When President Obama signed the Dodd-Frank Act a year ago, he said:
In the end, our financial system only works—our market is only free—when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system. And that’s what these reforms are designed to achieve—no more, no less. Because that’s how we will ensure that our economy works for consumers, that it works for investors, that it works for financial institutions—that it works for all of us.
So has Dodd-Frank been successful in achieving those goals? Will Dodd-Frank prevent another financial crisis from occurring? And what will the law mean for the investment advisory profession?
Let’s step back to recall the underlying motivation for enacting such a sweeping piece of legislation. The primary factor was to address factors that led to the 2008 meltdown. One could logically conclude that a key reason for the 2008 crisis was that regulators did a poor job enforcing existing laws and regulations and, therefore, it would be best to legislate bright lines that restrict or set limits on the size or activities of businesses, such as Glass-Steagall’s separation of investment and commercial banking.
But as my good friend Matt Fink (former president of the ICI) has written, Dodd-Frank generally rejected this approach and instead gave even more power to the regulators. Early in 2009, folks in Washington were whispering that the SEC could actually be abolished given its role in the financial crisis as well as the Madoff and Stanford scandals. But on the first anniversary of Dodd-Frank, the question now is how much bigger will the SEC grow, and how will it handle the 100 rulemakings, scores of studies, new offices and new responsibilities assigned to it by the legislation?
It’s far too early to assess whether Dodd-Frank is a “success” or “failure.” Of course, that assessment depends on who you are and what you do. In general, the larger and more complex your business is, the more Dodd-Frank could complicate your life. But even setting that aside, it’s clear that implementing core provisions of the law has been significantly delayed in large part because regulators are inundated with Dodd-Frank responsibilities and in part because the timeframes in the law were too aggressive.
The devilish details to be hammered out by various regulatory agencies will serve as the measuring stick for assessing the law’s successes or failures. But it will be months, if not years, before enough of the puzzle will be pieced