Midterm elections usually don't generate the same energy as presidential elections, but this year is different because it is shaping up as a referendum on President Donald J. Trump.
If Democrats take over the House — which many analysts see as a good possibility — and perhaps the Senate — a long shot — the outcome also could potentially affect the Securities and Exchange Commission's investment advice reform proposal.
Over the last couple weeks, Democrats have made clear that they don't think the SEC has gone far enough.
The latest example is a letter from three Senate Democrats, including Sen. Elizabeth Warren of Massachusetts, urging the Financial Industry Regulatory Authority Inc. to weigh in on the SEC's recommendations. They asserted that the way Finra interprets and enforces the SEC's proposal to raise broker standards would determine whether such a rule increases investor protection.
In their letter, the Democrats argued that the SEC proposal, which is open for comment until Aug. 7, is too weak. They wanted the SEC to pursue a uniform fiduciary standard for retail investment advice. They praised the recently deceased Labor Department fiduciary rule, which required brokers to act in the best interests of their clients in retirement accounts, as the model for reform.
House Democrats also have grumbled about the SEC proposal.
During a recent House Financial Services Committee hearing featuring SEC chairman Jay Clayton, the top two Democrats on the panel — Reps. Maxine Waters of California, the ranking member, and Carolyn Maloney of New York — said the SEC should have proposed a uniform fiduciary standard.
If the Democrats take over the House, they'll be able to put more pressure on Mr. Clayton.
In a Democratic House, Ms. Waters is the favorite to become chairwoman of the financial committee. In that position, she can haul Mr. Clayton up to Capitol Hill for a hearing specifically on beefing up the SEC proposal — a meeting on which she and her Democratic colleagues would control the agenda and the witness lineup.
She also could write legislation that would require the SEC to propose an advice standard for all financial advisers that is no less stringent than the fiduciary standard that currently governors investment advisers. Similar language was included in the Dodd-Frank financial reform law, but it was permissive — leaving the decision to the SEC — rather than mandatory, as it could be under a Democratic bill.
With Democrats in charge of the House, a fiduciary duty bill is likely to be approved by the chamber. It would almost certainly die in the Senate, where Republicans would have strong influence on the agenda, even if they're in the minority. But having a fiduciary bill move through even half of the legislative process would get the SEC's attention.
The decision of whether to have a fiduciary standard for retail investment advice is ultimately a political one. It's too tough a climb for a regulatory agency — especially one like the SEC with a built-in political split among commissioners — to achieve on its own.
A group called Fiduciary Voices is urging investment advisers to write comment letters to the SEC to advocate for a tougher advice regulation.
"The proposed Regulation Best Interest is very misleading because it sounds like a fiduciary standard. In fact, it is not," Patricia Houlihan, owner of Houlihan Financial Resource Group and chairwoman of the Committee for the Fiduciary Standard, said in a recent Fiduciary Voices media webinar. "A law that gives the public the impression that brokers are acting in their best interests when in fact they may not be, is the worst of all possible outcomes."
If Democrats take the House in November, that message will be amplified.