Whether you get your news in morning daily paper, on television in the evening, or by checking your Facebook feed throughout the day, no doubt you’ve heard the controversy over the Dodd-Frank Act.
One of President Trump’s more recent executive orders was pointed at the Dodd-Frank Wall Street Reform and Consumer Protection Act. This order would direct the Secretary of Treasury to review regulations on financial institutions and report specific recommendations to back the president. The target? The so-called Volcker Rule, which prohibits banks from making speculative investments.
Trump’s second order imposes a delay in implementing a rule requiring stock brokers and others who sell investments products to act as fiduciaries, which means basing every investment decision on their client’s best interest. Currently, some people in the financial industry, such as brokers, are held to the standard of suitability, meaning they must provide their clients investment options that are suitable to them, though not necessarily in their best interest.
This Fiduciary Rule was scheduled to go into effect April 10, however, our government can’t seem to make up their mind on this particular piece of legislation, so it’s anyone’s guess as to when or if it will actually go into effect. Congress is split over Trump’s orders. The Dodd-Frank Act has been heavily debated since its inception, and a roll back of this regulation has brought more discord among lawmakers.
Proponents of reforming the Act say that its rulings aren’t working, and instead are making it more difficult than it should be for legitimate investing activity. Dodd-Frank, they say, is the perfect example of excessive government regulation that slows job growth.
The opposition is not swayed. Those against reform to Dodd-Frank say the move is in direct conflict with Trump’s pre-election position that he would be tough on Wall Street.
Enacted in the wake of the 2008 economic crisis, Dodd-Frank contains a series of reforms to make sure that type of crippling market crash won’t happen again. In short, the Act was crafted to protect consumers from bad faith acts of leaders. According to critics, rolling back rules designed prevent another financial meltdown isn’t good for anyone, especially low- and middle-income Americans.
Dodd-Frank increased the amount capital banks must hold in reserve, thereby giving financial institutions an added cushion to absorb loan losses in future downturns. Every bank with more than $50 billion worth of assets must submit to annual stress tests administered by the Federal Reserve. These examinations are designed to determine if the bank would survive a hypothetical crisis akin to that of 2008.
So where does that leave us? The future of Dodd-Frank is unclear. What is clear is that key players in the financial services realm have already met Trump’s directive with approval. But while the Dodd-Frank regulations have proven themselves problematic in many ways, in other ways they have paved the way for increased market security.
With changes looming on the horizon, banks, marketplace lenders, and Americans across all socioeconomic strata should pay close attention. What’s important is how changes to the Act unfold in the coming months. Only time (and politics) will tell.
Watch my Facebook live video from this week starting at 8:16 to hear more of my thoughts on this.