Dodd-Frank Bank Reform Also Impacts Investment Managers, Advisers
The ultimate impact of a massive and complicated financial reform law passed two years ago is not yet fully known, but it's certainly begun to play out in the Central Massachusetts financial sector.
Most people associate The Dodd-Frank Act of 2010, which was passed in the wake of the worst financial crisis in the United States since The Great Depression, with banks. Local institutions said they're certainly feeling an impact and expecting further changes.But effects on another segment of the financial services industry came into the public spotlight in late September, when state regulators filed a complaint against Westborough-based CCR Wealth Management. The state alleged that the firm had misrepresented the size of its assets under management in an attempt to avoid state registration.
State securities regulators are pushing to deny the firm a license to be a registered investment adviser in Massachusetts. CCR's larger broker-dealer business is not targeted in the complaint.
CCR, the complaint charges, inflated its assets under management by including its broker-dealer business assets in the calculation, effectively bringing it above the $25-million minimum a firm needs to remain under supervision by the U.S. Securities and Exchange Commission rather than state examiners. Dodd-Frank increased that minimum to $100 million, and CCR and 195 other firms were required to register with the state this summer. CCR recently reported that it managed $7 million in 45 accounts in its advisory business.
Many financial firms these days have both an investment advisory arm (in which advisers manage client funds and have a fiduciary duty to the client) and a broker-dealer arm (in which brokers and dealers sell financial products to investors). Lumping together the assets of each has never been permitted, said Patrick McKeon, a Hopkinton-based consultant for financial firms with ComplianceNow.biz and former examiner for the independent Financial Industry Regulatory Authority.
"That's a books-and-records issue to me, not a Dodd-Frank issue," McKeon said. "It sounds like an isolated situation."
And indeed, the office of Massachusetts Secretary of State William Galvin has not announced any additional complaints about the 195 other firms that submitted registration papers in July. McNiff said there would be a securities division hearing after a 21-day period has passed.
But McKeon said he can understand why a firm would want to stay under federal regulation. The state generally examines firms more frequently, and smaller firms under the minimum must register in every state they do business in, meaning multiple state regulators could inspect them.
"I can see why a firm would want to have one regulator as opposed to four or five," he said.
Long Arm Of The State
CCR's situation may be unusual, but that doesn't make state registration a cakewalk for firms.
When Tom O'Connor led the formation of Baystate Financial Services' investment advisory business three years ago, he knew the minimum asset level required to stay under SEC regulation would likely rise.
"We were racing desperately to get there," said O'Connor, who is lead counsel for Baystate and head of the advisory business. "They raised [the minimum] as we were really getting off the ground."
Now, at $212 million in assets, Baystate, with office in Worcester, has its investment advisory business safely above the $100-million Dodd-Frank minimum, which is dandy as far as O'Connor is concerned.
"The state registration process for companies like ours is extraordinarily burdensome," he said.
Registered investment advisory firms (RIAs) with less than $70 million in assets might find the business isn't worth it under state registration, O'Connor said. He predicts consolidation in the industry.
"They'll roll into bigger RIAs," he said.
Another change Dodd-Frank has brought about is more extensive disclosure requirements for investors. Advisory firms must disclose more about their principals and advisers and any potential conflicts of interest.
O'Connor sees that as a good thing.
"Clients should know who they're dealing with," he said.
Banks Foresee Lending Impact
Martin F. Connors Jr., CEO of Fitchburg-based Rollstone Bank & Trust, doesn't have a kind word to say about Dodd-Frank.
"It's like they're punishing the survivors," Connors said. "It really is overkill."
There is much uncertainty among banks — even smaller banks, which are exempt from some of the Dodd-Frank provisions — over how the law will eventually shake out. Only about a third of the law has been implemented by federal regulators, according to law firm Davis Polk, which is extensively tracking the proceedings.
The law was more like a framework for regulators to fill in, Connors said.
But he knows this much: His bank's mortgage business, and how it makes its investments, will be impacted.
New origination and servicing requirements will cut into bank profits, he said, and make it harder to take a risk on a borrower the bank feels is worthwhile.
And the bank will be required to do its own evaluation of corporate or municipal bonds it wants to purchase as investments, rather than rely on the ratings agencies' evaluations, he said.
But as bad as Connors feels that is, he said his bank and others are more worried about other regulations from something known as Basel III, a set of global regulations which aim to require banks to have higher capital ratios. That means they would have to keep more capital on hand and potentially lend less.
"Dodd-Frank is a regulation," he said. "Basel will change the way we do business."
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