By: Anya Coverman, Senior Vice President of Government Affairs and General Counsel at the Institute for Portfolio Alternatives
The Biden administration’s picks for several key posts – including the helm of Department of Labor, the Securities and Exchange Commission and the Treasury Department – put a wide array of policy implications for the alternatives industry into play.
Lessons from Yellen’s Confirmation Hearings
While Senate Republicans have questioned Biden’s economic proposals, there was widespread support for Janet Yellen, his now-confirmed Treasury Secretary. Janet Yellen won unanimous approval from Democrats and Republicans on the Senate Finance Committee and was confirmed with an 84-15 vote.
There was one clear takeaway from Yellen’s confirmation: The focus of her policy work will be COVID-19 relief and recovery for the foreseeable future.
The hearing was initially thought to be a good indicator of what to expect from other confirmation hearings. However, a smooth confirmation for Yellen, who has a track record filled with pragmatism and pedigree, does not guarantee Gary Gensler, Biden’s nominee to fill the SEC chairmanship vacated by Jay Clayton in December, will receive the same treatment. Marty Walsh, the administration’s pick for DOL Secretary, also made it through a confirmation hearing relatively unscathed.
While there is potential for the nominees to miss, assuming both pass the Senate confirmation hearings with the narrow 50-50 “majority” held by Democrats, our industry can look forward to working with Gensler and Walsh to identify ways financial markets can be safely improved for the benefit of investors.
Expectations from Gensler’s SEC
The efforts to harmonize the public and private market regulatory frameworks were a hallmark of the SEC under Clayton over the past four years. Clayton focused on ways to improve retirement outcomes for Mr. and Mrs. 401(k), through financial advice standards, private offering modernization, proxy reforms, and other efforts. Improvements and modernization of the financial system have and should always result from due diligence and debate to arrive at the best solution for Americans. We expect this discourse to continue to be robust.
The focus on broker-dealers and financial advisory firms will be one item on a long list of priorities. For example, Nominee Gensler’s unique understanding of the market for digital assets will almost certainly ensure that cryptocurrency is a focus for a Biden administration’s SEC.
However, in his role as Maryland’s Financial Consumer Protection Commission chairman, Gensler recommended the state pass a fiduciary standard, which ultimately failed in the state legislature.
With that context in mind, it’s likely the SEC may try to revise Regulation Best Interest, whether through new rulemaking or regulatory interpretation. The Democrats don’t want conflicts of interest to be resolved through disclosure alone, and we expect that to be a major topic of debate at the SEC and congressional hearings, once this conversation rises to the top.
Revising Regulation Best Interest might be a priority but it likely will not be easy or fast to find a resolution. It will take work and time, require comment periods and debates, and ultimately, the eventual changes might not be sweeping. However, meanwhile, the SEC could ramp up enforcement, which will be worth watching in the early days of Gensler’s term.
We also expect Environment, Social and Governance (ESG)-centric reforms to take on a heightened precedence, both at the SEC and the DOL. On the campaign trail, President Joe Biden called climate change “the number one issue facing humanity.” There are actions both the SEC and DOL can take to address policies impacting ESG investing.
Massachusetts’ Marty Walsh and the DOL
As the industry watches what happens with Regulation Best Interest, it’s also worth noting that the Biden administration has decided to allow the DOL’s new investment advice exemption go forward, which was designed to harmonize with Regulation Best Interest. However, this initial indicator comes with a big caveat as DOL said in a press release that it may revisit the test that is currently used to determine who is an ERISA “fiduciary.”
Before deciding to allow the advice exemption to take effect, the DOL conducted a number of outreach meetings with trade groups in the initial weeks of the Biden administration. Ultimately, DOL’s decision came as a surprise. Speculation in January was that the advice exemption would be delayed to allow Walsh’s DOL to architect its own version. This speculation only seemed strengthened by the Biden Chief of Staff Ron Klein’s memorandum to agencies to consider delaying rules that did not take effect prior to President Biden’s inauguration.
This decision, for now, turns the attention of the industry to state-level rulemaking and enforcement of fiduciary standards. For example, the efforts of Massachusetts lawmakers to pass and enforce a stricter fiduciary rule in the state legislature. There have also been rumblings that the DOL may release FAQs on the advice exemption and/or model forms.
With little track record on the issue, any stance on investment advice and sales standards may be less a hallmark of Walsh’s efforts and more driven by nominations to fill the ranks of the DOL below him. So far, Biden has selected Ali Khawar to serve as the next Deputy Assistant Secretary.
Khawar had previously served as a career official at the DOL and would have worked both on the federal fiduciary rule efforts when Biden was vice president as well as on the recent Investment Advice Exemption. Based on these efforts, he is fluent in the rulemaking process and is now in a position to put his own stamp on sales activity. His influence will only be magnified if the DOL decides to reopen the rule for determining “fiduciary” status or some of the traditional exemptions that brokers, agents, and other salespeople have relied upon.
Our Industry Plays a Critical Role in Shaping Policy
It’s critical that our industry engages in constructive dialogue with the new faces in Washington as we watch Yellen, Gensler and Walsh’s early moves – as the new administration to make a significant mark on our economy and the financial services industry as we begin to recover from the pandemic.
Anya Coverman is senior vice president of government affairs and general counsel at Institute for Portfolio Alternatives where she leads all public policy and advocacy efforts.
The views and opinions expressed in the preceding article are those of the author and do not necessarily reflect the views of The DI Wire.