Dodd-Frank’s unintended consequence

The Dodd-Frank financial-reform law has created the potential for great uncertainty in the investment advisory and financial planning business. Two sections of the law are particularly troublesome. First, the law dumped a heavy load onto the Securities and Exchange Commission, requiring it to conduct 17 studies and issue 95 new or modified rules, mostly within a year following enactment of the law.

Second, it established a Consumer Financial Protection Bureau endowed with broad regulatory powers, whose director has almost unchecked authority. The bureau will be housed in the Federal Reserve, and it appears that the director will have authority to regulate some areas of financial advice.

Confusion and uncertainty will afflict the financial planning and advisory community for at least the next year, until the SEC develops its rules, and the new CFPB director is appointed, hires a staff and begins to issue rules and regulations.

Almost two months after President Barack Obama signed the Dodd-Frank law, Congress hasn’t yet passed the SEC’s budget, meaning that the commission has only 10 months to hire and train the necessary staff members and complete the work.

The likely result is that new rules will be developed in a rush.

One rule change in the works is the development of uniform rules of conduct for registered investment advisers and brokers. The result is unlikely to satisfy everyone and may lead to complaints that the process was flawed.

Perhaps a bigger source of concern and uncertainty is the role of the CFPB and its director. The Dodd-Frank law appears to put the CFPB’s director beyond the control of the president, the Fed and Congress.

For example, the law says that the director, while appointed for a five-year term by the president, with the advice and consent of the Senate, may be removed from office only for cause. It also says the Federal Reserve’s board of governors may not delay or prevent the issuance of any rule or order of the bureau.

And while Congress normally exercises control over the executive branch through the power of the purse, the CFPB has been given a source of independent funding in the form of an allocation of up to 12% of the Fed’s operating funds, which isn’t subject to appropriation by Congress.

The law gives the CFPB authority to regulate anyone who provides “financial advisory services” to individuals other than “services relating to securities” provided by those who are regulated by the SEC or the Commodity Futures Trading Commission in their registered capacity.

That would seem to leave accountants, financial planners and financial advisers under the CFPB’s regulatory thumb for general financial advice about topics that don’t involve the purchase or sale of securities.

Certainly, it appears that the CFPB’s director will have enough freedom to define the agency’s reach broadly, and there will be little that the president, Congress or the Fed can do about it for at least five years.

Overall, the Dodd-Frank law has introduced more uncertainty into the financial services sector — an unintended consequence.