Dodd-Frank Act's 5th anniversary: What's been done, what's left to do

Two of the more significant Dodd-Frank Act suggestions — the adoption of a new self-regulatory organization to oversee advisers and defining advisers' fiduciary duty — have not yet come to fruition

Jul 20, 2015 @ 11:03 am

By Alessandra Malito

In the five years since President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, officially making it a federal law, regulators have not yet fully implemented the legislation — and whether it will ever be completed is still up in the air.

Only eight out of the almost 400 rules in the law, which Congress passed after the 2008 financial crisis to seek transparency across the financial-services industry, mention financial advisers specifically and impact them directly. Some of the bill's provisions have been adopted, but others have not, due in part to the fact that they were not mandatory.

Two of the more significant Dodd-Frank suggestions — the adoption of a new self-regulatory organization to oversee advisers and defining advisers' fiduciary duty — have not yet come to fruition.

"We haven't seen the key part of the law that would affect financial advisers, which is the uniform fiduciary standard," said Duane Thompson, senior policy analyst at Fiduciary 360, an economics research firm. He expects to see a proposal by the Securities and Exchange Commission and Chairwoman Mary Jo White in the next year and a half.

He also said the Labor Department's proposal for a fiduciary standard in retirement accounts does not technically count toward the Dodd-Frank rule.

Rule Goal Outcome
Adviser SRO Create a self-regulatory organization to help the SEC oversee advisers. Three options include: allowing the SEC to charge a user fee to conduct exams, establishing a new SRO or allow Finra to oversee advisers. Not finalized
Fiduciary Duty Create a uniform fiduciary standard for all advisers and broker-dealers to abide by, where they would provide retail investment advice to act in their clients' best interests. Not finalized
Adviser Switch Move midsize advisers managing $25 million and $100 million away from the SEC to state regulators. Finalized
Private Funds Have hedge fund advisers and private fund advisers register with the SEC. Finalized
Performance Fees Adjust the requirement of net worth of an investor for advisers to charge a performance fee. Finalized
Broker-dealer Reporting Push broker-dealers to file more information about the custody of client assets. Finalized
Compensation Disclosure Require the SEC and other federal agencies to write rules about compensation to prevent reckless financial decisions that could harm investors. Not finalized
Accredited investor Exclude an investor's home when determining their net worth and investments. Finalized

Ron Rhoades, assistant professor of finance at Western Kentucky University and an advocate for the fiduciary standard, disagreed, saying that, once it passed, a DOL fiduciary standard could stretch across the industry.

"The SEC had other priorities and stalled on their effort," Mr. Rhoades said. "The DOL rulemaking is really setting the pace of that evolution."

There's still a ways to go in implementing Dodd-Frank's provisions. Of the 390 rulemaking requirements set forth by the law, 63.3% have been satisfied with finalized rules, while 15.4% more rules have been proposed. The last 21.3% of rules have not yet been proposed, according to a report by Davis Polk & Wardwell.


Some of the Dodd-Frank rules that affect advisers and broker-dealers have already been implemented, including one requiring private fund advisers to register with the SEC, as well as another shifting small and mid-size advisers to become state regulators' responsibility.

Within a year of the legislation passing, hedge funds and private-equity firms were registering with the SEC.

Within two years, the SEC required mid-sized advisers with assets under management between $25 and $100 million to amend their ADV forms to state they were no longer eligible to remain registered with the commission. Instead, they were forced to switch to a state regulator, decreasing the number of advisers registered with the SEC by 10% but increasing the total number of assets under management by 13% as the average AUM increases.

Another rule that was passed raised the minimum net-worth requirement of an investor for which an adviser can charge a performance-based fee.

And yet, some of the most significant rules have been held up indefinitely. There has been a debate since Dodd-Frank began rolling out about whether or not there needs to be a new self-regulatory organization to enforce Dodd-Frank requirements and do more adviser examinations.

Currently, the SEC examines about 10% of the 11,500 registered investment advisers from around the country every year. Suggestions include allowing the SEC to charge a user fee to conduct exams, establishing a new SRO or allowing the Financial Industry Regulatory Authority Inc. to step in and take over jurisdiction of adviser examinations.

"There's no real progress," said Thomas Gorman, a partner at Dorsey and Whitney, referring to the SRO debate. "I think many advisers, particularly the smaller ones, are content with the way the SEC is conducting the examinations."


Mr. Rhoades said he doesn't have much hope that there will be significant progress in the near future. Mandatory initiatives can be delayed, and suggestions could be avoided completely.

"You have some optional rulemakings by the SEC, such as the fiduciary standard, where the SEC has a history of making proposals but not acting on them," Mr. Rhoades said.

"I don't have a great deal of confidence that the SEC is able — with its current staff — to implement a whole new set of rules that are consumer-friendly," he said.


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