Regulatory Outlook | 11.14.18
After Midterms, Banks Face “Headline Risk” in 2019
In a Sept. 12 letter commenting on the U.S. Securities and Exchange Commission’s (SEC) proposed “Regulation Best Interest” — a set of rules aimed at improving and harmonizing federal oversight of brokers and investment advisors — Rep. Maxine Waters (D-Calif.) could not have been more blunt. The Ranking Democrat on the U.S. House of Representatives’ Committee on Financial Services urged SEC chairman Jay Clayton to craft provisions that would, at a minimum, mirror protections found in the struck-down Department of Labor (DOL) proposal for upping the stewardship responsibilities connected with retirement assets, a standard-of-care threshold known as “The Fiduciary Rule.” Waters was among its chief proponents.
“[Regulation Best Interest] falls woefully short of preventing some in the financial services industry to game the system,” wrote Waters in that public comment letter co-signed by a few dozen other prominent Congressional Democrats.
With Democrats winning control of the House last week, Rep. Waters will chair the House Financial Services Committee, which has jurisdiction over the SEC. But will her chairwoman’s gavel be big enough to quash Regulation Best Interest (also known as Regulation BI)?
No, according to experts who gave their opinions on the fate of the SEC’s proposal in the aftermath of the U.S. elections, which also saw the Republican Party increase its majority in the Senate.
On the Fast Track
Even before the midterms, industry lobbyists and lawyers have said in recent weeks that they believe the SEC is on track to finalize a standard-of-care rules package as early as the first part of 2019. Put forth in April, Regulation BI would require brokers to put customers’ interests ahead of their own when giving advice or recommending investment choices, replacing the existing “suitability standard.”
Opponents of Regulation BI insist it falls quite short of the fiduciary standard, and some of these advocates are holding out hope that the SEC rule might stall en route to the finish line. They point to the time it will still take to formally test certain brand new regulatory paperwork. Case in point: the new “Customer Relationship Summary” form (Form CRS), which is seen by some critics and even supporters of Regulation BI as being overly cumbersome to the point of being more trouble than it’s worth — and, thus, in dire need of a dry-run phase.
Nevertheless, a recently released study commissioned by the SEC prior to the proposal of Regulation BI (and not directly tied to it) seemed to highlight the need to make sure consumers comprehend precisely what is meant by the term “best interest” in the real-world context. For example, if best interest is to actually mean anything, then information relating to the manner by which professionals are compensated needs to be utterly unambiguous, explained Knut Rostad, president of the Institute for the Fiduciary Standard.
“The SEC study underscores that investors clearly prefer that advisors be compensated by the client alone,” Rostad said.
With that in mind, would behind-the-scenes product-distribution (revenue sharing) arrangements ever make it out of the fine print and into any new disclosure documents? And, if so, would clients ever read or even understand them?
No update on the status of the SEC’s specific Form CRS testing period was available as of Nov. 9, according to John Nester, an agency spokesman.
One industry watcher who believes it’s unlikely the SEC will alter its course on Regulation BI is Christine Lazaro, director of the Securities Arbitration Clinic at St. John's University's Law School. She shared her views with Law360.
Miami Law's Investor Rights Clinic Director Teresa Verges agreed. "You're looking at so many hurdles to overturn this that I do not think that the House control is necessarily going to win the day," Verges said in the Law360 article. Even assuming both the House and the Senate voted for a measure to reverse the rule, they’d still need President Trump to not veto it.
Spotlight on 401(k) Plans
Politically astute industry members will be keeping a close eye not only on the Democrats’ to-do list with respect to the Waters-chaired Financial Services Committee but also on the priorities of the House Ways and Means Committee. While it may or may not pry loose President Trump’s tax returns, the Ways and Means’ stamp on tax-related issues could likely extend measures impacting tax-exempt retirement plans. Rep. Richard Neal (D-Mass.) is set to take over as committee chair. He’s long been a proponent of boosting retirement savings.
One of his most recently proposed pieces of legislation would require more employers to offer a defined contribution plan. The Automatic Retirement Plan Act of 2017 would require most employers (with 10 or more employees) to have a retirement plan, either a 401(k) or 403(b) plan, and automatically enroll participants. In addition, the bill would enhance employers’ ability to participate in open multi-employer plans and permit workers to have 50 percent or more of their distributions invested in a “form that guarantees them lifetime income.”
Rep. Neal was another major proponent of the Fiduciary Rule. Back in early 2017, when President Trump in one of his first executive actions ordered the DOL to review — or effectively delay — the Fiduciary Rule, it was Rep. Neal who issued a most stern rebuke, emphasizing how the rule “underwent thorough scrutiny for nearly seven years during the Obama Administration, as it considered industry and consumer concerns from all sides.”
“Ultimately, this process produced a rule that ensures financial advisers act in their clients’ best interests and provide conflict-free advice, looking out for middle-class families as they save for retirement,” Rep. Neal said at the time. “The focus should be on getting bad actors out of the marketplace instead of holding the door open for them.”
Headline Risk in 2019
Another major, overarching take-away from the Democrats winning back the House is the probability that banks, in general, are going to be subjected to headline-generating scrutiny.
Wells Fargo and Deutsche Bank both are already in the committee’s sights.
“We expect the House Financial Services Committee will create an elevated level of headline risk for banks for the next two years,” Height Capital Markets analysts said in a note published after the election.
It’s not that anyone believes any new bank activity-curbing regulations will get through; rather, the steady drip of hearings and negative publicity is seen as potentially harmful to the perception of banks, analysts warned.
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.