The financial services industry is awaiting final versions of several significant regulations in the coming year, including the Department of Labor’s latest fiduciary rule, an independent contractor proposal and the Securities and Exchange Commission’s cybersecurity mandates.
The final rules will arrive during a presidential election year, and it remains to be seen whether the Biden administration will have the chance to follow through on second term priorities or whether his Republican challenger (which could be former President Donald Trump) will chart a different course.
The DOL’s latest version of its fiduciary rule will likely come out this spring, and it is a top priority for advisor and investor advocates alike.
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The proposed rule was released in October, touted as the latest attempt by the Biden administration to combat “junk fees.” After public hearings earlier this month, the rule’s public comment period will close at the end of the year.
Renee Barnett, vice president of federal regulatory affairs and senior counsel at the Financial Services Institute, called the rule one of 2024’s major developments, and worried it would drive up costs and limit access to retirement products and services for “Main Street Americans.” But the DOL’s expected rule clarifying independent contractor status will have an even greater impact on FSI’s members, she said.
The DOL proposed the independent contractor rule in October 2022, meant to change the employment status of independent contractors.
Then DOL-Secretary Marty Walsh said such misclassification could deprive workers of federal labor protections, including their “full, legally earned wages,” but Barnett argued a final rule, if unchanged from the proposal, would threaten an advisor’s independence and ability to “serve his or her clients through a business built through his or her entrepreneurial efforts.”
Joseph Peiffer, a founding partner of Peiffer Wolf Carr Kane Conway & Wise and the current president of the Public Investors Advocate Bar Association, said he’s hoping the DOL’s final fiduciary rule comes down hard.
“Any rule that makes everyone that touches retirement money a fiduciary is a success,” he said on how he’d assess the final iteration. “Any rule that allows people to define themselves as salesmen while advertising as fiduciaries is a failure.”
Peiffer and PIABA are also watching how the SEC will react to recommendations from its Investor Advocate Office that the commission temporarily suspend mandatory arbitration clauses in RIA client agreements. The SEC determined about 61% of RIAs working with retail clients included such clauses, while 97% of the 60% of clauses mandating a specific venue for arbitration did not consider the client’s location or place of business.
“The question is whether the SEC is going to do anything or not,” Peiffer said. “Are they going to implement what the Investor Advocate has suggested?”
The data in the Investor Advocate Office’s report was largely pulled from a congressionally-ordered analysis from last June on the mandatory arbitration issue, and it’s a timeline Peiffer hopes will repeat itself this year when the commission turns its focus toward unpaid FINRA arbitration awards.
According to Peiffer, Congress appropriated funds for the SEC to study the scourge of unpaid awards. According to Peiffer, one in every four dollars awarded to harmed clients goes unpaid. After that analysis is released, Peiffer hopes the commission will then take steps towards solving the issue.
Dan Bernstein, the chief regulatory counsel for MarketCounsel, expects to see more focus on the SEC’s marketing rule, which reached its compliance date last winter. Some firms are undergoing sweep examinations related to the rule, which Bernstein said is typically a precursor to guidance and risk alerts ameliorating thorny aspects of released rules.
“I’m hoping for more FAQs with regard to hypothetical performance, such as ‘who can you show hypothetical performance to? Can it be someone who’s more of a retail client, or do they have to be really sophisticated?’” Bernstein said. “I’m hoping for more on testimonials. How can you present them, what do you need to do with negative testimonials; is it cherry-picking, where you only show the good?”
MarketCounsel Chief Litigation Counsel Sharron Ash told WealthManagement.com she was watching M&A activity in the RIA space. As more advisors jumped from RIA to RIA (as opposed to a leap from brokerage into the independent space), Ash expected broader restrictive covenants, buttressed by a spate of non-compete clause bans in several states.
But even these bans often keep non-solicitation restrictions intact, and that could endanger clients’ ability to freely follow advisors who are locked up by their acquiring firm, Ash said.
“Ironically, people who moved from the brokerage to the independent side of the industry cite wanting to serve clients, and it was very client-centric reasoning that got them there,” she said.
“Now, with the continued acquisitions, that client freedom of choice is taking a back seat to the desire to protect the business interests that come out of those acquisitions."
The fact that these rules are being finalized so close to the presidential election make it more possible that a new Republican administration could reverse or not follow through on them, but Peiffer expressed his hope that the DOL fiduciary rule, for one, would transcend the rancor.
“I suppose you hesitate to say anything isn’t a partisan issue anymore, because it seems like everything is. But there are Republican investors just like there are Democratic investors,” he said. “So I am hopeful that regardless of what happens in 2024, we’ll get this rule, it’ll be a strong rule, and it’ll be able to be enforced.”