A First Look at the New Congress
Republicans are out. Democrats are in.
How will the changes in Congress affect the investment management industry?
The leadership and composition of the various committees and subcommittees won’t be nailed down until early next year. Already, however, there are a number of leading contenders for the top spots affecting advisers.
In the Senate, Senator Chris Dodd (D-CT) is expected to assume the powerful role of chairman of the Senate Banking committee. That, we’re told, is good news. "I wouldn’t be overly nervous with Senator Dodd coming in, as opposed to other members," said Andrew Gray, former spokesperson to outgoing Chairman Richard Shelby (R-AL). "He’s been a staunch advocate for the industry over the years."
Gray, who now works at Ogilvy Public Relations, noted that Dodd is a long-standing member of the Banking committee. Moreover, Dodd’s home state, Connecticut, is home to two key financial services industries: insurance and hedge funds. According to Gray, Dodd is "generally regarded as someone who will work across the aisle, someone who will work with the industry, someone who understands the financial services world." The industry, he added, "could be a lot worse off with other members as chairman."
On the House side, Rep. Barney Frank (D-MA) is the heir apparent to the chairmanship of the Financial Services committee. "One thing you can say unequivocally about Barney: He’s the funniest member of the House and he’s definitely one of the smartest," said Randall Dodd, director of the Financial Policy Forum (and no, he’s not related to Senator Dodd). "We will get a chairman who can really understand the issues," he said. "That’s going to make the debate much more substantive." According to Dodd, a former House staffer, Frank is "more middle-of-the-road in terms of regulation versus deregulation."
While Frank is well-regarded as a thoughtful policymaker, the hedge fund industry will be eyeing him nervously. Shortly after the Goldstein opinion was issued, Frank introduced legislation that would have effectively reinstated the SEC’s hedge fund rule. In recent weeks, he’s backed off from that approach and instead has supported H.R. 6079, the hedge fund study bill now pending in the Senate. At the same time, however, he indicated that the study is a bit of a place-holder and that he plans to take up the issue of hedge funds next year. One industry lawyer reported hearing that Frank is "actually more worried about pension funds investing in hedge funds."
For now, Frank has taken a vow of silence about his legislative priorities. "I know there will be a great amount of interest in the agenda of the committee, but right now it is too premature to discuss any agenda items that the committee will or will not consider next year," he said in a statement issued last week.
Also: You may hear a rumor going around about brewing turf war between Rep. John Dingell (D-MI) and Frank for oversight of the financial services industry. We’ve heard the same rumor. To date, there doesn’t appear to be anything behind it.
What about the subcommittees? It’s not yet clear who will assume the chairmanship of the Senate Banking committee’s Securities subcommittee. But it may not matter all that much. In the Senate, explained Investment Adviser Association executive director David Tittsworth, subcommittees "tend to operate more as an arm of the full committee."
In contrast, subcommittees in the House have traditionally taken on a life of their own and operate fairly independently of their top-level committee. For example, you may recall how Representative Richard Baker’s (R-LA) Capital Markets subcommittee of the Financial Services’ committee held hearings after the mutual fund scandal broke and ultimately pushed H.R. 2420 (a.k.a. the "Baker Bill") through the House.
The leading contender to fill Baker’s shoes as chairman of the Capital Markets subcommittee is Representative Paul Kanjorski (D-PA). A Kanjorski spokesperson concurred in that assessment, describing him as being "poised" to become chair.
Kanjorski’s assumption to leadership should comfort those who worry that a Democratic Congress will automatically lead to increased regulation. In the past, Kanjorski has quite vocally expressed his belief that when it comes to regulation, less is more. Take, for example, his remarks during the subcommittee’s June 2003 hearing on H.R. 2420: "I am worried about the expenditure of money and additional regulation," said Kanjorksi. "[W]e have had this downturn in the stock market and Enron and all these problems [and now] all of us are rushing around as part of the ‘bucket brigade’ to put out sometimes phantom fires." He went on to express the view that investors should shoulder responsibility for their investment decisions: "Frankly, if somebody is an investor and they have extra capital, at some point there should be a stimulus there for them to make and live by the judgments they make in financial matters, rather than being spoon-fed by the government or so over-protected by the government as to make it ludicrous." Kanjorski acknowledged that his views were somewhat unusual for a Democrat. "On this side of the aisle, we are supposed to be for regulation," he quipped. "That side of the House is supposed to be against regulation."
Legislative priorities. Other than Representative Frank’s interest in hedge funds, it’s not clear what Congressional initiatives the investment management industry should watch for in the next Congress. "There is no agenda that I see that directly affects advisers," said Tittsworth. Of course, he added, "that could change because of external circumstances."
Tittsworth, a longtime observer of Capitol Hill, cautioned that "even with these gigantic changes," it will still require a bipartisan effort to actually pass legislation, particularly since the Senate is so narrowly divided. He noted, however, that Congress also serves an oversight function, which it can wield quite powerfully. Tittsworth recalled how the Senate Banking committee held a series of hearings during the mutual fund scandal that prompted the SEC to adopt "revolutionary" regulatory changes. "But," he said pointedly, "there was no legislation."
And lastly … Consider this observation from Mercer Bullard of Fund Democracy. In his experience, party affiliation has not been a strong predictor of where members of Congress stand on mutual fund and investment adviser issues. With respect to the SEC’s independent chairman rule, "the support was all over the map," he said. "On the House side, it was more often the Republicans that were supporting reforms and the Democrats opposing them."