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Will Dodd-Frank Be Repealed? Will Congress Starve the SEC?

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Lately I’ve been hearing the following questions here in Washington with increasing frequency:

  • Is Congress going to repeal the Dodd-Frank Act?
  • Is Congress going to starve the SEC so it won’t be able to implement Dodd-Frank?

Though it may disappoint some folks, the 112th Congress will not repeal Dodd-Frank. It’s pure fantasy to imagine that enough Senate Democrats – all of whom supported the legislation last summer – would join Senate Republicans to overturn the law now (much less that two-thirds of both the House and Senate would vote to override Obama’s veto). So let’s get real…

It’s harder to answer the second question with certainty.    

The SEC’s funding is a relatively small skirmish within a gigantic budget war brewing in DC. House Republicans are charging ahead in an effort to make dramatic decreases to everything in the federal budget, including the SEC.  The Senate appears willing to engage, but is not as eager to cut into the bone. While the House and Senate are the primary warriors, don’t count out the Administration’s role in the upcoming melee.

The federal government, which began its 2011 fiscal year last October, is now being funded by virtue of a CR – that’s DC-speak for ‘continuing resolution’ – an omnibus measure that occurs when Congress is unable to agree on appropriations bills that provide specific funding for agencies. The current CR will expire next Friday, March 4, and there’s a serious question as to whether Congress and the White House will be able to reach an agreement by the rapidly approaching deadline. 

If no agreement is reached, we may see a repeat of the 1995-1996 government shutdown that occurred after Newt Gingrich and his colleagues failed to reach a compromise with President Bill Clinton. Some believe Republicans can avoid the backlash that occurred the last time the national parks closed and passport applications weren’t processed. They argue that Clinton got the best of the situation because of his success in spinning the story as ‘Republicans shutting down the government,’ when Republicans could/should have had the upper hand in the rhetorical battlefield by pointing out that the shutdown was caused by Clinton’s refusal to sign bills with lower spending levels.     

Even if a government shutdown is avoided, criticism for Dodd-Frank is mounting.  Last week, all Republicans who serve on the Senate Banking Committee signed a letter to SEC chairman Mary Schapiro and other regulators that basically says, “Slow down!” As the debate over Dodd-Frank continues, it’s possible that legislation could be considered to simply extend the timeframe for rulemakings and other requirements under the massive new law.

Where does this leave investment advisors? My bet is that provisions in Dodd-Frank that affect all investment advisory firms – for example, whether broker-dealer and investment adviser regulations should be ‘harmonized,’ including whether FINRA’s reach should extend to all or some advisory firms – will be considered later this year.  It’s likely that hearings will be held in both the House and the Senate. It’s essential for the investment advisory community to stand up now and to be actively engaged when these issues are debated. Unless investment advisors are willing and able to express their concerns to their elected officials, it is likely that FINRA and its allies will be successful in their efforts.      

As always, I welcome your thoughts and feedback on these important matters.