What Happens to SEC Broker Rule, Retirement Policy if House Flips?

If Democrats succeed in taking control of the U.S. House of Representatives in next month's midterm elections, chairmanship of key committees and subcommittees with jurisdiction over the Securities and Exchange Commission and the Labor Department will trade hands, giving Democrats power to try to advance more stringent consumer protections in the retail financial advice market.

Fivethirtyeight.com puts the Democrats' chances of flipping the 23 seats needed to gain a 218-seat majority in the House at 81.5 percent. The website also put Hillary Clinton's chances of winning the 2016 presidential election at 71.4 percent.

Should the Democrats win, Rep. Maxine Waters, D-CA, currently the ranking member of the House Committee on Financial Services, is expected to chair the committee, which has jurisdiction over the SEC.

Waters has led calls from Democrats to impeach President Trump. She was also a staunch supporter of the Labor Department's fiduciary rule during the Obama administration and has been critical of the SEC's proposal to enhance broker-dealers' standard of care obligations to retail investors.

Upon the SEC's release of Regulation Best Interest last spring, Waters and three other Democrat lawmakers called on the SEC and its Chairman, Jay Clayton, to advance a rule that "matches" the protections in Labor's fiduciary rule.

Comment letter to SEC

In September, Waters and 34 Democrats from both chambers of Congress submitted a comment letter to the SEC, alleging Reg BI "falls woefully short" of preventing some in the financial services industry to "game the system and choose a standard of care that allows them to put their interests and profit motives ahead of their retail clients." Senators Elizabeth Warren, Kirsten Gillibrand, Cory Booker, and Bernie Sanders, all said to be exploring a presidential run in 2020, were among the letter's co-signers.

The letter is critical of the SEC for taking a segmented approach in its proposed rules, which include separate proposals for broker-dealers and for fiduciary advisors.

"The best way for the SEC to protect investors and reduce confusion is require all brokers and advisers, regardless of their titles, to comply with the same fiduciary standard that puts their clients' interests first," the letter says.

The letter strongly implies that the Commission willfully undermined the enforcement standard proscribed in the Dodd–Frank Wall Street Reform and Consumer Protection Act, a bill passed in the wake of the financial crisis when Democrats controlled both chambers of Congress and the White House.

In crafting Reg BI, the SEC used a less specific subsection of Dodd-Frank to authorize the rules, which Waters and other Democrats claim resulted in watered down proposals.

"This decision has led to a less protective proposal for investors that applies two distinct standards: a best interest standard for brokers and a fiduciary standard for investment advisers, neither of which, as described by the Commission, matches the strong, enforceable standard set by Congress in 913(g)," the letter says, referencing the section of Dodd-Frank that gives the SEC authority to establish a fiduciary duty for broker-dealers.

A Chairman Neal may have more recourse on retirement issues

The SEC is expected to finalize a rule as early as the beginning months of 2019.

Were Democrats to take the House they would have little legislative recourse to block implementation of Reg BI. The Congressional Review Act gives Congress a timetable in which it can overturn administrative agency rulemaking.

But that route would require Democrats to take the Senate too, where a simple majority is required to overturn regulations under the CRA. It would also require a signature from President Trump.

A more immediate impact if Democrats win the House could be seen on the retirement policy front. Rep. Richard Neal, D-MA, ranking member of the House Ways and Means Committee, is one of the chamber's most experienced lawmakers on retirement issues.

Last year, Neal sponsored the Automatic Retirement Plan Act of 2017, which would require all but the nation's smallest employers to sponsor a defined contribution retirement plan.

Neal's bill does not mandate employer contributions and sets an automatic deferral rate at 6 percent of salary. The bill provides tax credits over five years to cover the cost of plan administration.

Neal also introduced the Retirement Plan Simplification and Enhancement Act of 2017, which exempts qualified retirement accounts with less than $250,000 in assets from existing required minimum distribution rules. It also expands the saver's credit to more taxpayers.

— Check out Valliere: 'Red-Hot' Economy Is Big Risk; Trump Is Favorite for 2020 on ThinkAdvisor.