Fisher Investments Editorial Staff

Rumored Rulemaking

By, 01/24/2011

Story Highlights:

  • Two of Dodd-Frank's many mandated studies are now completed, with a third rumored to be close.
  • The two completed studies held few surprises, but the rumored third raises more questions.
  • The third, if reports are true, poses a potentially sizable change for retail brokerages.


While last summer's passage of the voluminous Dodd-Frank financial reform legislation was widely hailed by legislators as a watershed moment in regulating banks and brokers, the bill had many unresolved aspects. The new law punted over 140 issues to regulators like the Securities and Exchange Commission (SEC) for "study." The rationale? Have regulators recommend the rules they'd enforce for future finalization. (A fine idea—but shouldn't that happen before a bill becomes law?) To date, few studies have generated any real results, but now, two widely discussed studies are complete—and a third is rumored close at hand.

First, the widely acclaimed Volcker Rule's study was completed by the newly created Financial Stability Oversight Council (FSOC). The study didn't yield tremendous surprises. As expected, banks will have to wind down some proprietary trading and other assorted operations (like hedge and private equity fund sponsorship) if the rules are implemented. Many financial firms didn't wait on the FSOC and have already begun this process. Importantly, the study's completion starts the clock ticking on final rule determination: Rules are due in nine months, and banks will be required to comply a year later. (Though banks can apply for a five-year extension for full compliance.)


Also, the single bank liability and deposit concentration study (part of the perceived "Too Big to Fail" issue) was completed. Whether "TBTF" actually played a role in 2008's financial panic is a moot point—Dodd-Frank assumed it did and commissioned the study on that basis. The rule, if implemented, effectively bars the biggest US banks from making strategic acquisitions. The FSOC study made only three recommendations—and none were particularly significant. Two proposals involve calculation methods for determining size limits. The third permits FSOC to override the Volcker Rule and allows a large bank to make an acquisition in the event of a bank failure.


The (rather unsurprising) resolution of these studies may remove some small amount of uncertainty from Financials. But the third study's rumored results may inject still more uncertainty—specifically for retail brokerages. Talk of consumer protection was at the core of Dodd-Frank. This sentiment led to an SEC study on whether to hold retail brokers to the same consumer protection standards  Registered Investment Advisers (RIAs) have operated under for decades (e.g., as fiduciaries). On Friday, a widely reported rumor held that the SEC will impose a higher standard for brokers. If the rule passes as rumored, the change won't be just semantics (though a Bloomberg survey finds many investors aren't aware of a material difference between the level of client care required of RIAs vs. retail brokers).


Since 1934, retail brokers have operated on a suitability standard. Brokers are required to ensure the appropriateness of products recommended. That falls short of mandating clients' interests come first—the fiduciary standard applying to RIAs. If the SEC does make retail broker fiduciaries, this could trigger more questions than answers. Here are a few:

  • Who would this apply to? Just retail brokers or insurance agents? What about online/discount brokerages?
  • How would brokers implement this?
  • How would this impact retail brokerages' common product based strategies—like variable annuity sales?
  • Since a fiduciary standard likely requires more client-servicing conversations that may not lead to sales, how well- (or ill-) equipped are brokers for immediate implementation? 
  • What level of continuing education will brokers receive to understand what this new standard entails?
  • Would this create additional barriers to entry for new brokers? 
  • Could the additional complexities involved draw veterans out of the industry?

These questions are merely the iceberg's tip. Many typical retail brokerage practices could be called into question by mandating brokers act as fiduciaries.

While the two announced studies yielded mostly unsurprised yawns, the rumored third has been a highly controversial subject. Since Dodd-Frank's passage, the SEC has received thousands of public comment letters (for and against). Whether the SEC ultimately recommends stricter standards for brokers is still an open question. But if it answers affirmatively, it could easily raise dozens—if not hundreds—of other important questions impacting retail broker/client relationships.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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