SCOTUS Conservative Majority’s Ruling on EPA Has Significant Implications for Wealth Management Regulatory Landscape
Wealth management compliance and supervisory professionals worth their salt will constantly observe the political landscape to determine the potential for new rules and regulations.
And if there’s any development worth watching more closely, it’s the Supreme Court’s ruling at the end of last month that significantly restricts the ability of the Environmental Protection Agency (EPA) to regulate carbon emissions.
The Supreme Court’s recent ruling underscores that its conservative majority is willing to adopt a more activist stance on a wide range of issues.
And perhaps even more importantly, the ruling sends a clear message that SCOTUS believes in carefully limiting the powers of regulators.
What Does This Mean for Wealth Management Regulations?
John Gebauer, President of NRS, a provider of compliance-related consulting, technology and education solutions for wealth management firms, notes, “Unexpected changes to regulations tend to come from judicial decisions which nullify all or part of an existing rule. The recent ruling in West Virginia v. EPA could possibly lead to successful challenges to SEC and DOL regulations.”
One possible example? Since the 2020 elections, there has been rising chatter about a potential new DOL Fiduciary Rule, as the Biden Administration continues to explore ways to equalize the standard of conduct between the broker-dealer and RIA sides of the industry.
Let’s assume for the moment that the DOL is successful and creates a fiduciary standard for broker-dealers. Would the Supreme Court step in and limit the scope of the new rule?
“Possibly,” says James Sallah, adjunct law professor at the University of Miami and a regulatory attorney.
“The issue is a new rule is passed by the DOL but enforcement of the rule rests with the SEC. If you look at the recent EPA decision, this iteration of the Supreme Court seems to have focused on enforcement actions not exceeding the letter of the law.”
According to Sallah, “How the SEC marries its enforcement powers to the DOL fiduciary rule will be critical to the Court’s determination if they choose to address this issue.”
Standard of Care – Are We STILL Talking About This?!
A common refrain from across the industry is that the tussle over competing standards of care has more than run its course and needs to be finalized. It is a sentiment that is keenly felt across not just the IBD segment, but among RIA firms as well.
According to Gebauer, “Virtually all RIAs are adamantly opposed to a new DOL fiduciary rule. Many firms carry the scars of their difficult and expensive attempts to meet the highly complex provisions of the 2016 Fiduciary Rule, and do not want to go through that process again.”
In many ways, Reg BI, which was conceived and born rather hastily following the collapse of the original DOL Fiduciary Rule, has been a bandage over a gaping wound that needs to be closed once and for all.
It’s Not That Complicated
There are many reasons why this conversation on standard of care harmonization needs to be over and done with, and in large measure that is because the industry itself has already evolved past this issue.
For the last decade, hybrid firms have become the norm and many financial advisors wear both broker and investment adviser hats. The most successful independent broker-dealers inevitably have their own corporate RIA platforms. Meanwhile, the number of independent RIA firms seeking to align with a “friendly” broker-dealer to accommodate commissionable business continues to rise.
Therefore, the starting point question for compliance professionals, home office leaders and financial advisors is increasingly this: If a client has brokerage and fee-based accounts under the same financial advisor, what is the prevailing standard of care?
If arbitration precedent means anything – and it should – multiple proceedings over the years have demonstrated that, in instances where the financial advisor is serving a client on a brokerage and fee-based level, then fiduciary responsibility applies.
What’s Ahead?
Of course, there are many other, tougher questions.
What happens to Reg BI if the DOL rule is passed? And will the industry be forced to play a game of round robin with Reg BI if a new DOL Fiduciary Rule is passed but ultimately declared invalid with the Court?
NRS’ Gebauer said, “Predicting how any court will act is a challenge for even the most seasoned professionals. RIAs are well-advised not to act on anyone’s prediction of how a court may decide any case. The last thing an RIA should do is wait to implement a rule or regulation because it may be overturned.”
Ultimately, one thing is clear: If the DOL, SEC and the Supreme Court get into an ideological battle over having a common customer standard of care, firms will be twisting in the wind trying to balance compliance costs with regulatory exposure.
That would undoubtedly be a classic lose-lose situation for the wealth management industry.
Sander Ressler, WSR’s Expert Columnist, Compliance & Regulatory Affairs, can be reached via ContributingEd@wealthsolutionsreport.com
