While it isn’t an updated version of Glass-Steagall, the latest financial-services reform legislation — still in need of a few last Senate votes to pass (as of press time in mid-July) — is poised to have a variety of impacts on the large banks employing wirehouse advisors, as well as on broker-dealers.
“This is a tough law that will also have profound effects on the operations and cost structure of most financial services companies and financial markets,” said Securities Industry and Financial Markets Association (SIFMA) president and CEO Tim Ryan in a statement on June 25.
Still, Ryan added, “Much of this new law should help to restore and maintain confidence in U.S. financial markets…such as the establishment of a systemic risk regulator, resolution authority, and a new federal fiduciary standard for retail investors.”
Many analysts note that the initial reforms were much more sweeping than the final legislation. The industry ended up with more benign reforms, they say, though some firms should be hurt financially and otherwise as the required changes take place.
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“Generally speaking, my impression is that overall the legislation is not going to be as restrictive as originally thought — for all firms, including the wirehouses,” said Fritz McCormick, a senior analyst with Aite Group, a Boston-based consultancy.
Wall Street analysts agree. “While we believe the final bill will be restrictive to earnings and constrain capital, the outcome could have been worse, with both derivative reform and trading restrictions eased somewhat in the final hours, though maybe not as much as some of the bigger banks would have hoped,” wrote Jason Goldberg, CFA, a large-cap bank analyst with Barclays Capital in New York in a June 28 report.
This doesn’t mean that carrying out required reforms will be a walk in the park for banks and other financial organizations: There are at least 350 new regulations and some 150 studies mandated in the 2,000-plus page conference report, according to the U.S. Chamber of Commerce.
“The new law could translate into anywhere from an estimated 15,000-20,000 pages of new rules by which firms will have to manage in the future,” explained Goldberg. “Much of the legislation is short on specifics, giving regulators power to either determine its impact or leave it open to interpretation and/or regulatory discretion; while many of the other changes won’t occur near-term, rather they will be phased in over a long period of time, giving banks time to adjust.”
The Senate and House conferees’ deal on fiduciary duty requires that the SEC take six months to study advisor and broker obligations toward retail customers. The SEC can then put brokers under the same fiduciary standard of care that applies to investment advisors, putting firms with retail-brokerage and wealth-management operations under new rules.
“Investment advisors will be dealing with this legislation for years to come,” said David Tittsworth, CEO of the Investment Advisers Association, in an e-mail interview with Investment Advisor. It remains to be seen “whether or not the bill represents a net ‘win’ or ‘loss’ for advisors and their clients,” he added.
Tittsworth also explained that the legislation may lead to new regulations “that could increase the complexity and burden of compliance for all advisory firms.”
“Raising the $25 million threshold to $100 million alone will result in a significant reduction in the number of SEC-registered investment advisors,” and “other critical questions, such as whether a [self-regulatory organization or] SRO is warranted, will be the subject of study and potential future action,” said Tittsworth.
The Financial Services Institute, according to CEO Dale Brown in a phone interview, has wanted to see “a new standard of care developed for all advisors in all client situations across all business models in the industry. The group now has “concerns about imposing the fiduciary duty and its unintended consequences on small investors.”
With the increased regulatory complexity, Brown explains, “small investors could be priced out of the reach of professional service and advice. That is not a good outcome.”