RIA Washington Watch

This report is current as of March 14, 2024

2024 is shaping up to be a year of unpredictability and anxiety for investors. Wars continue in Ukraine and the Middle East, neither with any clear path to resolution. Rebel attacks on container ships in the Red Sea have impacted supply chains. U.S.-China tensions continue to rise. The Federal Reserve and central banks around the world are wrestling with inflation and other economic indicators as they determine when to begin interest-rate cuts. A landmark election looms in November. Add to that list unprecedented dysfunction on Capitol Hill, and it's no surprise investors are nervous.  

But markets have been resilient over the first two months of 2024, with the S&P 500 and the Nasdaq, as well as international stock indexes, solidly in positive territory. Volatility may increase in the months ahead as some of the geopolitical and domestic risks sort themselves out. So, what can we expect from Washington this year?

Congress stymied by dysfunction

With Republicans holding only a slight advantage of 219–213 in the House of Representatives and Democrats having just a two-seat majority in the Senate, the split Congress has struggled to pass even the most basic legislation. Indeed, have struggled for months to finalize the government spending bills for the current fiscal year, which started back on October 1. A series of temporary extensions of last year's funding levels avoided a government shutdown. On March 8, Congress approved a package of 6 of the 12 appropriations bills that fund every federal agency and program. Lawmakers are scrambling to meet a March 22 deadline for the other funding bills, including the most complicated bills, Defense and Homeland Security.

The struggle to pass the government funding bills, coupled with the rapid collapse in February of a bipartisan border security package that was months in the making, raises the question of whether Congress can get anything substantive done in the more than seven months before November's election. With some Republicans eager to leave key issues unsolved until after the election, we think the legislative agenda in the coming months will be very meager.

Rare bipartisanship on taxes

One surprising bit of bipartisanship emerged amid the chaos of the first few weeks of 2024: The House easily passed a $78 billion tax bill in February. It's one of those rare bills that has something for everyone. It combines an expansion of the child tax credit, a top priority for Democrats, with the extension of several business tax breaks, a priority for Republicans. After an overwhelming House vote of 357–70, the bill is now in the Senate, where the path forward has slowed. Senators are pushing for a chance to amend the bill with other tax priorities, which risks upsetting the fragile bipartisan balance in the House. One possibility to watch for is whether the tax package gets attached to government funding legislation, as that would allow it to move forward without getting bogged down with endless amendments.

But last month's tax debate is also relevant because it serves as a preview of what is shaping up as a massive battle over taxes next year. That's because the 2017 tax cuts, including lower income tax rates, the higher standard deduction, and the increased level of assets exempt from the estate tax, expire at the end of 2025. Whether to extend some or all of those tax cuts will be one of the highest priorities for the new Congress that takes office next January.

Big SEC decisions loom

With Congress bogged down, attention has turned to the regulatory agencies, which are expected to be very busy. The SEC has several rules in the queue to be finalized over the next few months, many of which could have big implications for investors and advisors. Timing is crucial for regulators because of the Congressional Review Act (CRA). The CRA would come into play if the administration changes parties in the 2024 election. The new Congress would be able to use this legislative tool to overturn regulations that were finalized near the end of the previous administration. While the deadline is a bit of a moving target, the best estimates are that agencies would want to finalize regulations before late May or early June to avoid the risk of seeing them overturned by a new administration early in 2025. Here are some of the key regulatory issues to watch at the SEC over the next few months:

  • Equity market structure reform: A series of four proposals that include more transparency for investors on trade executions, allowing some stocks to be traded in increments smaller than a penny, and a sweeping overhaul of retail trading that would see trades go to an auction system at the exchanges. The first rule, a non-controversial one requiring more disclosure to investors about the execution quality of their trades, was approved by the SEC on March 6.
  • Use of predictive analytics in advice interactions: The proposal seeks to combat conflicts of interest from the use of "emerging technologies" when a broker-dealer or RIA provides advice to an investor. But the overly broad rule would impact the use of virtually any technology in an advice interaction. Upending decades of securities law, the proposal says that disclosure of conflicts is not enough—conflicts must be "neutralized" or "eliminated." In its comment letter, Schwab called for withdrawal of the rule, joining a barrage of voices from across the industry objecting to the proposal. Expect a legal challenge if this rule is finalized in any form close to the way it was proposed.
  • Expanded custody rule: The industry is still waiting for the SEC to finalize this rule, proposed more than a year ago. The proposal would expand the types of assets covered under the rule to include art, cryptocurrency, commodities, and more, as well as require written agreements with each custodian. Schwab argued in a comment letter that the proposal was unworkable, overly broad, and a solution in search of a problem.
  • RIA cybersecurity and third-party outsourcing: These proposals create new requirements for cybersecurity standards and the management and oversight of third-party vendors providing services to RIAs. Criticized by many as overly prescriptive, they are part of a series of rule proposals that would place serious burdens on RIAs, particularly smaller firms.

DOL's new fiduciary rule comes under fire

The other big regulatory initiative for RIAs to watch is the Department of Labor’s new Retirement Security rule proposal. Public comments closed on January 2, and the DOL is expected to finalize the rule this spring, perhaps as soon as April. The rule is the latest entry in the 15-year effort by the DOL to redefine who is a fiduciary in the retirement savings context, a battle that has now spanned three presidential administrations. The proposal revises the test for determining who is a fiduciary and would make one-time advice, such as rollover advice or annuity purchases, subject to the fiduciary definition. To many, the proposal bears a striking similarity to the DOL's 2016 fiduciary rule, which went into effect briefly before being vacated in 2018 by the Fifth Circuit Court of Appeals.

Not surprisingly, pushback from the industry has been fierce. Trade associations, such as the Investment Company Institute (ICI) and the Securities Industry and Financial Markets Association (SIFMA), called on the agency to withdraw the proposal, arguing that it overstepped the agency's authority and would likely be rejected by the courts. The ICI called the proposal "legally flawed," noting that "it ignores past case law, exceeds the DOL's authority and falls short of applicable administrative law standards." Schwab also called for the DOL to "withdraw its proposal, rather than embark on an ill-fated sequel to its 2016 rulemaking." Schwab, in addition to arguing that the proposal contradicts existing law, said that the DOL has failed to provide a coherent rationale for the proposal, overestimated the potential benefits to investors, and underestimated the cost to the industry. Schwab wrote that the proposal "is wrong as a matter of law and policy… There are ample opportunities for industry and the Department to partner on expanding the accessibility and affordability of investment advice, where our collective energies would be better expended."

The Labor Department has sent the final version of the rule to the White House's Office of Management and Budget for review, the last step before finalizing a regulation. That means the new rule is likely to be released this spring. A court challenge is likely if and when the rule is finalized.

It all adds up to a busy and unpredictable year that should keep investors and advisors on their toes.
 

What you can do next

  • Register for the next Schwab Market Talk to hear the latest information on potential impacts to the market and regulatory changes. 
  • Tune in to Michael Townsend's biweekly podcast, WashingtonWise, for insights on the policies and politics impacting portfolios.
  • If you're thinking about becoming an independent investment advisor, contact us to learn more about the benefits of a Schwab custodial relationship.

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