Displaying items by tag: regulations

The Supreme Court's recent decision to overturn the "Chevron deference" doctrine is expected to significantly impact the financial industry, creating greater regulatory uncertainty. This doctrine, based on a 1984 precedent, previously allowed government agencies to interpret the laws they administer with substantial autonomy. 

Experts like Prof. Richard Lazarus from Harvard Law School anticipate that the ruling will disrupt the legal system, as much of lawmaking over the past 40 years relied on Chevron deference. Regulatory agencies such as the SEC, Federal Reserve, OCC, CFPB, and CFTC will now need to draft rules more carefully to align with specific statutory language. 

Despite the potential for less regulation, large banks and industry groups have largely remained silent on the decision, though the American Bankers Association has expressed that the ruling underscores the necessity for federal agencies to operate within their statutory limits. 

Finsum: We’ll see how tightly regulation becomes as an issue leading into falls major election.

Smarsh, a compliance tech firm serving major global financial institutions, has integrated OpenAI’s ChatGPT Enterprise Compliance API into its platform. This enables clients to utilize generative AI while adhering to regulatory requirements. 

According to Chief Product Officer Goutam Nadella, regulated industries face challenges with new cloud-based solutions due to stringent oversight. The integration allows for AI-generated content to be tagged, helping financial institutions comply with upcoming regulations. 

CEO Kim Crawford Goodman highlighted the importance of maintaining governance policies for AI-generated content. This aligns with FINRA's Regulatory Notice 24-09 regarding the supervision of electronic correspondence using generative AI.

Finsum: AI is best used to augment the relationship between advisors and clients and can serve for scheduling and many writing tasks. 

The rapid growth of private credit lending beyond its traditional markets highlights concerns about its opaque nature and potential risks to the U.S. economy, according to Moody's. Non-bank private credit lenders are increasingly competing with traditional banks by offering non-publicly traded debt to mid-sized corporate borrowers. 

This trend has expanded into alternative lending opportunities such as asset-based financing. Despite banks refinancing significant debt and providing leveraged loans for M&A deals, private credit lenders are finding new opportunities. 

Regulators and the IMF have expressed concerns about the potential risks and lack of transparency in this growing market. Four major alternative asset managers have significantly increased their credit assets under management, further highlighting the sector's rapid expansion.

Finsum: We probably aren’t close to a regulation overhaul with private credit but transparency is worth considering. 

The DOL's new Retirement Security Rule mandates that advisors handling retirement savings follow a fiduciary standard, prioritizing clients' best interests. Effective September 23, 2024, with a 365-day transition period, this rule could help clients save up to $5 billion annually by ensuring unbiased advice. 

The rule addresses issues with rollovers and commissions, aiming to close previous regulatory loopholes. While some industry groups plan to challenge the rule in court, many investment advisors already operating under fiduciary standards support it.

The CFP Board applauds the rule, noting that 92% of Americans expect fiduciary-level retirement advice. This rule intensifies the debate between fee-only advisors and commission-based professionals regarding conflicts of interest.

Finsum: We don’t expect this rule to have a huge impact on advisors, but future regulation will drastically be impacted by November 2024. 

The IMF estimates that the private credit industry is now over $2 trillion in size, with 75% of it located in the US. It now rivals the leveraged loan and high-yield credit markets in size. Private credit offers borrowers more speed and flexibility and provides higher returns and less volatility to investors. 

While the advantages are clear, the IMF warns that as lending moves away from regulated financial institutions to private markets, systemic risks will increase. With private credit, there is less transparency, price discovery, and information about credit quality. Additionally, there is less information about how various players in the ecosystem are connected. Therefore, the IMF doesn’t see near-term risks but believes that as private credit keeps growing, there will be a need for greater regulation. 

On average, private credit borrowers tend to be smaller and have weaker balance sheets than companies raising money through syndicated loans or public markets. This means more downside risk in the event of rising rates or a negative economic shock. 

Currently, the IMF estimates that ⅓ of private credit borrowers’ financing costs are higher than earnings. It also warns that lending standards have weakened amid increased competition among lenders due to the influx of capital in the sector. 

Finsum: The private credit industry has experienced rapid growth over the last few years and now rivals the size of the high-yield credit and leveraged loan markets. Here’s why the IMF is concerned that continued growth could lead to systemic risks to financial stability.