The continuing government shutdown has left federal agencies scrambling. Short-term, tax refunds and passports could be delayed being issued, but the long-term implications could have dire repercussions for potential policies such as the Securities and Exchange Commission’s Regulation Best Interest standard, which, before the shutdown, was due out sometime this year.
In fact, some experts believe Reg BI may be impossible to establish and enact under the current conditions of the administration and the government shutdown.
Reg BI Gets Shutdown
James Cox, professor of law at Duke University specializes in corporate and securities law. Cox has spent years studying market regulation, corporate governance and securities regulation cases, and he believes Reg BI may be a futile effort for Clayton and the SEC to try to pass under current circumstances.
“People have been clamoring for it, but I think it would be very easy for Jay Clayton to say. ‘Gee, this has all gotten so complicated. Look, we have to coordinate and see what Labor is going to do,’ Cox said. “All of that makes sense, but it’s going to drag it out.”
Because of the delays caused by the shutdown, it’s possible that the commission and its two new commissioners will revisit parts of the rulemaking process.
“I think what’s going to have to happen is that they’re going to go through the whole rulemaking proceeding again,” Cox said. “Again, open up the record for comment, rejigger the rule and correct the administrative parts of it. That’s an elaborate process.”
It’s not outside the realm of possibilities for Clayton and the SEC to put off Reg Bi until a new administration takes control in 2021, Cox said.
“I believe that what’s going to happen is the SEC comes back, there’s so much activity, this thing gets shoved aside and all of a sudden we are in the campaign season and we’ll just have to wait and see what the new administration wants to do,” Cox said. “There’s going to be a lot of foot-dragging in this process.”
The continuing popularity of populist movements from the right and left is more likely to rule in favor with pro-investor policies, especially when there’s already a distrust of Wall Street lingering from the Great Recession.
Cox expects that will fuel election-season campaigns, citing Elizabeth Warren’s tough stance on Wall Street.
“You can run against Wall Street,” Cox said. “This is something that is going to be part of the campaign rhetoric.”
Too Tough Or Not Tough Enough?
With pro-investor groups shouting that Reg BI isn’t tough enough, and industry interest groups saying it’s too complicated, Cox said the proposal is likely to stall.
“The industry will keep pushing to delay Reg Bi,” Cox said. “All of these groups are all yelling that there is something wrong with the rule, which plays right into the hand of the people who didn’t want to do anything.”
Cox doesn’t see that changing until a new administration comes in and makes passing a best interest standard a priority.
In the absence of a federal best interest standard, Cox said FINRA will continue with its current suitability standards.
“This is going to be dependent on what the big brokerage firms that have investment advisory services, as well, feel is in their best economic interest. I’m going to think that that’s going to be maintaining the status quo,” he said.
The ramifications of these delays are yet to be determined, but as the shutdown continues, the possibility of Reg BI being thrown into hibernation are growing more and more likely.
“I’ve never seen something that had the rug pulled out from underneath it as quickly as this one did,” Cox said comparing Reg BI’s fate to the vacated DOL rule. “It may not have a quiet death, but it’s going to have a long sleep.”
AdvisorNews Managing Editor Cassie Miller may be reached at cassie.miller@Adnewsfeedback.com. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.