Beyond Democratic lawmakers, RegBI's critics include consumer advocates as well as some in theregistered advisory community. (Photo: Diego M.Radzinschi/ALM)

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The Security and Exchange Commission's proposed regulations toheighten broker-dealers' standard of conduct, codify registeredadvisors' fiduciary obligations to retail investors, and streamlineclient disclosures are not expected to be slowed or materiallyimpacted now that Democrats will hold the majority in House ofRepresentatives.

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“There will be a lot of noise when committees call for oversighthearings in the next Congress, but it doesn't mean anything willget changed,” said Duane Thompson, senior policy analyst at Fi360,a fiduciary education training and technology company.

Waters likely to chair Financial Services Committee

The Financial Services Committee oversees the SEC. The Committeemost recently held a hearing on the SEC's Division of InvestmentManagement on September 28.

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Rep. Maxine Waters, D-CA, has a “higher than 99 percent chance”of being named  the next Chairwoman of the Committee, saidRep. Jeb Henserling, R-TX, the current committee chair, in aninterview with CNBC.

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Rep. Maxine Waters, D-CA

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Rep. Waters and other Democratic members of the Committee havebeen critical of the SEC's proposed Regulation Best Interest, whichwould require broker-dealers to give investment recommendations inretail investors' best interest but stops short of requiring a purefiduciary standard of care.

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Waters and 34 other Democrats submitted a comment letter to theSEC in September, claiming the SEC's Reg BI proposal “fallswoefully short” of preventing conflicts of interest in investmentrecommendations.

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Waters, an ardent supporter of the Labor Department's fiduciaryrule under the Obama administration, is critical of the SEC forattempting to apply different standards of care for broker-dealersand registered investment advisors.

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“The best way for the SEC to protect investors and reduceconfusion is require all brokers and advisers, regardless of theirtitles, to comply with the same fiduciary standard that puts theirclients' interests first,” according to Waters' letter to theSEC.

Clayton likely will be called to testify before committee

The SEC has put a September 2019 deadline for finalizing therules, but that could come even sooner. FI360's Thompson expectsSEC Chair Jay Clayton will be called to testify before theFinancial Services Committee in the next congressional sessionbefore the proposals are finalized. The SEC is currentlyconsidering more than 6,000 comment letters.

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“I think you will see hearings, and maybe even a few pieces oflegislation that advance out of the committee, but that would be anexercise in futility because those bills won't get through theSenate,” said Thompson.

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“My sense is there will be very limited changes to the Reg BIproposal,” he added. “At the end of the day, if advisors are goingto look at the political ranting that affects them, it's whathappens in the agencies, not Congress, that will matter.”

One 'long shot' Democrats may have

The one “long shot” Waters and Democrats may have in theirquiver would be to place a rider in appropriations to fund the SECthat would prevent the agency from using funds to implement therule, said Thompson.

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Republicans tried a similar measure under the Obamaadministration to attempt to block implementation of the fiduciaryrule, but to no avail.

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“It's the only way Congress could stop the SEC, but I'd say ithas a less than 1 percent chance of happening,” he said. “Iwouldn't bet the house on that one.”

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Walter Joseph “Jay” Clayton III, SECChair

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The SEC, now fully staffed with four commissioners under ChairClayton, can expect to finalize the proposals on a 3 to 2 vote, ora 3 to 1 vote, depending on the timing of Commissioner Kara Stein'sretirement, according to Thompson's analysis. Stein opposes Reg BIas it is currently written.

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Beyond Democratic lawmakers, Reg BI's critics include consumeradvocates, who argue the proposal is too protective ofrecommendations on propriety investment products andcommission-based products, as well as some in the registeredadvisory community, who argue the proposal for broker-dealers wouldonly cloud the distinction between best-interest advice and thehigher fiduciary standard.

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But in previous testimony and hearings, Chair Clayton has beeninsistent that Reg BI substantially heightens broker-dealers'existing suitability standard to investors.

Final rule likely without major changes

“I think you will see a final rule without real changes to theproposal, and that will impact large swaths of the brokerageindustry as well as stand-alone RIAs. For decades, RIAs have usedthe fiduciary standard to market their services. Now you will havethe broker down the street explaining their best interest standardto clients. Investors are going to want to know what the differenceis,” explained Thompson.

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Chair Clayton has made protecting the “Main Street” investor theSEC's top priority. While there is some vehement disagreement inindustry over Reg BI, Clayton has commanded respect as a policymaker from stakeholders across industry, according to Thompson.

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“Advisors may disagree with Reg BI, but he has been veryconsistent in his message and transparent in what he plans to do,”he said. “He comes across as a straight shooter.”

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.