Legislation that Kills Fiduciary Rule and Reforms SEC Faces Uncertain Future
The full U.S. House of Representatives passed the Financial CHOICE Act this month. While its passage may be welcomed by those who want to see the DOL Fiduciary Rule killed and the SEC’s use of administrative hearings curtailed, both they and opponents should note that it has a long way to go before becoming law.
The Financial CHOICE Act (H.R. 10) passed the House on June 8 by an almost straight party-line vote of 233 to 186. In addition to repealing the Fiduciary Rule, the bill allows private parties to terminate administrative hearings, makes the rulemaking process more difficult, enacts changes affecting private fund managers, and imposes an enforcement ombudsman and enforcement advisory committee on the SEC. Beyond that, it guts much of the Dodd-Frank Act, including retroactively repealing the authority of the Financial Stability Oversight Council to designate firms as too big to fail, and repealing the Volcker Rule.
But before it becomes law, there are two big hurdles the bill needs to jump over: Getting through the U.S. Senate, which may offer up a bill or bills of its own; and then, assuming the Senate does not simply adopt the House bill outright, getting whatever comes out of the Senate through a joint House-Senate conference committee. If things reach that point, proponents of the bill may be justified in cheering and opponents of the bill may be justified in feeling alarm.
Chances of passage
Currently, the website govtrack.us, which tracks legislation, gives the Financial CHOICE Act a 35 percent chance of being enacted. While that figure means the bill has a less than even chance of becoming law, it should not be forgotten that a few weeks ago, prior to the bill passing the House, govtrack.us gave the Financial CHOICE Act a 1 percent chance of being enacted.
But not all agree. "I don’t see the likelihood of the CHOICE Act being enacted in its present form as even 1 percent," said Mayer Brown government affairs adviser John Mirvish. "There’s so much contentious stuff in there. I don’t see it getting 60 votes to pass the Senate."
Perhaps a more likely possibility is that the Senate will pick and choose the parts of the Financial CHOICE Act it likes, and simply pass those. Senator Mike Crapo (R-Idaho), chairman of the Senate Banking, Housing and Urban Affairs Committee, "is unlikely to consider the CHOICE Act," said Investment Adviser Association vice president for government relations Neil Simon, "but he is open to more ‘discrete’ Dodd-Frank reforms."
In particular, Simon said, "Crapo is especially interested in offering regulatory relief to small banks, as was just addressed in a report – the first of four – from the Treasury Department. I think it’s likely that policymakers will examine those areas of confluence between the CHOICE Act and the legislative recommendations from Treasury."
The question then becomes when the remaining reports, one of which is expected to cover the asset management industry, will be released by Treasury. Depending on the timing of that report’s release, any action by the Senate on measures affecting advisers may not occur this year, said Mirvish. "It would be a little bit odd for the Senate to get out ahead of the Treasury and the administration, particularly when the banking committee is pressed for time on other issues, such as reauthorization of the national flood insurance program."
The Financial CHOICE Act, as currently written, "still looks more like a discussion piece than it looks like something that might be enacted," said Willkie Farr partner and former SEC Division of Investment Management director Barry Barbash.
The Fiduciary Rule
There have been so many developments concerning the DOL Fiduciary Rule in recent weeks that observers might be forgiven for thinking they need a road map to keep them all straight. Here are just some:
The Labor Department said that it will not enforce the provisions of the Fiduciary Rule until January 2018, even though the Rule took effect June 9 of this month.
The House passed the Financial CHOICE Act, which terminates the Rule.
The Labor Department on June 6 took initial steps with the Office of Management and Budget to seek public comments on further changes to the Rule.
New SEC chairman Jay Clayton said the agency would seek public comment on its own Fiduciary Rule, welcoming a call from Treasury secretary Alexander Acosta to work together (ACA Insight, 6/12/17).
Secretary of the Treasury Steve Mnuchin on June 12 issued the first of four reports about ways in which the executive branch would pare back parts of Dodd-Frank.
Two more bills that would terminate the Fiduciary Rule – one in the House and the other in the Senate – were introduced this month.
What seems increasingly likely with all this activity is that whatever may become of the Fiduciary Rule in the months and possibly years ahead, it probably won’t look the same as it does now. What remains to be seen is whether those changes are targeted to specific provisions of the Rule, whether the Rule is replaced by another Rule, whether the Rule becomes subservient to a future SEC rule (also required in the CHOICE Act), or whether the Rule is simply killed.
"There are a lot of moving parts, which leaves everyone in an extremely anxious state," said Stradley Ronon partner Lawrence Stadulis.
On the other hand, he said, "the longer the DOL Rule stays in effect, the more difficult it will be to disassemble the monster that was created." Large advisory firms and broker-dealers have already spent large sums of money getting into compliance. "They can’t afford to sit it out and wait until they see what happens later." He added that smaller firms also want to be compliance-ready.
The SEC reforms
Among the changes the Financial CHOICE Act would make to the SEC are the following:
Administrative hearings. The bill would amend Title I of the Securities Exchange Act by adding a new section, "Private parties authorized to compel the Commission to seek sanctions by filing civil actions." It would say the following: "In the case of any person who is a party to a proceeding brought by the Commission under a securities law . . ., and against whom an order imposing a cease and desist order and a penalty may be issued at the conclusion of the proceeding, that person may, not later than 20 days after receiving notice of such proceeding, and at that person’s discretion, require the Commission to terminate the proceeding." Should that occur, the SEC may bring a civil action against the person, seeking the same remedy, the bill states. However, the bill also requires there to be "certain findings" before civil money penalties may be approved against issuers.
Private placement. In a section of the CHOICE Act called "Private Placement Improvement," the bill requires the SEC to revise Form D filing requirements so that an issuer offering or selling securities in reliance on an exemption under Rule 506 will need to file only a single notice of sales. "The Commission shall not require such an issuer to file any notice of sales containing the information required by Form D except for the single notice."Further, the bill forbids the SEC from requiring issuers to submit written general solicitation materials to the Commission in connection with Rule 506(c) offerings, except in certain circumstances. Other changes include a prohibition on the SEC extending the requirements of Rule 156 to private funds, and that Rule 501(a) would be revised so that a person who is a "knowledgeable employee" of a private fund or the fund’s investment adviser shall be considered an "accredited investor" for purposes of a Rule 506 offering of a private fund.
Rulemaking. Among the Financial CHOICE Act’s most sweeping changes is a substantial revision of the requirements for rulemaking for federal agencies, including the SEC. Specifically, the Act states that an agency may not issue a notice of proposed rulemaking unless certain requirements are met. These include an identification of the need for the rule, an explanation of why the private market or state or local authorities cannot address the problem, an analysis of "adverse impacts to regulated entities," and a "quantitative and qualitative assessment" of all anticipated direct and indirect costs and benefits. In addition, each agency’s chief economist would be required to issue a report five years after a rule is adopted, examining the costs and benefits of the rule.
Enforcement ombudsman and advisory committee. The bill would amend the Securities Exchange Act to require the SEC chairman to appoint an ombudsman, who would report to the Commission. The ombudsman would act as a liaison between the Commission and any person who is the subject of an investigation or an administrative or judicial action. Separately, the SEC chairman would be required to establish an advisory committee on the agency’s enforcement policies and practices. The committee would conduct an analysis of the SEC’s enforcement policies and practices, and then make recommendations as to how the Commission’s enforcement objectives may be more effective, how they relate to due process, and more.