Welcome to the CFALA e-newsletter, a periodic publication with stories about noteworthy events and programs sponsored or hosted by the society, guest articles by members, book reviews, and other items of interest to CFALA members. Click on the headlines below to read the full stories. And if you’d like to contribute a story suggestion or, even better, write an article, we’d love to hear from you. Please email Executive Director Laura Carney at laura@cfala.org.

*Please note that the content of this e-newsletter should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of  CFA Society Los Angeles.

In this issue ...

• Policy Outlook: Which Issues Will Define CFA Institute Advocacy Work in 2016?

• Ten-Event Wealth Management Series Starting Next Year

• Advocacy & Ethics Committee Observations on Socially Responsible Investing

• You [Individual Investors] Too Can Now Invest in Startups! What Could Go Wrong?

• Smart Assistants Are Making Progress ... But Slowly

• Don’t Assume a Fed Action Will Move the Market

• 'Star Wars': Destroying Death Star Would Trigger Economic Crisis

Policy Outlook: Which Issues Will Define CFA Institute Advocacy Work in 2016?

As head of regulatory outreach, Americas, for CFA Institute, Jim Allen, CFA, spends much of his time at the epicenter for public policy, Washington, D.C. In this recent interview, Allen discusses which financial policy issues are likely to claim the spotlight in 2016, their anticipated impact on the investment profession, and what CFA societies can do to help influence the debate.
What are the top 3 financial policy issues likely to take center stage in Washington D.C. in the coming year?
Allen: The biggest issue in DC, no doubt, will be the standard of care issue. The Labor Department brought the issue to the fore this year with its conflict of interests proposal, though its future is uncertain at this point. There are a number of different paths that this issue could take. One is that Labor will implement it largely as it was proposed and call on the industry to adopt within a year or so. That could be squelched by a bipartisan group in Congress, some who don’t like the proposal, and some who want the new spending within the just-negotiated budget deal. Another option is to revise the proposal substantially, though that would require a further delay as people respond. And the third is just to put the proposal on the shelf and wait for a new Congress and president to take it up.
Regardless of what the Department decides to do, the issue is likely to remain largely unresolved well into 2017 (after the 2016 election) and perhaps even into 2018. Securities and Exchange Commission Chair Mary Jo White stated recently that the Commission is working full out to produce a fiduciary rule, but also said that it would be late 2016 before a proposal might emerge. Again, the issue is likely to bleed into 2017.
Market structure issues will remain front and center, as well, though perhaps with a different hue in the coming year. Recall that in the spring of 2014, high-frequency trading and dark pools became the cause celebrè. Those issues remain, but the golden boys of that drama, now at IEX, are trying to launch a full-blown equity exchange. They’re currently an alternative trading system, or ATS, in Reg NMS parlance, in which they will use a “speed bump” to ensure that HFTs cannot take advantage of structural latencies — delays to physical distances, sometimes due to co-location of servers — to take advantage of so-called “stale” quotes in the system.
That’s one piece of the puzzle.
The other comes on the fixed-income side, where former CFA Society of Los Angeles Board Member Larry Harris, CFA, from the University of Southern California, has devoted some of his research time and interest. Mr. Harris’ work indicates that bond markets aren’t as “special” as we’ve often been led to believe by dealers and that the mark-ups, not to mention the bespoke nature of many issues, has made this a costly marketplace for investors and issuers, alike. Going forward, his research indicates that there is hope to overcome these inefficiencies. He has been invited to speak at a January meeting of the SEC Investor Advisory Committee, which Kurt Schacht, CFA, managing director of Standards and Advocacy at CFA Institute, chairs. The last issue is likely to relate to financing for small- and medium-sized enterprises. This issue has two strands. The first, crowdfunding, is likely to come to the fore in the coming year thanks to the release of much-delayed SEC rules, as well as organic growth in the sector at the state level. The second issue, relating to venture exchanges for JOBS Act companies, is likely to remain in inventory throughout 2016, but could gain greater interest after the election and the introduction of a new Congress in 2017.
How will these issues impact CFA Institute members and the broader investment profession?
Allen: The standard of care issue can and likely will have some effect on how members who work in the brokerage sector engage with their retirement account customers. Indeed, we’ve heard from one Washington attorney who is advising his clients to prepare for implementation of the Department of Labor’s rules, regardless of whether they like the proposals. Even though the rules could be blocked by this Congress or overturned by the next Congress in 2017, his advice is that change is coming, particularly for retirement clients of brokerage firms, and they will be better served to prepare for rules now than to hope nothing occurs.
On the equity side, it will be interesting to see how the IEX experiment works. In a little over a year, its ATS has grown to more than 1.6% of the market, from a less than one-tenth of a percent of total market share in October 2013. They remain a minor player at this point, but should the institutional investor market see the speed-bump exchange as giving them an effective and efficient way to compete with the HFTs, it could ultimately give them critical mass to compete.
The problem investors face, however, is that retail order flow would remain under the tight control of big brokerages who cross nearly all retail trades within their internal systems. And without that retail order flow on the lit markets, institutions are likely to continue to trade their large blocks within dark pools. That suggests that significant change isn’t likely to come to equity markets right away.
Change in the fixed-income markets, however, is more feasible and could produce some noticeable benefits for investors. Mr. Harris’ call for pre- and post-trade transparency in the bond markets could lead to reduced trading costs for institutional investors, in particular. He’s also called for trade-through protection, which would prevent brokers from executing trades at prices worse than the available best bid or offer at the time. That, he estimates, will save nearly half of all trades as much as 77 bp. Finally, requiring brokers to post customer limit orders to order display facilities would enhance price transparency and prevent many trade-throughs.
The SEC’s new crowdfunding rules should provide some direction and limits to the national market for small-denomination investments. Its newly proposed rules for the intra-state crowdfunding market has been developing on its own for several years, and it will be interesting to see how the SEC’s new proposals will seek to protect investors in state-based transactions. If these changes reduce the flow of capital to SMEs, however, look for other “shadow banking” entities such as hedge funds and other specialized funds to seek to fill the gap.
Is there an opportunity for CFA Institute to influence the debate? How?
Allen: CFA Institute is involved in trying to influence the debate in standards of care, market structure, and SME finance. We’ve done that through a number of avenues. First, we have responded directly to the regulators’ proposals in all three cases.
We also tried to reach out in other ways. On the standards of care issue, we hosted a webinar a month ahead of the July deadline for the Department of Labor proposal to engage CFA Institute membership on the issue. We are working with the Washington D.C. society to host a panel with some important and influential industry voices on 28 January to discuss the DOL’s proposal, whether and how the SEC might help the process, and where things go from here.
On the market structure front, we have produced three research reports in recent years that have sought to influence the debate. We’ve always taken these reports to the SEC to answer their questions and to promote the policy proposals related to these reports (in fact, SEC Commissioner Luis Aguilar recently cited two CFA Institute studies on dark pools and price improvement rules in his remarks at the Market Structure Advisory Committee meeting). And now we are working with a panel of investors, issuers, exchanges, intermediaries, and regulators to discuss ways to make a venture exchange palatable to all parties, not just issuers, exchanges and intermediaries.
Going forward, local societies can play a big role in working with their state regulators to help shape rules related to such matters as crowdfunding. As I noted earlier, much of this activity has been developing at the state level. State regulators are working with each other to develop a set of best practices. Nevertheless, we believe they would benefit substantially from the input of investment and private wealth managers in their states and local communities who’ve seen these programs up close, and can provide useful input.
What kinds of obstacles will CFA Institute face in making our advocacy voice heard over others in the policy debate?
Allen: While we’ve been active in responding to regulatory proposals since the early 1980s, we’re relative newcomers to the world of proactive, legislative advocacy. Our members haven’t wanted CFA Institute to be seen as engaged in lobbying, as that term is traditionally considered. True to that perspective, we do not have or support political action committees, nor do we as an organization make political contributions to individual political candidates or political parties. At the same time, our views and positions must compete with those of organizations that do engage in these political activities, and therefore our advocacy efforts operate at an initial disadvantage. Unbiased perspectives on what is best for markets and investors is certainly valued in the halls of Congress, but it must compete with views that are augmented by financial contributions from individuals and firms that operate in key congressional districts. Our 89 CFA Institute societies in the United States can play an important role in counteracting the influence of these other parties. Most valuable in this sense is the District Dialog program that a number of societies, including the Los Angeles society, have helped launch. This society-based program puts CFA Institute members in touch with their Congressional representatives in their local communities. The message to these representatives is that CFA Institute has a large number of members operating in their districts and states, with influence over an even larger number of investors in those communities. This is a powerful message that the representatives are sure to remember when they are back in Washington D.C. and considering legislation that can affect financial markets.
We are hoping that over time, these District Dialogs become annual events for local societies. Regular and consistent contact with these representatives will help drive home the point that CFA Institute is an organization that they should listen to.
By CFA Institute

Ten-event Wealth Management Series Starting Next Year

“First Wednesdays”: The Wealth Management Excellence Series is designed for thought-leaders in the advisory community who want to bend the curve, not just stay ahead of it. The intent of the program is to learn about and analyze cutting-edge strategies to generate market-leading client results and share the next level of evolution in practice management. Attendees will include C-suite executives of family offices and RIAs, leading financial advisors, investment managers, business managers, and other top private wealth industry professionals.
This 10-part series is designed to address the issues, concerns and interests of wealth management practitioners. Meeting on the first Wednesday of each month from February through November, this first-of-its-kind program will be led by a dynamic team of industry experts. Register for individual sessions or for the entire series.
Schedule of events:
FEB 3 | CIO Discussion (and Debate): Economic Outlook and Market(s) Forecast
MAR 2 | The Next Five Years: Asset Allocation and Portfolio Positioning
APR 6 | Active Equities vs. Passive vs. Smart Beta in a Taxable Environment
MAY 4 | Incorporating Institutional Best Practices in a Wealth Management Practice
JUN 1 | Spring Mixer – RIAs, Family Offices and Wealth Managers -- Bonus Speech: The Future of Wealth Management
JUL 6 | Double Live Debate: 1) Liquid Alternatives: Is 50/30/20 the New 60/40? 2) Are Hedge Funds Poised to Outperform?
AUG 3 | Problem Solving with Annuities --Longevity/Deferred/Variable: What to Look for and What to Look Out For
SEP 7 | Advanced Estate Planning as Part of Wealth Management Practices
OCT 5 | Advanced Philanthropy and ESG: Meeting Client Social Goals While Optimizing Investment and Tax Results
NOV 2 | Robo Advisors and the Future of the Wealth Management Business & ”So You Want to Start an RIA?”
All events will be held from 4pm – 6pm.
Pricing: For individual sessions, $20 for members and $30 for non-members; or the entire ten-session program for $150 for members and $250 for nonmembers.
By Tom Mahoney, CFA, CAIA and Michael Wu, CFA

Advocacy & Ethics Committee Observations on Socially Responsible Investing

Socially Responsible Investing (SRI) has surged in popularity in recent years and has grown over 60% from 2012 to 2014, according to the GSIA’s “2014 Global Sustainable Investment Review.” Specifically, the article states that retail participation, as a proportion of total SRI assets in Canada, Europe and the U.S., has increased over 20% during the same period. The CFA Institute’s “Environmental, Social and Governance (ESG) Survey” (June 2015) reports that 44% of respondents, consisting of portfolio managers and research analysts, consider ESG (a type of SRI) in the investment analysis process because investors demand it.
As SRI strategies continue to gain traction with retail investors, advisors must make a concerted effort to identify specific goals and present tailored SRI solutions. For example, the investor may only want to exclude companies based on factors such as the sale of tobacco and firearms, or alternatively, may only want to include companies with a strong track record in human rights practices. Others may desire targeted exposure to alternative energy projects such as solar and wind farms.
Interpreting an investor’s goals can be tricky because there is not one single term or approach for SRI strategies. In addition to SRI, it can take on many definitions such as responsible investing, impact investing, or ethical investing, among others. Understanding the ambiguity of SRI investing and its various strategies can be difficult for practitioners and individual investors alike. For this reason, here are a few of the most common broad SRI themes applicable to individual investors –
 

• Exclusionary screening: excludes companies based on a set of factors such as the sale of tobacco or firearms.
• Environmental, social, governance (ESG): screens for companies with strong practices in areas such as climate change, human rights, and shareowner rights, among others.
• Mission-aligned: investments targeting a specific cause such as sustainable alternative energy projects.

If SRI strategies are going to continue to meet the growing demand from investors, advisors must be knowledgeable and sensitive to the nuances of various strategies. A lack of understanding of these nuances can lead to ineffective recommendations that ultimately give investors a false sense of confidence that their assets are being deployed in a manner consistent with their SRI goals.
Your CFALA Advocacy & Ethics Committee typically focuses on helping create an ethical financial industry. In this article, we expand on that by asking advisors to help interested investors effectively incorporate ethics into their own decision-making process.
By Noah Damsky, CFA, Member of the Advocacy & Ethics Committee

You [Individual Investors] Too Can Now Invest in Startups! What Could Go Wrong?

WIRED staff writer Julia Greenberg explains the SEC's recent adoption of final equity crowdfunding rules to her connected audience. Read more... And more... 

Smart Assistants Are Making Progress ... But Slowly

How widely are intelligent personal assistants -- i.e., Microsoft’s Cortana, Google’s Google Now, and Apple’s Siri -- being used? Do people really use them for "smart" activities? Check out this Re/code article by Bob O’Donnell for the answers to these questions. Read more...  

Don’t Assume a Fed Action Will Move the Market

“Humans don’t behave like computers. That makes life interesting, but it has a serious downside for economists.” In this New York Times piece, Robert Shiller, Nobel Laureate and Sterling Professor of Economics at Yale, explains why we don’t know what will happen in the major markets if and when the Fed raises rates.  Read more... 

'Star Wars': Destroying Death Star Would Trigger Economic Crisis

Also in the spirit of highly anticipated events, NBC News' Alexander Smith provides a summary of a Washington University in St. Louis paper which examines the economic impact of the destruction of two "fully armed and operational" Death Stars, with an eye towards systemic risk and banking bailouts of truly astronomical proportions. May the Force be with us! Read more... And more...