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If House Flips, SEC Advice Standards Package Likely to Face Scrutiny

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If the House flips to the Democrats in tomorrow’s midterm election and Rep. Maxine Waters, D-Calif., becomes chairwoman of the House Financial Services Committee, Securities and Exchange Commission Chairman Jay Clayton will likely be in the hot seat over the agency’s advice standards package.

Assuming the SEC adopts Regulation Best Interest, Waters could call in Clayton “to explain how it serves the best interest of clients, and also have a top-heavy list of consumer organization witnesses to make their point that they dislike it,” Duane Thompson, senior policy analyst at Fi360, a fiduciary education, training and technology company, told ThinkAdvisor on Monday.

Waters, the likely new chair of the Committee replacing Rep. Jeb Hensarling, R-Texas, was one of 35 House and Senate Democrats who signed a letter to Clayton “complaining that the SEC did not follow the Dodd-Frank mandate to establish a uniform fiduciary standard for both advisors and brokers,” Thompson notes.

If the House shifts to Democratic-control and the Senate stays in Republicans’ hands, also expect a lot of “headline noise,” particularly from the House, meaning Democrats will focus on “messaging through legislation that can pass the House but not the Senate, as well as oversight hearings,” Thompson opines.

While gridlock will likely ensue, one exception will be the “lame duck” session of Congress after the Nov. 6 vote, when Congress returns to wrap up unfinished business.

(Related: Insiders Go Deep on Midterm Predictions)

Regarding retirement savings, “there is considerable bipartisan support for legislation that would encourage retirement savings, which could come to fruition once Congress comes back after the election,” Thompson said.

Also expect renewed legislative activity at the state level “to raise the bar for investment advice,” Thompson added. “Most or nearly all of this activity would be limited to ‘blue’ states where Democrats control both chambers.”

The National Association of Insurance Commissioners, he continued, “is in the final stages of approving a model rule covering annuity transactions,” which would “likely beef up the suitability requirements but not rise to the level of a fiduciary standard.”

Thompson says all advisors eyes should be on the regulatory implications of the Labor Department and SEC advice rules. “It is very likely the DOL will let the SEC take the lead in most overlapping areas covering investment advice, and likely wait for the SEC to act on Regulation Best Interest before responding with a final fiduciary rule of its own that would not break much new ground.” Rather, a new Labor rule would likely create “more safe harbors for conflicted advice under ERISA as long as the advisor and firm is in compliance with Reg BI or Advisers Act requirements.”

Midterms Market Impact 

Greg Valliere, chief global strategist for Horizon Investments, offered his “final election call” Monday by reiterating that “there will be no tidal wave,” and that the Republicans will keep the Senate, probably adding two net seats.

The House, however, Valliere continued, “suddenly has become a closer call, but we’ll predict a net gain of 29 seats for Democrats – nothing to brag about by historical standards – but six more than they need to regain control. Democrats are also poised to win a handful of governorships and dozens of legislative seats.”

As to the midterm election’s impact on the markets, “not enormous,” Valliere predicts.

Expect continued gridlock, “with only a few issues like infrastructure likely to move in 2019.”

Gridlock, he said, “is benign for the markets, although the inability to agree on any fiscal discipline could eventually become an irritant.”

There will be a “continued tidal wave of young conservative judges winning confirmation to federal courts, thanks to [Senate Majority Leader] Mitch McConnell and a GOP Senate,” he stated.

President Donald Trump’s economic agenda will also face “no serious threat,” as his veto power will be dominant for the next two years, Valliere opines.

However, a “flood of subpoenas” against Trump and his aides will likely be lodged if the Democrats take the House, “with the possibility of impeachment – which still seems unlikely to produce a conviction in the Senate.”

Tuesday’s election results “may have only a modest impact on investors,” Valliere said, as they have “two bigger macro worries: the likelihood of more Fed rate hikes in the wake of Friday’s tremendous jobs report; and the realization that Trump’s tease last week on trade progress with China was largely pre-election spin. There’s no imminent deal with Beijing.”

By the end of the week, Valliere projects, the focus will have shifted to other issues: the 2020 presidential election—with Trump the likely favorite again; the next move from [former FBI director] Robert Mueller, who has been very busy behind the scenes; the next Fed rate hike and Trump’s response.

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