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Reg BI: A Case Study in Politically Fueled Regulatory Whiplash


Sen. Elizabeth Warren (D-Mass.) shares the stage with then-President Barack Obama at an AARP event in 2015 as Obama unveils the Department of Labor's fiduciary rule.

Earlier this week, a U.S. district court in New York state dismissed a consolidated lawsuit that had sought to halt implementation of the U.S. Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI) rule. The challenges had been brought to the court by private fiduciary advisers and a group of state attorneys general.


This week’s decision is just the latest in the ongoing saga surrounding this rule, which not only has undergone a couple of iterations but has been subject to a rebranding too. Readers might recall that, under the Obama administration, this regulation was known as the fiduciary rule and didn’t emanate out of the SEC.


Though the Trump-era SEC is working furiously to implement Reg BI before January 2021 – when a new president potentially could be sworn in – this epic tale will continue for some time, regardless of whether Donald Trump retains his residence in the White House after the November 2020 elections. In fact, Reg BI is a perfect case study in regulatory and legal back and forth consumers and industry can expect in an increasingly polarized political world.


Let’s back up first, however, and review the history of this rulemaking.


As the nonpartisan Congressional Research Service explains, “propelled in part by concerns over investor confusion between investment advisors and broker-dealers,” the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act granted the SEC “the authority to impose fiduciary rules on broker-dealers subject to certain conditions.” Because the U.S. Department of Labor (DOL) has authority over some types of retirement plans under the Employee Retirement Income Security Act of 1974 (a throwback to when employees received pensions from their employers), President Barack Obama asked that agency to step in, however.


The Obama-era DOL published its fiduciary rule in April 2016. Republicans on Capitol Hill were not pleased the DOL took the initiative and, in June 2016, the GOP-U.S. House and Senate each passed a resolution that would have overturned the fiduciary rule. President Obama vetoed that legislation – it was the tenth instance he vetoed legislation that had been passed by Congress, and he would go on to veto two additional bills before leaving office – but a federal lawsuit followed.


While that challenge proceeded, the 2016 presidential election five months later changed everything. Upon inauguration, President Donald Trump signed an executive order requiring DOL to delay implementation of the fiduciary rule until June 2017 and to review the rule’s potential negative impact on investor protection, litigation, and product pricing. The Trump administration delayed the rule one more time – proving the old adage that the best way to kill something in Washington is to delay it in perpetuity – but by then a three-judge panel from the 5th Circuit Court of Appeals had vacated the Obama-era regulation. The full 5th Circuit agreed in June 2018. The Trump administration, which by this point had in place its leadership at the DOL, the SEC and Department of Justice, unsurprisingly chose not to challenge the 5th Circuit’s decision.


While that decision provided an important legal win for the rule’s opponents, it ultimately was overshadowed by the fact that the SEC proposed its less-prescriptive Reg BI in April 2018. The SEC approved the final Reg BI on a party-line vote 14 months later on June 5, 2019. The compliance date for the rule is June 30, 2020, just four months before the 2020 election. And in Washington, all things are political.


While the vast majority of the Democrats running for the White House would not list Reg BI or the fiduciary rule as one of its top five priorities, Sen. Elizabeth Warren (D-Mass.), who is currently leading her Democratic presidential primary rivals in several polls, certainly would. The senator’s involvement in this rule goes back to the beginning of our story.


In fact, Sen. Warren was on stage with President Barack Obama at the February 2015 AARP event where the then-president announced DOL would move forward with its own fiduciary rule. Then, at a Senate hearing that summer, Sen. Warren used her platform to discuss the need for the regulation. When the SEC voted to approve Reg BI this past June, according to Politico, Sen. Warren “blasted the new regulation, claiming it will ‘make it easier for Wall Street to cheat families out of their hard-earned life savings.’”


Block, or potentially undoing, the Trump administration’s Reg BI is a key part of Senator Warren’s Wall Street agenda, and if she is elected president, she will follow in President Trump’s footsteps by acting swiftly to reverse her predecessor’s policy.


Her action could take one of two forms. She could keep the issue under the SEC’s purview, asking her appointees at the Commission to promulgate amendments to the rule or additional guidance to strengthen the Trump-era regulation. Or she could send the issue back to the Department of Labor, asking it to layer a stronger regulation over the REG BI standard that will, by then, be implemented. From a timing perspective, moving the matter back to the DOL might be the quicker, and more certain, option.


A new Labor secretary would be likely to be confirmed by the U.S. Senate within a few weeks of Sen. Warren taking office. (President Trump’s first Labor Secretary, Alexander Acosta, was not confirmed until April 2017, but usually the Senate acts more quickly on cabinet nominations. Acosta didn’t get confirmed until April because a previous nominee, Anthony Puzder, was named, but then dropped out.)


The SEC and its bloc of five commissioners is another story. A new president would name a new chair, just as President Trump did. Current Chair Jay Clayton’s confirmation came in May 2017 – after Secretary Acosta was in place – even though Clayton was nominated the day President Trump took office. If Republicans retain the Senate, it is anyone’s guess how they will prioritize the nomination of a Warren-appointed SEC chair. And an SEC majority could be kept from Democrats’ grasp even beyond the point at which a new chair is in place.


Let’s say Clayton is replaced relatively swiftly by a Democrat. The terms of Elad Roisman, a Republican, and Allison Herren Lee, a Democrat, do not end until June 2023 and June 2022, respectively. That gives Democrats a two-to-one advantage.


Democrat Robert Jackson’s term ended June 5, 2019 and he plans to step down instead of serving the extra 18 months on the panel to which he is entitled. He has said, however, that he will stay on until Democrats find a replacement. But with the GOP in control of the Senate nominations calendar it is unclear when Jackson’s replacement could get a committee or floor vote. Jackson very well could hang around until December 2020, despite his intention to depart earlier.


Which means a President Warren would need to fill Jackson’s seat. That opening means the tally still is only two-to-one in Democrats’ favor.


Hester Peirce, a Republican, is the fifth member of the SEC. Her term ends on June 5, 2020. If Elizabeth Warren is sitting in the Oval Office, it is likely Peirce will exercise her extra 18 months and stay on the panel until December 2021. That is, unless Senate Majority Mitch McConnell (R-Ky.) and the White House work quickly to appoint and confirm her successor before next year’s election.


Either way, if Jackson has not been replaced, there is a two-to-two deadlock on the SEC. A new, stronger, Reg BI could not move forward.


That is why moving this matter back to the DOL, where a single Warren appointee would sit atop the department, might be a President Warren’s best option for getting a new rule out the door and, in all probability, back into the hands of the courts.


If Donald Trump is reelected, the current lawsuits against the rule will proceed. A House and Senate in Democratic hands would continue to raise the issue, but, practically, they could not do anything about it legislatively barring a veto-proof Democratic majority in both chambers.


By the time this saga is sorted out, this week’s court ruling will be but a distant memory.

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