Wall Street Reform – Vote Over, Studies Just Beginning

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Imagine being a Senator or Congressman with a specific agenda to advance. For example, say you think it’s important for those offering financial advice to act as a fiduciary – to put their client’s need for objective advice ahead of their need for commissions.

To make that happen, you include a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that accomplishes your goal. Nice work.

But somewhere in the reconciliation process, your provision morphs from something that will occur to something that might someday occur. Because rather than making it law, the bill’s final wording only requires your idea to be “studied” by a government agency for six months, then maybe – or maybe not – enacted.

That’s not a hypothetical; it just happened – see New Rule: Investment Advisers Must Give Honest Advice – and it’s not an isolated incident. According to this CNN/Money article, the new financial reform law calls for 68 studies. Studies are often commissioned in legislation, especially if it makes sweeping changes and/or has potentially unknown impacts. The health care reform bill requires 40 studies to be done.

Sometimes studies are a prudent way to pass major legislation while preserving the ability to perform important in-depth analysis prior to enacting something that could ultimately prove to have negative unintended consequences. On other occasions, however, studies are simply a way of temporarily or permanently burying contentious provisions of a law in order to garner enough votes to get it through Congress.

There are three types of studies often called for by Congress:

  • The “let’s get rid of this thing” study: This type of study doesn’t require any follow-up or mandate that recommendations at the conclusion of the study be acted upon. It’s often – although not always – simply a way of burying a deal-breaking provision in a bill while allowing the sponsoring congressman to save a little face.
  • The “we’re serious” study: This study has a deadline to be completed and requires follow-up. But it doesn’t require that it’s recommendations be acted upon.
  • The “something’s changing – just not today” study: This study features both a deadline and mandates that the study’s recommendations be acted upon at its conclusion.

The financial adviser study appears to be in final category. It mandates the SEC to explore the implications of forcing investment advisers to act in the capacity of a fiduciary. It requires that the study be completed in six months. And it empowers the SEC to implement their recommendations. Does that mean that changes are forthcoming? Not necessarily, but it makes changes more likely than if the follow-up and empowerment weren’t included.

The financial services industry lobbied hard to allow most financial advisers to remain non-fiduciaries. Now that the law has passed and the study will soon be underway, the battleground shifts from Congress to the SEC as their lobbying effort will now attempt to influence the SEC to maintain the status quo.

Consumer advocates like the Public Interest Research Groups and the Consumer Federation of America – groups that believe consumers are best served by forcing financial advisers to put their client’s interests ahead of their own – will try to keep that from happening.

We’ll stay on top of this story and report the results.

To read more about the fiduciary debate, see this article from the Washington Post. To learn more about other studies commissioned by the new law, read this story from CNN/Money. To learn more about the new financial regulatory reform bill, see our recent article, What Financial Reform Means to You.

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