New Leaders Take Over in Washington

Despite the new year kicking off in the midst of a government shutdown, new faces don the leadership of congressional committees that will play a critical role in crafting — and potentially passing — legislation that impacts advisors and broker-dealers. The new democratic congressional leaders also are poised to tighten the screws on regulators.

Rep. Maxine Waters, D-Calif., the new chairwoman of the House Financial Services Committee, is expected to be an aggressive overseer of the Securities and Exchange Commission’s advice-standards rule proposal that may be finalized in the first part of 2019 — specifically the plan’s much-debated Regulation Best Interest.

Now at the helm of the House Education & Labor Committee, which has jurisdiction over the Department of Labor, is Rep. Bobby Scott, D-Va., a supporter of Labor’s now-defunct fiduciary rule.

(Education & Labor is a new committee name adopted on Congress’ opening day in January by new House rules and replaces the former House Education and Workforce Committee moniker.)

Scott joined Waters last year in chastising the U.S. Court of Appeals for the Fifth Circuit’s ruling to vacate Labor’s fiduciary rule, arguing in a joint statement that killing the rule “will only benefit unscrupulous financial advisers who put their own financial interests and profit motives ahead of their retirement clients.”

Labor signaled in its fall 2018 semi-annual regulatory agenda that it was working on a new fiduciary proposal. Attorneys remain divided on whether the SEC can finish its advice-standards package early in 2019, particularly because the government shutdown had the securities regulator operating with a skeleton crew. Labor, however, remained funded and fully staffed.

Waters — who promises to crack down on abusive financial practices, ensure “strong safeguards” are in place to prevent another financial crisis and conduct keen oversight of regulators — argued in comments on the House floor in early January that the government shutdown “has all but closed the doors of the SEC, furloughing 94% of the agency and essentially providing fraudsters and schemers with a free pass to swindle investors and small businesses.”

With a “crew of less than 300 staff, the SEC cannot possibly oversee the activities of the over 26,000 registered entities, such as investment advisers, broker-dealers, and stock exchanges. Worse, the SEC is unable to hold bad actors accountable through most enforcement actions, preventing harmed investors from obtaining relief,” Waters stated.

Up for debate is whether Labor is forging ahead with its own fiduciary rule — in collaboration with the SEC — or is waiting to use a final SEC Reg BI as a template in writing its own fiduciary rule.

Duane Thompson, senior policy analyst at Fi360, a fiduciary education, training and technology company, told me that he expects Labor “to pass a ‘fiduciary-lite’ rule comprising safe harbors for certain advisory activities after the SEC adopts Regulation Best Interest.” Another variable that could hinder the SEC’s ability to see an advice standards package through to completion are new commissioners.

As Bob Plaze, former co-director of the SEC’s Division of Investment Management, who’s now a partner at Proskauer Rose in Washington, told me recently, SEC Chairman Jay Clayton “will have two new commissioners to deal with who did not participate” in pushing out the original proposal last April, Plaze said, speaking of newly christened Commissioner Elad Roisman, a Republican, and the vacant seat left by Kara Stein, a Democrat, who stepped down at year-end.

“None of the commissioners who considered the original proposal seemed very happy about it for an assortment of reasons,” noted Plaze. (Republican Commissioner Hester Peirce and Democratic Commissioner Robert Jackson both voiced reservations, but Stein cast the sole dissenting vote.)

Barbara Roper, director of investor protection at the Consumer Federation of America, added in her comments to me that the fate of the SEC’s advice-standards package hinges on whether it’s passed on a 3-2 “partisan” vote. That is, if the votes to pass the package come from Clayton along with Republican Commissioners Peirce and Roisman.

“Unless Chairman Clayton is willing to work with Democratic Commissioner Jackson to strengthen the rule,” Roper continued, “it is all but guaranteed that the rule would be back on the Commission’s agenda as soon as there is a Democrat in the White House” and an SEC chair is appointed to “reopen the rulemaking.”

As with the now-defunct fiduciary rule, “brokers could once again spend a year or two, and millions of dollars, coming into compliance with the [SEC] rule, only to see it evaporate as early as 2021,” Roper said.