Almost everyone is anticipating that the incoming Trump administration will try to kill — or at least delay — a Labor Department investment advice rule. If it does, it could be a catalyst for the Securities and Exchange Commission to finally break out of its stasis on the issue.
The conventional wisdom is that the Labor regulation, which requires financial advisers to act in the best interests of their clients in retirement accounts, is doomed, and that the SEC under a Republican majority will continue to leave untouched its authority to promulgate a fiduciary regulation applying to all retail investment advice.
But financial industry opponents for years have tried to stop the DOL rule by asserting that the SEC, not the DOL, is the primary securities regulator. It should go first, they say, with a regulation that imposes a uniform best-interest standard on brokers and investment advisers, raising the bar for brokers.
We could see a microcosm of the situation play out when a Republican Congress tries to end the Affordable Care Act. Killing it without replacing it could be politically untenable.
In the same way, if the DOL rule falls, it could be put up or shut up time for the SEC. A fiduciary vacuum would not be acceptable.
“The biggest issue [next year] is the fallout from the DOL rule being taken off the books,” said a former SEC official who asked not to be identified. “That's going to dictate what the commission does. There is going to be pressure on the SEC from the financial industry to fill the void.”
Industry groups are already saying it is not enough simply to quash the DOL rule, which they say is too complex and costly and will make giving and receiving investment advice much more expensive.
“We are figuring out the best path forward because there likely will be some sort of best-interest standard put in place,” Kevin Mayeaux, chief executive of the National Association of Insurance and Financial Advisors, said in a recent interview. “We plan to work with the administration and members of the House and Senate to craft a more commonsense standard.”
The reformulated requirement probably won't please advocates for the DOL rule, which they say is needed to protect workers and retirees from conflicted advice that leads to high-fee investments that erode savings.
With the industry holding sway in 2017, the SEC might focus on beefing up rules surrounding rollovers from 401(k)s to individual retirement accounts and fee disclosures. Perhaps the suitability rule will be elevated. Whatever proposal is rolled out won't look like the DOL rule.
At that point, the politics of fiduciary will change. It will be the industry and Republicans arguing for a new SEC rule and Democrats and consumer advocates resisting it because they say it's not tough enough.
We could see fiduciary advocates demanding stringent cost benefit analyses and resisting SEC efforts to promulgate what they think is a watered-down rule.
They'll be on defense instead of offense — and will need to find an aggressive Democratic SEC commissioner for the party's open seat to join incumbent Democratic commissioner Kara Stein.
The two Democrats may find themselves trying to block SEC action on fiduciary duty — a role that the Republican commissioners have played in recent years.
“We need someone who goes in with guns blazing,” Mercer Bullard, a professor of law at the University of Mississippi and president of Fund Democracy, said at a Dec. 1 Consumer Federation of America conference in Washington.
Rather than a ceasefire at the Fiduciary Corral, the advent of the Trump administration may portend more gunslinging.