Fierce fiduciary debate awaits Biden’s SEC pick

As fiduciary advocates and brokerage firms await the expected confirmation of a new SEC chair, they’re lining up on opposite sides of a fierce ongoing debate over fiduciary rules: do they go too far, or not far enough?

The Institute for the Fiduciary Standard and the Financial Services Institute each held events in the past two weeks displaying the persistently growing chasm within wealth management over the SEC’s Regulation Best Interest. Consumer advocates have reason to hope the Biden administration could toss the rule; brokerage firms are pushing hard to keep it in place.

Besides indications of President Biden and Vice President Harris’ stances on investor protection rules, the administration’s pick to lead the SEC, former CFTC Chairman Gary Gensler, led a bipartisan state-level commission that called for a strict fiduciary standard across the industry in 2019. Independent wealth managers and advisors represented by FSI oppose such efforts.

“Our message to regulators and the incoming administration is pretty simple that we think Reg BI works,” Robin Traxler, FSI’s deputy general counsel, said in a press briefing at the group’s virtual conference. “It's a good rule, and it's a major step forward for the industry in providing a strong, common standard of care for both advisors and clients across the country.”

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Traxler praised the SEC’s “very smooth and successful” implementation of Reg BI last year, and she says the group has already started seeing the rule’s impact in bolstering disclosures and prompting conversations between advisors and clients. FSI also plans to gather data to promote the rule’s effectiveness in doing so as it makes the case against stronger rules in various states.

The research and consumer advocacy group that held its own session on priorities under the Biden administration views the rule as “fundamentally misguided,” according to a white paper released by the Institute for the Fiduciary Standard. The group made five recommendations, including eliminating certain conflicts of interest and even changing the rule’s name.

“The history lessons are filled with anecdotal evidence of broker-dealers trying to dress up as investment advisors,” MarketCounsel CEO Brian Hamburger said in a phone call with reporters. “Words are important. We can't just rebrand sugar as whole grains and expect a marketing campaign to cure what ails us.”

Hamburger and the other fiduciary advocates object to the use of the phrase “best interest” in the standard for brokers because they say it conflates tougher standards governing fiduciaries who must place their clients’ interests ahead of their own. They praised Reg BI’s elimination of product sales contests. Still, they called for Gensler to make significant amendments to the rule.

Representatives for the SEC and the White House didn’t respond to requests for comment. While Gensler’s confirmation by the Senate is a “virtual certainty,” the process could take many weeks or even several months, Bloomberg News reported last week. President Trump’s SEC chair, Jay Clayton, didn’t get his thumbs-up vote from lawmakers until May 2017, for example.

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Recent actions by Gensler, Biden and Harris provide substantial hints about their views on Reg BI — which became one of the most contentious and significant rules of Clayton’s tenure after an appeals court vacated the Obama administration’s Fiduciary Rule in March 2018. Biden’s Democratic Party included a plank about fiduciary standards in its 2020 convention platform.

“When workers are saving for retirement, the financial advisors they consult should be legally obligated to put their client's best interests first,” according to the platform. “We will take immediate action to reverse the Trump administration's regulations allowing financial advisors to prioritize their self-interest over their clients' financial wellbeing.”

For her part, Harris joined 28 other Democratic lawmakers, including Sens. Bernie Sanders and Elizabeth Warren, in sending a scathing comment letter in opposition to the Fiduciary Rule that the Trump administration’s Labor Department crafted to fit Reg BI last year. The Maryland Financial Consumer Protection Commission, led by Gensler, also called for stronger state rules.

The group recommended that any firm or representative “who offers advisory services or holds themselves out as advisors, consultants, or as providing advice, would be held to a fiduciary duty to act in the best interest of the customer without regard to the financial or other interest of the person or firm providing the advice,”according to the document.

Subsequent legislation languished in the Maryland Senate after a deluge of opposition from brokerage industry groups, Politico reported. In addition to beating back such efforts in 2021, FSI will be speaking with the SEC about Reg BI, CEO Dale Brown says. FSI will be “engaged in a process of continually working to make the rule work” for investors and its members, he said.

“The rule is workable,” Brown said. “It doesn't drive up costs, unnecessarily increase complexity, or cause confusion. The losers when that happens are small investors who lose access to affordable objective advice.”

On the other hand, the fiduciary advocates argue that the rule did increase confusion. They’re pushing for Gensler’s SEC to make changes through interpretive guidance and amendments to Reg BI, as well as supporting potential Congressional legislation. Knut Rostad, president of the institute, acknowledged that Gensler must first receive his confirmation vote in the Senate.

“We've got good reason to believe that he'll be open-minded,” Rostad said. “I think we'll get an open hearing with sympathetic ears.”