Republican takeover of the House of Representatives won't scuttle Dodd-Frank, but the party's decisive victory last week will likely shape implementation of the massive financial regulatory reform law through aggressive oversight of the rule-making process.
Republican takeover of the House of Representatives won't scuttle Dodd-Frank, but the party's decisive victory last week will likely shape implementation of the massive financial regulatory reform law through aggressive oversight of the rule-making process.
The GOP has added 60 House members so far, comfortably above the 39-seat threshold that they had to secure on election night last week to achieve a House majority. Democrats remain in charge of the Senate, even though Republicans have added six members to their caucus so far.
By taking over the House, Republicans have a platform to advocate for reductions in federal spending and regulations, and put pressure on the executive branch through hearings and other oversight.
But House Republicans will be limited in how much they can accomplish because their legislative initiatives will face resistance from a Democratic Senate and from President Barack Obama, who can veto any legislation.
Rather than roll back new regulations, the party likely will focus on the regulators themselves.
Indeed, the GOP will use the bully pulpit provided by its leadership of the House Financial Services Committee to try to influence the implementation of the Dodd-Frank legislation. That could mean, for instance, that Securities and Exchange Commission Chairman Mary Schapiro would be brought up to Capitol Hill for regular grillings.
“You're going to see an unprecedented level of congressional oversight of the rulemaking process,” said Dan Crowley, a partner at K&L Gates LLP. “We are looking at a new world order in how these policies are implemented.”
Mr. Crowley doubts, however, that Republicans will raise too much of a ruckus about the portion of Dodd-Frank that gives the SEC the option of imposing a universal fiduciary standard of care for anyone who provides personalized investment advice to retail customers.
“That's not a traditionally partisan issue,” said Mr. Crowley, who served as general counsel to then-House Speaker Newt Gingrich in the 1990s. “A harmonized standard of care is pretty much baked into Dodd-Frank.”
Republicans might face public relations challenges if they try to change the fiduciary provision substantially, as it is designed to protect consumers, said Marilyn Mohrman-Gillis, managing director of public policy and communications at the Certified Financial Planner Board of Standards Inc.
“I don't see them homing in on Mary [Schapiro] on the fiduciary standard of care,” Ms. Mohrman-Gillis said. “I don't see that playing out on Main Street as a good strategy for them.”
Nonetheless, the House Financial Services Committee is in a position to exert influence because so much of the policymaking in the 2,300-page Dodd-Frank law is left up to the regulatory agencies, which must answer to Congress.
“Everything in it is a pretty much an authorization, not a mandate,” said Barbara Roper, director of investor protection at the Consumer Federation of America.
The Republican ascendancy “changes the dynamic of how [the House] approaches these rulemakings. There is a concern that the SEC will become much more timid in its approach to implementation,” Ms. Roper said.
A Republican member of the House Financial Services Committee said that the panel will take another look at fiduciary duty in January when the SEC delivers to Congress its study of the differences in oversight of investment advisers and broker-dealers.
“That issue was kind of glazed over” during congressional debate on Dodd-Frank, said Rep. Randy Neugebauer, R-Texas. “We should have hearings on that [study] and make sure everyone understands the findings.”
Just three Republicans voted for Dodd-Frank. Mr. Neugebauer is concerned that the measure went too far in trying to regulate the financial markets.
“You can't take the risk out of risk taking,” Mr. Neugebauer said. “We have to be extremely careful with government intervention [through] the regulatory process.”
A former SEC official said that congressional pressure will weigh on SEC officials but won't necessarily change their minds about whether to pursue a fiduciary-duty regulation.
“It's a factor that might influence their decision,” said Howard Kramer, a partner at Schiff Hardin LLP and a former associate director of the SEC's Division of Trading and Markets. “It's not going to be the driving force.”
But GOP leadership of the committee will set a different tone from that set by the Democrats, who were led by Rep. Barney Frank, D-Mass., a fiduciary champion.
“A Republican-controlled oversight committee might be more sympathetic to brokerage industry concerns about the costs of imposing a fiduciary standard on brokers and how it might make it more difficult and expensive for them to provide advice to their clients,” Mr. Kramer said.
The Republican-majority committee also is likely to be more inclined to allow the SEC to designate a self-regulatory organization for investment advisers. The presumptive chairman, Rep. Spencer Bachus, R-Ala., has sponsored a bill that would put thousands of investment advisers under the aegis of the Financial Industry Regulatory Authority Inc., which regulates broker-dealers.
Another factor that could make Republicans inclined toward Finra oversight of advisers is that the party probably will do all it can to limit federal spending, including paring the SEC budget, which was doubled to $2.25 billion over the next five years to give the it more resources to implement Dodd-Frank.
“Part of the message of the election is that people are very concerned about government spending,” said David Tittsworth, executive director of the Investment Adviser Association.
The SEC has a huge Dodd-Frank to-do list but is operating under funding levels from the previous fiscal year. A Republican House may look for ways to ease the SEC's burden without increasing its budget.
“There's going to be great scrutiny on spending,” Mr. Tittsworth said.
“It's going to be tough to get support for increase for anything,” he said. “That could lead to other solutions [for adviser oversight], like an SRO.”
Ms. Roper also predicts budget difficulty for the SEC in the next Congress.
“I don't see the appetite for giving the SEC the resources it needs to do its job,” she said.
E-mail Mark Schoeff Jr. at mschoeff@investmentnews.com.
