Although Republican control of the House of Representatives has the potential to slow and shape the implementation of the massive financial regulatory reform law, it might not have a substantial impact on provisions that deal with the standard of care for investment advice.
The GOP has added 60 House members so far, comfortably above the 39-seat threshold they had to secure on election night Tuesday 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 now have a platform to advocate 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.
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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 financial legislation. That could mean, for instance, that Securities and Exchange Commission Chairman Mary Schapiro will 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, however, doubts 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 providing 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 substantially the fiduciary provision, 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 honing 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 committee is in a position to exert influence because so much of the reform in the 2,300-page Dodd-Frank measure is left up to the regulatory agencies, who 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.”
A Republican member of the House Financial Services Committee said that the panel will take another look at fiduciary duty when the SEC delivers to Congress in January 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.”
Only 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 the minds of 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 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 committee also is likely to be more inclined to allow the SEC to designate a self-regulatory organization for investment advisers. The person likely to assume the chairmanship of the committee, 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 doubling of the SEC budget to $2.25 billion over the next five years that is designed to give the agency Dodd-Frank resources.
“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 currently operating under funding levels from the previous fiscal year. A Republican House may look for ways to ease the agency'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. 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,” Ms. Roper said.
