The passage and implementation of Dodd-Frank has had a profound impact on the markets for all US stocks. Under Dodd-Frank for the first time in the history of the US, a broker became criminally liable for recommending stocks which then decline substantially in price. This has resulted in a boon for large cap stocks and a continuing expansion of their multiples and valuations of these large companies. Conversely, the Dodd-Frank Act has caused a bust for low-priced share and micro-cap companies as well as a continuing contraction of their multiples and valuations. The graph below depicts the performance comparisons for the Royce Price Stock Index from 1995 through 2017.
The passage of the Dodd-Frank Act in 2010 was a consequence of the crash of 2008. The origin of the act, which the SEC began to implement in 2012, was expressly for the purpose of preventing another crash like that of 2008.
In an regrettable ironic twist, it will be Dodd-Frank that will be the cause of the next crash since it is the primary contributor to the expansion of the S&P 500’s PE multiple. Dodd-Frank strengthened the SEC’s enforcement powers and for the first time ever added criminal liability for US stock brokers who recommend shares to clients which decline significantly. The resultant dynamic was a mass exodus of the brokers into the wealth management industry.
Many of whom I have shared this information with were shocked to the point of disbelief that a broker for the first time ever could be criminally prosecuted. This link to a law journal delves into Dodd Frank’s criminalizing conduct for the first time.Prior to Dodd-Frank a broker’s liability for recommending an investment gone sour was a civil arbitration proceedings. There was case that I found in a December 2014 law journalwhere a broker and a registered investment advisor were criminally prosecuted for recommending the shares of a small company at a price that “had no relationship to the company’s true worth”. See page 22 of law journal. This is very scary. The market prices for all stocks throughout my 40 year career and up until Dodd-Frank was passed, were based on the future and not on current or past financials. The precedent that has been set, especially for the criminal prosecution of a registered investment advisor who had purchased shares for clients that were valued for a premium