Dodd-Frank: Too Big Not to Fail

Last Friday, President Trump signed an executive action to scale back the Dodd-Frank Act of 2010.  This act was created in response to the 2008 financial crisis in an attempt to prevent the future insolvency of financial institutions that were deemed "too big to fail," meaning that their ability to continue to function was critical to the stability of our financial system.  Many financial institutions required taxpayer-backed bailouts as a result of the financial market crash.

In February of 2012, The Economist had an article regarding the Dodd Frank Act presciently titled "Too Big Not To Fail."  The article spells out many of the problems with the act, and stated "there is an ever-more-apparent risk that the harm done by the massive cost and complexity of its regulations, and the effects of its internal inconsistencies, will outweigh what good may yet come from it.  The law that set up America's banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, spread out to 37 pages.  Dodd-Frank is 848 pages long."

While the act's intentions were noble, many of its provisions evidently have not resolved problems, and have created wasteful regulatory burdens that are a drag on our economy.  Importantly, the increased capital requirements that now apply to banks should not be impacted by an unwinding of the Dodd-Frank Act. 

A second executive order signed by President Trump applies to the Department of Labor Fiduciary Rule scheduled to take effect in April.  This rule requires all retirement plan advisors to perform their work as a fiduciary, meaning in the best interest of their clients.  The majority of financial and investment professionals are merely required to ascertain that an investment is suitable for a client, and not necessarily in their client's best interest.  At 1,023 pages, this new legislation exceeds even the Dodd Frank Act in length.  President Trump has directed the Secretary of Labor "to examine the Fiduciary Duty Rule to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.  As part of this examination, you shall prepare an updated economic and legal analysis concerning the likely impact of the Fiduciary Duty Rule."

Financial firms are in the thick of implementing changes to comply with this rule, and I would be surprised if they go backwards with respect to some of the requirements once they have gotten this far down the road.  This rule largely does not impact me and GSR Capital Management as I have already been acting on behalf of our clients in a fiduciary capacity, and have been for many years.

Glenn S. Rank, CIMA®

Certified Investment Management Analyst®