The future of advice regulation could be on the ballot as the presidential election heads into the final stretch, according to fiduciary advocates and industry groups.
To be sure, neither President Donald Trump nor former Vice President Joe Biden is campaigning on how their SEC or Department of Labor would regulate investment advisors and brokers, but industry insiders point to different philosophies between the candidates that could broadly shape how regulators handle the wealth management sector, a topic that has been the subject of contentious debate in recent years.
"In general, we would expect a Biden administration's priorities to consist of diversity and inclusion, financial literacy and a strong focus on investor protection," says David Bellaire, general counsel at the Financial Services Institute. "This would include strict enforcement of Reg BI and likely both the SEC and DoL revisiting standard-of-care regulation."
Just what form that "revisiting" would take is an open question. Even some harsh critics of the SEC's Reg BI aren't looking for an SEC under a Biden administration to scrap the rule and start over.
Barbara Roper, director of investor protection at the Consumer Federation of America, says she would like to see the SEC retain the regulation’s framework but enact clarifying tweaks that would set a higher standard for retail advice.
"If they use Reg BI as their starting point, they need to adopt a principles-based definition of 'best interest' that makes clear that this is not just a rebranded version of FINRA's suitability standard," Roper says. Further, she is hoping that the commission will commit to evaluating how firms are mitigating conflicts of interest "based on whether mitigation is sufficient to prevent the conflict from influencing recommendations."
The SEC could achieve both of those goals through formal guidance, rather than a separate rulemaking process, Roper suggests.
If a Biden SEC is going to revisit investment advice regulation, it's more likely to adopt an incremental approach rather than starting from scratch — and for a very simple reason, according to Neil Simon, vice president of government relations at the Investment Adviser Association.
Eyes on DoL
"Regulators don't much like reopening rules," Simon says. "I think revision to the rule is more likely than a complete reconsideration and sort of reformulation of it, and it may be that that is more achievable.”
Industry groups that favor Reg BI over a broad-based fiduciary standard, like the Insured Retirement Institute, also hope that an SEC under a Democratic administration won’t be in any rush to rewrite the Reg BI rules, which took effect June 30.
Instead, the IRI and like-minded outfits are advocating that the commission give the industry a chance to digest the regulation and then assess whether it is achieving its core goal of improving investment advice.
"Let's see how this thing is actually working in the real world," says Jason Berkowitz, IRI's chief legal and regulatory affairs officer. "You can't really judge something like this, that's a significant change to the way the industry's regulated, without giving it time to take hold."
Industry groups are also keeping a close eye on the Labor Department. In the event of a Biden victory, fiduciary advocates are expected to call for the department to revive its fiduciary standard for retirement advisors, which was
Looking for ‘tells’
Much will depend on who will lead the Labor Department and the SEC should the Biden/Harris ticket prevail, Berkowitz says. For instance, if the incoming president taps a vocal critic of Reg BI to lead the SEC, that would suggest that the agency is likely to revisit the rule in short order. Choosing someone to head Labor with a background in employee benefits rather than, say, workplace safety, could signal that the agencies are likely to revisit advice regulation. "Depending on who they appoint to lead the agency, that will be a significant ‘tell’ in terms of what's likely to occur," Berkowitz says.
If Trump is reelected, by contrast, further efforts to prune regulations would likely follow.
"If we find ourselves with a second Trump term we'd be looking at a continued analysis of the regulatory framework to find areas where there might be duplication or inconsistency or just overregulation," Berkowitz says.
Of course, the presidency isn't the only open office on the ballot. Congress will also have a say, though sources interviewed for this article don't anticipate any election scenario that results in lawmakers fast-tracking bills directing the SEC to adopt a uniform fiduciary standard or explicitly authorizing the Labor Department to revive its fiduciary rule.
"There are going to be an awful lot of fish to fry in the financial services world, and I just do not see that there is a lot of appetite" for advice legislation," says Simon.
Simon's group has its eye on other issues on Capitol Hill, including a reinstatement and expansion of the tax deductibility of advisory fees, something the Investment Adviser Association has been trying to get included in a COVID relief bill.
State activity?
Meantime, some states, disappointed with the SEC's Reg BI, have been
The national election could bear on those efforts as well, though Berkowitz sees the tumult of 2020 — from the COVID pandemic to economic uncertainty to social unrest — undercutting momentum for state-level advice regulation.
"That's just not on the top of their radar," he says. "In the short term, I would personally be somewhat surprised if we see a significant increase in that activity."
A Biden victory could further slow down those efforts, as fiduciary advocates in statehouses and state legislatures might look to a Democratic-led SEC to tighten up Reg BI. On the other hand, should Trump prevail and Reg BI remain the law of the land, it could rekindle state efforts to set fiduciary rules, according to Berkowitz.
"That may cause some of the blue states to reevaluate whether this is something they need to take on at some point when they have the regulatory bandwidth," he says.
