Members of the Council of Institutional Investors might have been hoping for guidance on what to expect as the SEC translates the intent of the Dodd-Frank Act, but the message they got at their annual meeting in Washington earlier this month was less than certain.
Complicating the issue is the shift to Republican control in the U.S. House of Representatives that brings a more skeptical approach to government regulation of markets.
The more than 580 CII attendees took some comfort from J.P. Morgan Chase & Co. Chairman and CEO Jamie Dimon, who offered Wall Street's perspective on the looming regulatory battle. Quoting Winston Churchill, Mr. Dimon said: “Americans do the right thing after they exhaust all other possibilities.”
While he saw both good and bad impacts of the pending regulatory changes, Mr. Dimon said it was time to get on with it. “There are some tough choices that have to be made ... but if we don't fix it, it will be a terrible outcome for us. This partisan bickering doesn't work.”
Like Mr. Dimon, CII members don't necessarily embrace all parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. But they do welcome the protections it can offer institutional investors. “We understand the need to have an honest broker,” Anne Simpson, senior portfolio manager for the $234.7 billion California Public Employees' Retirement System, Sacramento, said in an interview. “The danger is that it will simply be a large heap of paper.”
Luis Aguilar, a Securities and Exchange Commission commissioner, said in a keynote speech that the SEC is eager to provide the protections called for in Dodd-Frank, which he argued were necessary for economic growth and to prevent further economic crises.
“In an anemic economy, we must facilitate real capital formation (and) we need to take lessons learned in the crisis. How we move forward will set the tone for the future of our economic recovery,” Mr. Aguilar said.
Noting the more than $2 trillion in asset-backed securities issued “with practically no oversight” or disclosure, “one might argue that we had capital destruction, rather than capital formation. True capital formation is about helping investors,” he said. “Regulation also makes a level playing field to make sure that all companies make appropriate disclosure. I want the risk-taking to be as informed as it can be.”
Before SEC officials can carry out their Dodd-Frank regulatory assignment, their first battle is with congressional appropriators, who have a lot to say about how much enforcement money to release, and which parts of Dodd-Frank they don't like.
Standing in for House Financial Services Committee Chairman Spencer Bachus, R-Ala., majority chief of staff Larry Lavender said that while the law “was well-intentioned,” the panel's majority is skeptical about some provisions, such as the Volcker rule on proprietary trading.
“Our great concern is that it may result in proprietary trading not going away, but going overseas,” Mr. Bachus said.
He commended the added transparencies on derivatives, but criticized the posting of margins and collateral for the end user.
The bigger issues, Mr. Lavender told CII members, are government spending overall and how much regulation to inject into the U.S. economy. “We didn't get here by government control. We got here by initiative.”
“Underlying everything else is the debt and deficit problem,” he said. “It's not sustainable.”