Regulatory Outlook | 01.20.21
Advisory Industry Braces for Stiffer Regulation
With Democrats taking control of all three branches of the federal government – amidst the surreal backdrop of a MAGA mob storming the nation's Capitol – global investors bet big on more pandemic aid, and more borrowing in general.
This drove up yields on treasuries, which hiked Wall Street’s outlook for bank lending revenue.
Bank advisory practices leaders, meanwhile, were bracing for rising regulatory pressure.
For starters, the incoming Biden Administration can put the kibosh on any regulation not yet in effect, such as, say, the Department of Labor’s newly finalized rule creating an exemption for fiduciaries from certain prohibited transactions under ERISA.
Currently, the DOL, in step with the Securities and Exchange Commission's recently adopted Regulation Best Interest, takes the view that a registered representative's IRA rollover recommendation escapes more intense ERISA-level scrutiny, provided a number of “impartial conduct standards” are met.
Fiduciary Rule Payback?
Among the earliest actions by the Trump administration in 2017 was to put a hold on the DOL's prior, stricter, rollover treatment policy (which became known as the "fiduciary rule"), ultimately leading to a death spiral for the rule, begging the question: now what will happen to the still-not-fully-etched-into-the-Federal-Register rule?
Advisors were ready to embrace some SEC/DOL harmony pertaining to rollover-related regulation and move on. A decade of debate over standards of care had led to what seemed like a clear path forward, particularly in terms of rollovers not being subjected to a higher bar, one that the broker-dealer industry clearly felt was too high – to the point of potentially being debilitating to their businesses i.e. Wall Street fought it tooth and nail.
Everything changed with two Democrats prevailing in the Jan. 5th special runoff elections in Georgia, handing the Democrats 50 Senate seats, with Vice-President-elect Harris representing the tie-breaking vote. That means that, when combined with the fact that Democrats control the House of Representatives, the Biden White House can more easily push through its picks for new leaders of agencies like the DOL, SEC, and the Consumer Financial Protection Bureau.
The entire financial services industry is preparing for regulatory changes. Squarely in the crosshairs is the DOL's treatment of rollovers.
The Public Investors Advocate Bar Association has urged the incoming administration to delay the DOL rule from taking full effect.
David Meyer, PIABA president, said the Biden administration should "review the steps taken by DOL to push through this gift to Wall Street."
“The DOL should adopt a new regulation," Meyer wrote.
"Which would eliminate the need to satisfy a five-part test before someone providing investment advice would be deemed a fiduciary.”
U.S. Sen. Patty Murray (D-Wash.) and U.S. Rep. Robert C. Scott (D-Va.) warned the DOL that its rule would harm retirees by enabling “unscrupulous financial advisors” to put their interests first.
“People are looking for reliable help as they try to navigate the painful economic fallout of this pandemic—but this rule will make that unbiased help even harder to find,” the lawmakers wrote.
‘More Enforcement Cases’
Financial markets are likely to remain nervous about the stronger potential for corporate tax rises and the prospect of tighter regulations on key sectors including financial services, said James Knightley, chief international economist for ING, in a blog on Jan. 6, 2021.
"Stronger growth than would have been the case in a split Congress should go some way to mitigating these worries," he added.
Ballard Spahr's Consumer Finance Monitor, an online publication, has forecast a blue wave scenario that includes the possibility of a beefed-up, more intensely vigilant CFPB.
Expect a new approach to the exercise of its authorities, reflecting criticism, fairly or unfairly, by Democrats that the CFPB has been lax, according to Chris Willis, Ballard Spahr's practice leader for Consumer Financial Services Litigation. "There will likely be more enforcement cases involving larger dollar amounts and a more aggressive focus on fair lending," Willis said.
A CFM roundtable also predicted that Senator Elizabeth Warren likely will play a key role in selecting the leadership of the CFPB and other financial regulatory agencies and that the individuals she selects will take aggressive – but also innovative – approaches.
Willis said that state attorney general and regulators, many of whom have taken on a more active role during the Trump Administration to fill a perceived gap in enforcement by the CFPB, will likely remain very active and receive significant support from the CFPB.