After two years on the books, the massive Dodd-Frank financial reform law is generating more fear of overbearing regulation than final rules.
President Barack Obama signed the 848-page measure July 21, 2010. Since then, regulatory agencies have struggled.
As of last week, 123 of the 398 rule-making requirements, or 30.9%, have been finalized, according to a report by Davis Polk & Wardwell LLP.
The Securities and Exchange Commission has finished 28 of 95 mandatory regulations.
The Dodd-Frank law gave the SEC the authority — but didn't require it — to promulgate a rule that would impose a universal fiduciary duty on anyone providing retail investment advice and harmonize regulations governing investment advisers and brokers.
The SEC's inaction has stalled the provision of Dodd-Frank that would most directly affect investment advisers, who so far haven't felt a major impact from the law.
“Our regulations have increased over the years — that's for sure. But I don't know that Dodd-Frank has had anything to do with that,” said Roy Diliberto, chairman of RTD Financial Advisors Inc.
“There's a tone [created by Dodd-Frank] that financial services as a whole need tougher scrutiny and regulations,” he said. “That may eventually affect smaller firms.”
The complexity of Dodd-Frank can make it opaque.
“To this point, I don't see any increase of regulatory impact [from] Dodd-Frank, as no one seems to understand what it is or what its rules will be,” said Bradley Teets, a registered representative with Kovack Securities Inc.
Part of the challenge of assessing Dodd-Frank is that the expansive bill directly or indirectly could affect advisers in myriad ways.
One area that has yet to play out involves a self-regulatory organization for investment advisers. In a January 2011 report to Congress mandated by Dodd-Frank, the SEC indicated that it lacks adequate resources to review more than a fraction of registered advisers annually and recommended establishing an SRO as one of three options to increase examination rates.
But SRO legislation written by House Financial Services Committee Chairman Spencer Bachus, R-Ala., lacks momentum.
“My sense is, there are Republicans on the committee who have concerns about the bill,” said Duane Thompson, senior policy analyst for fi360 Inc.
Another part of Dodd-Frank designed to ease the SEC's adviser oversight burden shifted about 2,400 small to midsize advisers to state regulation.
“The switch has gone very well,” said Jack Herstein, assistant director of the Nebraska Department of Banking and Finance, and president of the North American Securities Administrators Association Inc.
The other side of the switch equation requires private-fund advisers to register with the SEC for the first time to allow the commission to better monitor dark-capital pools. After the shuffle, the SEC will have about 10,000 registered advisers with $48.6 trillion in assets under management, down from 12,623 with $48.8 trillion.
Dodd-Frank raised the bar for accredited investors, who now must have $1 million in investible assets independent of the value of their homes. Prior to its enactment, the value of residences could be included in attaining the minimum.
Other provisions might indirectly affect advisers. For instance, the so-called Volcker rule could curtail proprietary trading by banks and wind up affecting their wealth management operations.
Dodd-Frank also gives the SEC the authority to ban mandatory-arbitration clauses in brokerage agreements. It is unclear whether the SEC will pursue a rule.
“There are a lot of provisions that may affect only certain types of advisers,” said David Tittsworth, executive director of the Investment Adviser Association. “There's still a lot of uncertainty about how these issues are going to be resolved.”
Nowhere is uncertainty more pervasive than on the issue of fiduciary duty.
The SEC has developed an outline of elements of a potential fiduciary-duty rule — similar to a concept release — that would serve as the foundation for a data request for a cost-benefit analysis, according to a source with knowledge of the process, who asked not to be identified.
The document is being circulated among the commission members for approval of a public release, which hasn't yet been scheduled.
The SEC is emphasizing the regulatory-impact assessment in part because a proxy-access rule was vacated last year by a federal court that cited a flawed cost-benefit analysis.
Fiduciary-duty advocates are frustrated by what they see as an attempt by skeptics to undermine Dodd-Frank by insisting on detailed cost studies.
“It's too bad that it has run into an industry-funded campaign to slow down the rule-making pro-cess,” Mr. Herstein said. “I can't see much cost in putting your clients first.”
One financial services executive is pleased that the SEC is treading carefully, however.
“What we've learned over the last two years is how complicated it is to get regulatory reform right. There's a renewed focus today on the need for cost-benefit analysis,” said John Taft, chief executive of RBC Wealth Management-U.S. and chairman emeritus of the Securities Industry and Financial Markets Association.
Conducting a cost assessment is likely to take months, pushing a rule proposal into next year.
The delay “is a challenge more than a disappointment,” said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc., which sees the rule as integral to investor protection. “We're doing everything that we can to encourage the SEC to move forward on a uniform standard of care.”
The National Association of Insurance and Financial Advisors contends that a poorly written rule would significantly increase costs for its registered-representative members, forcing them to focus on fee-based accounts for high-net-worth clients.
“We're pleased that [the SEC] is taking a deliberative approach to this process,” said Terry Headley, president of Headley Financial Group and immediate past president of NAIFA. “We remain concerned about the unintended consequences and the impact on middle-income investors.”
It will take at least another year to assess the consequences of Dodd-Frank.
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