The Security and Exchange Commission's proposed regulations to heighten broker-dealers' standard of conduct, codify registered advisors' fiduciary obligations to retail investors, and streamline client disclosures are not expected to be slowed or materially impacted now that Democrats will hold the majority in House of Representatives.

“There will be a lot of noise when committees call for oversight hearings in the next Congress, but it doesn't mean anything will get 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 Committee most recently held a hearing on the SEC's Division of Investment Management on September 28.

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

Rep. Waters and other Democratic members of the Committee have been critical of the SEC's proposed Regulation Best Interest, which would require broker-dealers to give investment recommendations in retail investors' best interest but stops short of requiring a pure fiduciary standard of care.

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

Waters, an ardent supporter of the Labor Department's fiduciary rule under the Obama administration, is critical of the SEC for attempting to apply different standards of care for broker-dealers and registered investment advisors.

“The best way for the SEC to protect investors and reduce confusion is require all brokers and advisers, regardless of their titles, to comply with the same fiduciary standard that puts their clients' interests first,” according to Waters' letter to the SEC.

Clayton likely will be called to testify before committee

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

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

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

One 'long shot' Democrats may have

The one “long shot” Waters and Democrats may have in their quiver would be to place a rider in appropriations to fund the SEC that would prevent the agency from using funds to implement the rule, said Thompson.

Republicans tried a similar measure under the Obama administration to attempt to block implementation of the fiduciary rule, but to no avail.

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

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

Beyond Democratic lawmakers, Reg BI's critics include consumer advocates, who argue the proposal is too protective of recommendations on propriety investment products and commission-based products, as well as some in the registered advisory community, who argue the proposal for broker-dealers would only cloud the distinction between best-interest advice and the higher fiduciary standard.

But in previous testimony and hearings, Chair Clayton has been insistent 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 the proposal, and that will impact large swaths of the brokerage industry as well as stand-alone RIAs. For decades, RIAs have used the fiduciary standard to market their services. Now you will have the broker down the street explaining their best interest standard to clients. Investors are going to want to know what the difference is,” explained Thompson.

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

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

Instant Insights /

Democratic House not expected to slow SEC's REG BI

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