Will the 112th Congress Repeal Dodd-Frank?

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There’s been a lot of action on Capitol Hill lately—and, of course, lots of talk—about various provisions of the Dodd-Frank Act. Lawmakers (particularly Republicans) are questioning whether the law is deficient. The main question they agree on is whether regulators are taking appropriate steps—and enough time—to ensure that all angles are considered and that appropriate cost-benefit analyses have been conducted as agencies race to implement dozens of provisions required by the new law.

Among other favorites, the current headline concerns are derivatives and swaps regulation, whether private equity firms should be required to register with the SEC as part of the “private fund advisor” requirements, and whether the Consumer Protection Financial Bureau (CFPB) and Elizabeth Warren have too much unfettered power

But if you think all of this will lead to a wholesale repeal of Dodd-Frank, you are sadly mistaken, at least until another national election is held in 2012.  The simple fact of the matter is that Democrats, who voted for the Dodd-Frank law, still control the Senate (albeit by a slimmer margin than a few short months ago).  Don’t forget that President Obama has the extremely powerful tool of exercising his veto authority.  In addition, folks understand that “normal” Americans have nagging concerns about the 2008 financial meltdown and that getting rid of the law touted to “reform” Wall Street shenanigans could be politically unpopular.  So while you will see Republicans in the House moving forward to approve bills that delay, revise or even repeal elements of Dodd-Frank, that’s a far cry from enacting final legislation…   

However, what Republicans on both sides of Capitol Hill have accomplished is slowing down the Dodd-Frank train. The “let’s-slow-it-down-to-get-it-right” rhetoric has a lot of appeal. 

For example, at a session last week to approve a bill delaying implementation of swaps/derivatives regulations in Dodd-Frank, Frank Lucas, (R-Okla.), chairman of the House Agriculture Committee, said that, “efforts of Dodd-Frank to increase transparency

and stability in our financial markets will be for naught if the regulatory process is rushed. We need to acknowledge that Dodd-Frank set impractically tight deadlines for the implementation of dozens of regulations that will touch every segment of the economy.” 

Similarly, in a May 4 letter, Sen. Richard Shelby (R-Ala.) and other Senate Banking Committee Republicans asked the inspectors general (the internal audit arms) of the Fed, SEC, CFTC, FDIC and Treasury Departments to “initiate a review of the economic analysis” performed by each agency (and attached a list of more than 20 specific Dodd-Frank rulemakings). Even Rep. Barney Frank (D-Mass.), the co-author of the legislation, stated in a recent interview that he’s not terribly concerned about the failure of regulatory agencies to meet specific deadlines and that “no one will lose their job” if delays occur.

But what about issues that affect rank-and-file investment advisory firms, such as those relating to fiduciary duty and other “harmonization” issues? Or whether FINRA, the broker-dealer self-regulatory organization (SRO), will be successful in its efforts to extend its reach to advisory firms?

As it stands now, the best prediction is that the House will move first to consider these important issues.  In a March 17 letter to SEC Chairman Schapiro, Rep. Scott Garrett (R-N.J.), chairman of the House Capital Markets Subcommittee, and other Republicans voiced concerns about whether the SEC has conducted appropriate analyses to move forward with a fiduciary standard rulemaking. They also said that issues relating to examinations of investment advisory firms “must be considered concurrently.” The letter concludes by noting their intention to hold a hearing on these issues “in the coming weeks.” Such a hearing has not yet been scheduled but will provide the best information about where members of the House stand on issues that will have a direct and profound impact on the investment advisory profession.

The Dodd-Frank train may be moving a bit slower but it would be very unwise to conclude that its journey is over. 

As always, I welcome your thoughts and observations…

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