Journal of Financial Planning: August 2018
It’s been a long and winding road—politically—since the Obama-era Department of Labor (DOL) finalized its fiduciary rule in June 2016. Full of soap opera-esque twists and turns, many believe the Fifth Circuit Court of Appeals’ decision to kill the DOL rule, combined with the recent proposal by the Securities and Exchange Commission (SEC) to effectively co-opt the fiduciary rulemaking process, means the end could finally be in sight. But the political reality suggests that the industry may have to wait another year—or even longer—before the path is ultimately clear.
The Long and Winding Road
The fiduciary rule as a political lightening rod is not a new phenomenon. Two months after the Obama DOL published its fiduciary rule in April 2016, the Republican-held U.S. House and Senate both passed a resolution overturning the rule. President Barack Obama vetoed that legislation (the 10th veto of his presidency) but a federal lawsuit followed. Though the DOL won early legal challenges, the 2016 election changed everything. Subscribing to the old Washington truism that the easiest way to kill a federal rule is to delay it, shortly after his inauguration, President Donald Trump signed an executive order requiring the DOL to delay implementation of its fiduciary rule until June 2017 and to review the regulation’s potential negative impact on investor protection, litigation, and product pricing.
The DOL eventually announced that it would delay implementation of key provisions until July 1, 2019. Eight months later, on March 15, 2018, a three-judge panel for the Fifth Circuit Court of Appeals vacated the regulation, arguing the Labor Department overstepped its authority. That led to a three-month purgatory of sorts, where the DOL rule was no longer alive, but not quite dead, either. The full Fifth Circuit Court of Appeals ended that uncertainty on June 21, 2018 when it affirmed the March ruling. But before the court acted, the SEC proposed its less-prescriptive Regulation Best Interest.
An End in Sight?
On April 18, 2018, the SEC voted 4-1 to move ahead with its “best interest” rule. To some observers, it might seem the SEC’s strong, bipartisan vote represents an end to the uncertainty financial planners and industry stakeholders have endured over the last 26 months.
Not so fast.
The 4-1 vote tally was misleading. Democratic Commissioner Robert Jackson Jr. made it clear that he reluctantly supported the draft regulation and, in fact, opposes it. Jackson decried the draft’s “ambiguous” language but voted in favor of the Commission forging ahead with a public comment process, arguing “The need for SEC action in this area has been made all the more urgent by the Administration’s refusal to implement the crucial protections put in place by the [DOL] in 2016.”1 With Commissioner Jackson unlikely to support a final rulemaking, Republicans will need to find a majority on the SEC to get the rule across the finish line from within their ranks. With a 3-2 majority, one would imagine this shouldn’t be a heavy lift.
Again, not so fast.
With Commissioner Michael Piwowar’s announced departure from the SEC this July, the agency will have only four commissioners: two Democrats, Commissioners Kara Stein and Jackson, and two Republicans, Chairman Jay Clayton and Commissioner Hester Peirce. (Stein’s term expired on June 5, 2017, but she may stay on at the Commission for an additional 18 months. She will depart the SEC by early December 2018, unless she is nominated to serve an additional term.)
The SEC will, in the near-term, be deadlocked. Barring an unforeseen breakthrough in the nomination logjam in the Senate (more on that later), the Commission will be evenly split between Republicans and Democrats for at least three months after the public comment period on its best interest rule ends. The long-term picture is even less clear: Commissioner Jackson’s term expires in June 2019. The White House and the U.S. Senate will therefore face at least two, but up to three, SEC nomination fights over the next 18 months.
With the 2018 midterm elections on the horizon and the start of the 2020 presidential campaign not far behind, Senate Democrats—several of whom are potential White House contenders—will use every tool at their disposal to seek to prevent the SEC from finalizing its rule, including, of course, erecting obstacles to confirmation of new SEC commissioners who would approve the rule.
Even in the absence of political melodrama, there also is the Senate calendar with which to contend.
The Nominations Crunch …
President Trump announced on June 1 his intention to nominate Elad Roisman, former Republican chief counsel to the U.S. Senate Banking Committee, to succeed Commissioner Piwowar. Even with the cancellation of the Senate’s August recess, and Senate Majority Leader Mitch McConnell’s (R-Ky.) desire to focus on nominations during the extended summer work period, it is unlikely Roisman will be confirmed by the chamber before the November 2018 midterm elections, or before Commissioner Stein departs in December.
If Congress’ upper chamber actually remains in session all of August, it will have, at most, 85 days left on its legislative calendar before the end of October, which may seem like sufficient time to approve of the president’s nominees for the SEC. The data suggests, though, that this is not the case. Though the timeline for presidential nominees receiving Senate confirmation has been growing longer for decades, it has been remarkably sluggish in the Trump era.
According to the Brookings Institution, in 1981, the GOP-held Senate took an average of 30 days to confirm President Ronald Reagan’s executive branch nominees. That figure increased to 41 days in 1993 with President Bill Clinton and a Democratic Senate, but by 1999, with Republicans in charge on Capitol Hill, the process had slowed to 87 days. National Journal found the process improved under President George W. Bush, when nominations took just 45 days from start to finish, but the process deteriorated again under President Obama. Obama nominees languished on the Hill for nearly 70 days.
It has taken an average of 84 days for Trump nominees to make it through the confirmation process in a Republican-held Senate. By the end of President Trump’s first year, 57 percent of positions in need of Senate confirmation had been filled, compared to 74 percent for President Obama and 80 percent for President George W. Bush during their first years in office. As of mid-May of this year, President Trump had 127 executive branch nominees awaiting confirmation. (There also were more than 200 positions for which the administration had not named a nominee.)
The recent slog has also weighed on noncontroversial nominees to financial services regulatory bodies that have no contentious pending rulemakings. For example, the White House announced President Trump’s intention to nominate Jelena McWilliams to the Federal Deposit Insurance Corporation on November 30, 2017. It took almost six months for the Senate to confirm McWilliams, who had received almost unanimous approval from Democrats and Republicans alike in the Senate Banking Committee. There was no effort to tie McWilliams’ nomination to broader policy fights, as there most surely will be for any SEC nominee.
… With Some Political Punch
In advance of an election where their party could realistically gain Senate seats, Democratic leaders will do all they can to slow the nominations process even more, particularly when it comes to the SEC. The closer the Senate gets to the midterm elections, the more likely progressives, including Sen. Elizabeth Warren (D-Mass.), are to try to use any SEC nomination as a political proxy fight over the fiduciary rule.
While the issue is complex, and unlikely to be one of the top concerns on voters’ minds when they enter the voting booth in 2020, the data suggests that, politically, the fiduciary rule is a wedge issue for Democrats. A 2016 Financial Engines Study found 77 percent of Americans favored the fiduciary rule.2 That figure grew to more than nine in 10 in a poll taken a year later by the same firm.3
Democrats also have no intention of allowing any nominations to move easily in August. Senate Minority Leader Charles Schumer (D-N.Y.) already has pledged that, during the summer non-recess, his party will use procedural maneuvers to bring up the rising cost of prescription drug and overall health care costs whenever their GOP counterparts raise nominations for any vacancy, in an effort to boost the Democrats’ chances at the polls in November. Schumer and the Senate Democrats are also likely to insist that the Senate follow historical precedent, which dictates that commissioners from opposing parties go through the confirmation process in tandem, if possible, further diminishing the likelihood of a quick confirmation process for SEC nominees.
That could leave the Senate with a lame duck fight. If the November elections result in the GOP keeping control of the chamber, the party might be able to push through Roisman’s bid, particularly if paired with a strong Democratic nominee to replace Stein. That would realistically require that the White House begin the process of naming Stein’s replacement in short order. As of this writing in late June, President Trump had not floated a name for Stein’s seat.
If Democrats pick up enough seats in November to elevate Senator Schumer to majority leader in January (and all they need is two) the SEC nomination fight and work on the “best interest” rule will last well into 2019 or even beyond. Democrats would insist that any attempts by the lame-duck Republican majority to push through confirmation votes would be tantamount to circumventing the results of the midterm elections. A bitter legislative battle would ensue.
So, while it is possible that the Senate confirms one or more new SEC commissioners immediately after the metaphorical steam is released from the system in the November elections—and, by extension, settles the fate of the fiduciary rule once and for all—the path to doing so is murky at best.
More Uncertainty Ahead
In an April 2018 poll conducted by the National Association of Plan Advisors following the Fifth Circuit Court’s ruling vacating the fiduciary rule, a plurality of respondents said they had little idea what would happen next, and it’s not hard to see why. The Fifth Circuit Court’s June ruling means financial planners won’t have to contend with the DOL rule, but given the plodding nature of all executive branch nominations, the reality of the Senate calendar, and a political environment that will only get more heated as the months bleed into 2019 and beyond, it’s likely they won’t have final SEC guidance any time soon, either.
- See Jackson’s public statement at www.sec.gov/news/public-statement/proposed-rulemaking-retail-investor-relationships-investment-professionals.
- See the March 2016 report, “In Whose Best Interest?” at financialengines.com/docs/financial-engines-best-interest-report-040416.pdf.
- See the April 2017 report, “In Whose Best Interest? (Part 2)” at financialengines.com/docs/financial-engines-best-interest-report-2-041817.pdf.