Investors are speculating whether Snapchat will make an initial public offering of its stock next year, but investors with individual retirement accounts should be concerned that the Department of Labor's new fiduciary rule will not allow them to participate in this — or any other — IPO.
A basic tenet of capitalism is the effective and efficient transfer of capital, through investment, from savers to entrepreneurs. This investment fuels new ideas and creates jobs, supporting a vibrant and adaptive economy while creating wealth opportunities for retirement investors. In a free society like ours, capital is allocated by choice: Entrepreneurs want access to the public's ocean of savings to grow their businesses, yet each individual investor can choose to vote, in the marketplace, for the ideas he or she supports. IPOs have become a hallmark of American finance by connecting entrepreneurs on one side with investors on the other — in a forum that releases the creativity of both.
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However, the DOL's recently enacted fiduciary rule covering IRAs creates major obstacles in this critical channel between investors and entrepreneurs by prohibiting individual IRA investors from participating in IPOs with the assistance of their financial adviser. The rule does not affect hedge fund managers and other large institutional investors, who still will have access to IPOs. Only individual, Main Street investors will be prohibited from working with their financial advisers to make long‐term, growth‐oriented IPO investments with their retirement savings.
The DOL's intention is to eliminate the potential conflict of interest between advisers and their clients in an IPO transaction. However, it has chosen to accomplish this goal by effectively outlawing IPOs for IRAs, no matter how fully informed, how sophisticated or how willing to invest the particular investor may be.
To be sure, all investors should be fully informed, sophisticated and willing before they invest in an IPO. Federal securities laws, including the Securities Act of 1933, provide a robust written prospectus regime, requiring ample disclosure of important matters relating to an IPO, including risks and conflicts. These rules are diligently followed, strictly enforced and should be strengthened where necessary. The result should be a balance that mitigates potential conflicts of interest while preserving the tools investors use, together with their advisers, to shape their financial portfolios.
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The DOL's fiduciary rule affords no balance: You simply may not work together with your financial adviser to invest your IRA in an IPO. This prohibition comes with a huge cost to the economy. IRA investible assets are enormous, estimated at approximately $8 trillion. The abrupt and arbitrary removal of those assets from the IPO marketplace will slow the engine of job creation and productivity growth. Yet Labor's absolutist stance with respect to IPOs imposes another, more ominous cost for individual IRA investors. Those investors will lose their freedom to shape their own financial affairs as they see fit, but also the freedom to vote, through the allocation of capital, on the future direction of our nation's economy.
Our primary federal regulators, entrusted with protecting the integrity of our economy and financial markets, should study and weigh in on the potential ramifications of this rule, on the capital formation process as well as the impact on wealth creation opportunities for retirement savings. At the very least, the DOL's rule should provide an exemption permitting qualified investors to continue to access IPOs with professional advice and the protections of the existing disclosure regime.
Snapchat's original idea generated excitement by embracing ephemeral moments as they occur, then letting them evaporate into the past. Unless the DOL reconsiders its rule, the ability for IRAs to invest in IPOs may very well disappear — like a Snapchat photo.
Ronald J. Kruszewski is chairman and CEO of Stifel.
