The Law and Other Anomalies

Last week I posted that eight States had sued the SEC over the allegedly weak content of the SEC Regulation BI that set fiduciary standards for registered investment advisers and something a bit less robust (and more confusing perhaps) for registered broker dealers.

It seems that a couple of registered investment advisers also have sued the SEC on September 10, making similar complaint that the SEC lacked authority to issue BI and its related confusing interpretive release. The suit notes that the SEC in so acting had ignored the recommendations of the SEC staff.

An observation: I don’t think BI is confusing, and I think it is made more user-friendly by the release. The real point here is not that people are confused; the real point is that many people do not like the regulatory bottom line.

The twists and turns of these suits are beyond the scope of mere blog posts, but the point generally is that lots of people are unhappy with BI, complaining that brokers are getting a skate. As of now BI stands and becomes effective for brokers the first of next year, and its implementation has not (yet) been enjoined. I bet all brokerages are gearing up for BI compliance, including extensive disclosure requirements; who can take the risk of being in SEC violation?

I am getting tired of saying, as to this subject, “stay tuned.”

CEOs of some of Boston’s leading corporations (IDG, Hancock, Boston Scientific and State Street) were unanimous in agreeing that the major issue for management, and boards of directors, is establishing and maintaining the culture of the enterprise.

At a Boston breakfast meeting last week convened by the National Association of Corporate Directors – New England Chapter, CEOs discussed their methodology for establishing a culture throughout a company with numerous employees in different locations, or indeed different countries.  The methods for communicating corporate culture were numerous, and many companies adopted many of them.  Some CEOs regularly communicate with everybody about what they themselves are doing on a given day (whether it is work-related or personal-related, as personal values matter).  But one major theme was to carefully pick the next tier of executives to be “innovators” and not “managers.”

In the context of constant technological change, the recent statement of the Business RoundTable, calling upon corporations to consider not just profit but also impact on people and communities and the world, takes on relevance.  There is an art to balancing current return to investors against societal results.  Those societal results are important to long-term of viability, and particularly important in attracting and retaining a generation of employees deeply interested in ESG factors.

One speaker, Mohamad Ali, former President of Carbonite and newly installed CEO of worldwide company IDG, made reference to those things which one might predict a CEO should be concerned with:  trade wars.  He believes that over time significant impairment of profitability will occur by their continuation.

Other major issues:  integrating women into the workforce by overcoming reticence (based on fear they lack the necessary tools), to “take a chance” and reach for more senior positions; and,  as workforces will require greater skills, companies cannot afford to tell people to “go away and when you obtain the necessary skills come back to us” (companies must themselves undertake that training).

There was discussion of European and California laws on maintaining data privacy.  The younger generation has less concern for data privacy, but privacy in the long run is absolutely necessary.  The problem is with Congress, which does not have an understanding of the issue; what is needed is a uniform law throughout the United States so as to avoid inconsistent regulations, such as the new California data privacy statute.

Just one week ago I posted a link to my current article on SEC amendments to the regulations defining the duties of investment advisers and brokers to the investing public, and noted controversy about the alleged deficiencies in the treatment of brokers asserted by critics.

Today’s press references a suit in New York Federal Court filed yesterday by eight state attorneys general seeking to void entirely the SEC standards for brokers. The grounds are technical: noncompliance with the statute that requires certain steps be taken by US agencies to amend their regulations. It is asserted that the 2010 Dodd Frank Act does not permit brokers to enjoy lesser fiduciary duties than investment advisers. Aside from New York, the other plaintiff states include California and Delaware (although not Massachusetts).

To this point, the SEC has not answered the complaint; far too soon. This suit will be a long one, and is the tip of the iceberg relative to this volatile issue.

The SEC this summer altered the legal obligations of brokers and investment advisers. If you invest, you should care about the groundrules that these professionals owe you. There is controversy as to whether you are now better or worse protected after the SEC actions. See https://www.duanemorris.com/articles/brokers_investment_advisors_in_your_best_interest_0819.html for my August article attempting to decipher what the SEC thought it was doing.

Most cannabis investing began in Canada where companies are publicly listed.  Everyone thinks that the United States will be a huge market in the near term with particular emphasis on places like Michigan, Massachusetts and California (with California hurt by a large black market, allegedly).

Some experts thought that investments in Canada were “played.”  The Canadian contingent sharply disagreed, claiming particularly that Canada was very well situated by way of geography and regulatory controls to be a source for growing and henceforth also a location for processing. 

Europe is perceived to be “a few years behind, although medical use is growing” and it is thought that the rollout in Europe will be country by country.  Expectation that Germany and Italy will be substantial markets. 

Some valuations for investments in cannabis related companies too pricey.  Counterargument is that as a multiple of future revenues, with future revenues growing quickly, these investments are not particularly overpriced.  There was noted a recent fallback in the price of Canadian public shares.

There has been difficulty in obtaining banking for cannabis, by way of both loans and deposits.  Recent newspaper articles indicate that some credit sources are opening up.  Everyone seems to expect that banks will “fall in line” within the next year or so, although there was no express definition of what “in line” might mean.

What about the prospects of a federal statute leaving the issue of legality to each State.  The consensus is that this will not happen, if at all, until after the next election but that thereafter, it is likely that “any new President” would be willing to undertake this unbundling.  Counterpoint: “Trump won’t sign anything from Liz Warren’s desk.”

People involved in playing the market in cannabis noted that the current confusion in terms of legality is not a problem for them; they believe in the long-term prospects, and the confusion reduces market prices today and creates a better opportunity for arbitrage.

In the long run, companies in the “sin” business (beer, alcohol, tobacco) are likely to be large acquirers, particularly since it is possible that their other businesses will fall off.  Pharma is reported as generally opposed to legalization.

General warning that there are “sketchy operators” in the marketplace and that one should invest in “professional best in class operations.”  This suggests the necessity for sophisticated investment advice.

What about the State by State legalization issue?  This is expected to be slow, sort of like States permitting gambling casinos.  Mention that the process overall could take years.

Finally, mention of an investment opportunity in “third party labs” necessary to do testing inherent in government-authorized marketing of cannabis products.  One has to look closely at the regulatory context of local labs.  Speculation that these labs would ultimately be the subject of rollups.