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Implementation of Dodd-Frank regulations loom in new year

New and altered regulations could change the way financial professionals do business in 2013 — if those regulations are ever signed into law.

The Qualified Mortgaged rules are set to be finalized by the Consumer Financial Protection Bureau (CFPB), according to Sandeep Shah, CEO at eFinancial Communications.

“This will direct lenders on ‘ensuring’ a borrower’s ability to repay the loans they make,” Shah said. “Many in the industry are concerned about the QM definition being too narrow and ruling too many borrowers out, which would have a cooling effect on the housing market in general. Lenders will have to update their systems and processes to adhere to the regulations.”

David Ely, finance professor at San Diego State University, said the CFPB is working to require mortgage lenders to consider the ability of consumers to repay loans before extending credit to prospective borrowers.

Other regulations that will have an impact in 2013, according to Ely, include: Stress testing requirements and Basel III capital standards. The proposed Basel III rules would “implement changes to international regulatory capital standards made by the Basel Committee on Banking Supervisions (BCBS)."

Specifically, the proposals would revise the federal banking agencies’ current minimum risk-based and leverage capital rules by introducing a minimum common equity risk-based capital ratio and, for internationally active banking entities, a supplementary leverage ratio. It would also restructure the agencies’ capital rules into a “harmonized, integrated regulatory framework," according to the Securities Industry and Financial Markets Association (SIFMA) website.

“The Federal Reserve published rules regarding stress testing requirements in 2012. These will impact certain banking organizations in 2013. The largest institutions were required to conduct stress tests in 2012,” Ely said.

“Development of plans to implement Basel III capital standards will continue. New standards were to be in place in January 2013; but implementation has been delayed.”

Derivative rules are also scheduled to be finalized, Shah said, and businesses will have to adjust to these rules in order to hedge risks.

“Other institutions that buy derivatives as investment instruments will have to adjust as well, but the negative economic impact to these folks doesn’t concern me as much,” Shah said. “It’s the companies like Southwest that might have to jump through a few more expensive hurdles to hedge against volatility in fuel prices.”

The completion of the Volcker rule has been delayed, Ely said, and Federal Reserve Chairman Ben Bernanke said at a recent press conference that he expects it to be finalized in early 2013. This will push implementation later than 2013, Ely said. The Volcker rule was adopted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act to ban banks from trading with their own funds.

“[The Volcker rule] prevents commercial banks from proprietary trading. I don’t really know how much of a bank’s balance sheet is propped up by such investments, but if this goes away, the pressure will be on to raise fees and cut costs,” Shah said.

The implementation of the rule, if it is “well crafted,” has the potential to lower the chance of another financial crisis, Ely said.

“On the other hand, there is much concern that the implementation of the rule will lower bank performance by eliminating profitable activities and lower liquidity in markets in which banks exit],” Ely said.

The Fiduciary Standard rules by the Securities and Exchange Commission is likely to be implemented in 2013, said Shah, which he said is one of the “more helpful” laws.

“This basically makes for a uniform code of conduct for how financial institutions interact with their customers,” Shah said. “Remember the hearings in the Senate when Sen. Carl Levin read the email transcripts between Goldman Sachs employees laughing about a ‘shitty deal’ they were pushing to investors? That would become a violation of fiduciary duty. If you know you are screwing someone, it doesn’t matter if it’s technically legal. Not anymore. Or at least that would be the case under new fiduciary duty rules, if issues by the SEC this year.”

The Dodd-Frank Act directed the SEC to study the need for establishing a uniform fiduciary standard and to evaluate the effectiveness of existing legal or regulatory standards of care, and whether there are shortcomings or overlaps in the standards in the protection of retail customers, according to SIFMA and the SEC.

The study recommended fiduciary standard rules that would apply to both broker-dealers and investment advisers “no less stringent” than the Advisers Act, which is currently applied to investment advisers.

The study by the SEC, released in January 2011, outlined the uniform fiduciary standard as: “The standard of conduct for all brokers, dealers and investment advisers, when providing personalized investment advice about securities to retail customers (and such other customers as the Commission may by rule provide), shall be to act in the best interest of the customer without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice.”

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