On November 15, 2016, shortly after Donald Trump was elected President, we released our first take on how the election of Trump could impact registered investment adviser (“RIA”) regulation. Now, nearly two months later, there are still many unanswered questions, but with the recent key appointee announcements it’s time to take a second stab at predicting how President-elect Donald Trump may impact invest adviser regulation in regards to the Department of Labor (“DOL”) fiduciary rule, the Dodd-Frank Act, and efforts to increase the audit frequency of RIA firms registered with the Securities and Exchange Commission (“SEC”). However, “uncertainty” still trumps clarity at this moment and likely will continue to for the next few months.
Future of the DOL Fiduciary Rule under new Secretary Andrew Puzder
As we did on November 15, we continue to recommend that all RIA firms continue to prepare for the DOL fiduciary rule to be implemented as scheduled on April 10, 2017. Donald Trump has still yet to personally comment on the rule, and as more time passes, the possibility of the rule being overturned before April continues to decrease. Right now, there are a number of possible future scenarios for the fiduciary rule which include:
- The rule is fully implemented as it stands today as the new administration focuses on other short-term priorities.
- The rule is implemented but with modifications such as the removal of the right of class action clause.
- The rule is implemented as-is but the DOL makes it clear it will not be an enforcement priority.
- The rule is overturned or permanently delayed through a series of executive orders.
- The rule is overturned by Congress with the passage of a new law.
- The rule is defeated in federal court as the new DOL administration chooses not to actively defend it.
President-elect Trumps’s nominee for DOL secretary, Andrew Puzder, has also not yet taken a public stance on the rule. In the past, Puzder has been a vocal critic of the DOL’s recently overturned rule that would have increased overtime pay eligibility for a number of additional workers. Many speculate Puzder’s past anti-regulation stance implies he is likely to be opposed to the fiduciary rule as well. Once Puzder appoints a new nominee to replace Labor Assistant Secretary Phyllis Borzi, the key architect of the current rule, there may be more clarity. There also continues to be more chatter that a number of the larger broker-dealer firms are privately supporting the rule as those firms have already made significant financial investments to comply.
Potential Repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act
Throughout the campaign, President-elect Trump expressed his desire to repeal the Dodd-Frank Act. This policy position was previously reinforced on the official transition website but has subsequently been removed since November. At this point, it seems that a full repeal of the Dodd-Frank Act is unlikely. There is more indication that Trump and the Republican-controlled House and Senate will focus their initial attention on possible healthcare and tax reform. If the repeal of Dodd-Frank does emerge as a near-term priority, it appears that the CHOICE Act introduced by Rep. Jeb Hensarling (R-Texas), chair of the House Financial Services Committee, could emerge as a potential replacement.
However, regardless of the future of the Dodd-Frank Act, we continue to believe that a full or partial repeal of the Dodd-Frank Act would have limited impact on the vast majority of RIA firms. However, it is possible that a Dodd-Frank repeal could remove the requirement for private funds to register as RIAs.
SEC RIA Examination Frequency under new Chairman Jay Clayton
Current SEC chairwoman Mary Jo White previously announced that she will be stepping down later this month. Yesterday, President-elect Trump President-elect Trump nominated Jay Clayton to be the new chairman of the SEC. Under Ms. White’s leadership, the agency has expressed a desire to increase investment adviser examination frequency. Clayton has not previously publicly commented on the RIA regulation. There is not much presently known about Clayton’s potential policy stances as he has previously had a low public profile with the one exception being an editorial that he co-authored on the importance of addressing cybersecurity threats. However, in the nomination’s official press release, Trump does state, “we need to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers.”
Early speculation is that the SEC is less likely to introduce new rules under Clayton’s leadership and that the current status quo of the investment adviser examination program is likely to continue. However, it is interesting to note that third-party audits were an approach previously put forth by former Republican SEC Commissioner Dan Gallagher. Thus, it is possible that a third party audit rule could be introduced under Clayton’s leadership. We also continue to believe that previously proposed and announced rule changes such as new Form ADV requirements are still likely to proceed as expected.