Due Diligence

SIFMA 2010: Brokerage Executives Optimistic About Dodd-Frank

At SIFMA's 2010 annual meeting in New York City Monday, amid nostalgic rock & roll songs like Hotel California and Born in the USA, brokerage executives including James Gorman, CEO of Morgan Stanley, sounded optimstic about their ability to thrive in a post-crisis world under Dodd-Frank. In fact, optimism seemed to be one of the conference's themes. Industry executives sounded conciliatory notes about their dealings with the SEC so far, and Chairman Mary Schapiro emphasized the importance of industry input to the regulator's rulemaking efforts.

In a breakfast interview with Charlie Rose, Gorman said he felt his firm could function well under Dodd-Frank. "Dodd-Frank has given us an architecture" to protect against future crises, he said. But he added that the degree to which the legislation succeeds will depend on the rule-making that comes out of the SEC. For instance, "if the Volcker rule makes it impossible to make markets, that would not be good," he said.

The big lesson of the financial crisis, he added, was that "leverage is a killer." If you're leveraged at 35 times the balance sheet, you can be wrong only 2 percent of the time, and you're dead, Gorman said. As for too big to fail, he said that any institution should be allowed to fail if it is failing by its own reckelessnes. But if it's failing due to a run on the bank, then the government must have the sources of capital to step in and shore it up. Gorman also said he feels there is still a big imbalance in the way financial services firms compensate their employees for risk. Employees who take big risks can receive a big payoff if things go right, but if they don't, those individuals don't lose any money, they just get fired. That is not disincentive enough.

In a panel on the impact that Dodd-Frank would have on broker/dealer firms, Chet Helck, chief operating officer of Raymond James, said Dodd-Frank is long overdue, but his worry is that the public sees reform as a punitive action. As a result, the big job of SIFMA membership is to restore public trust and confidence in the system, he said. He added later, however, that because demand is so great for financial advice, he is extremely optimistic about the future of the business. Kent Christian, senior managing director and president of the financial services group at Wells Fargo Advisors, added that though trust of the financial services industry is near historic lows, client loyalty to individual advisors is very high.

John Taft, CEO of RBC U.S. Wealth Management, and incoming chairman of the SIFMA board, said that because of the enormity of the task the SEC has ahead of it (235 rulemakings, 41 reports, 71 studies), the trade group has been trying to provide the regulator with "fact-based content-rich analysis." He urged SIFMA membership to get involved. A number of groups dispute the validity of a study recently released by SIFMA about the impact that a fiduciary standard for brokers would have on clients. It was a topic raised by brokerage executives in the panel--that extending a fiduciary standard to brokers could make it too expensive for less wealthy clients to get good advice and might limit their choices.

One executive also emphasized that there could be unintended consequences of new regulations. When pressed by Charlie Rose to offer an example, the executive asked whether a universal fiduciary standard would require that an advisor eliminate any concentrated stock holdings owned by a client, pushing that client to diversify instead. And Thomas Paprocki, chief executive officer of The Ziegler Companies, said that smaller firms would be disproportionately hurt by the new regulations, as they would have to spend as much as the large companies to implement all the new rules.

In her own interview with Charlie Rose, SEC Chairman Mary Schapiro said the agency had made a big effort to reach out to industry, as well as to investors. What will not happen in the future, she said, is a return to the kind of "light touch" regulation that she found to be in vogue when she joined the SEC in January of 2009. She also empahsized that Dodd-Frank is not meant to be punitive but to close gaps. Among other things, her agency will be writing rules on the kinds of compensation programs that encourage short-term risk-taking, she said.

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