Even if Republicans make gains in the elections, financial reform – including the push for a universal standard of care for advisers – will be hard to derail
With political winds seemingly blowing in their favor, Republicans are already outlining changes for 2011 if they take over the House of Representatives. The party faces a big challenge, though, in trying to modify a sweeping financial-reform law that most of its members opposed.
“The party is committed to right a number of the wrongs that were in the Dodd-Frank bill,” said Rep. Scott Garrett, R-N.J., a member of the House Financial Services Committee. “We can be effective on a number of different fronts. In 2,300 pages, there are a lot of different fronts to address.”
Nevertheless, a governing manifesto released by the GOP today vowed to rip up health care reform but said very little about the financial regulatory overhaul. Certainly, a number of obstacles stand in the way of Mr. Garrett and his GOP colleagues gutting Dodd-Frank. Democrats could remain in control of the Senate, ensuring that any legislation the House passes will meet opposition on the other side of Capitol Hill. More importantly, President Barack Obama is guaranteed at least two more years in the White House – and he would likely veto any attempt to backpedal on financial reform.
Republicans might take a different tack in trying to declaw Dodd-Frank. GOP legislators could reshape financial reform through the appropriations process by denying funds required by regulators such as the Securities and Exchange Commission.
The strategy carries risks, however.
“They can try to crimp the funding of those agencies, and they can probably prohibit implementation of some of these rules,” said R. Bruce Josten, executive vice president for government affairs at the U.S. Chamber of Commerce. “That's a very difficult way to do it. You could end up with one of these government shutdown gambits, which I suggested to the Republican Party once before is not a smart game to play.”
When Republicans took over Congress in 1995, they forced a budget showdown with President Bill Clinton, leading to the closure of the federal government for several days. Following the conflict, Mr. Clinton saw his political fortunes rise, and he cruised to re-election in 1996.
Unlike 1995, however, Republicans are not likely to capture control of the Senate this year.
“It would take a huge change of the kind no one is anticipating to get Senate [Republican] numbers that are needed to attach riders to appropriations [bills],” said Barbara Roper, director of investor protection at the Consumer Federation of America.
Even if they pursue the funding route, today's Republicans also must deal with a Democratic president.
“At the end of the day, you have to have the president sign an appropriations law,” said Terry Haines, a partner at McGuireWoods LLP.
Nonetheless, Mr. Haines said, even if Republicans control only the House, they could influence the SEC. The agency is independent of the White House but not necessarily independent of Congress.
“They're going to have to engage in aggressive oversight of the implementation of Dodd-Frank,” Mr. Haines said. “Putting a spotlight on an agency's deliberations has the effect of changing how the agency deliberates and what it does.”
The Dodd-Frank measure, however, helps insulate the SEC from such political machinations by giving it more power over its own budget, according to Ms. Roper.
“It is less susceptible to those threats than it has been in the past,” Ms. Roper said.
Ms. Roper and other advocates of a universal fiduciary duty for anyone providing retail investment advice are confident that the Dodd-Frank bill's standard-of-care mandate — which requires an SEC study and gives the agency the option of implementing such a rule — will remain intact, regardless of the election outcome.
“Whether the House or the Senate, or both, go to the GOP in November, it will not change these provisions of Dodd-Frank,” said David Tittsworth, executive director of the Investment Adviser Association.
Mr. Garrett, however, is not giving fiduciary duty a pass.
“We'll certainly have discussions on it,” he said.
In fact, it may not require a change of party control in the Senate for a revisiting of fiduciary duty in that chamber. Sen. Tim Johnson, D-S.D., and the leading opponent of a universal fiduciary standard, is slated to take over the Senate Banking Committee in 2011 from Sen. Christopher Dodd, D-Conn., who is retiring.
“Look and see where our next chairman was on that issue,” said a banking panel Democratic aide, who asked not be identified.
