More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
This year’s congressional elections hold considerable potential to reshuffle power on Capitol Hill. Neither the Democratic majority in the Senate nor the Republican majority in the House has a secure grip on control of its respective institution. For the financial sector, the stakes include the future of the Dodd-Frank regulatory framework and the composition of the key committees overseeing financial services industries.
Congress, indeed, is one of the few institutions rivaling Wall Street in unpopularity at present. An April average of polls tracked by the website Real Clear Politics showed job disapproval ratings for Congress at 78% and approval ratings at 14%.
Remarkably, even this dismal public assessment was a slight improvement over polling results earlier in 2012 and in the last five months of 2011, which tended to put congressional disapproval ratings in the low 80s. Prior to August of last year, those negatives had been fluctuating in the 60s and 70s.
Last summer’s debt ceiling conflict appears to have been an important factor in souring the public about Congress. However, the upswing in negatives continued after a compromise agreement was passed in early August, which suggests that both the standoff and the compromise irritated significant portions of the public.
Against this backdrop of widespread popular disenchantment, the two major parties are seeking to protect majorities that could prove fragile. In the Senate, the Democrats currently have a de facto 53-47 majority (two of those seats are held by independents who are part of the Democratic caucus). This year, 23 of those seats are up for election. Senate Republicans, by contrast, have only 10 seats at risk in November.
In the House, the GOP now holds 242 seats, and so would need to lose 25 in order to fall short of the 218 needed for a majority. Although many analysts have argued that a shift of that magnitude is unlikely this year, it would hardly be unprecedented; the Democrats lost 63 House seats in 2010. House Speaker John Boehner recently caused a stir by stating there is a “one-in-three chance” of the Democrats winning back the chamber.
The presidential race promises to be a big factor in how the congressional races turn out. A victor at the top of the ticket might have “coattails” on which legislative candidates can ride. One concern expressed by Boehner was that Republican House candidates might fare poorly in “orphan districts,” areas where GOP turnout may be weakened since they’re in states that President Obama can be confident of winning.
In early May, the Intrade prediction market gave a 27% chance to the 2012 elections resulting in a Democratic president, a Democratic Senate and a Republican House — the status quo, in other words. The market put a 23% chance on a GOP sweep of the presidency and Capitol Hill, while attributing the next greatest likelihoods — 17% and 15%, respectively — to a Democratic president with a GOP House and Senate, or alternatively to a Democratic president with Democratic control of both chambers.
The market assessed at around 9% the chance that the White House will shift parties while neither house of Congress does so, and put in low single digits the chances of a Republican president facing either two Democratic chambers or getting elected while the two parties swap control of the House and Senate.
Mitt Romney has stated an intention of repealing the Dodd-Frank legislation, but has said little about what regulatory framework he would put in its place. A Romney victory accompanied by GOP control of both houses of Congress would make a sweeping repeal of Dodd-Frank plausible. At the other end of the spectrum, an Obama victory with Democrats in charge of both houses essentially would cement Dodd-Frank into place, curbing efforts to limit its impact.
If, as is more likely, some degree of divided government emerges from this year’s elections, then while the Dodd-Frank framework will probably endure, its scope and practical meaning will be the subject of an ongoing tug of war by the competing parties. How broadly and aggressively regulators undertake their Dodd-Frank responsibilities will depend, in substantial part, on the pressures they face from Capitol Hill.
Contention over financial regulation can be expected to be an ongoing theme at the two congressional committees tasked with oversight of that policy area. These are the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs. The partisan division of each committee reflects, roughly, the overall balance in its respective chamber. Currently, the Senate committee has 12 Democrats and 10 Republicans, while the House committee has 34 Republicans and 27 Democrats.
Besides the prospect that these balances will change with the broader composition of Congress in the upcoming elections, the committees will be altered by some decisions and maneuvering among their current members.
The impending retirement of Barney Frank (D-Mass.) means the House Financial Services Committee will get a new Democratic ranking member or (if Democrats win the House) a new chairperson. Maxine Waters (D-Calif.) would be that person if, as is often the case, the matter is decided by seniority. The prospect of the left-leaning Waters as the top Democrat has stirred some industry grumbling that she would be, as one anonymous financial executive put it, “too much of a bomb thrower.”
There has been speculation that Carolyn Maloney (D-N.Y.), the next most senior member, might challenge Waters for the top slot. Maloney has disavowed such an intention, but the matter may not be closed. Waters has been embroiled in a long-running ethics inquiry, while Maloney has taken a high-profile role on the committee, including in the recent bipartisan bill for a self-regulatory organization for investment advisors.
Further uncertainty involves who will be the top Republican on the House committee. The current chairman, Spencer Bachus (R-Ala.), is expected to step aside in keeping with House Republicans’ self-imposed six-year term limit on committee chairs. The second-ranked Republican, Peter T. King (R-N.Y.), probably would not be in the running, as he heads another committee. Likely leading aspirants include Ed Royce (R-Calif.) and Scott Garrett (R-N.J.), both widely seen as staunch conservatives.
On the Senate committee, the chairman is Tim Johnson (D-S.D.) and the ranking member is Richard Shelby (R-Ala.). Neither faces reelection this year. Johnson, who was next in line in seniority when Chris Dodd (D-Conn.) announced his retirement two years ago, was viewed skeptically on the left as the “Banks’ Favorite Dem,” in the words of a Huffington Post headline. As chairman, however, Johnson has been a vocal proponent of Dodd-Frank. Shelby, meanwhile, has been a frequent critic of the new regulatory regime.
On the committee’s current majority, Sherrod Brown (D-Ohio), Bob Menendez (D-N.J.) and Jon Tester (D-Mont.) are up for reelection; Menendez and Brown have the edge in their races, while Tester is in a hard-fought battle. Two members, Daniel Akaka (D-Hawaii) and Herb Kohl (D-Wis.) are retiring; the Hawaii seat is relatively likely to stay Democratic, while the Wisconsin seat is closely contested. On the committee’s minority, Bob Corker (R-Tenn.) is favored to win reelection.
Relevant to the future composition of the Senate banking committee is the tightly contested Massachusetts race between incumbent Republican Scott Brown (who is not on the committee) and Democratic challenger Elizabeth Warren. A Warren victory could lead to her gaining a committee seat as a forum for her high-profile criticism of Wall Street. Brown, who was one of just three Republicans in the Senate to vote for Dodd-Frank, enjoys heightened support in the financial sector from non-enthusiasts of Warren.
Kenneth Silber is senior editor of Research magazine.