At its enactment in 2010, the Dodd-Frank Act represented the most far-reaching and consequential financial market regulatory initiative in nearly 80 years. Addressing perceived problems in everything from bank capital, securitization and over-the-counter derivatives markets, to credit ratings and conflict mineral usage, it would seem inconceivable that policymakers would consider changes on a monumental scale.
Yet here we are, not yet seven years from those heady days of 2010, with many of Dodd-Frank’s original provisions still awaiting implementation and the new Trump administration and its potential Congressional allies preparing for an overhaul.
It’s about time.
Revisions to Dodd-Frank, let alone broader reform, have been on hold out of a fear that any change would gut the law, notwithstanding the fact that many financial experts believe it would ultimately fail in achieving its primary purpose of preventing a future financial crisis. A 2010 survey of CFA Institute members showed that 75 percent of respondents felt the law would not help prevent another financial crisis.
Now that reform is possible, however, it is important that policymakers get the balance right. Legislation needs to fix real problems in the law, but must leave in place those provisions that have enhanced the long-term health of our capital markets.
In surveys dating back to 2008, CFA Institute members have consistently called for better enforcement of existing laws and regulations, together with greater transparency of financial products and services.
The main vehicle for revision in this new Congress, the Financial Choice Act, seems consistent with those aspirations for a more stable, transparent and enforced financial regulatory regime. Crafted by House Financial Services Committee Chairman Jeb Hensarling (R-Texas), the Choice Act’s breadth and reach are nearly as bold as that of Dodd-Frank in its aspiration, as well as its legislative target.
In the investment markets realm, the Choice Act proposes to reassert the authority of the Securities and Exchange Commission (SEC) in matters of oversight of investment firms and staff, particularly those giving investment advice. We, too, believe the SEC should have primary authority over such matters, specifically as it relates to imposing and enforcing a fiduciary duty on investment advisers.
It is the SEC’s failure to distinguish between those owing a fiduciary duty from those that do not, however, that some, CFA Institute included, saw as necessitating the Department of Labor to create its own fiduciary duty rule for investment advice on retirement accounts. In particular, it was the SEC’s decision in the 1990s to let broker-dealers use the term “financial advisors” that has confused investors about the duties owed to clients by different service providers.
There is a relatively simple, non-intrusive change that could go a long way to fix this perennial issue: ensure investors have an honest description of the roles of individuals and firms giving them investment advice for their retirement and other investment accounts.
Specifically, the SEC needs to limit the use of the title “adviser,” or any derivative of that title, to those who are subject to the fiduciary duties stemming from the Investment Advisers Act. Those subject to the lower suitability standard should have to call themselves “salespersons.”
Elsewhere, the Choice Act proposes governance changes to the regulatory apparatus for systemic risk. The Financial Stability Oversight Council (FSOC) would face greater transparency for its decisions, and the Office of Financial Research would be shuttered. We would welcome both to enhance the quality of proposed oversight, particularly for asset managers.
Under the bill, banks would have the option to forgo heavy regulatory oversight in return for maintaining at least 10 percent shareowners’ equity, thus placing greater importance on capital than regulatory omniscience. It also would repeal the Volcker Rule.
House leaders see this giving local and regional banks needed regulatory relief from rules intended for too-big-to-fail institutions. Most observers see little prospect for big banks relaunching their proprietary trading desks or taking advantage of the alternative capital rules, due to higher capital charges for trading and because they will have a higher regulatory touch, regardless.
Perhaps boldest of the Choice Act’s proposals are provisions to replace Title II Orderly Liquidation Authority with a bankruptcy-based structure. When considered in 2010, the proposal was abandoned in recognition of a lack of debtor-in-possession financing sufficient to fund the collapse of one, let alone multiple, megabanks. At the same time, bondholders will require higher interest rates if they face the prospect of loss, thus reducing banks’ ability to leverage their balance sheets.
The nearly 69,000 U.S. members of CFA Institute want to ensure that our nation’s capital markets are fair, open, efficient and transparent for the benefit of all investors. It is in the details, the saying goes, where devilment will be found.
The Financial Choice Act would no doubt have its share of unintended consequences. Nevertheless, the emphasis on greater regulatory enforcement, improved transparency and appropriate labeling is certainly a step in the right direction.
James C. Allen is head of capital markets policy for the Americas at the CFA Institute, the largest association of investment professionals in the world.
The views of contributors are their own and are not the views of The Hill.