Fiduciary rule redux? Democratic win in November could revive stringent regulations

Former Vice President Joe Biden, 2020 Democratic presidential candidate, speaks during a news conference in Wilmington, Delaware, U.S., on Thursday, March 12, 2020. Biden sought to deliver an antidote to President Donald Trump's response to the coronavirus outbreak on Thursday, unveiling a new plan that shows how he would fight the spread of the virus and urging the administration to use it. Photographer: Ryan Collerd/Bloomberg
Former Vice President Joe Biden, 2020 Democratic presidential candidate, speaks during a news conference in Wilmington, Delaware on March 12, 2020.
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Depending on how the election turns, big regulatory changes could be on the horizon, according to industry observers and fiduciary advocates.

Should former Vice President Joe Biden win the presidential election and his party control both the House and the Senate, that would mean a whole new slate of political appointees, including, in all likelihood, a new chair of the SEC and a new secretary of labor.

For fiduciary advocates disappointed by the SEC's Regulation Best Interest package, that raises hopes for reviving more stringent regulations on brokerage advice.

"We fully expect that a Democratic-led SEC would reexamine [the rule package] with an eye toward how best to deliver the high standard of conduct investors reasonably expect from the financial professionals they rely on for advice and recommendations about their investments," says Barbara Roper, director of investor protection at the Consumer Federation of America.

Regardless of whether Trump or Biden is president, "you have to start with who controls the two houses in Congress," says Joel Seligman, professor of political science at the University of Rochester.

"If Trump were reelected and, for example, the Democrats controlled the House or the House and the Senate, initiatives would be limited," he says. Likewise, if the GOP ran the table, Seligman anticipates more deregulatory activity across the board, though he notes that SEC Chairman Jay Clayton has been less zealous about rolling back regulations than many other Trump appointees.

Is wealth management ready for Reg BI? It’s complicated.
Firms are spending millions to comply with a controversial rule that is facing a legal challenge while state regulators push their own stringent regulations.

The courts will also have a say. How a future SEC may reassess Reg BI will turn on how a federal court rules on a current legal challenge seeking to throw out those regulations. Should the court side with the plaintiffs' argument that Congress intended for the SEC to write a uniform standard of conduct, then it would be back to square one. If the court upheld Reg BI, a Democratic-led SEC try tweaking the rule to further crack down on conflicts of interest, define the term "best interest," and strengthen disclosure and monitoring provisions.

Of course, how the court will rule is anyone's guess at this point. "It's in the laps of the gods," Seligman says.

A Democratic sweep would likely bring "the most significant changes," according to Paul Richman, chief government and political affairs officer at the Insured Retirement Institute. Richman's group will continue to advocate for policies to shore up retirement security, such as the SECURE Act, which passed with strong bipartisan support in an intensely polarized Congress. But he also sees the potential for a blue wave to rekindle interest in a regulation that his group fought tooth and nail to defeat: the Department of Labor’s fiduciary rule.

"Depending on the size of the majority the Democrats win in this scenario [it] could allow for a significant number of legislative victories," Richman says in an email. That includes "a return to the earlier Department of Labor fiduciary rule and the harmful effects we began to see it have on consumer choice and access to professional financial advice, effects which IRI believes could be avoided by giving SEC's Reg BI the opportunity to work with a stronger standard and enforcement mechanisms to deliver consumer protections and preserve consumer choice of financial advice."

The IRI was one of the groups that successfully sued to overturn the Labor Department’s fiduciary rule.

Roper suggests that an SEC under more fiduciary-friendly leadership would scrutinize firms’ compliance with Reg BI and their efforts to minimize conflicts before tweaking the regulation or crafting a new uniform fiduciary standard.

That last prospect seems less likely to Duane Thompson, senior policy analyst at Fi360, a fiduciary consultancy. Thompson points to the new research and economic analysis agency staff would have to conduct, the fraught politics of any such effort, and the all-but-certain legal challenges new rules would face.

"Regulators have a bit of a straitjacket — you can't have a Biden SEC-appointed chair come in and just gut Reg BI," Thompson says.

He does anticipate that in the event of a Democratic sweep of the presidency and Congress, there could be renewed momentum on Capitol Hill for clarifying the language in Dodd-Frank that authorized the SEC to adopt a uniform standard. The current litigation focuses on whether Congress went a step further and meant to mandate the commission to do so.

Seligman advocates a more structural reimagining of the regulatory regime for brokers and advisors, suggesting that their governing statutes, from 1934 and 1940, respectively, have fallen badly out of step with the way the industries have evolved and converged. He sees potential in the aftermath of the current crises for a watershed moment when there is renewed appetite to advance policies that would have been unthinkable just a couple years earlier.

"Things don't always move instantly, but the oscillations in the stock market [and] the amount of economic dislocation may translate into substantial changes in our elected officials. That is the fundamental basis for actual change," he says. "Are the current circumstances such that we've reached one of those moments?"

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Regulatory reform Regulation Best Interest SEC FINRA Fiduciary Rule Fiduciary standard DoL Donald Trump Joe Biden Election 2020
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