Compliance

Dodd-Frank Repeal Battle Parallels Fiduciary Fight

Federal agencies and initiatives carry significant momentum and must be redirected carefully, but forcefully, by any incoming president.

By John Manganaro editors@assetinternational.com | February 22, 2017
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Many in the retirement plan advisory industry are closely watching the Trump administration’s effort to repeal the Department of Labor’s (DOL) fiduciary rule, but the wider financial services community is clearly focused on the related effort to attack the Dodd-Frank reforms.

A quick refresher: The Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted on July 21, 2010, and it was expected to at least peripherally impact the standard of conduct of those financial advisers who provide their services as registered representatives of broker/dealers. Mainly the rulemaking impacted consumer and investment banks, but the extent of the changes mandated by Dodd-Frank were massive in scope.

As a very helpful “Dodd-Frank cheat sheet” supplied by Morrison and Foerster observes, the term “Dodd-Frank” represents an entire ecosystem of rules and requirements that have been variously well-established among the nation’s large and small financial institutions. Similar to the DOL fiduciary rule, millions have been spent on compliance efforts market-wide.  

The cheat sheet outlines the reforms this way: “The Dodd-Frank Act implemented changes that, among other things, affected the oversight and supervision of financial institutions, provided for a new resolution procedure for large financial companies, created a new agency responsible for implementing and enforcing compliance with consumer financial laws, introduced more stringent regulatory capital requirements, effected significant changes in the regulation of over the counter derivatives, reformed the regulation of credit rating agencies, implemented changes to corporate governance and executive compensation practices, incorporated the Volcker Rule, required registration of advisers to certain private funds, and effected significant changes in the securitization market.” Get all that?

At the time of its implementation, Marcia Wagner, a trusted ERISA attorney and columnist for PLANADVISER, explained that the Dodd-Frank Act was technically unrelated to the Department of Labor’s regulatory initiative to broaden the “fiduciary” definition under the Employee Retirement Income Security Act (ERISA). This was the rulemaking specifically targeting financial advisory professionals and their supervising firms, but both efforts were expected to have an impact on the standard of care that brokers must adhere to when advising their clients, including retirement plan clients. This was because the Dodd-Frank Act required the U.S. Securities and Exchange Commission (SEC) to perform a study of the different standards of conduct that apply to broker/dealers and investment advisers working in various distribution channels and with various compensation structures.

Obama administration officials ostensibly wanted a two-pronged attack against what they perceived as conflicts of interest standing between fair access to investment products and consumers, one lead by the DOL and the other by the SEC. Their goal, now quickly unraveling under President Trump, was to start to reduce confusion about client care standards that were variously applied based on adviser type and compensation model. In the end, the DOL far outpaced the SEC in proposing and adopting regulations impacting conflicts of interest—although the SEC has indicated its research efforts support the basic notion of unifying advisory standards.

NEXT: How likely is a full successful repeal?