Obama woos Warren wing with anti-Wall Street push

President Barack Obama stood before AARP Monday, drawing spirited applause for a plan that he says will prevent mom-and-pop investors from getting fleeced by financial advisers as they plan for their retirement.

But even as Obama spoke, many eyes were on the woman seated on the stage behind him, looking on approvingly: Elizabeth Warren, the Democrats’ populist crusader.


Many liberals have yearned for the president to pick up more of Warren’s mantle — and to turn a more skeptical eye toward Wall Street — but the two have maintained an arm’s-length relationship. Increasingly, White House aides have felt more pressure from the Warren wing of the Democratic Party to prove that he isn’t going soft on Wall Street. On Monday, he announced his target.

After years of dragging its feet on the issue, the White House is getting fully behind a proposal strongly opposed by the industry to police financial advisers who steer clients toward products that may not be best for them but bring in bigger commissions and fees.

“If your business model rests on taking advantage — bilking — hard-working Americans out of their retirement money, then you shouldn’t be in business,” Obama said during a speech to AARP.

Warren’s supporters could only wonder whether this gesture is fleeting, or reflects a deeper turn by Obama toward more consumer regulation of Wall Street.

“I am happy to be here with the president of the United States to say it’s about time to do something we should have done long ago,” Warren said before the president arrived.

The issue has pitted the investment industry against consumer groups in a heated lobbying battle for years, while the White House maintained a low profile on the issue after the Labor Department decided in 2011 to delay the rule so more research could be done.

Now, the president is jumping in aggressively as the liberal wing of the party is loudly expressing concerns that big banks and other Wall Street firms have begun to find ways to roll back reforms enacted after the 2008 financial crisis, in part because the administration is not holding the line.

Late last year, for instance, Warren led an unsuccessful revolt against a year-end spending bill that watered down restrictions from the 2010 Dodd-Frank law concerning derivatives trading. The tension over the provision had the White House on its heels and since that time administration officials, such as Treasury Secretary Jack Lew, have said the president will not allow his Wall Street reforms to be further eroded.

Monday’s announcement, however, allows Obama to go beyond saying he’ll play defense and show disgruntled liberals that he’s willing to use the regulatory apparatus to play offense as well.

“Nothing was guaranteed here,” said Americans for Financial Reform Policy Director Marcus Stanley. “There was a very significant industry lobbying effort against this both in 2010 and continuing steadily ever since then behind the scenes and in the back rooms.”

If the rule is finalized in the months ahead, it would be the biggest overhaul to the retirement investing advice industry in decades. At issue is the definition of a “fiduciary,” or person who provides sound financial advice in good faith. Under the 1974 Employee Retirement Income Security Act, anyone designated a pension fiduciary must act solely in the interest of plan participants. But with workers relying more on 401(k) and IRA accounts instead of defined benefit pensions in recent years, the goal of the proposal is to expand the fiduciary requirement to more advisers, such as broker dealers, who offer advice on such accounts.

Industry groups contend this will expose them to more legal liability and raise the cost of doing business at the expense of lower-income investors it may no longer make sense for them to serve.

The issue is of importance to several big financial firms — including Morgan Stanley and Fidelity Investments — and it is a top priority for lobbying groups, such as Securities Industry and Financial Markets Association (SIFMA) and the Financial Services Roundtable.

Two financial companies that specialize in retirement savings, Prudential Financial and Principal Financial Group, warned their shareholders this month that the Labor Department’s rule could hurt their sales, according to their annual regulatory filings.

Democrats, particularly more centrist members, have not been united in favor of the rule in the past, with some giving credence to the industry’s warning that it could hurt lower income investors while urging Labor to coordinate with other financial regulators.

Some liberals, such as former House Financial Services Committee Chairman Barney Frank (D-Mass.) and former Sen. John Kerry (D-Mass.), also had concerns with the Labor Department’s 2010 version of the proposed rule, which was retracted in 2011. Massachusetts is the home of some large mutual fund companies that were concerned with the proposal. Members of the Congressional Black Caucus and the Congressional Hispanic Caucus have also urged caution.

Now, however, the party appears ready to rally around the president and for the rule, particularly as the newly Republican-controlled Congress prepares to advance legislation that would delay or kill the rule.

For instance, Sen. Cory Booker of New Jersey, a Democrat who is sometimes friendly with Wall Street, also attended the event as did a House Democrat who once voted to delay the proposal.

“Booker’s presence there suggests the party is far more unified on this than it was before,” said Robert Borosage, founder of the Institute for America’s Future, a liberal advocacy group. “There will be a lot more pressure on the legislators to not block it.”

In October 2013, Rep. John Delaney of Maryland was one of 30 Democrats who voted for a House bill that would have delayed the Labor Department rule, but on Monday he joined Obama for the announcement.

Delaney said he believed that enough transparency and deliberation had been reached to now implement the rule.

“This new standard is designed to target the few bad actors that are hurting middle-class investors,” Delaney said in a statement. “The Department of Labor’s fiduciary standard has been discussed for years now and 16 months have passed since the House voted to delay the rule. In that time, reams of additional data have been released showing how damaging this problem can be for middle-class investors.”

Republicans are not backing down and are casting the proposal as more regulatory overreach from the administration.

Rep. Ann Wagner (R-Mo.), the author of the House bill in the previous Congress that would have put the rule on hold, on Monday said she is planning to introduce legislation this week “that will preserve options for Americans to obtain financial advice and empower families to be able to properly save for their retirement and their family’s future.”

While the president sought to focus attention on the rule on Monday, it is far from being finalized and the lobbying will only intensify in the months ahead.

Labor is now taking the procedural step of submitting the proposal to the Office of Management and Budget for review and then in the weeks or months ahead will put it out for public comment. When the rule could be finalized is unclear and some analysts suggested that given how long the regulatory process can take, the Obama administration may run out of time.

“This is a very complicated area of the law, there is a lot of interest on Capitol Hill, and industry is going all out to educate lawmakers on what the new standard could mean for their constituents,” Jaret Seiberg, an analyst with Guggenheim Securities LLC, said in a note to clients. “This is why we believe the odds are against any change taking effect.”

Regardless, Obama’s big show of support for the proposal has its opponents on the defensive.

“This proposal needs a thorough review as it has the potential to cause a detrimental impact on all American savers and the retirement system as a whole,” SIFMA President Kenneth Bentsen said in a statement.

The industry’s vigorous lobbying against the rule in the past may have had the unintended consequence of raising its profile and making it a ripe target for the White House.

“This is Main Street versus Wall Street,” said Jennifer Eller, co-head of the fiduciary practice at Groom Law Group, which is representing financial institutions and retirement plan service providers. “There has been a constant and consistent effort to squash this thing. Had that not been the case would the administration have decided to plant a flag with this rule?”

Anticipating the fight ahead, Obama noted that “industry doomsday predictions” have not come true in other countries while maintaining his administration would keep an open mind.

“Just because we put forward a new rule doesn’t mean that it becomes law,” he said. “There are a lot of financial advisers who support these basic safeguards to prevent abuse, but there are also some special interests that are going to fight it with everything they’ve got.”