Congressional Republicans marked the 15th anniversary of the Dodd-Frank Act this week by trying to pack all the financial-service industry’s complaints about the law into a single hearing.
Most of the criticism during a July 15 hearing before the House Committee on Financial Services focused on the impact on the banking industry from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
However, Republican attacks on parts of the Act designed to increase protection for investors play into a larger effort at deregulation that shifts much of the SEC’s protective energies from investors to banks and investment companies, according to Dennis Kelleher co-founder, president and CEO of consumer-advocacy group Better Markets, who testified at the hearing.
SEC chair Paul Atkins “has already directed the staff to revisit guidance that prevents private funds from selling to retail investors,” Kelleher said during his testimony. “And the SEC has already allowed trading of an exchange-traded fund (ETF) that intends to invest in private credit.”
Both changes have the potential to raise fees and increase the risk to which mutual-fund and ETF investors are exposed, “with few if any offsetting benefits,” Kelleher said. “Retail investors are unlikely to fare any better and will probably fare much worse.”
“The SEC has also stopped defending rules intended to provide investors with material information; extended the compliance dates for rules intended to promote financial stability; and withdrawn rules intended to ensure investors receive the best prices when trading securities, protect investors from the dangers of artificial intelligence and shield investors from cybersecurity risks,” Kelleher said. The SEC has also said it would lend “a more sympathetic ear” to investment companies facing penalties for regulatory violations, he said.
“If the SEC continues on this track, it will be fair to say that its mission is no longer to protect investors but to protect the industry it is supposed to regulate,” Kelleher said.
Focus on deregulation
Dodd-Frank was intended to plug holes in the regulatory infrastructure protecting US markets and help the US economy recover more quickly from the 2007-2008 financial crisis and large-scale industry bailout.
Its rules about risk, liquidity management and consumer protection are widely credited with making US investment markets more resilient and safer for investors, especially individual investors and borrowers.
They are also widely criticized for increasing the regulatory burden on public companies and the investment industry, and for encouraging greater emphasis on enforcement and on high penalties for rule-breakers, especially through the actions of the Consumer Financial Protection Bureau (CFPB), the Financial Stability Oversight Council (FSOC) and enforcement of the Volcker Rule that limited the ability of banks to engage in some types of speculative investments.
Even a partial rollback of Dodd-Frank rules in 2018 didn’t make enough of a dent to make up for the cost of additional regulation and bureaucracy, according to House Financial Services Committee chair French Hill, (R-AR) who led criticism of Dodd-Frank during the hearing.
Dodd-Frank “handed the SEC sweeping new powers that have led to regulatory overreach, costly disclosure mandates, and mission creep into areas like corporate governance and executive compensation, areas historically governed by state law and protected by the business judgment rule,” Hill said in his opening statement. “For 15 years, these policies have burdened U.S. public companies while giving foreign competitors a leg up.”
Dodd-Frank is imperfect, outdated and in desperate need of reform, according to testimony at the hearing from Tom Quaadman, chief government affairs and public policy officer for the Investment Company Institute (ICI), which contributed to the legislative rollback in 2018 and helped lead the fight against over-regulation during the tenure of former SEC chair Gary Gensler.
The US economy has grown and become more resilient during the past 15 years, but Dodd-Frank rules have not kept pace with new technology or “many of the current challenges to our economy and financial system,” Quaadman said.
ICI is lobbying for changes to the act that would expand the ability of investment companies to offer private-market investments to retail investors. It is also lobbying for changes that would, among other things, shift the focus of the FSOC toward activity-based regulation rather than SIFI designations.
The existence of regulations is not the main issue for either the US banking or investment industries, according to Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association (SIFMA), who testified at the hearing.
Good rules help protect good markets, but over-regulation and too great a focus on penalties and enforcement can squelch innovation, limit the willingness of companies to open themselves to public investment and prevent retail investors from taking as much advantage as many would like of private markets to which they currently have little access, he said.
“Beyond question, our markets and related participants are among the most regulated sectors in the U.S. economy,” Bentsen said. “Many regulations that affect the financial sector are essential to ensure fair and orderly markets, safety and soundness of the financial system, and to protect investors, issuers, depositors, and consumers. But they are not without cost.”
Members of the committee did tout bills they’d proposed to limit FSOC/CFPB penalties, reduce disclosures or make other changes that would make life easier for regulated companies.
But none of those advanced significantly thanks to the results of the July 15 hearing, however, which was designed primarily to air grievances against Dodd-Frank and leave any legislative changes for later.
