Jay Clayton came out punching for the SEC’s new Best Interest Rule this week. The rule has faced a lot of criticism from all sides, but was finally approved internally. Now, Clayton is combatting critics. In particular, the SEC chairman is defending the harshest criticism of the rule—that it does not define “best interest”. Clayton argues that using a principles-based framework, which relies on a contextual definition of best interest depending on the situation in question, is a well-trod regulatory path and one that is superior to creating a definition for every scenario.
FINSUM: We don’t love this rule, but we agree with Clayton on this point. Having a highly defined rule leaves it more vulnerable to loopholes. With the current contextual structure, one has to worry whether their behavior could be considered “best interest” depending on an amorphous standard. It seems like a better way to keep bad actors in line.
In what comes as a real eye opener, the House passed a bill this week that would block the SEC’s ability to enforce its new fiduciary rule. The driving force behind the rule, you guessed it, Maxine Waters. The measure came as part of a broader bill regarding the funding of federal agencies. The bill now heads to the Senate, where it will likely be changed and then re-voted on. Democrats, who are in charge in the House, are worried the SEC’s rule does not go far enough to protect investors.
FINSUM: The interesting thing here is that this bill is likely not totally dead in the Senate. We wonder how hard the Democrats will stick to this part of it.
The White House is considering a new plan to cut capital gains taxes. The administration is seeking to do so by indexing capital gains rates to inflation, a move that would significantly help wealthier Americans lower their tax bills. Interestingly, the White House is considering advancing the bill in such a way as to bypass Congress. The impetus for doing so is that they want to make sure the changes hit before the 2020 election.
FINSUM: This is quite logical and could have a big impact. Imagine you could exclude 2% of an annualized 8% gain from all capital gains taxes!
The SEC’s Best Interest rule is still being digested by markets. It contains some potentially big changes, including the definition of fiduciary duty. The DOL is yet to release its new Fiduciary Rule, but it will reportedly work smoothly alongside the SEC’s rule. One of the questions that has arisen in this context is whether under the new rules it may be increasingly easy for fiduciaries to accept commissions. The idea of fiduciaries accepting commissions is generally a big no-no in the current paradigm, but top industry lawyers like Fred Reish see this loosening under the new rules. In particular, it is seeming as though broker-dealers could accept commissions when offering fiduciary advice, but the jury is still out on RIAs.
FINSUM: This is just one of the many new changes that are on the horizon. The combination of new rules will likely create grey areas, risks, and opportunities that are not yet apparent.
RIAs all over the country have been quite confused over the last couple of weeks. Ever since the SEC’s infamous change from “and” to “or” regarding fiduciary duty and a new ban on the use of the word for certain advisors, RIAs have been unsure about whether they are allowed to called themselves “fiduciaries”. On the one hand, the ban of the term’s use for certain groups made it seem like they could not use it, while on the other the technical definition of their duty had changed such that they no longer need to be fiduciaries to in order to comply with the SEC’s rules on defining an RIA. The SEC cleared up confusion late last week, however, saying that RIAs could continue to call themselves fiduciaries as the ban on use of the word does not apply to them, and nothing has changed to limit their use of the term.
FINSUM: While many RIAs are unhappy with the recent changes because of how they will water down the RIA brand, at least the SEC was very quick to clear up this confusion.
RIAs need to ready themselves for an onslaught of broker marketing. Changes to the SEC’s rules on fiduciary advice means brokers can now say that they put client interests ahead of their own. This is leading industry experts to expect a marketing bonanza that is expected to help brokers capture market share back from RIAs, who are having their niche diluted by the changing rules. Accordingly, RIAs will need to recraft their narrative, changing marketing language in order to re-differentiate themselves from brokers.
FINSUM: The big loser in the new regulatory push has been RIAs, as they have essentially had their turf artificially eaten away from some shifts in language by the SEC. That said, they have been gaining market share for years, so are in a better position to begin with.