For investment advisers and many brokers, the first two years of the Dodd-Frank financial reform law amounted to the big wait.
Enacted on July 21, 2010, the measure's two provisions that most directly affect the investment advisory world – a universal fiduciary duty rule for retail investment advice and improved adviser oversight, perhaps through a self-regulatory organization – remain stalled.
The reason for the
slowdown is that the controversial fiduciary-duty and SRO issues are a microcosm of democracy. Every group with a stake in each of them is getting its say, which means that the rulemaking and lawmaking processes are grinding slowly.
Let's look first at fiduciary duty. During negotiations over Dodd-Frank, lawmakers came up with a grand bargain on this narrow issue. They agreed to give the Securities and Exchange Commission the authority to promulgate a universal-fiduciary-duty rule but only after it conducted a study of the issue.
That report was delivered to Congress in January 2011 with a recommendation that the SEC move forward with a rule. Since then, the SEC has received thousands of comment letters and conducted dozens of meetings with fiduciary-duty skeptics and outright opponents urging it to take its time and think through the economic impact of such a regulation.
Those entreaties – petitioning the government in the parlance of the Constitution – along with a federal court ruling last summer that vacated a proxy access rule (over the issue of cost-benefit analysis) have caused the SEC to delay proposing a fiduciary-duty regulation until after it conducts a regulatory-impact assessment.
The slowdown has frustrated fiduciary advocates. Yet, they and opponents accept the SEC's measured pace.
“It's critically important that we get these [regulations] right,” said Terry Headley, president of Headley Financial Group and former president of the National Association of Insurance and Financial Advisors, which has warned about the consequences of a too-expansive fiduciary duty.
One of the leading fiduciary proponents, David Tittsworth, executive director of the Investment Adviser Association, wants the SEC to be careful not to make the rule too weak.
“I'd rather have more delay than to see a bad rule finalized,” Mr. Tittsworth said.
Investment advisers are dead set against an SRO regulating them, especially if it turns out to be the
Financial Industry Regulatory Authority Inc., the broker SRO.
Adviser groups say that an SRO represents a costly additional layer of regulation that would hurt small advisory firms. Finra says an SRO would strengthen investor protection by increasing the number of adviser exams that are conducted annually.
Legislation that would establish one or more SROs, which responds to a Dodd-Frank-mandated report on adviser oversight, is
now stalled in Congress. The slowdown can be attributed in part to the effectiveness of
advisers lobbying against the bill.
Opponents of the measure are exercising their democratic right to petition lawmakers.
“I'm fine with that delay,” Roy Diliberto, chairman of RTD Financial Advisors Inc., said of the SRO bill. “They can delay that forever.”
Those who support an SRO are not giving up on the bill in this session of Congress. They want to move it as far in the legislative process as possible to set a precedent for reintroducing the measure next year.
“If it takes longer than we originally thought, we're all better off in the long run,” said Dale Brown, chief executive of the Financial Services Institute.
Democracy is a winding road that requires a lot of compromise along the way – especially, it turns out, on investment-adviser issues.
