Regulations Affecting Investors and Asset Managers in Phoenix

As a result of the 2008 financial crisis, the federal government has created several regulations to protect consumers and investors. Many investors suffered significant losses because of risky practices in the financial sector. In additional to financial losses, many investors lost confidence in financial institutions and their advisors.

The purpose of regulatory reform was to address serious system weaknesses and flawed practices uncovered during the financial crisis. As a result, new regulations have been put into place to protect investors and help them regain confidence in the financial markets. Asset managers in Phoenix must be well versed in these regulations, be able to explain them to their clients and demonstrate an ability to comply.

Five Key Areas of Focus for Regulators

The main areas most needing reform after the financial crisis included:

  1. Lack of Transparency – Many financial firms failed to adequately provide appropriate information to consumers and investors. It was common practice to rely extensively on fine print, technical language and massive information documents to market products. These practices made it difficult to educate consumers and allow them to compare products easily.
  1. Conflicts of Interest – In many cases, financial firms marketing investment products did not disclose conflicts of interest. Investors were being sold investment products and not being told their advisors were earning commissions on the products they sold. With compensation based on selling products, consumers could not be assured of receiving independent advice that was in their best interest.
  1. Aggressive Practices – To maximize revenue potential, some financial institutions used aggressive practices to market their products. It was not uncommon for financial intermediaries to target products to more vulnerable consumers. These practices were especially prominent in the U.S. mortgage and credit card industries.
  1. Flaws in Asset Valuation – The valuation of certain investment vehicles was based on the issuer’s judgement. Because the valuation process was not transparent or objective, investors were unaware of the extent of their potential losses.
  1. Predatory Mortgage Lending – Mortgage lenders used questionable lending practices prior to the financial crisis. They marketed adjustable rate mortgages that many consumers would not be able to afford once interest rates started pushing upwards. Rising interest rates caused many loans to go bad and forced many consumers into foreclosure and/or bankruptcy. In addition, investors who invested in these bad loans suffered huge losses.

New Regulations after the Financial Crisis

To increase the strength of the financial system and protect the interests of consumers and investors, regulators developed several new regulations, including:

  • The Dodd-Frank Act – The intent of this legislation is to standardize consumer information forms for financial products. By standardizing information, consumers should be better positioned to compare competing options. In addition, the Act created the Consumer Financial Protection Bureau to regulate capital requirements and financial practices of financial institutions. Specifically, banks, credit unions, lenders, servicers and collection agencies must disclose information regarding executive compensation, governance, risk management, derivatives portfolio and credit ratings.
  • CARD Act – Passed by Congress in 2009, this legislation placed restrictions on the charging models used by credit and debit card issuers. These restrictions involved overdraft fees and interest calculations on balances.
  • The Housing and Economic Recovery Act of 2008 – Designed to strengthen the U.S. economy, this act was created to prevent home foreclosures through debt counseling and community development programs. In addition, mortgage lenders and other banking institutions are required to register with the Nationwide Mortgage Licensing System and Registry through the Federal Deposit Insurance Corporation (FDIC) and operate with greater transparency.
  • The Emergency Economic Stabilization Act of 2008 – Authorization was given to the federal government to bail out banks and financial institutions at risk of complete failure because of their investments in mortgage-based securities. Once solvent, the Act requires financial institutions to increase capital and maintain a lower debt ratio.

As a result of the financial crisis, the U.S. government has increased regulation on financial products marketed to consumers and investors. Continually evolving, these regulations have significantly changed processes and practices within financial institutions. To ensure compliance, financial firms will have to operate transparently, proactively disclose conflicts of interest and assess the suitability of products to each investor’s profile.

At WealthTrust Arizona, our fee-based investment advisors will develop a thoroughly researched asset management strategy. We begin with a written financial plan that determines how we will manage your portfolio. Then, assets are allocated in the best way possible to reach your financial goals.

To learn more about asset managers in Phoenix, call for a free consultation at (480) 483-7300. You can also visit our website for more information.