How will the new Small Business Capital Act affect you?
Amid the hubbub of stock-market activity last week, the House of Representatives quietly approved a new law giving Wall Street an exclusive monopoly on funding for smaller businesses — including even your little side hustle. Sponsored by Stephen Fincher (R-Tenn.), it goes by the innocuous-sounding name of “H.R.3623 – Improving Access to Capital for Emerging Growth Companies Act.” (As with all U.S. legislation, you can find all the details on the official Congress website: http://www.opencongress.org/bill/hr3623-113/show.) There was enough support, apparently, to allow the bill to pass to the Senate for the next step in its passage.
Buried in the fine print toward the end of this pending legislation is Section 4, which reads “No source of capital shall be permissible from any entity not accredited by the Securities and Exchange Commission as an approved investment banker or broker/dealer.”
Translation: Small business can obtain its capital from no source other than Wall Street. Effectively, this cuts off other sources of small business funding like loans or investments from family members, crowd-funding, peer-to-peer lending, or even old-fashioned “Main Street” bank loans. Apparently, the sponsors see this as a means to “protect small businesses from themselves” by insisting that only “trained professionals” (i.e., Wall Streeters) have the necessary expertise to offer financing that doesn't put small businesses at risk.
Not everyone sees it that way. “What do suits on Wall Street know about running a small business in Peoria?” fumed Satch Miller, owner of four bakeries in Peoria, Illinois. Added Melanie Walker, President of Sedona First National Bank in Arizona, “No doubt, that powerful Wall Street lobby is taking aim at crowding out family-owned banks like ours, who have always been there for our friends and neighbors.” Indeed, it seems several lobbying firms representing Wall Street firms had a hand in drafting H.R.3623.
If you generate any side income, from blogging to selling your cookies at a church bake sale, the new law (full text here) will require you to add a certification to your 2014 tax return, stating that you took no capital or loans from anyone but an investment banker registered with the SEC. This is eerily similar to individual taxpayers who are now required to file a certification of health insurance coverage with their tax returns. Wall Street, it appears, is poised to shove Main Street commercial banks and your parents out of its way in its quest to dominate all financial transactions.
Consumers are not affected, which may account for the scant media coverage, but small businesses definitely will be. Rather than debate the merits of the new legislation, let's focus on how you can comply with a minimum of fuss. The first thing to do is to check your calendar again.
What day is it? April 1. If we got you, smile! So you can relax, you don't have to use Wall Street for anything if you don't want to.
The H.R.3623 bill is real, but a casual glance at the actual text will reveal it's just a common-sense amendment to make life easier for smaller businesses. But it had such a catchy title, I couldn't resist. The quotes, and the certification requirement are fake — hopefully you got an April 1 chuckle or two out of it.
Wall Street is not fake, however. Neither is the nation's scorn. If you had your dander up at the notion that Wall Street is fleecing ordinary citizens to feed million-dollar incomes, you're not alone. A reader recently contacted us, calling himself a “contentious objector to Wall Street.” Freudian slip, or deliberate phrasing, contentious objector seems to describe millions. Why is this? What drives this groundswell of anti-Wall Street sentiment?
From an unscientific (hey, I admitted it, no shooting the messenger, please) glance through blogs and articles on the Internet, it seems the hate toward Wall Street stems from:
1. Pay — Average salaries are about $500,000 at Goldman Sachs, over a quarter of a million dollars at J.P. Morgan Chase and so on … and for what?
2. Contribution — Wall Street bankers don't overtly contribute anything to the economy. Paul Volcker, king of all bankers at one time, famously declared that banking's only real contribution to society was the ATM machine.
3. Manipulation — With their high-speed computers and super-high-speed communications lines (some even moved closer to the NYSE to shave a few nanoseconds off the time it takes to complete a trade) these anonymous Wall Street drones rig the market so you and I don't stand a chance.
4. Domination — With their million-dollar lobbying efforts, they succeed in crafting legislation that shifts their risk to ordinary taxpayers while they keep all the rewards. Haters point to the repeal of the Glass-Steagall Act, and the subsequent propping up of the greedy banks when their risk-taking blew up in their faces (without a single CEO getting fired) as evidence that Wall Street now dominates Capitol Hill.
5. Arrogance — Perhaps more of an emotional stereotype, it may be difficult to put a face on this sentiment, but it's there.
What About You?
Two questions — one that matters and one that doesn't:
A. How do you feel about Wall Street?
You probably have a ready answer, filled with various measures of steam and dander. However, this is the answer that doesn't matter. How you feel about Wall Street doesn't do you any good, other than the occasional after-dinner rant with a few friends.
B. What do you do about Wall Street?
Like the weather, Wall Street is what it is, and we are not going to change it. The smart people focus their attention on how to get ahead in this system, flawed though it may be. Jeff Rose gave us a list a few weeks ago of investments off-Wall Street; but like it or hate it, Wall Street dominates the investing landscape and is not going away anytime soon. If you have a 401(k) retirement plan in the USA, you're tied to Wall Street since the law requires that those plans can only invest in mutual funds.
Given that, what are your options?
1. Get out of day-trading. In the '80s and '90s, when the stock market was on a long-term bull run, it was relatively easy to make money day-trading. Those days are gone. The market is too volatile, and this is the prime area of focus for those Wall Streeters with their mega-computers and superfast communication lines.
2. Start with index funds. J.D. Roth has said it hundreds of times, but index funds capture entire markets or segments. No Wall Streeter is big enough or rich enough to move an entire market. And they compete with each other too much for them to work in cahoots with each other.
3. Avoid the conventional mutual funds your company's adviser wants to steer you toward. They talk a good story, but the stats prove fewer than 20 percent of them beat the market even BEFORE their egregious fees. And it's never the same 20 percent, so an index fund is guaranteed to beat any one over the long haul.
4. Take a long term view. Wall Street doesn't. This is why Warren Buffett so handily outperforms them. Every quarter, your Wall Streeter is fired or gets a bonus. They can't afford to take a long-term view. You can. You know the market's going to fall again. It always does. But it will recover again. (It always does that too.) Most people sell after a market crash and blame Wall Street. Smart people don't. They stay the course and buy some more to reap even more reward when the market recovers (as it always does).
5. Contribute, contribute, contribute. In the beginning, almost all of the value of your fund will be from your contributions, because 8 percent (or whatever you get) will never add up to much early on. But as time passes, the more you contribute, the more there is to fuel the inevitable growth.
If you do these things, you'll come out ahead. Whether Wall Streeter X makes millions or joins the unemployment line won't make any difference to you. You can make the system work for you. And every year thereafter, you may be able to pull the April Fool's prank on some unsuspecting Wall Streeter. 🙂