On 4th anniversary of Dodd-Frank, adviser issues remain unresolved

Regulators taking care of more pressing mandatory rules first

Jul 18, 2014 @ 1:11 pm

By Mark Schoeff Jr.

Former U.S. Representative Barney Frank, left, and former Senator Christopher Dodd.
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Former U.S. Representative Barney Frank, left, and former Senator Christopher Dodd.

As financial regulators slog through hundreds of required rulemakings in the sprawling Dodd-Frank financial reform law on its fourth anniversary, many provisions that affect investment advisers sit at the back of the line because they're not mandatory.

The most prominent unfinished Dodd-Frank business that would affect financial advisers is a rule to raise investment advice standards for broker-dealers. The law gave the SEC the authority to impose a uniform fiduciary standard for retail investment advice, but didn't require it.

Former Sen. Christopher Dodd, D-Conn., one of the financial reform law's namesakes, said he had no choice but to give the SEC leeway on fiduciary duty due to the brittle politics surrounding the issue.

“One of the reasons it was optional is because, frankly, I was faced with a problem,” Mr. Dodd said at a Dodd-Frank anniversary conference Tuesday sponsored by the Bipartisan Policy Center in Washington. “If I had tried to [make it] more than optional, the bill was going to die. Listening to my colleagues and looking at what the tipping points and tolerance levels were, you had very strong interest being reflected in that conversation. It continues today.”

After completing a staff study in 2011 that recommended the agency proceed with a fiduciary-duty regulation, the SEC has not yet made a decision on whether to commence rulemaking.

The Dodd-Frank law, enacted on July 21, 2010, contains 398 rulemaking requirements, 208 of which have been satisfied with finalized rules as of July 18, according to an analysis by Davis Polk & Wardwell. The Securities and Exchange Commission must promulgate 95 rules and has finalized 42.

Another Dodd-Frank provision the SEC has not yet touched is one that gives it the authority to end mandatory arbitration for investor disputes.

Nearly every brokerage customer contract contains a mandatory arbitration clause. Investors must pursue claims through an arbitration system run by the Financial Industry Regulatory Authority Inc., the industry-funded self-regulator.

Investor advocates have called for an end to mandatory arbitration. So far, they haven't budged the SEC.

“We're definitely frustrated with the lack of movement,” said Jason Doss, president of the Public Investors Arbitration Bar Association.

The group is promoting legislation that would end mandatory arbitration. It is stalled on Capitol Hill without Republican support.

When it comes to adviser oversight, Dodd-Frank only called for a study of the issue. That study was completed in January 2011 and concluded the options were: charge advisers user fees to pay for exams, establish a self-regulatory organization for adviser oversight or have the Financial Industry Regulatory Authority Inc. expand its reach to include advisers dually registered as brokers — each of which would require congressional authorization.

The SEC essentially has punted the issue to Congress, which is where it remains today as debate continues.

Whether the SEC ever gets to other optional items in Dodd-Frank may hinge on how much pressure investor advocates apply. Of course, they're balanced by countering industry forces that don't want the SEC to proceed.

The other complicating factor is all the non-Dodd-Frank work the SEC has on its agenda, including money-market fund reform, rules pertaining to legislation that eases securities registration for small businesses and controversies over high-frequency trading.

“In terms of picking what optional things they want to work on, I think it will be market structure,” said Hester Peirce, senior research fellow at the Mercatus Center at George Mason University.

One Dodd-Frank area where the SEC has completed its work — the registration of advisers to private funds — may be detracting from retail adviser oversight, according to Ms. Peirce.

The number of private-fund advisers registered with the agency has increased by 50% to 4,153. At the same time, about 2,400 advisers with less than $100 million in assets under management have moved to state oversight. The SEC took on the private funds to better track systemic risks they might pose.

“SEC resources will be diverted from monitoring advisers who manage the assets of average retail investors to monitoring the assets of wealthy investors who invest in private funds,” Ms. Peirce wrote in “Dodd-Frank: What It Does and Why It's Flawed” (Mercatus Center at George Mason University, 2013), a book she co-edited.

SEC Chairman Mary Jo White touted the agency's work on private funds in a statement on the Dodd-Frank anniversary.

“Among the many areas the SEC was directed to address under the Dodd-Frank Act, certain ones stand apart to me — asset management, especially private-fund advisers; proprietary activities by financial institutions; derivatives; clearance and settlement; credit ratings agencies; asset-backed securities; municipal advisers; and executive compensation,” Ms. White said. “The commission has already completed mandates in half of these areas. In the other areas, we have issued proposals and shortly will be finalizing some of the most important.”

Overall, Mr. Dodd is pleased with the law that bears his name.

“It's actually working pretty well,” he said.

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