This column was originally published for the Institute's Legislative Intelligence quarterly column.

This column focuses on the regulatory outlook for wealth managers and financial planners as the Biden administration begins to make key agency appointments and the 117th Congress gets underway.

Rollback of Trump Rules, Strengthening Investor Protection Top Biden Regulatory Agenda at SEC, DOL

No one may have expected former President Donald Trump’s Executive Order 13771 to be more than routine political bombast when it was announced days after his January 20, 2017, inauguration. The executive order called for a 2:1 ratio in new federal regulations. In other words, “If there’s a new regulation, they have to knock out two,” President Trump said after signing it.

Although a lightning rod for controversy over the next four years during his presidency, Trump kept his promise even though E.O. 13771 itself quickly faded into the background. The regulatory rollback across federal agencies, including the Securities and Exchange Commission (SEC) and Department of Labor (DOL) continued nonstop until a few days before the Biden inauguration.

The success of this de-regulatory effort means that instead of proactively pushing forward investor protection-oriented rules, much of the Biden administration’s next four years will be spent on rolling back the Trump rollback, as it were. As such, the financial services industry is likely to see a dramatically different regulatory emphasis on climate change disclosures, greater focus on regulating conflicts of interest, and significant expenditure of political capital by the Democratic-controlled Congress to tax wealthy Americans and even financial transactions.

However, it’s likely going to take a while before those changes translate into new laws or rules. How that activity impacts regulation of wealth managers and other investment fiduciaries over time remains to be seen, but one thing is guaranteed—the pace of change heading in the opposite direction will keep heads turning similar to a marathon Wimbledon match.

Although the change in regulatory climate by a new administration is a time-honored Washington tradition, four years ago it wasn’t clear at first how many of the executive orders signed with a flourish in the Trump Oval Office were more political theater than substance. Nor was it clear how seriously the new political leadership at the SEC, an independent federal agency, would take E.O. 13771. But an informal scan of the 46 major rules adopted by the agency over the course of four years indicates Trump-appointed SEC Chairman Jay Clayton took the order in earnest.

In fact, the ratio of knock-out rules to new SEC regulations was a near-perfect 2:1 ratio during the Trump era. During this four-year period, about 30 major de-regulatory rules were adopted by a divided SEC Commission—rules that carved out new industry exemptions and streamlined compliance requirements within existing rules—while 16 new regulations (including Regulation Best Interest) were adopted by the Clayton-run SEC.

Looking ahead to the next four years, although not every Trump-era rule at the SEC or DOL’s sub-agency regulating 401(k)-type plans, the Employee Benefits Security Administration (EBSA), is likely to be targeted, SEC Chair-nominee Gary Gensler and recently confirmed Labor Secretary Marty Walsh will have plenty of housekeeping tasks ahead of them. Reversing some of the Trump rules—and significantly modifying others—are tasks that likely will delay other Democratic priorities. As a rule of thumb, Democratic administrations often focus on enhancing investor protection in contrast to Republican administrations that encourage capital formation.

Congress

Congress is unlikely to play more than a limited role in making these changes. Although the Congressional Review Act (CRA) offers a streamlined approach for a new Congress to overturn previous administrative rules, it is likely to be constrained in this effort. One law firm estimates that more than 1,400 Trump-era rules are eligible for reversal, but the Democrat-controlled Congress is only likely to prioritize just 10 to 20 rules due to limited floor time for scheduling votes during the limited 60-day lookback available for using the CRA.

Still, one of the first efforts got underway in late March when the new chair of the Senate Banking Committee, Sen. Sherrod Brown (D-OH), introduced resolutions repealing SEC proxy policy rules that made it more difficult for shareholder activists to introduce proxy proposals at annual shareholder meetings.

With a 50–50 split in the Senate and Vice President Kamala Harris as the tiebreaker, few substantive changes in securities laws are likely for the next two years unless Senate Democrats overturn the filibuster rule requiring a 60-vote majority. However, wealth managers could see significant changes in pension and tax laws. Bipartisan agreement on pension reform is one of the few areas where legislative action by the 117th Congress is likely. In addition, using the budget reconciliation process, which requires only a simple majority vote, House and Senate Democrats are likely to roll back some of the 2017 tax cuts that significantly reduced corporate taxes and “wealth” taxes on individuals earning more than $400,000 a year.

Observers in the pension industry are confident that legislation dubbed Secure Act 2.0 (named after the last-minute bill that passed Congress two years ago, the Setting Every Community Up for Retirement Enhancement Act), will soon be re-introduced with key leadership on both sides ready to push it through Congress with lopsided vote margins similar to last time.

If re-introduced unchanged, pension advisors will find 2.0 chockful of savings incentives like its predecessor. The required minimum distribution age, pushed back to 72 in 1.0, would be increased yet again to age 75. Catch-up savings provisions would be available for individuals age 60 and older, and among many other retirement savings incentives would be flexibility in using participant assets to pay down college loans or make charitable contributions from individual retirement accounts. Look for re-introduction of this bill sometime this spring and a signing ceremony possible by the end of the year.

Financial Transaction Tax. A tax on securities transactions has been introduced in New Jersey and New York, countered by strong Wall Street opposition and threats to move trading centers out-of-state. However, the market volatility produced by high-frequency trading and, more recently, risks posed to younger day-traders, may add fuel to arguments by congressional supporters to impose a federal tax.

Securities and Exchange Commission

Former Goldman Sachs executive Gary Gensler, who ran the Commodities Futures Trading Commission (CFTC) during the Obama administration, is likely to be confirmed by the full Senate in mid-April. As chairman of the CFTC, Gensler pushed for greater transparency and stricter rules in the derivatives market, and is likely to pursue an aggressive pro-investor agenda at the SEC.

Reg BI. Although Gensler is not expected to try and dismantle Regulation Best Interest (Reg BI), a cornerstone of the Clayton regulatory agenda, the Biden SEC is likely to try and define “best interest” under the rule, provide further guidance on mitigating conflicts of interest, and transition the agency from the “educating” brokers phase of implementing Reg BI to actively enforcing the new market conduct rule early in his administration. Consumer groups also heavily criticized Form CRS, the disclosure form highlighting differences between the brokerage and advisory business models, and it is possible revisions could be seen to this form as well.

Advisors who also are licensed as insurance producers selling annuities should keep track of the related state insurance rule that is being adopted at a fairly rapid pace by the states. Compliance with Reg BI or federal or state securities advisor laws also would meet this updated suitability standard under state insurance law.

Best Execution Issues. The highly publicized GameStop short sales battle and related market volatility resulting from discount broker Robinhood’s attraction to day-trading millennials are likely to pressure Gensler to do something about it, whether substantive or not. “What does it mean when balloons and confetti are dropping and you have behavioral prompts to get investors to do more transactions,” Gensler asked in response to questions at his Senate Banking hearing. He didn’t answer his own question, but a Gensler-run SEC is likely to take a hard look at Robinhood’s online Las Vegas-like inducements to trade as well as online chat rooms and the like. More substantively, the SEC may renew its attention to the common brokerage practice of payment for order-flow, which could build on rules approved in 2018 requiring more information on how broker–dealers handle investor orders.

ESG. Regulatory issues related to environmental, social, and governance (ESG) investment strategies, which are rapidly gaining traction with institutional investors and the wider public, will be front and center for the Biden SEC and already are under the helm of acting SEC Chair Allison Herren Lee. Lee recently invited public comment on 15 different ESG topics in anticipation of further SEC disclosure activity in this area, for both public companies and advisory firms.

The SEC’s Asset Management Advisory Committee in December 2020 also considered a number of recommendations to the SEC, including uniform standards for disclosing ESG risks by corporate issuers as well as in product strategies (i.e., mutual funds and exchange-traded funds), and to develop best practices with clear descriptions of each product’s strategy including nonfinancial objectives such as environmental impact or adherence to religious requirements. Expect a Gensler-run SEC to pick up the mantle and run hard with this one.

Continuing IAR Education. Long a backwater issue for the SEC and state securities regulators, the issue of continuing education (CE) requirements for investment advisers surfaced recently, first in a proposal by the SEC two years ago, later withdrawn, and about the same time by the states. Under a model rule adopted by the North American Securities Administrators Association (NASAA) in November 2020, states soon will be adopting a rule requiring 12 hours of annual CE by investment adviser representatives (IARS), half of the hours focused on products and markets, the other half on regulation and ethics.

Although a state requirement, the model rule also will apply to IARs of SEC-registered firms because federal securities law permits state regulators to “qualify” all IARs.

Department of Labor

The U.S. Department of Labor, once it has a nominee installed as assistant secretary for EBSA, is expected to revisit—among others—two controversial rules approved in the final days of the Trump administration addressing ESG investing by plan sponsors and conflicted investment advice by fiduciary advisers to 401(k)-type retirement plans.

ESG. Earlier in March the Biden DOL announced it would not enforce two Trump-era ESG-related investment duties or proxy voting rules, which took effect in late January. President Joe Biden made climate change and other ESG issues a key part of his agenda, flagging the ESG rule for review in the near future.

Prohibited Transactions. The DOL prohibited transaction exemption (PTE) affecting fiduciary advisers providing retirement advice to plans or participants, or PTE 2020-02, was subject to a new, temporary nonenforcement policy announced by the Biden DOL. Although the PTE was allowed to go into effect as scheduled on February 16, 2021, a previous temporary rule, Field Assistant Bulletin 2018-02, will serve as the primary safe harbor for conflicted advice until further notice.

It’s also anticipated that EBSA will look at revising the five-part definition of an investment fiduciary under sec. 3(21) of the Employee Retirement Income Security Act of 1974 (ERISA), and possibly sweep in some of the brokers and insurance producers who previously were tagged fiduciaries under the Obama fiduciary rule.

Taken together, wealth managers should keep an eye not only on the markets, but on anticipated compliance changes to their practices over the next four years.

About Legislative Intelligence Update

The purpose of this update, prepared by Potomac Strategies for Investments & Wealth Institute, is to give members legislative, regulatory, and other public policy intelligence and analysis. It is strictly informational and should not be relied upon as legal or compliance advice. Investments & Wealth Institute, as an education and credentialing organization, does not lobby Congress and generally does not advocate for any particular legislative or regulatory position either on its own or through its relationship with Potomac Strategies.

If you have questions after reading this update, please contact the Institute. 

Duane Thompson, AIFA^®, President, Potomac Strategies, LLC
Duane is president of Potomac Strategies, LLC, a legislative and regulatory consulting firm founded in 2009. He has 25 years of experience specializing in analysis and advocacy work related to federal and state regulation of financial advisors. Duane is a periodic contributor to the Investment and Wealth Institute’s flagship publication, Investments & Wealth Monitor, as well as Prudent Practices for Investment Advisors, a publication of Fi360, Inc., a Broadridge company.

Duane holds the Accredited Investment Fiduciary Analyst^® designation, a Master's in journalism from the University of Missouri-Columbia, and a Bachelor of Arts with a double-major in history and studio art from Principia College in Elsah, Ill.