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The Dodd-Frank Wall Street Reform and Consumer Protection Act that cleared Congress on Friday, like the health care reform legislation before it, is a complicated document. The US Chamber of Commerce estimated that the 2,319 page bill will generate 533 new regulations, 60 studies and 94 reports. Until the regulations are finalized, and the studies and reports completed, it won’t be clear how it will affect all of us, but there are some observations that can be made now.

Put Clients’ Interests First at All Times
Jane Bryant Quinn, the financial journalist, did a great job of describing the Fiduciary standard and its importance to consumers while the issue was still being debated: (https://janebryantquinn.com/2010/05/will-brokers-have-to-put-your-interests-first/). This standard, unfortunately, did not make it through the lobbying and political process. Insurance agents and investment brokers marketing financial planning and investment products will still NOT be held to the same standard of client care that the Asset Advisory Group follows as a Registered Investment Advisor. Instead, the financial reform requires the SEC to do a second study on the subject. Is it conceivable that someone could do a study and conclude the person giving you financial advice should NOT put your interests first? Stay tuned for the study…..

Consumer Protections
A new Consumer Financial Protection Bureau has been created with the purpose of ‘protecting consumers from unfair, deceptive and abusive financial products and practices.’ My first concern is how will they determine what products and practices are abusive and unfair? If they don’t think the financial community should have to put their clients’ interests first, will selling you a mutual fund that charges a high commission up-front with an annual expense of 2.85% a year be considered unfair? On the positive side, there will be a national, toll-free, consumer complaint hotline for people to report problems. This is a great first step, but how will they follow up on these complaints? Many people reported their concerns about Bernie Madoff to the SEC, but no action was ever taken against him.

Ending the Gambling Risk
Banks and brokerage firms sell products to clients, but they also use their own money to trade investments to make a profit for themselves, a practice known as proprietary trading. Problems developed because these trades were sometimes in conflict with their clients – brokerage firms would sell their clients a product while simultaneously betting against it in their own accounts. Banks also began to take more and more trading risk as they enjoyed the profits it added to their bottom line. When this trading contributed to the failure of companies like Merrill Lynch, AIG and Lehman Brothers, the government was asked to step in to save them. The Volker Rule, contained in the Act, requires regulators to implement laws that will prohibit proprietary trading, investment in and sponsorship of hedge funds and proprietary equity funds – the investments that took down Lehman and forced others to be bailed out. The problem is the laws will be developed after – you guessed it – another study; to be conducted by the new Financial Stability Oversight Council, so it remains to be seen how this will all work out.

The bottom line is there will be much more debate and discussion as the newly created Consumer Financial Protection Bureau and Financial Stability Oversight Council mentioned here, as well as the new Office of National Insurance, Office of Credit Ratings and SEC Investment Advisory Committee are formed. Their studies, decisions and regulations will change the financial industry landscape.

Jeannette A. Jones, CPA, CFP®