As the country looks ahead to November’s presidential election, experts are weighing how a potential Joseph Biden administration could impact securities regulations and enforcement.
In the past year, arguably the most significant regulatory developments were the Securities and Exchange Commission’s Regulation Best Interest and the Department of Labor’s proposed rule on fiduciary exemptions, which comes two years after a federal court vacated the Obama administration’s previous fiduciary rule.
A. Valerie Mirko, a partner with the North America financial regulation and enforcement practice at Baker & McKenzie, said Reg BI was safe for the moment, even if Biden were to win the White House. The Democratic Party alluded to its intention to reverse Reg BI in a recent draft of the party’s platform, but legal experts say it would be very difficult to undo the rule.
“I think we need to remember Reg BI has gone through rulemaking and implementation, and firms have changed practices to come into compliance depending on its business model,” Mirko said. “I think it’s unlikely we’ll see that rolled back in the next year.”
But beyond Reg BI, Barbara Roper, the director of investor protection at the Consumer Federation of America, believes a Biden administration may review the data available to clients for options in private securities markets. SEC Chairman Jay Clayton has focused on expanding the scope of who is allowed to invest in private securities, with the commission issuing a concept release for a change to the “accredited investor” definition in June 2019. Roper said the SEC could finalize a new rule at any time.
“The first thing from a Biden administration is to get serious about collecting the data necessary to find out what’s going on in a private marketplace that dwarfs our public markets in size, then use that to determine what changes are needed to restore an appropriate balance between public and private markets,” she said.
A recent appropriations bill that was approved by the House of Representatives said the SEC would not be allowed to use federal funds to finalize or implement its proposed rule on private securities offerings unless it strengthened the filing requirements around exempt offerings, in line with an old SEC rule proposal from 2013. The bill must still go through the Senate.
Roper said the threat to the public markets was to such a degree that a potential Biden administration could be pushed to probe the matter further, while a second Trump term would continue expanding private equity’s ability to market directly to investors.
“You have so many investment opportunities where the bulk of the population can’t invest, and a lot of their growth is occurring in the private markets where the bulk of the population can’t invest,” she said. “And you risk reducing public markets to the place where you have behemoths who have already achieved all their growth without the potential that public offerings have offered for decades.”
Phyllis Borzi, the former head of the DOL’s Employee Benefits Security Administration during the Obama administration, echoed Roper’s concern about the expanded access for private equity among noninstitutional and less sophisticated investors. She also decried the DOL’s recent move to limit retirement plan providers’ ability to include ESG investing in their products and hoped such a move would be rescinded in a Biden administration. She also mentioned the loss of a client’s private right to action to pursue legal remedies in the DOL’s recent fiduciary exemption proposal, saying that a mandatory arbitration process for conflicts would be detrimental for clients.
“This has to do with who controls the venue. It’s supposed to be independent, but there’s a panel of arbitrators, with different ways of selecting them,” she said. “(Financial service providers) have a tremendous advantage to force all your claimants into arbitration. You know the arbitrators and you know the system.”
Knut Rostad, the founder of the Institute for the Fiduciary Standard, said that he expected other states to move forward on their own fiduciary standards, regardless of who wins in November. He also warned against consumer protection advocates who believe a Biden victory might mean great changes for investor protections.
“What gets me going is the comments that suggest that it’s almost a plan that if the Democrats take over it’ll be alright,” he said. “I think a lot of the states are politically savvy enough to know that a Democratic administration does not necessarily mean a great change with what’s going to go on in Washington.”
Both Mirko and Amy Greer, a co-chair of Baker McKenzie’s North American financial regulation and enforcement practice, noted that the SEC had been one of the few instances during the Trump administration where a federal agency had actually increased enforcement and regulatory changes in some respects.
“The SEC’s been an outlier among the various federal agencies,” Greer said. “My expectation in either regime is this will continue, and that the issues we see being discussed, whether it’s cryptocurrency or ESG issues, or the finalization of the advertising and solicitation proposal—all the things we’ve seen in recent times, I expect those to continue no matter which administration is in the White House.”
Greer also hypothesized that the SEC might try to find another issue where firms could self-report violations, similar to its mutual fund share class self-reporting initiative. The initiative allowed firms to avoid enforcement proceedings when client assets were placed in higher-cost share class mutual funds when more affordable alternatives for the same funds were available for investment by reporting the violations to the SEC. Critics argue that such initiatives constitute "regulation by enforcement" and unfairly penalize firms.
Greer said the self-reporting initiative brought in close to 100 cases, and she theorized that the commission would want to retain that higher caseload.
“When you take those out, it really alters what the number of cases are,” she said. “As a former trial lawyer at the SEC, I’m a great believer that the number of cases shouldn’t matter, and that’s what they say. But I think it does matter to them, and as long as it does, I think they’ll bring as many cases as they can."
