U .S. Chamber of Commerce Capital Markets Summit
ON MARCH 19, THE U.S. CHAMBER OF COMMERCE hosted its 8th Annual Capital Markets Summit, featuring many prominent speakers representing both the private sector and federal regulatory agencies. The general theme of the day’s discussions was how to make financial regulations work for Main Street and consumers.
View from the CFPB: Protecting and Serving Consumers
Steve Antonakes, Deputy Director of the Consumer Financial Protection Bureau (CFPB), spoke about his agency’s goals and the five main tools at its disposal: rulemaking, complaint response, enforcement, supervision, and consumer education.
Antonakes noted that the CPFB and the U.S. Chamber of Commerce have very common goals, and that the agency’s work is supposed to benefit consumers and the vast majority of financial institutions that operate according to current law. He stressed that the CPFB cares about the health of financial institutions, and seeks to put them in a position to be able to compete globally.
Effective rulemaking, Antonakes said, allows businesses to remain healthy and competitive. He listed mortgage origination, mortgage servicing, and debt collection as current focuses of rulemaking.
Collecting consumer responses has been very useful in identifying areas of concern for the CPFB, Antonakes said. He noted that the CPFB receives thousands of complaints from consumers each month.
The CPFB supervises banks that have over $10 billion in assets, as well as student loan servicers, debt collectors, and consumer reporting agencies, said Antonakes. He added that the CPFB has prioritized minimizing the financial burden of supervision on businesses.
Antonakes said the enforcement functions of the CPFB, comprising mainly of administrative proceedings and litigation, are meant to hold companies and individuals accountable.
Consumer eduction, Antonakes mentioned, should stress providing consumers with enough information to make responsible financial decisions.
Antonakes said the CPFB is a data-driven organization that seeks to be fact-based and objective. He added that he wants business leaders to be involved with the agency to help improve Americans’ financial lives.
Five Goals Our Financial System Must Achieve to Spur Jobs, Growth and Opportunity
Thomas J. Donohue, President and CEO of the U.S. Chamber of Commerce, said the real test of financial reform is see whether it has succeeded in establishing a structure that protects innovative and stable financial markets. He said that dealing with the Dodd-Frank Act is like “drinking water from a fire hose.”
Donohue offered five goals for financial regulators to help grow the economy. First, he stressed that reform must meet the needs of consumers and businesses by ensuring access to the full range of financial products. He said the financial services industry should “address what consumers need, not what regulators want.”
Second, Donohue said that a healthy financial services industry must have a diverse marketplace with every type of financial institution and that diversity serves the needs of different markets across the country. He criticized Dodd-Frank for inhibiting diversity, and said the Federal Reserve must acknowledge that there is no “one size fits all” regulatory approach that can work for the whole industry.
Third, rules must be clear and predictable, and governed by common sense, Donohue said. He added that regulators should clearly identify the problems rules seek to solve, and avoid unintended consequences.
Fourth, Donohue said regulation must be coordinated both at home and abroad to harmonize enforcement and implementation. He expressed concern that Dodd-Frank created over 400 rules and uses over 20 regulatory agencies in an overly-complex and often contradictory system. Internationally, he noted, the government must work on cross-border rules and fight protectionist policies.
The final goal, Donohue said, is to manage risk in the marketplace rather than eliminating it. He said that “the hallmark of entrepreneurship is responsible risk-taking.” Regulators focus on preventing reckless risk-taking, he opined.
Overall, Dodd-Frank has undermined all these goals, Donohue said, and the system will not work for consumers or companies the way it should.
Disclosure Overload and the Future of Corporate Governance Reform
The first panel of the day, moderated by former Commissioner of the U.S. Securities and Exchange Commission (SEC) Troy Paredes, discussed the state of corporate governance today.
Bob Fatovic, Executive Vice President, Chief Legal Officer, and Corporate Secretary of Ryder System, noted a major shift in the issues being focused on and the influence of the powers that make decisions. He said focus is now on directors and their performance, and added that it is no longer unusual for directors to be replaced en masse.
Directors used to have the right to exercise their own judgment, but no longer, said Fatovic, and special interest groups can take advantage of this landscape with the aid of proxy advisors. He noted that many small and medium-sized institutions do not have the resources to consider all issues, and are “following [proxy] advisors blindly” in some cases. Shareholder engagement, Fatovic said, is an important tool.
Cindy Fornell, Executive Director of the Center for Audit Quality, said that social media and increased access to information has put much more pressure on corporations and their directors.
Darla Stuckey, Executive Vice President and General Counsel of the Society of Corporate Secretaries and Governance Professions, said the balance of power is shifting to shareholders and activist investors, adding that increased engagement between boards and shareholders is more important than ever.
Amy Borrus, Deputy Director of the Council of Institutional Investors, said that small investors use proxy advisors, and this may be ascribing too much influence to proxy advisors like Glass-Lewis and Institutional Shareholder Services.
Turning the conversation to disclosure reform, Borrus said reform would take a long time. She said that disclosure documents should be easy to find and understand, highlighting the most important details for investors.
Fornell said that disclosure documents at present are mainly lengthy legal documents that are difficult for the average investor to understand. Fatovic agreed, saying that explaining every last detail of a business does not help investors.
Asked to identify what makes for good corporate governance, Stuckey said the most important thing is getting “the right people in a room with the right information.” Fornell and Borrus stressed that trust based on accountability and transparency is critical.
Keynote Address – Jim Rosenthal – Business Growth and Job Creation
Jim Rosenthal, Chairman of SIFMA and Chief Operating Officer at Morgan Stanley, said he is a strong supporter of the Chamber’s pro-growth agenda and that the financial services industry plays an indispensible role in economic expansion. He said that the industry has learned from the mistakes of the financial crisis and must continue to have a stronger “safety and soundness mentality.”
Rosenthal noted that most of the money invested in the capital markets comes from individual investors and retirement savings and that these investments in stocks and bonds give individuals a stake in the growth of the nation. He also noted that the levels of venture capital (VC) funding are much higher in the U.S. than in other countries and said these VC firms rely on banking and securities firms to securitize and distribute shares in their sponsored ventures.
Rosenthal explained that banks lower the costs of buying and selling corporate bonds which improve the ability of corporations to obtain funding and that this democratic bond market leads to a more innovative America.
He said that well functioning capital markets rely on responsible regulations that give confidence to investors but said that excess regulation that leads to unintended consequences should be avoided. He added that the financial crisis demonstrated that the system needed a better and more modern regulatory framework. Rosenthal then noted that under this new framework, financial institutions have fundamentally reshaped the industry and have become more resilient by increasing their capital levels, decreasing their leverage, and increasing their cash holdings.
In conclusion, Rosenthal said that he supports the Dodd-Frank Act’s attempts to make the system safer but that the large volume of rules adds costs, complexity, and uncertainty to the markets that adversely affect Main Street businesses. He hoped the regulators would soon conclude their rule writing processes and finalize a set a reasonable regulations.
Balancing Consumer Protection and Consumer Choice
Jess Sharp, Managing Director of the Center for Capital Markets Competitiveness (CCMC), moderated a discussion of preserving consumer choices in the modern regulatory environment. He opened the conversation by asking how the CFPB has been using its tools, and whether it is “getting the mix right.”
Kelly McNamara Corley, Executive Vice President, General Counsel, and Secretary of Discover Financial Services, said that one tool in particular, supervision, has been used more than the others. She called its use “extensive, intrusive, and constant.”
Andy Koblenz, Executive Vice Present and General Counsel of the National Automobile Dealers Association, criticized the CFPB for not providing clear rules and methodology. He said that businesses are unclear of the “rules of the road” and do not know whether they are violating regulations.
Andy Navarette, Senior Vice President and Chief Counsel of Capital One, said consistency in regulation is most important, and that he wants to see more use of rulemaking. Rulemaking, he said, affects everyone’s behavior, while enforcement only influences individual cases.
Mark Oesterle, Senior Vice President and Senior Counsel of SunTrust, expressed concern that uncertainty about regulations and future rules is stifling innovation. He worried that “everyone might sit on their hands” while waiting to see the direction of regulation.
Asked about the expectations of consumers and the tradeoff between choice and protection, Eric Rodriguez, Vice Present of the National Council of La Raza, said that while there is a strong interest in protection, people need to have access to credit and want to see new financial products made available.
Oesterle added that over-standardization is a concern because every new product can add a new element to the market. He said regulators cannot “homogenize the entire landscape and have a successful marketplace.”
Conversation with SEC Chair Mary Jo White
David Hirschmann, President and CEO of the Center for Capital Markets Competitiveness (CCMC), asked what the SEC’s approach will be regarding disclosure requirements for firms. White replied that it is a high priority for the SEC to have a disclosure regime review and noted that when it comes to the amount of information in disclosures, “more is not always more.” She said the objective of the review is to make disclosures more effective and meaningful for investors while taking into consideration the differences in what a retail investor and an institutional investor can digest. She noted that she has asked the SEC Director of Corporate Finance to provide her with specific recommendations and said the SEC will reach out to interested parties in the “fairly near term.”
When asked how the SEC can meet the needs of retail investors, White said that disclosures should have the detail that retail investors need but should not have too much mass where an individual would not be able to distill the information and figure out what is important.
Hirschmann then asked about proxy advisory firms and said that three areas worth talking about are: 1) the degree to which these firms have become corporate governance standard setters; 2) any conflicts of interest in their business models; and 3) how to correct any errors in their reports before they are published. He said that a recent roundtable hosted by the SEC was helpful and asked what the Commission’s next steps are in this area.
White said that there was “more agreement than I expected” at the proxy advisory roundtable and that she is interested in conflict of interest disclosures by these firms and the fiduciary duty of the entities that use their recommendations. She said that proxy advisors are important to the system and that she is “actively in discussion” with the staff who will make recommendations on possible next steps “very shortly.” She added that the Chamber’s best practices document has been useful and that the industry ought to continue its constructive dialogue with the SEC.
Next, Hirschmann asked what role the SEC plays on an international level to help create a resilient financial system without regulating every entity like a bank. He added that the term “shadow bank” is a “misnomer at best” and the term implies that bank regulation is better than the regulatory structure of shadow banks.
White said that the term shadow bank is “taken as a pejorative” and some think they are not regulated. However, she said, these entities are highly regulated and have been for some time. She noted that the SEC staff is active in the Financial Stability Oversight Council (FSOC) working stream with the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) to look at issues in this space.
Hirschmann then asked if there is a willingness of the other financial regulators in the FSOC to listen to the input of the SEC and referenced the study conducted by the FSOC’s Office of Financial Research (OFR) on the asset management industry. White said that while the OFR is designed to be an expert research entity, the SEC provided their expertise in this area and has been a “full partner in discussions” of the FSOC.
When asked about money market fund (MMF) reform and its tax implications, White said that the SEC is actively involved in proceeding to its adoptive phase for reforms in this industry. She noted that the SEC is sensitive to preserving these products and that it is engaged in discussions with the Internal Revenue Service (IRS) about the tax implications of the floating net asset value (NAV) proposal, especially as it affects institutional investors. She added that the structure of MMFs “does not translate” to regulating these entities as banks.
On the issue of resources and funding for the SEC, White said that the agency is “significantly underfunded” and that it owes it to the markets to push for proper funding. This funding is needed to improve their technology systems and increase the number of examinations, she added. White said she supports bipartisan legislation, The Stronger Enforcement of Civil Penalties Act (S. 286), which seeks to increase the maximum level of civil penalties for recidivists.
Hirschmann then asked if the SEC needs Congress to provide more flexibility or make changes to the Sunshine Act. White said that she supports the Sunshine Act’s goal of providing more transparency but said it creates challenges because the Commissioners cannot speak to more than one of their counterparts without calling an open meeting.
On the Volcker Rule, Hirschmann expressed concern that the five regulators in charge of writing and implementing the rule may have different enforcement approaches and asked White how issues of coordination will be addressed. White said that it was critical for the Volcker Rule to be a joint rule as it allowed the SEC to provide their expertise in the market making debate. She said that the work of implementing is just beginning and that there will be a transition period where loopholes may need to be dealt with. She added that the SEC always welcomes input from the industry.
When asked about the goal of financial reporting convergence, White said that she favors robust global standards but that it will be challenging to create these joint standards with other international standard-setting bodies. White also encouraged the Public Company Accounting Oversight Board to improve their core standards for audits and noted that the SEC will be looking closely at potential enforcement actions for failures in financial reporting and auditing gatekeepers.
Lastly, Hirschmann asked about the current state of market structure and if the markets are working well overall. White said that the SEC is engaged in a comprehensive review of market structure to see if any steps need to be taken to improve market functioning, including Regulation NMS and the structure of self-regulatory organizations (SROs). She said that “one size doesn’t fit all” and that the “process is never over.”
Managing Systemic Risk in the U.S. and Abroad
The panel discussion on systemic risk included: Paul Atkins, CEO of Patomak Global Partners; John Baumgardner, Partner at Sullivan and Cromwell; Aaron Klein, Director of Financial Regulatory Reform at the Bipartisan Policy Center (BPC); and Brian Reid, Chief Economist at the Investment Company Institute (ICI). The discussion was moderated by Alice Joe, Managing Director at the CCMC.
Joe began the discussion by asking the panel what systemic risk really is. Reid replied that defining “systemic risk” is a challenge and that most people think about financial institutions when they hear the term, but that this is not the only aspect of the issue. Klein said that the definition needs to move beyond the idea of “we know it when we see it” and should look at shared activity across the industry in asset classes and the effect of leverage.
Baumgardner said that Congress “didn’t have a clue” what the term “systemic risk” meant when they were writing the Dodd-Frank Act and that now the Fed is using theory rather than practice to build up a case for regulation, which he sees as a problem. He also said there is a disconnect between the reality of people responding to their own self-interests and their responsiveness to government policies. Atkins added that the intense focus on stability as a goal is a “very market-unfriendly approach” and noted that human nature is not stable.
Joe then asked how Congress and the regulators try to address systemic risk through Title I of Dodd-Frank and if this is the right approach. Klein said that the cutoff for systemically important financial institutions (SIFI) at $50 billion “is suspect” and said he was concerned with the automatic designation of firms above this level rather than taking a case-by-case approach. He also expressed concern with the bank centric nature of regulations as they apply to non-bank entities.
Baumgardner agreed and said while he is grateful that non-banks above this asset threshold are not presumptively designated as SIFIs, he thought Congress needed to give more qualitative guidance on how institutions are evaluated. Reid said that this designation process gives the “false allusion” that regulators are doing something productive and that “the cart is getting ahead of the horse.”
Atkins added that the FSOC’s ability to look at activities and practices is “more scary” because it allows them to “reach across the system.” He also noted that the dissenting statement from the insurance designee on the FSOC during the SIFI designation process “casts doubt on the whole process” and the FSOC’s end goals.
Reid also had concerns with the process of the FSOC, saying that their closed door meetings are a rejection of due process. He also had doubts if designating firms as SIFIs really makes the financial system more stable and wonder if the Federal Deposit Insurance Corporation (FDIC) “has the right to tax shareholders” and use the money for future industry bailouts.
Joe then asked about the FSB’s process of designating global SIFIs and how international regulators are coordinating their efforts. Baumgardner said that the FSB process is “more of a black box” than the FSOC process and noted that the FSB set a $100 billion threshold for designation and looks at investment pools rather than managers. Reid said that it is “clear there is a lot of coordination” but is it not clear if it is completely U.S. driven.
When asked by the audience what kinds of solutions there are to address systemic risk, Reid said that regulators should figure out how to gather more data to identify global macro-economic risks. Klein noted that some policies which became unpopular politically were eliminated in the Dodd-Frank Act and said that some of these policies may be useful to bring back. He also said that changes in the bankruptcy code to supplement Title II resolution processes could address systemic risk issues.
Conversation with CFTC Acting Chairman Mark Wetjen
Mark Wetjen, Acting Chair of the Commodity Futures Trading Commission, spoke with Hirschmann on the state of derivatives market reforms.
Wetjen explained that the focus of Title VII of Dodd-Frank came out of the global reaction to the financial crisis and the desire to reform the derivatives market to better take into account counterparty risk, and increase transparency while still providing risk management functionality and price discovery to market participants including corporations and manufacturers. He said that it is “hard to tell” now what the full impact of these reforms has been because the new market structure continues to develop, adding that it will take time to settle.
Hirschmann noted that most people support transparency in the derivatives markets but said the “devil is in the details.” He then asked for Wetjen’s thoughts on the U.S. moving more quickly than Europe in its regulation of international products.
Wetjen said that there has been much interest in the CFTC’s cross-border guidance and the process by which it was created. He said there were legitimate issues raised and that while he doesn’t think the guidance was a perfect document, he believes it is a rational, good set of policies. He noted that Europe is in a process to defer to U.S. rules if they are equivalent but said they are “lagging behind” the U.S. in this area. He also said that when compliance is required in the U.S. before Europe it “leads to competitiveness issues.”
Wetjen said that the Commodity Exchange Act (CEA) has “long embraced deference” and mutual recognition of other jurisdictions’ rules and regulations as long as other countries’ standards are high and they are serious about enforcement. He said the CFTC should be able to work well with other countries and use memorandums of understanding (MOUs) to established mutual recognition of rules.
Hirschmann then asked if the public conversation will move beyond cross-border issues in five years due to the use of substituted compliance. Wetjen said he thinks it will move beyond this point and noted that substituted compliance is already being used with European jurisdictions. He said that the CFTC is now expanding these equivalency determinations and is beginning to work with Japan and Australia.
Hirschmann then asked about the concept of “futurization” of the swaps market, where customers are moving towards futures products rather than using swaps because of regulatory complexity. Wetjen said that futurization was seen mainly in the energy asset class around the time of swap dealer registration. Wetjen explained that it happened because the swaps market was new and customers better understood the long-standing regulatory framework of the futures market. He said “at the end of the day” there will probably be more complexity in the swaps space because of the legislation in place, which requires more interconnections. However, Wetjen stated he wants to make sure that the CFTC is not incentivizing choosing one market structure over another for regulatory reasons.
Hirschmann then asked about margin requirements for end-users and if more legislation is needed for these market participants to get clarity that they will be exempt from these rules. Wetjen said that the CFTC resolved this issue in an effective way but noted that they are holing a roundtable on this topic to look at it more carefully in case anything more needs to be done. He also announced that the CFTC is released a request for comment on their data reporting rules to get more industry insight.
Lastly, Hirschmann asked how the CFTC deals with problems as they arise and where it makes sense to amend the rules to provide businesses with more certainty.
Wetjen replied that there have been implementation challenges and instances where staff action “encroached into the realm of policy making that’s more appropriate for the commission to undertake.” He said that the November staff advisory on the CFTC’s cross-border guidance is an example of this. Wetjen continued that this advisory was the “sort of weighty decision that’s probably better left for the commission to decide rather than the staff.” He said that while there may be a few other examples, “by and large” they do not cause problems and serve to interpret rules and allow flexibility to address problems.
Encouraging Savings: One Investor Opportunity at a Time
The panel on savings was moderated by Kenneth Bentsen, President and CEO of the Securities Industry and Financial Markets Association (SIFMA), and included: Bradford Campbell, Counsel at Drinker Biddle & Reath; Mark Iwry, Senior Advisor to the Secretary and Deputy Assistant Secretary, Retirement Health Policy, Department of the Treasury; J.J. Johnson, Executive Vice President of Public Affairs and Policy at Fidelity Investments; and Judy Mares, Deputy Assistant Secretary of the Employee Benefits Security Administration (EBSA) at the U.S. Department of Labor (DOL).
Bentsen asked the panel if there is a savings crisis in America today. Mares took the opportunity to share some recent statistics provided by the Employee Benefit Research Institute (EBRI) which showed that worker confidence in a secure retirement is up from 2013, but only to 18 percent. She noted that 73 percent of Americans without a retirement plan have less than $1,000 in savings, adding that both retirement income adequacy and confidence are lacking.
Mares highlighted the importance of financial literacy, which she said is “highly correlated” with confidence. She also said uncertainty erodes confidence, noting a DOL initiative to illustrate on benefit statements what assets translated into retirement income would look like.
Johnson said he believes there will be a crisis unless something is done to affect the behaviors of people going forward, adding that incentives are important to encourage individuals to make decisions that will prove fruitful.
Iwry noted there has not been much progress over the past 20 years other than a retirement system that is “a little more simple and easier to access,” but said there needs to be a “major breakthrough to coverage.” He said Americans will not be sufficiently prepared for retirement if the current path is continued. There needs to be a “major uptick” in access to employer plans, which he said “work the best.” Iwry also highlighted the importance of features like payroll deduction.
Campbell said he believes “crisis” is the wrong word, saying the direction needs to be adjusted to get a better outcome. He agreed with Iwry on the importance of payroll deduction but said the problem is that some individuals do not have access to a workplace plan. He suggested the removal of regulatory barriers could “improve the situation.”
Bentsen asked the group how they would characterize the debate on tax policy. He noted the advent of MyRA and asked if there were any counterintuitive initiatives.
Iwry said MyRA was created as “a way to move forward, to some degree, while we are waiting for something more major that would require legislation.” Regarding the difference of MyRA and IRAs, he noted that for some individuals, choice is good, but for others that choice can be daunting. He added that MyRA is a simple investment that can act as an “incubator” for those individuals that are not saving at all, do not have access to an employer plan, or find the choices daunting.
When asked about the impact on savings of small employers offering SIMPLE plans, Johnson replied that the option has been a driver of savings, and said the ability to defer taxes is an important incentive. He noted that 74 percent of workers have access to a workplace plan currently, and the question should be how to incentivize more people to utilize those plans. Johnson highlighted the benefits of auto features and said impediments such as costs and administrative burdens should be alleviated for small employers looking to offer a plan.
Bentsen asked the panel if the current legislative and regulatory environment is making it “more complicated” for firms to offer retirement plans. Mares said the issue of coverage is not new and there has always been a portion of the population that does not live in a “plan world.” She added there is “no simple or single solution.”
Mares noted that “great innovation” has come about from the study of behavioral economics – looking not at what people should do, but at what people actually do. She highlighted the importance of payroll deduction and automatic features and asked how to get more employers to use those features. Mares reiterated the importance of helping participants understand the transfer of assets to a stream income, and said education needs to start at a “really young age.”
Iwry replied that legislation is not necessary for much of those ideas, adding that a “major breakthrough” will require legislation, but said plan design features can take us “very far.”
Mares said an example of “tremendous innovation” has been the automatic-rebalancing features of target date funds (TDFs).
Campbell expressed concern with the current debate on tax reform, saying it is “driven by the thought that this is a pool of money from which to draw.” He added that both the President’s budget and House Ways and Means Chairman Dave Camp’s (R-Mich.) discussion draft had elements in the “opposite direction we want to go.”
Bentsen asked how regulations from multiple regulators should be handled.
Campbell expressed concern with a “history of stovepipe regulation,” noting that regulations in each of the banking, securities, and ERISA spaces do not always “play well” together. He highlighted the DOL definition of fiduciary proposal and their interest relating to rollovers as examples of activity at different agencies that is not “well coordinated and could cause some real problems.”
Relating to the definition of fiduciary, Mares responded that while the DOL and Securities and Exchange Commission (SEC) “may not be in the same boat,” they are “rowing in the same direction.” She added that no one wants to create a regulation where compliance with one standard results in noncompliance with another. She added that regulatory regimes need to work together.
Johnson said we have a “vibrant marketplace, competition, and innovation,” noting that recent proposals in various states for state-run retirement plans could stifle the innovation. Regarding an illustration of retirement income streams that Mares spoke about, he suggested regulators allow the private sector to develop different solutions. He expressed concern that with some of the proposals considered, education could be limited. He asked DOL and SEC to be cognizant of those concerns.
A question from the audience asked the panel to consider the importance of real estate and home equity in building savings. Johnson replied that at Fidelity, they consider all potential assets when working with clients to get a holistic view of their savings. He noted that saving through home equity can be a volatile vehicle, however. Campbell also highlighted the importance of holistic advice, but added that there are barriers to that advice.
Funding America’s Future
Doug L. Peterson, President and CEO of McGraw Hill Financial, LLC, gave a presentation on the potential for institutional investors bridging the funding gap for infrastructure.
Peterson opened by pointing out that $3.6 trillion is needed to update U.S. infrastructure, and the American Society of Civil Engineers has given America’s infrastructure a D+ rating. Unfortunately, he said, infrastructure is “not sexy” and does not get the same attention as issues such as defense or education.
Infrastructure spending in terms of percentage of GDP is at a 20-year low, Peterson said, but the significant funding gap could be at least partly funded by institutional investors. He noted that infrastructure investment provides high yields and low default rates, which should attract investment. In addition, he said, it provides an immediate return on investment to the economy by creating construction and engineering jobs in addition to promoting future liquidity of goods, services, and capital.
Coordination between policymakers and market participants is needed to unlock institutional investment, Peterson said. He said that the federal government should streamline regulatory regimes and minimize political and regulatory risk.
The State of the U.S. Economy and Prospects for Growth
Jason Furman, Chairman of the Council of Economic Advisors, noted that of the twelve nations that went through systemic financial crises, the U.S. is one of just two that has returned to pre-crisis GDP per capital. He lauded the strength of the recovery even in the face of the payroll tax cut, sequester, and government shutdown of 2013.
Furman said he is optimistic about 2014 because of the recovering housing market and decreasing interest rate payments as a percentage of household disposable income. He also noted the energy boom, decreasing growth of healthcare costs, and advancements in technologies such as computing power and mobile devices.
Furman offered seven key legislative actions as the Obama administration’s priorities for the year: 1) cutting the medium and long-term budget deficit; 2) increasing infrastructure spending; 3) enacting business tax reform; 4) continuing financial reform; 5) finalizing trade agreements with European and Pacific partners; 6) making sure that all Americans benefit from growth through measures such as a minimum wage hike; and 7) immigration reform.
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ON MARCH 19, THE U.S. CHAMBER OF COMMERCE hosted its 8th Annual Capital Markets Summit, featuring many prominent speakers representing both the private sector and federal regulatory agencies. The general theme of the day’s discussions was how to make financial regulations work for Main Street and consumers.
View from the CFPB: Protecting and Serving Consumers
Steve Antonakes, Deputy Director of the Consumer Financial Protection Bureau (CFPB), spoke about his agency’s goals and the five main tools at its disposal: rulemaking, complaint response, enforcement, supervision, and consumer education.
Antonakes noted that the CPFB and the U.S. Chamber of Commerce have very common goals, and that the agency’s work is supposed to benefit consumers and the vast majority of financial institutions that operate according to current law. He stressed that the CPFB cares about the health of financial institutions, and seeks to put them in a position to be able to compete globally.
Effective rulemaking, Antonakes said, allows businesses to remain healthy and competitive. He listed mortgage origination, mortgage servicing, and debt collection as current focuses of rulemaking.
Collecting consumer responses has been very useful in identifying areas of concern for the CPFB, Antonakes said. He noted that the CPFB receives thousands of complaints from consumers each month.
The CPFB supervises banks that have over $10 billion in assets, as well as student loan servicers, debt collectors, and consumer reporting agencies, said Antonakes. He added that the CPFB has prioritized minimizing the financial burden of supervision on businesses.
Antonakes said the enforcement functions of the CPFB, comprising mainly of administrative proceedings and litigation, are meant to hold companies and individuals accountable.
Consumer eduction, Antonakes mentioned, should stress providing consumers with enough information to make responsible financial decisions.
Antonakes said the CPFB is a data-driven organization that seeks to be fact-based and objective. He added that he wants business leaders to be involved with the agency to help improve Americans’ financial lives.
Five Goals Our Financial System Must Achieve to Spur Jobs, Growth and Opportunity
Thomas J. Donohue, President and CEO of the U.S. Chamber of Commerce, said the real test of financial reform is see whether it has succeeded in establishing a structure that protects innovative and stable financial markets. He said that dealing with the Dodd-Frank Act is like “drinking water from a fire hose.”
Donohue offered five goals for financial regulators to help grow the economy. First, he stressed that reform must meet the needs of consumers and businesses by ensuring access to the full range of financial products. He said the financial services industry should “address what consumers need, not what regulators want.”
Second, Donohue said that a healthy financial services industry must have a diverse marketplace with every type of financial institution and that diversity serves the needs of different markets across the country. He criticized Dodd-Frank for inhibiting diversity, and said the Federal Reserve must acknowledge that there is no “one size fits all” regulatory approach that can work for the whole industry.
Third, rules must be clear and predictable, and governed by common sense, Donohue said. He added that regulators should clearly identify the problems rules seek to solve, and avoid unintended consequences.
Fourth, Donohue said regulation must be coordinated both at home and abroad to harmonize enforcement and implementation. He expressed concern that Dodd-Frank created over 400 rules and uses over 20 regulatory agencies in an overly-complex and often contradictory system. Internationally, he noted, the government must work on cross-border rules and fight protectionist policies.
The final goal, Donohue said, is to manage risk in the marketplace rather than eliminating it. He said that “the hallmark of entrepreneurship is responsible risk-taking.” Regulators focus on preventing reckless risk-taking, he opined.
Overall, Dodd-Frank has undermined all these goals, Donohue said, and the system will not work for consumers or companies the way it should.
Disclosure Overload and the Future of Corporate Governance Reform
The first panel of the day, moderated by former Commissioner of the U.S. Securities and Exchange Commission (SEC) Troy Paredes, discussed the state of corporate governance today.
Bob Fatovic, Executive Vice President, Chief Legal Officer, and Corporate Secretary of Ryder System, noted a major shift in the issues being focused on and the influence of the powers that make decisions. He said focus is now on directors and their performance, and added that it is no longer unusual for directors to be replaced en masse.
Directors used to have the right to exercise their own judgment, but no longer, said Fatovic, and special interest groups can take advantage of this landscape with the aid of proxy advisors. He noted that many small and medium-sized institutions do not have the resources to consider all issues, and are “following [proxy] advisors blindly” in some cases. Shareholder engagement, Fatovic said, is an important tool.
Cindy Fornell, Executive Director of the Center for Audit Quality, said that social media and increased access to information has put much more pressure on corporations and their directors.
Darla Stuckey, Executive Vice President and General Counsel of the Society of Corporate Secretaries and Governance Professions, said the balance of power is shifting to shareholders and activist investors, adding that increased engagement between boards and shareholders is more important than ever.
Amy Borrus, Deputy Director of the Council of Institutional Investors, said that small investors use proxy advisors, and this may be ascribing too much influence to proxy advisors like Glass-Lewis and Institutional Shareholder Services.
Turning the conversation to disclosure reform, Borrus said reform would take a long time. She said that disclosure documents should be easy to find and understand, highlighting the most important details for investors.
Fornell said that disclosure documents at present are mainly lengthy legal documents that are difficult for the average investor to understand. Fatovic agreed, saying that explaining every last detail of a business does not help investors.
Asked to identify what makes for good corporate governance, Stuckey said the most important thing is getting “the right people in a room with the right information.” Fornell and Borrus stressed that trust based on accountability and transparency is critical.
Keynote Address – Jim Rosenthal – Business Growth and Job Creation
Jim Rosenthal, Chairman of SIFMA and Chief Operating Officer at Morgan Stanley, said he is a strong supporter of the Chamber’s pro-growth agenda and that the financial services industry plays an indispensible role in economic expansion. He said that the industry has learned from the mistakes of the financial crisis and must continue to have a stronger “safety and soundness mentality.”
Rosenthal noted that most of the money invested in the capital markets comes from individual investors and retirement savings and that these investments in stocks and bonds give individuals a stake in the growth of the nation. He also noted that the levels of venture capital (VC) funding are much higher in the U.S. than in other countries and said these VC firms rely on banking and securities firms to securitize and distribute shares in their sponsored ventures.
Rosenthal explained that banks lower the costs of buying and selling corporate bonds which improve the ability of corporations to obtain funding and that this democratic bond market leads to a more innovative America.
He said that well functioning capital markets rely on responsible regulations that give confidence to investors but said that excess regulation that leads to unintended consequences should be avoided. He added that the financial crisis demonstrated that the system needed a better and more modern regulatory framework. Rosenthal then noted that under this new framework, financial institutions have fundamentally reshaped the industry and have become more resilient by increasing their capital levels, decreasing their leverage, and increasing their cash holdings.
In conclusion, Rosenthal said that he supports the Dodd-Frank Act’s attempts to make the system safer but that the large volume of rules adds costs, complexity, and uncertainty to the markets that adversely affect Main Street businesses. He hoped the regulators would soon conclude their rule writing processes and finalize a set a reasonable regulations.
Balancing Consumer Protection and Consumer Choice
Jess Sharp, Managing Director of the Center for Capital Markets Competitiveness (CCMC), moderated a discussion of preserving consumer choices in the modern regulatory environment. He opened the conversation by asking how the CFPB has been using its tools, and whether it is “getting the mix right.”
Kelly McNamara Corley, Executive Vice President, General Counsel, and Secretary of Discover Financial Services, said that one tool in particular, supervision, has been used more than the others. She called its use “extensive, intrusive, and constant.”
Andy Koblenz, Executive Vice Present and General Counsel of the National Automobile Dealers Association, criticized the CFPB for not providing clear rules and methodology. He said that businesses are unclear of the “rules of the road” and do not know whether they are violating regulations.
Andy Navarette, Senior Vice President and Chief Counsel of Capital One, said consistency in regulation is most important, and that he wants to see more use of rulemaking. Rulemaking, he said, affects everyone’s behavior, while enforcement only influences individual cases.
Mark Oesterle, Senior Vice President and Senior Counsel of SunTrust, expressed concern that uncertainty about regulations and future rules is stifling innovation. He worried that “everyone might sit on their hands” while waiting to see the direction of regulation.
Asked about the expectations of consumers and the tradeoff between choice and protection, Eric Rodriguez, Vice Present of the National Council of La Raza, said that while there is a strong interest in protection, people need to have access to credit and want to see new financial products made available.
Oesterle added that over-standardization is a concern because every new product can add a new element to the market. He said regulators cannot “homogenize the entire landscape and have a successful marketplace.”
Conversation with SEC Chair Mary Jo White
David Hirschmann, President and CEO of the Center for Capital Markets Competitiveness (CCMC), asked what the SEC’s approach will be regarding disclosure requirements for firms. White replied that it is a high priority for the SEC to have a disclosure regime review and noted that when it comes to the amount of information in disclosures, “more is not always more.” She said the objective of the review is to make disclosures more effective and meaningful for investors while taking into consideration the differences in what a retail investor and an institutional investor can digest. She noted that she has asked the SEC Director of Corporate Finance to provide her with specific recommendations and said the SEC will reach out to interested parties in the “fairly near term.”
When asked how the SEC can meet the needs of retail investors, White said that disclosures should have the detail that retail investors need but should not have too much mass where an individual would not be able to distill the information and figure out what is important.
Hirschmann then asked about proxy advisory firms and said that three areas worth talking about are: 1) the degree to which these firms have become corporate governance standard setters; 2) any conflicts of interest in their business models; and 3) how to correct any errors in their reports before they are published. He said that a recent roundtable hosted by the SEC was helpful and asked what the Commission’s next steps are in this area.
White said that there was “more agreement than I expected” at the proxy advisory roundtable and that she is interested in conflict of interest disclosures by these firms and the fiduciary duty of the entities that use their recommendations. She said that proxy advisors are important to the system and that she is “actively in discussion” with the staff who will make recommendations on possible next steps “very shortly.” She added that the Chamber’s best practices document has been useful and that the industry ought to continue its constructive dialogue with the SEC.
Next, Hirschmann asked what role the SEC plays on an international level to help create a resilient financial system without regulating every entity like a bank. He added that the term “shadow bank” is a “misnomer at best” and the term implies that bank regulation is better than the regulatory structure of shadow banks.
White said that the term shadow bank is “taken as a pejorative” and some think they are not regulated. However, she said, these entities are highly regulated and have been for some time. She noted that the SEC staff is active in the Financial Stability Oversight Council (FSOC) working stream with the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) to look at issues in this space.
Hirschmann then asked if there is a willingness of the other financial regulators in the FSOC to listen to the input of the SEC and referenced the study conducted by the FSOC’s Office of Financial Research (OFR) on the asset management industry. White said that while the OFR is designed to be an expert research entity, the SEC provided their expertise in this area and has been a “full partner in discussions” of the FSOC.
When asked about money market fund (MMF) reform and its tax implications, White said that the SEC is actively involved in proceeding to its adoptive phase for reforms in this industry. She noted that the SEC is sensitive to preserving these products and that it is engaged in discussions with the Internal Revenue Service (IRS) about the tax implications of the floating net asset value (NAV) proposal, especially as it affects institutional investors. She added that the structure of MMFs “does not translate” to regulating these entities as banks.
On the issue of resources and funding for the SEC, White said that the agency is “significantly underfunded” and that it owes it to the markets to push for proper funding. This funding is needed to improve their technology systems and increase the number of examinations, she added. White said she supports bipartisan legislation, The Stronger Enforcement of Civil Penalties Act (S. 286), which seeks to increase the maximum level of civil penalties for recidivists.
Hirschmann then asked if the SEC needs Congress to provide more flexibility or make changes to the Sunshine Act. White said that she supports the Sunshine Act’s goal of providing more transparency but said it creates challenges because the Commissioners cannot speak to more than one of their counterparts without calling an open meeting.
On the Volcker Rule, Hirschmann expressed concern that the five regulators in charge of writing and implementing the rule may have different enforcement approaches and asked White how issues of coordination will be addressed. White said that it was critical for the Volcker Rule to be a joint rule as it allowed the SEC to provide their expertise in the market making debate. She said that the work of implementing is just beginning and that there will be a transition period where loopholes may need to be dealt with. She added that the SEC always welcomes input from the industry.
When asked about the goal of financial reporting convergence, White said that she favors robust global standards but that it will be challenging to create these joint standards with other international standard-setting bodies. White also encouraged the Public Company Accounting Oversight Board to improve their core standards for audits and noted that the SEC will be looking closely at potential enforcement actions for failures in financial reporting and auditing gatekeepers.
Lastly, Hirschmann asked about the current state of market structure and if the markets are working well overall. White said that the SEC is engaged in a comprehensive review of market structure to see if any steps need to be taken to improve market functioning, including Regulation NMS and the structure of self-regulatory organizations (SROs). She said that “one size doesn’t fit all” and that the “process is never over.”
Managing Systemic Risk in the U.S. and Abroad
The panel discussion on systemic risk included: Paul Atkins, CEO of Patomak Global Partners; John Baumgardner, Partner at Sullivan and Cromwell; Aaron Klein, Director of Financial Regulatory Reform at the Bipartisan Policy Center (BPC); and Brian Reid, Chief Economist at the Investment Company Institute (ICI). The discussion was moderated by Alice Joe, Managing Director at the CCMC.
Joe began the discussion by asking the panel what systemic risk really is. Reid replied that defining “systemic risk” is a challenge and that most people think about financial institutions when they hear the term, but that this is not the only aspect of the issue. Klein said that the definition needs to move beyond the idea of “we know it when we see it” and should look at shared activity across the industry in asset classes and the effect of leverage.
Baumgardner said that Congress “didn’t have a clue” what the term “systemic risk” meant when they were writing the Dodd-Frank Act and that now the Fed is using theory rather than practice to build up a case for regulation, which he sees as a problem. He also said there is a disconnect between the reality of people responding to their own self-interests and their responsiveness to government policies. Atkins added that the intense focus on stability as a goal is a “very market-unfriendly approach” and noted that human nature is not stable.
Joe then asked how Congress and the regulators try to address systemic risk through Title I of Dodd-Frank and if this is the right approach. Klein said that the cutoff for systemically important financial institutions (SIFI) at $50 billion “is suspect” and said he was concerned with the automatic designation of firms above this level rather than taking a case-by-case approach. He also expressed concern with the bank centric nature of regulations as they apply to non-bank entities.
Baumgardner agreed and said while he is grateful that non-banks above this asset threshold are not presumptively designated as SIFIs, he thought Congress needed to give more qualitative guidance on how institutions are evaluated. Reid said that this designation process gives the “false allusion” that regulators are doing something productive and that “the cart is getting ahead of the horse.”
Atkins added that the FSOC’s ability to look at activities and practices is “more scary” because it allows them to “reach across the system.” He also noted that the dissenting statement from the insurance designee on the FSOC during the SIFI designation process “casts doubt on the whole process” and the FSOC’s end goals.
Reid also had concerns with the process of the FSOC, saying that their closed door meetings are a rejection of due process. He also had doubts if designating firms as SIFIs really makes the financial system more stable and wonder if the Federal Deposit Insurance Corporation (FDIC) “has the right to tax shareholders” and use the money for future industry bailouts.
Joe then asked about the FSB’s process of designating global SIFIs and how international regulators are coordinating their efforts. Baumgardner said that the FSB process is “more of a black box” than the FSOC process and noted that the FSB set a $100 billion threshold for designation and looks at investment pools rather than managers. Reid said that it is “clear there is a lot of coordination” but is it not clear if it is completely U.S. driven.
When asked by the audience what kinds of solutions there are to address systemic risk, Reid said that regulators should figure out how to gather more data to identify global macro-economic risks. Klein noted that some policies which became unpopular politically were eliminated in the Dodd-Frank Act and said that some of these policies may be useful to bring back. He also said that changes in the bankruptcy code to supplement Title II resolution processes could address systemic risk issues.
Conversation with CFTC Acting Chairman Mark Wetjen
Mark Wetjen, Acting Chair of the Commodity Futures Trading Commission, spoke with Hirschmann on the state of derivatives market reforms.
Wetjen explained that the focus of Title VII of Dodd-Frank came out of the global reaction to the financial crisis and the desire to reform the derivatives market to better take into account counterparty risk, and increase transparency while still providing risk management functionality and price discovery to market participants including corporations and manufacturers. He said that it is “hard to tell” now what the full impact of these reforms has been because the new market structure continues to develop, adding that it will take time to settle.
Hirschmann noted that most people support transparency in the derivatives markets but said the “devil is in the details.” He then asked for Wetjen’s thoughts on the U.S. moving more quickly than Europe in its regulation of international products.
Wetjen said that there has been much interest in the CFTC’s cross-border guidance and the process by which it was created. He said there were legitimate issues raised and that while he doesn’t think the guidance was a perfect document, he believes it is a rational, good set of policies. He noted that Europe is in a process to defer to U.S. rules if they are equivalent but said they are “lagging behind” the U.S. in this area. He also said that when compliance is required in the U.S. before Europe it “leads to competitiveness issues.”
Wetjen said that the Commodity Exchange Act (CEA) has “long embraced deference” and mutual recognition of other jurisdictions’ rules and regulations as long as other countries’ standards are high and they are serious about enforcement. He said the CFTC should be able to work well with other countries and use memorandums of understanding (MOUs) to established mutual recognition of rules.
Hirschmann then asked if the public conversation will move beyond cross-border issues in five years due to the use of substituted compliance. Wetjen said he thinks it will move beyond this point and noted that substituted compliance is already being used with European jurisdictions. He said that the CFTC is now expanding these equivalency determinations and is beginning to work with Japan and Australia.
Hirschmann then asked about the concept of “futurization” of the swaps market, where customers are moving towards futures products rather than using swaps because of regulatory complexity. Wetjen said that futurization was seen mainly in the energy asset class around the time of swap dealer registration. Wetjen explained that it happened because the swaps market was new and customers better understood the long-standing regulatory framework of the futures market. He said “at the end of the day” there will probably be more complexity in the swaps space because of the legislation in place, which requires more interconnections. However, Wetjen stated he wants to make sure that the CFTC is not incentivizing choosing one market structure over another for regulatory reasons.
Hirschmann then asked about margin requirements for end-users and if more legislation is needed for these market participants to get clarity that they will be exempt from these rules. Wetjen said that the CFTC resolved this issue in an effective way but noted that they are holing a roundtable on this topic to look at it more carefully in case anything more needs to be done. He also announced that the CFTC is released a request for comment on their data reporting rules to get more industry insight.
Lastly, Hirschmann asked how the CFTC deals with problems as they arise and where it makes sense to amend the rules to provide businesses with more certainty.
Wetjen replied that there have been implementation challenges and instances where staff action “encroached into the realm of policy making that’s more appropriate for the commission to undertake.” He said that the November staff advisory on the CFTC’s cross-border guidance is an example of this. Wetjen continued that this advisory was the “sort of weighty decision that’s probably better left for the commission to decide rather than the staff.” He said that while there may be a few other examples, “by and large” they do not cause problems and serve to interpret rules and allow flexibility to address problems.
Encouraging Savings: One Investor Opportunity at a Time
The panel on savings was moderated by Kenneth Bentsen, President and CEO of the Securities Industry and Financial Markets Association (SIFMA), and included: Bradford Campbell, Counsel at Drinker Biddle & Reath; Mark Iwry, Senior Advisor to the Secretary and Deputy Assistant Secretary, Retirement Health Policy, Department of the Treasury; J.J. Johnson, Executive Vice President of Public Affairs and Policy at Fidelity Investments; and Judy Mares, Deputy Assistant Secretary of the Employee Benefits Security Administration (EBSA) at the U.S. Department of Labor (DOL).
Bentsen asked the panel if there is a savings crisis in America today. Mares took the opportunity to share some recent statistics provided by the Employee Benefit Research Institute (EBRI) which showed that worker confidence in a secure retirement is up from 2013, but only to 18 percent. She noted that 73 percent of Americans without a retirement plan have less than $1,000 in savings, adding that both retirement income adequacy and confidence are lacking.
Mares highlighted the importance of financial literacy, which she said is “highly correlated” with confidence. She also said uncertainty erodes confidence, noting a DOL initiative to illustrate on benefit statements what assets translated into retirement income would look like.
Johnson said he believes there will be a crisis unless something is done to affect the behaviors of people going forward, adding that incentives are important to encourage individuals to make decisions that will prove fruitful.
Iwry noted there has not been much progress over the past 20 years other than a retirement system that is “a little more simple and easier to access,” but said there needs to be a “major breakthrough to coverage.” He said Americans will not be sufficiently prepared for retirement if the current path is continued. There needs to be a “major uptick” in access to employer plans, which he said “work the best.” Iwry also highlighted the importance of features like payroll deduction.
Campbell said he believes “crisis” is the wrong word, saying the direction needs to be adjusted to get a better outcome. He agreed with Iwry on the importance of payroll deduction but said the problem is that some individuals do not have access to a workplace plan. He suggested the removal of regulatory barriers could “improve the situation.”
Bentsen asked the group how they would characterize the debate on tax policy. He noted the advent of MyRA and asked if there were any counterintuitive initiatives.
Iwry said MyRA was created as “a way to move forward, to some degree, while we are waiting for something more major that would require legislation.” Regarding the difference of MyRA and IRAs, he noted that for some individuals, choice is good, but for others that choice can be daunting. He added that MyRA is a simple investment that can act as an “incubator” for those individuals that are not saving at all, do not have access to an employer plan, or find the choices daunting.
When asked about the impact on savings of small employers offering SIMPLE plans, Johnson replied that the option has been a driver of savings, and said the ability to defer taxes is an important incentive. He noted that 74 percent of workers have access to a workplace plan currently, and the question should be how to incentivize more people to utilize those plans. Johnson highlighted the benefits of auto features and said impediments such as costs and administrative burdens should be alleviated for small employers looking to offer a plan.
Bentsen asked the panel if the current legislative and regulatory environment is making it “more complicated” for firms to offer retirement plans. Mares said the issue of coverage is not new and there has always been a portion of the population that does not live in a “plan world.” She added there is “no simple or single solution.”
Mares noted that “great innovation” has come about from the study of behavioral economics – looking not at what people should do, but at what people actually do. She highlighted the importance of payroll deduction and automatic features and asked how to get more employers to use those features. Mares reiterated the importance of helping participants understand the transfer of assets to a stream income, and said education needs to start at a “really young age.”
Iwry replied that legislation is not necessary for much of those ideas, adding that a “major breakthrough” will require legislation, but said plan design features can take us “very far.”
Mares said an example of “tremendous innovation” has been the automatic-rebalancing features of target date funds (TDFs).
Campbell expressed concern with the current debate on tax reform, saying it is “driven by the thought that this is a pool of money from which to draw.” He added that both the President’s budget and House Ways and Means Chairman Dave Camp’s (R-Mich.) discussion draft had elements in the “opposite direction we want to go.”
Bentsen asked how regulations from multiple regulators should be handled.
Campbell expressed concern with a “history of stovepipe regulation,” noting that regulations in each of the banking, securities, and ERISA spaces do not always “play well” together. He highlighted the DOL definition of fiduciary proposal and their interest relating to rollovers as examples of activity at different agencies that is not “well coordinated and could cause some real problems.”
Relating to the definition of fiduciary, Mares responded that while the DOL and Securities and Exchange Commission (SEC) “may not be in the same boat,” they are “rowing in the same direction.” She added that no one wants to create a regulation where compliance with one standard results in noncompliance with another. She added that regulatory regimes need to work together.
Johnson said we have a “vibrant marketplace, competition, and innovation,” noting that recent proposals in various states for state-run retirement plans could stifle the innovation. Regarding an illustration of retirement income streams that Mares spoke about, he suggested regulators allow the private sector to develop different solutions. He expressed concern that with some of the proposals considered, education could be limited. He asked DOL and SEC to be cognizant of those concerns.
A question from the audience asked the panel to consider the importance of real estate and home equity in building savings. Johnson replied that at Fidelity, they consider all potential assets when working with clients to get a holistic view of their savings. He noted that saving through home equity can be a volatile vehicle, however. Campbell also highlighted the importance of holistic advice, but added that there are barriers to that advice.
Funding America’s Future
Doug L. Peterson, President and CEO of McGraw Hill Financial, LLC, gave a presentation on the potential for institutional investors bridging the funding gap for infrastructure.
Peterson opened by pointing out that $3.6 trillion is needed to update U.S. infrastructure, and the American Society of Civil Engineers has given America’s infrastructure a D+ rating. Unfortunately, he said, infrastructure is “not sexy” and does not get the same attention as issues such as defense or education.
Infrastructure spending in terms of percentage of GDP is at a 20-year low, Peterson said, but the significant funding gap could be at least partly funded by institutional investors. He noted that infrastructure investment provides high yields and low default rates, which should attract investment. In addition, he said, it provides an immediate return on investment to the economy by creating construction and engineering jobs in addition to promoting future liquidity of goods, services, and capital.
Coordination between policymakers and market participants is needed to unlock institutional investment, Peterson said. He said that the federal government should streamline regulatory regimes and minimize political and regulatory risk.
The State of the U.S. Economy and Prospects for Growth
Jason Furman, Chairman of the Council of Economic Advisors, noted that of the twelve nations that went through systemic financial crises, the U.S. is one of just two that has returned to pre-crisis GDP per capital. He lauded the strength of the recovery even in the face of the payroll tax cut, sequester, and government shutdown of 2013.
Furman said he is optimistic about 2014 because of the recovering housing market and decreasing interest rate payments as a percentage of household disposable income. He also noted the energy boom, decreasing growth of healthcare costs, and advancements in technologies such as computing power and mobile devices.
Furman offered seven key legislative actions as the Obama administration’s priorities for the year: 1) cutting the medium and long-term budget deficit; 2) increasing infrastructure spending; 3) enacting business tax reform; 4) continuing financial reform; 5) finalizing trade agreements with European and Pacific partners; 6) making sure that all Americans benefit from growth through measures such as a minimum wage hike; and 7) immigration reform.
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