RIA Washington Watch

What is RIA Washington Watch?

Every quarter, RIA Washington Watch brings you the most up-to-date information on registered investment advisor news and policy changes to help your firm make informed decisions.


 

This report is current as of July 5, 2024

With a split Congress and razor-thin majorities in both House and Senate, Washington continues to be a hotbed of dysfunction. Both Democrats and Republicans are eagerly anticipating the election in less than six months, and neither party wants to give the other an advantage that could be used on the campaign trail. Yet Congress did manage to come together this spring to pass key federal spending bills—a reminder that, even in divisive times, bipartisan majorities can find their way to success. Looking forward, however, legislative victories are likely to be rare between now and November.

As often is the case as the end of an administration approaches, regulatory agencies in Washington are very busy trying to push key proposals across the finish line before the election. For investment advisors, the extensive list of rule proposals in the queue at the SEC, as well as the Labor Department's lightning-fast regulatory process for a new fiduciary rule, have remained in the spotlight. Here's a look at the latest developments in the nation's capital.

Congress passes key funding bills

On Capitol Hill, months of tensions over government spending are finally in the rearview mirror—for now. In March, strong bipartisan majorities in both House and Senate approved two packages of six appropriations bills each, ensuring that all federal agencies and government programs are funded through the end of the fiscal year on September 30. Lawmakers have begun the appropriations process for Fiscal Year 2025, which starts on October 1, but the proximity of that deadline to the election all but guarantees a bipartisan agreement to temporarily extend funding until at least late November or early December. Neither party wants to shut down the government just weeks before the election.

In April, Congress, again with overwhelming bipartisan support in both chambers, approved the $95 billion foreign aid bill. The package includes funding for Ukraine, Israel, and Taiwan, as well as provisions requiring TikTok's Chinese parent company, ByteDance, to sell the company within nine months or see the app banned in the United States. This dispute is headed for the courts—but it might be the issue that gets your teenager interested in Washington's policy debates.

So, what's next on the Congressional agenda? Truthfully, not much. There are precious few "must-do" items between now and the election. Expect a lot of "messaging" bills in the House of Representatives—policy issues that have no chance of passing the Democrat-controlled Senate but might make for fodder on the campaign trail. We are keeping our eyes on bipartisan efforts to put some guardrails around artificial intelligence, but expectations are low for big legislative initiatives in the coming months.

In May, however, the House of Representatives passed a landmark bill that would create a regulatory structure for cryptocurrency. The bill, which was approved with a surprisingly strong bipartisan majority, would give primary regulatory authority to the Commodity Futures Trading Commission (CFTC), while relegating the SEC to a lesser role. It would create an investor disclosure regime and require intermediaries to adhere to rules around risk management, conflicts of interest, customer funds and recordkeeping. It's uncertain whether the Senate will take up a crypto bill before the election, so this may be an issue that gets added to the 2025 list. But it's clear that momentum has shifted on Capitol Hill and that a regulatory framework for cryptocurrency is on its way.

Perhaps the most notable policy debate on Capitol Hill is one that won't even ripen until next year: taxes. With a major tax overhaul looming in 2025, both the House and Senate are beginning to lay the groundwork for an epic battle. The catalyst is the pending expiration of the 2017 tax cuts, including lower individual income tax rates, the higher standard deduction, the cap on the state and local tax deduction, and the higher exemption amount for assets that can be inherited without triggering the estate tax. (There are dozens of other provisions set to expire as well.) But both parties see the looming battle as an opportunity for a much broader reconsideration of the tax code. House Ways & Means Republicans have formed 10 working groups to examine different aspects of the tax code, with the goal of making recommendations for reform beyond just the expiring tax cuts. They are currently soliciting public comment. Similarly, Senate Finance Committee Republicans recently formed six working groups. Democrats are pushing their own ideas, such as President Biden's proposals around wealth taxes, including a higher capital gains tax for filers earning above $1 million and a "billionaire's tax." Next year promises one of the biggest tax debates in decades.

IRS delays decision on Inherited IRAs—again

In April, the IRS announced that owners of Inherited IRAs would not have required minimum distributions in 2024, providing heirs with relief for another year but maintaining the underlying confusion about the agency's intentions. The issue arose from the original SECURE Act, which required heirs to distribute the assets in an inherited account within 10 years. It was broadly understood that the heir could distribute those assets on whatever timeline he or she preferred, as long as the account was liquidated by the end of the 10 years. In 2022, the IRS unexpectedly proposed a rule that required heirs to take annual distributions. Overwhelmed by public criticism and confusion, the IRS announced that individuals who inherited an account after January 1, 2020, would not be expected to take distributions retroactively, at least until the rule was finalized. With the rule still in limbo, the IRS extended that relief for 2023 and more recently for 2024. The agency did indicate that it planned to finalize the rule by the end of 2024, although it also said the same in both 2022 and 2023. Owners of inherited IRAs, meanwhile, continue to hope for clarification.

Labor Department finalizes "Retirement Security Rule"

One of the most notable regulatory developments thus far in 2024 was the much-anticipated unveiling on April 23 of the Department of Labor's latest fiduciary rule, which the DOL dubbed the "Retirement Security Rule." It marks the DOL's latest attempt in a 15-year odyssey to redefine who is a fiduciary in the retirement savings context. A key point of contention is that the rule declares that one-time advice, such as recommending an investor roll over assets from a 401(k) to an IRA, triggers fiduciary status, even though the 2016 version of the rule was vacated by the courts in 2018 due in part to this very issue. 

The rule went from proposal to final in less than six months, an unusually fast timetable for any rulemaking of this significance. The speed itself has become a major issue, with the business community arguing that the DOL made little effort to review or take into consideration the hundreds of public comments. DOL Assistant Secretary Lisa Gomez may have inadvertently underscored that argument when she somewhat oddly declared in an April press briefing, "There's nothing in these clarifications or changes that anyone should interpret as a watering down or real change from the proposal." DOL staff later attempted to walk back that statement, pointing out that many changes were made in the final rule as a result of public comments but that the principles behind the rule remained the same.

By summer, multiple legal challenges had been filed against the rule, including one filed by a group of insurers in Texas, requesting both an injunction to stop the rule's implementation and a vacating of the rule itself. The suit makes many of the same points argued by numerous commenters (including Schwab) during the public comment period: that the regulatory process was rushed, that the rule was arbitrary and capricious, that the agency was dismissive of public input, and that the rule failed to address the very issues that formed the basis of the court's rejection of the rule's previous iteration in 2018. The court is expected to rule on the request for an injunction later this summer.

SEC continues busy agenda

Over at the SEC, the agency still has a long list of proposed rules in the queue for finalizing. March saw perhaps the most high-profile rule reach the finish line, as a divided SEC approved a controversial rule requiring public companies to disclose more to investors about the risks they face from climate change and the role they play in climate change via greenhouse gas emissions. That rule was also immediately challenged in court. In fact, eight different lawsuits have been filed and now consolidated into a single appeal. The SEC has formally paused implementation of the rule until the legal situation is resolved, which of course could take a while.

Meanwhile, we continue to wait for final rules on several key pending issues at the SEC, including the mutual fund liquidity proposal that includes the controversial "swing pricing" and "hard 4 p.m. close" provisions. That proposal, which would require mutual fund trades to be received by the fund by market close, means that brokers would likely need to cut off trading for mutual funds well before market close, leaving mutual funds at a competitive disadvantage. There is tentative optimism, however, that the SEC may back away from those elements of the proposal in the final rule. Also in the queue for possible finalization in the coming months are multiple proposals to overhaul the equity market structure, including a tick size proposal that would allow trading in increments smaller than a penny and a proposal to require retail trades to be executed via an auction system at the public exchanges. 

We also continue to watch several rules that would affect investment advisors directly, including the proposed expansion of the custody rule, requirements for how RIAs should perform due diligence on third-party vendors, and RIA cybersecurity rules. A new proposal from Treasury and the SEC would require RIAs to establish an anti-money laundering program. Schwab, in its comment letter, asked for clarification on whether RIAs who custody with a broker-dealer that has a robust AML program could rely on that, rather than establishing a duplicative program. And two other proposals – one on "predictive data analytics" that would curtail the use of technology in any investment advice interaction and the other an expansion of the Custody Rule – have been of particular concern to RIAs. In a May speech, however, SEC Chair Gary Gensler indicated that the agency may rework and resubmit both proposals. With a possible change in administration looming, the SEC and other regulators are likely to try to move quickly to get final rules on the books in the next few months.

Finally, there was a major development at the end of June that could have profound implications for the aforementioned regulations. A divided Court voted to end the so-called "Chevron doctrine," a 40-year-old standard that required courts to defer to the expertise of regulatory agencies in interpreting vague or unclear laws from Congress, as long as those regulations were "reasonable." Instead, the Court said that courts must "exercise their independent judgment in deciding whether an agency has acted within its statutory authority" when writing rules. While it will take years to sort out the implications, the change is likely to dramatically reduce the power of regulatory agencies, increase legal challenges against regulations across every sector of the economy, and result in the courts being the ultimate arbiter of the regulatory playing field. Many of the rules discussed above that are currently pending or recently approved appear to be in danger of eventually being rejected by the courts, leaving an uncertain regulatory landscape. 

 

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