vote Common Shares. Public markets in the U.S. now allow a complete shakedown of shareholder rights that were championed for generations. One-share, one-vote has been the foundation of investor rights at public companies. However, the recent parade of dual-class share IPOs effectively reshapes conventions on good corporate governance. Companies can become public with little governance and offer preferential voting power for founders over public shareholders. Without corrective action on the quality of new public listings, our corporate governance system will deteriorate and may take our equity markets along with it.
Proxy Voting Advice. The SEC recently proposed strict changes to the independence of proxy voting advice, despite limited regulatory processes and the near unanimous pleas of proxy adviser customers. Threatening both the investors who use the advice and proxy firms providing it, the SEC gave guidance to the effect that such proxy voting advice had better be checked with the public company for accuracy; it might otherwise be seen as fraudulent and misleading. We remember a section in the Constitution called the First Amendment about this.
Something seems very disquieting in all of this. Regulations during the last ten years perfected balancing investor protection and market oversight, while not hindering economic growth with unnecessary free market and company constraints. Signals of late say all are comfortable throwing them out with the bathwater, because we’re confident we can handle anything. Through the great misfortune of the financial crisis, we may have learned some of the lessons. But our future selves may find we’ve been dancing on our own grave once more.
Kurt Schacht is managing director of standards and advocacy at CFA Institute.