Reports coming out of Washington last week suggest the SEC might consider loosening up the rules on selling stock in privately held companies. Why not? It’s just the latest in a string of legislative attacks and regulatory missteps, not to mention the biggest market collapse since the Great Depression, that appear to represent the end of American Capitalism.

Now, most normal folk don’t give a rat’s behind about matters of high finance, which is generally why things like this go unnoticed. That’s too bad, because the end of American Capitalism might just also mean the end to your 401(k), IRA or any other retirement plan.

What’s happening and why should you be concerned?

Following the 1929 market crash and the hemorrhaging that occurred in the years after, the government came out with a series of actions and regulations to avoid a repeat. Among the many pre-SEC era problems with the markets included the lack of credibility in financial reporting. The Securities Laws enacted in the 1930s required publicly traded companies to conform to certain standards. These standards were meant to protect the common investor (who really wasn’t that common back then) from unscrupulous salesmen.

Really rich investors were allowed to continue to invest in private companies, but the government put a cap on how many investors those private companies could have. Beyond that, companies had to go public to raise more capital. This encouraged companies to enter into the public market and fed a growing need of the (by now) common investor’s desire to own stock.

This, in essence, is what we called “American Capitalism.” It’s called “American” because we are all owners – we are all capitalists. The promise of America was that everyone could own a piece of the business.

Not only was this promised, it was (and continues to be) encouraged. Tax laws gave more favorable treatment to capital gains compared to earned income. The rise of the twin towers of the IRA and the 401(k) – and with these the growth of the mutual fund industry – all but sealed the deal for American Capitalism. The country, its citizens and its businesses thrived as the planets aligned and boosted markets – at least until the Internet bubble-burst in 2000.

As happens during financial crises, politicians found several convenient scapegoats for these losses during the first few years of the new Millennium. Congress, drunk with hypocrisy, passed an elixir called “Sarbanes Oxley” while the SEC enacted something called “Reg FD” and thus began the end of American Capitalism.

I spoke to a CEO of a publicly traded company during this era of the beginning of the end. When I asked how he dealt with the new regulations regarding company news announcements, he said, “There’s no upside in optimism.” He predicted the new laws would discourage companies from going private. Within a year, he had left the public world for the private world.

But his prediction rang true. In the 1990s, we saw an annual average of 500 IPOs. Today that number is down to 130 per year.

This could dramatically damage your own IRA, 401(k) or pension plan because it’s reducing the number of public companies – the lifeblood of growth in retirement plans. With more money chasing fewer stocks, the Law of Supply and Demand could cause stock prices to inflate beyond normal valuations. This, in turn, can likely to lead to more volatility, placing more downside risk in the kind of “buy and hold” portfolio typically associated with retirement plans. The last few years might be a testament to that increased volatility.

Many feel the Facebook-Goldman Sachs snafu prompted the SEC’s venture into relaxing the private investment rules. In olden days, investigative reporters might follow the trail of political donations to see if the potentially favorable treatment might have come about for less than honorable reasons.

Ironically, just as the SEC is considering this major rule to benefit the elite few, it claims it doesn’t have the time or resources to consider the harm done to investors by 12b-1 fees, where the obvious conflict of interest sucks unnecessary fees from 401k plans every day.

Instant Insights /

Will your 401(k) survive the death of American capitalism?

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