House Republicans last week formally began their effort to roll back parts of the Dodd-Frank financial reform law, with a House Financial Services subcommittee approving several bills that would reverse some of the measure's mandates, including one that requires private fund advisers to register with the Securities and Exchange Commission.
In addition, another subcommittee approved bills that would curtail the authority of the Consumer Financial Protection Bureau, and the House Agriculture Committee passed a bill that would delay until December 2012 implementation of derivatives provisions.
Most Republicans have opposed Dodd-Frank since it began moving through Congress last year, criticizing it for saddling the financial industry with hundreds of burdensome new regulations. Most Democrats supported the measure, calling it a necessary step to improve market regulation and prevent another financial crisis.
Even though approval of the bills at the committee level and by the full House is almost assured in the Republican-majority chamber, their viability drops precipitously as they cross Capitol Hill to a Senate controlled by Democrats.
“The common thread is that Republicans want to chip away at Dodd-Frank,” said Brian Gardner, senior vice president of Keefe Bruyette & Woods Inc.
“I think they'll come up short. I don't see much interest in the Senate for revisiting those issues,” Mr. Gardner said.
Even though the private-fund-registration exemption gained some Democratic support in House subcommittee action last week — and was contained in a Senate version of Dodd-Frank last year — it isn't likely to survive on its own.
“Once you open the door on any issue to change Dodd-Frank, you've set the precedent for other potential changes,” Mr. Gardner said.
“I don't think Chairman [Tim] Johnson wants to go down that road,” he said, referring to the South Dakota Democrat who heads the Senate Banking Committee.
The Senate financial panel is “being more deliberate,” said David Tittsworth, executive director of the Investment Adviser Association.
A sign of Democratic Senate resistance to Republican efforts to erode Dodd-Frank — or, alternatively, slow its implementation — was demonstrated by Sen. Dick Durbin, D-Ill., during a Senate appropriations subcommittee hearing on fiscal 2012 budget proposals for the SEC and the Commodity Futures Trading Commission.
“We've got to push forward on this law, give you the time you need to promulgate these rules, and give you the resources to enforce them,” Mr. Durbin, chairman of the appropriations subcommittee and assistant Senate majority leader, told SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler. “Otherwise, we invite a similar disaster to the one we went through a few years ago in our economy.”
TOUGH BATTLE
Supporters of bigger budgets for financial regulators are fighting a tough battle in a political atmosphere charged by efforts to reduce the federal deficit and debt.
“Simply increasing funding does not mean that an agency can successfully achieve its mission,” said Sen. Jerry Moran, R-Kan., ranking member of the appropriations subcommittee.
Critics said that Republicans are using fiscal austerity as an excuse to starve regulators and halt Dodd-Frank implementation.
The SEC received a $74 million increase in its $1.18 billion funding level in the budget that Congress passed last month for the remainder of fiscal 2011, which ends in September.
That bump is far less than the SEC said it needs this fiscal year to implement Dodd-Frank.
“We oversee financial firms that spend more on their technology operations than the SEC spends on its entire budget,” Ms. Schapiro testified last week.
Things look worse for the SEC in fiscal 2012.
Under a budget resolution approved by the House last month, the SEC's budget would drop to $906 million, a $212 million cut from its fiscal 2010 level.
At the Senate hearing last week, Ms. Schapiro reiterated that the GOP's proposal would force the SEC to cut its 3,800-member staff by about 1,000 and would cause the commission to forgo critical information technology investments, significantly reduce the number of investment adviser examinations it performs and cut back on enforcement cases, all while continuing to implement about 100 Dodd-Frank rules and conduct 20 studies required by law.
It isn't clear whether the GOP fervor to scuttle parts of Dodd-Frank will extend to areas that have a direct impact on the investment advice industry.
“This could impact things down the line,” Mr. Tittsworth said. “It depends on how it plays out.”
FIDUCIARY DUTY
The SEC in January delivered to Congress a study that recommended extending to broker-dealers the fiduciary duty that investment advisers must meet when dealing with clients. Dodd-Frank gives the SEC authority to proceed to rulemaking.
But the two Republican SEC commissioners — Kathleen Casey and Troy Paredes — said that the report failed to provide an economic justification for its conclusion. Playing off that dissent, Republicans on the House Financial Services Committee urged the SEC in a March 17 letter not to promulgate a fiduciary rule until more economic analysis was completed.
The SEC has delayed moving forward on fiduciary duty until later in the year.
House Republicans have indicated that they will hold a hearing in coming weeks on the fiduciary study as well as another report about a potential self-regulatory organization for advisers. A date hasn't yet been set.
In the meantime, interest groups are meeting with congressional staff members to parse Capitol Hill sentiment on the issues.
“We're trying to get a sense of where the mindset is,” said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc.
Mr. Tittsworth also is taking the congressional temperature.
“It's pretty vague at this point,” he said. “Until we have a hearing, we won't know any more than what's in that [March 17] letter.”
E-mail Mark Schoeff Jr. at [email protected].
