How Rules Governing Financial Advisors Could Change Under Biden

The financial services industry is preparing for regulatory changes under President-elect Biden that will impact enforcement, examinations, the standard of care for clients and the mandate of the Consumer Financial Protection Bureau.

Changes at the Securities and Exchange Commission start with the tone at the top and a shift in presidential leadership may mark a move from the lax disclosure requirements of outgoing SEC Chair Clayton to the prescriptive approach of his predecessor Mary Jo White with more specific disclosures requirements around ESG investing and valuations, according to Paul Hastings partner Nick Morgan.

Depending on who president-elect Biden nominates to be the next SEC chair, there could also be a return to the broken windows policing that was seen under Chair White, punishing small infractions in order to foster an environment of compliance.

While much of the work of the enforcement division stays consistent across administrations, with roughly 800 cases annually, there could be nuanced changes in what violations are prioritized, according to Morgan, who previously served as senior trial counsel in the SEC’s enforcement division.

USA Financial chief compliance and legal officer Andrea McGrew anticipates an uptick in examinations and enforcement. This would not only be the product of a new administration less hellbent on deregulation but an outgrowth of the volatility and chaos of the pandemic, an environment ripe for malfeasance.

As a result of that Covid-19 market volatility, Morgan expects a large number of cases dealing with portfolio asset valuation, similar to the aftermath of the financial crisis a decade ago.

There could also be a greater emphasis on using enforcement or examinations to set new precedents, a common way to amend regulation without the long and arduous rulemaking process.

One area likely to see rulemaking through enforcement is the long saga of broker-dealer regulation. The current law of the land, known as Regulation Best Interest, was adopted in June 2019 by the Securities and Exchange Commission after the Trump administration vacated a stricter predecessor, the Department of Labor Fiduciary Rule, shortly before the fiduciary rule went into effect. It does not rise to an advisor-like fiduciary standard for brokers as the DOL rule did, but requires that all advisor recommendations meet a standard of best interest to a client.

While the Trump administration threw out the DOL Fiduciary Rule in the 23rd hour before replacing it with Regulation Best Interest, the newly assembled commission could work within the framework of Reg. BI and simply apply enforcement aggressively with the goal of elevating standards and developing a unified fiduciary standard for advisors and brokers.

A companion DOL Rule recently went into effect that will also have to be evaluated by the incoming administration but will not go into effect until after inauguration day and is therefore likely to see changes.

McGrew expects to see changes to Reg. BI, but is optimistic that the incoming administration will make changes slowly through enforcement and examinations that set the standards. This would ease the burden on firms in the midst of wrestling with the challenges to operations brought on by Covid-19. McGrew says that the abundance of gray area in Reg. BI makes it well suited for this approach.

Compliance officers like McGrew have had whiplash from the shifting approach to broker regulation. Now the industry is more interested in finding certainty than in how strict a rule they ultimately face.

A Democratic administration signaling intent to strengthen the regulation would likely slow efforts by states to create their own advice standards for brokers. In an industry with an increasing number of national firms, state-by-state rules were always seen as the worst possible outcome.

Kirkland & Ellis partner Norm Champ also expects enforcement to be a tool used to strengthen Reg. BI that avoids the laborious process of reopening the rule. Champ, who spent nearly five years at the SEC serving as director of the Division of Investment Management, deputy director of the Office of Compliance, Inspections and Examinations and the associate regional director for examinations in the regional office located in New York, also highlights other potential avenues the commission could take to expand the reach and scope of the regulation. This includes the Division of Trading and Markets issuing no-action letters or guidance. He emphasizes that the new administration's intentions will be more clear when an acting chair is named.

Champ foresees three potential possibilities for the new chair, someone from capitol hill, a person with a prosecutorial background or someone from an advocacy group or think tank. If the next chair comes from capitol hill, that could signal prioritizing unfinished business from the Dodd-Frank Act. A prosecutorial background would indicate a focus on enforcement. A chair from the world of think tanks and advocacy would mean that new rulemakings would be a focus.

The most likely acting SEC chair will be Allison Herren Lee, who currently serves as commissioner. She is one of several candidates for the permanent post and is being discussed as less likely than the two favorites: former U.S. Attorney for the Southern District of New York Preet Bharara and former Commodity Futures Trading Commission chief Gary Gensler. Bharara would bring a prosecutorial background and approach while Gensler brings a focus and expertise in rulemaking. 

Biden is expected to look at a progressive candidate to head up the Labor Department, with Michigan Representative Andy Levin and California Labor Secretary Julie Su among the frontrunners. Levin may face complications being from a toss-up district with a special election potentially reducing the Democrats’ slim margin in the House. Other names in the mix include former Obama Labor Secretary Tom Perez and AFL-CIO Chief Economist Bill Spriggs It has also been reported that Vermont Senator Bernie Sanders has expressed interest in the position.

“The big question is whether the scope of an investment advisor's fiduciary duty comes back under consideration by the SEC,” Champ says, “In the last Democratic administration, the Department of Labor paid a lot of attention to fiduciary duty and that's an area that you could see renewed attention from the administration.”

The CFPB should be among the venues where the stark differences between the 45th and 46th presidents are evident. The decade-old agency was created as the brainchild of Senator Elizabeth Warren in the aftermath of the great recession when Biden was last in the White House as vice president. Created as part of Dodd-Frank it was dormant under the deregulatory four years of Trump and now is set to reemerge in a new landscape.

“It's a pretty safe bet that CFPB will be more active under a Biden administration,” Champ says. 

In the four years since Democrats controlled the executive branch, the structure of the CFPB has shifted after the Supreme Court ruled the structure unconstitutional when Trump wanted to fire the head of the agency. This allowed Trump to undermine the agency but now will allow the Biden administration to wrestle control back easily.

“Everything I've been seeing and reading about both [President-elect] Biden and [Vice President-elect] Harris says that their goals and objectives are to help the working person and inventors save and get control of their finances,” McGrew says. “So with any department within the government that has a direct impact on consumers and investors we could see increased activity.”

This article originally appeared on Forbes.


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