Fiduciary, Best Interest, or Something Else?
The election will determine the next move in the ongoing battle over the regulation of advice.
Everyone is sick of this topic. They should be. Policymakers have been arguing about fiduciary duties, conflicts of interest, and standards of conduct for advisors for years. They have been arguing with each other—across agency and political party lines—and they have been arguing with industry. Not only that, after several false starts, regulators and advisors finally implemented a new standard: Regulation Best Interest. No matter which way the election goes, the fight over fiduciary duties is far from finished. Advisors and investors need to pay attention to what happens in November and what that means going forward.
First, a quick review of where we are today. Everything is a confusing mess. Regulation Best Interest, which covers brokers’ recommendations on securities, has been in effect since June, but brokers are still figuring out exactly what it will mean and what the SEC will look for as it begins enforcing it. Meanwhile, the Department of Labor has proposed more rules to align advice on IRAs and 401(k) rollovers to Regulation Best Interest for both brokers and Registered Investment Advisors—except, of course, in cases where the rule does not apply, which hinges on whether a relationship is, or will be, ongoing. The DOL had a hearing two weeks ago on the proposal; industry representatives said the rule was too tough, consumer groups said it was too lax, and everyone said it was unclear when a rollover recommendation would trigger fiduciary status under the rule.
If you are not confused yet, this summary does not even cover insurance agents, who are covered by an increasingly divergent set of state laws. Meanwhile, insurance agents selling fixed indexed annuities, as well as other products that are not securities, to IRA investors can probably avoid following the DOL proposal, but some of their trade associations are worried that they might qualify as fiduciaries under the rules.
The good news is that the election will probably give us clarity and direction on these issues, but what that clarity looks like depends on the three most likely outcomes we see. Assuming control of the House of Representatives is not competitive—which is what the polls tell us, but the Senate could potentially flip from Republican to Democratic—we have these possible scenarios.
In the first scenario, President Donald Trump wins reelection but faces a Democratic House, and possibly a Democratic Senate. (In scenarios in which the president wins reelection, it is unlikely Republicans lose control of the Senate.) Either way, the president’s administration does not need Congress to amend any laws to complete its regulatory push on standards of conduct. The DOL will probably finalize its rule, and we will eventually get more clarity on what Regulation Best Interest means and does not mean. The upshot will be that advisors to brokerage accounts, as well as IRAs and defined contribution plans, will need to ensure they do not have any conflicts, but most firm-level conflicts created by revenue-sharing arrangements and the like will be permitted. Advisors, at least those that plan on entering an ongoing relationship with a client, may need to justify rollover recommendations if the administration sticks with its existing proposal.
In the second scenario, Joe Biden wins the White House but faces a divided Congress with Republicans in control of the Senate and Democrats in control of the House. Biden will attempt to use the executive branch to raise standards of conduct for advisors, but current law will stay the same and largely constrain those choices. He might also need to decide whether to focus on rolling back or modifying regulations (such as the newly proposed fiduciary rule) that the Trump administration finalizes before the end of the transition. Moreover, the Senate may not be willing to confirm further left appointees to the DOL or Treasury that might help advance some of these goals. Nonetheless, Biden will appoint a new chair of the SEC when Chair Jay Clayton’s term expires early next year. Democrats will have three-to-two advantage among the SEC’s commissioners, and a high priority for Democrats will be to either rewrite Regulation Best Interest or at least amend it while enforcing it more aggressively to raise standards of conduct for advisors.
The third scenario would lead to the most change. If Biden wins and Democrats control the House and Senate, they might well amend the laws that govern advice: the Employee Retirement Income Security Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act. Democrats are clear about what they would want out of making such amendments: a uniform standard of conduct that elevates the standards for RIAs, aligns brokers’ standards with these new tougher rules, and de facto prohibits most conflicts of interest. These rules would apply across different account types and constrain future administrations from relaxing the standards of conduct. Of course, Republicans will be firmly in opposition to such changes, and the minority party has historically had tools—most notably the filibuster—to block legislation. However, it seems likely that the filibuster, which both parties have weakened repeatedly over the past half-decade, is on its last legs.
Many other important policy issues are on the ballot this November, and many of these stir more emotions than a seemingly endless fight about standards of conduct. However, advisors and investors should be aware that a lot of the ongoing confusion about the current patchwork of regulations and inconsistencies across different account types will likely be clarified by this election.