The fate of a proposed regulation that could have a profound impact on investment advisers is resting on the results of tomorrow's presidential election.
After a close, contentious campaign, the final outcome will bring clarity to the Labor Department's proposal to expand the definition of “fiduciary” under federal retirement law.
The controversial regulation was proposed in 2010 as a way to protect workers and retirees from conflicted advice as they build their nest eggs through 401(k) and individual retirement accounts.
The financial industry and members of both parties in Congress strongly opposed the rule because they said that it would, for the first time, impose retirement law fiduciary standards on brokers selling IRAs, potentially raising their costs and forcing them out of the market. Other concerns center on potential changes about the rule to rollovers and to the sale of 401(k) plans.
The proposal was withdrawn last year. The Labor Department delayed a re-proposal until after the election.
As long as the contest between President Barack Obama and the Republican presidential nominee, former Massachusetts Gov. Mitt Romney, isn't knotted in an Electoral College tie or tangled in a ballot-counting dispute, the prospects for a re-proposed regulation will crystallize.
A ROMNEY WIN
“One thing that is contingent on who wins the White House ... is the definition of fiduciary regulation,” Brian Graff, executive director of the American Society of Pension Professionals and Actuaries, told his group's annual conference last week in National Harbor, Md. “If Gov. Romney wins the White House, in my opinion, that regulation is pretty much dead.”
As the saying goes, in Washington, personnel is policy.
If Mr. Romney prevails, he will replace Assistant Labor Secretary Phyllis Borzi, the head of the Employee Benefits Security Administration.
"TORCH BEARER'
“Without anyone carrying the torch, it's not going to continue,” Mr. Graff said in an interview.
“The major torchbearer for the regulation is the current assistant secretary,” he said. “If Romney wins, she's out of a job.”
A new administration typically freezes regulations that its predecessor had in the pipeline. Even if the Labor Department rule were re-proposed between the election and the inauguration, it wouldn't be finalized before Mr. Romney's inauguration.
An Obama or a Romney administration would take different approaches to enforcing retirement law, according to C. Frederick Reish, a partner at Drinker Biddle & Reath LLP.
“From the perspective of a Democratic administration, their focus is on trying to protect participants, and they'll put a greater burden on service providers to do that,” Mr. Reish said.
“Republican administrations are also interested in protecting participants, but they're much more comfortable that the private-benefit marketplace can sort that stuff out,” he said. “As a result, they're going to rely more on disclosure than fiduciary status.”
The outlook for another fiduciary-duty rule won't be as crisply defined on election night. The Dodd-Frank financial reform law gave the Securities and Exchange Commission the authority to promulgate a regulation that would impose on brokers a fiduciary duty for retail investment advice — the same standard of care that investment advisers must meet.
The SEC hasn't proposed a rule in the two and a half years since Dodd-Frank was enacted. It is unclear whether the election outcome will move the needle.
Regardless of who wins the presidency, SEC Chairman Mary Schapiro is likely to step down. The SEC's next leader will influence the trajectory of the fiduciary rule.
"UPHILL BATTLE'
“Even with her leadership on the issue, it's something they haven't gotten out of the box yet,” said Dan Barry, managing director of government relations and public policy at the Financial Planning Association.
“The next chairman, if supportive of it, will face the same uphill battle,” he said. “If the next chairman is not supportive, the issue will fade into the background for the foreseeable future.”
The election result won't have a decisive impact on an SEC fiduciary-duty rule, according to Kevin Carroll, managing director and associate general counsel of the Securities Industry and Financial Markets Association.
“In a Democratic administration, it is slightly more likely to move forward; in a Republican administration, slightly less likely,” Mr. Carroll said.
CONGRESSIONAL RACES
On the larger question of Dodd-Frank implementation, the results in congressional races will be important. Republicans are likely to maintain control of the House, while Democrats are fighting to keep their slight Senate majority.
Either party will have plenty of senators to maintain a filibuster, which means that Dodd-Frank may be tweaked but not overhauled.
“I see very few significant changes to Dodd-Frank, regardless of who wins the election,” Brian Gardner, head of Washington policy research at Keefe Bruyette & Woods Inc., told reporters last week during a conference call.
Before the election outcome's impact on adviser issues can be parsed, a winner has to be declared.
With so many swing states in play, that might take until late into the night Nov. 6. Even then, it could be a split decision of sorts.
“If I were to place a bet right now, it would be Obama in a squeaker,” Mr. Barry said. “I could see very easily Romney getting the popular vote and Obama winning the electoral vote.”
Such an outcome might foster the gridlock that many voters hope to resolve.
“There are going to be some very bitter feelings in Washington,” Mr. Gardner said.
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