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RIA Washington Watch: Will policy developments add to market volatility in 2019?

Submitted by lina.zuluaga on March 11, 2019
RIA Washington Watch

RIA Washington Watch features the insights and analysis of Michael Townsend regarding issues that affect Registered Investment Advisors (RIAs), their clients, and the industry.

Michael Townsend

Retirement policies: Lawmakers find bipartisan support for required minimum distribution changes and open multiple employer plans.
Regulation Best Interest: The government shutdown and a lack of SEC consensus make the Regulation Best Interest proposal’s timeline uncertain.
SEC exam priorities: Priorities include conflicts of interest, senior vulnerability, and digital assets.

A new era of divided government began in January as the 116th Congress convened. Democrats hold a 235–197 majority in the House of Representatives (there are three vacancies), but Republicans retained their advantage in the Senate by a 53–47 margin.

A split Congress is typically a recipe for gridlock, and 2019 is shaping up as no exception. The combination of a bitterly divided Congress, an unpredictable White House, and the frenzied start to the 2020 presidential campaign has produced a volatile and uncertain atmosphere. Indeed, the new Congress convened in January amid the unprecedented 35-day partial government shutdown. Although Congress was open and operating during the shutdown, the circumstances contributed to unusually slow activity on Capitol Hill and delayed the focus on legislation by a month or more. The policy and political agenda has remained unpredictable ever since. The president’s February declaration of a national emergency on our southern border has only added to the chaos.

For RIAs, 2019 is likely to be a year in which Washington policy developments add to market volatility. A looming debt-ceiling battle, multiple high-stakes trade decisions, and another year of tense budget negotiations are just some of the issues that have the potential to move the market. Advisors and investors could also be affected more directly by policy initiatives, from both Capitol Hill and regulators. Here’s a look at what advisors should be keeping their eyes on in the months ahead.

Retirement policy: A bipartisan priority

The list of issues that could produce potential bipartisanship this year is painfully short, with infrastructure spending and reducing the cost of prescription medicine often cited as top possibilities. But retirement savings is another potential area of bipartisan action, and it is one that advisors should be monitoring.

Rep. Richard Neal (D-MA), a 30-year veteran of Congress, is the new chairman of the powerful House Ways and Means Committee, which has jurisdiction over taxes, health care, trade, and retirement policy. In the weeks following the November election, Neal told audiences that his top three priorities as chairman were “retirement, retirement, and retirement.”

Neal has reiterated plans to reintroduce two pieces of retirement legislation that he has long supported. The first is a comprehensive bill addressing a wide array of pension and retirement issues, which may include several provisions that were part of a tax package passed by the House in December but never considered by the Senate. These include:

  • Eliminating required minimum distributions for individuals whose total assets in retirement savings accounts are less than $50,000 (an alternative proposal would bump that up to $100,000)
  • Waiving additional taxes on distributions from retirement accounts that are used to pay for childbirth and adoption expenses
  • Increasing the cap on auto escalations from 10% to 15%
  • Providing lifetime income disclosure to help individuals better understand how their current level of savings translates into a monthly income during their retirement years

The bill is also likely to include simplified pooled employer plans (also known as open multiple employer plans, or open MEPs), which would allow unrelated small businesses to band together to offer a plan to their employees. President Trump has endorsed the idea, which has strong bipartisan backing. The provision, whether part of a larger retirement bill or attached to some other legislation, stands a very good chance of becoming law during this Congress.

Neal’s second priority is more controversial: the so-called Automatic Retirement Plan Act, which would require employers with 10 or more employees to establish a 401(k) or 403(b) plan or to offer an IRA for all employees. The bill’s mandate continues to be a source of contention, particularly with Senate Republicans. Expect Neal to continuing pushing for this legislation in 2019, though it’s likely that he will have to make changes to the mandate to have a chance at passage.

It remains difficult to forecast how the 2019 Congress will unfold, but retirement savings policy remains one of the few issues that stand a chance of breaking through the partisan bickering.

The SEC slowdown on Regulation Best Interest

On the regulatory front, the SEC was one of the agencies affected by the partial government shutdown. The regulator operated for the entire 35-day shutdown with only a skeleton staff that focused mostly on monitoring the day-to-day operation of the capital markets. As a result, the SEC halted most its routine business, from overseeing IPOs (no company went public in January due to the shutdown) to processing new advisor registrations. Employees returned to an enormous backlog of work, pushing back the SEC’s agenda for the year.

The industry continues to await final action from the SEC on its proposed rules that seek to clarify the standard of conduct for investment advisors and broker-dealers. Regulation Best Interest and its two accompanying proposals remain at the very top of the SEC’s priority list. But the timing of a final rule remains uncertain. SEC Chair Jay Clayton indicated last fall that a final rule during the first quarter of 2019 was likely. Getting consensus among the four commissioners—one seat is vacant, and the administration has yet to nominate someone to fill the seat of former Commissioner Kara Stein, who departed at the end of the year—has proved elusive thus far. In recent weeks, the agency has indicated that the third quarter is the more likely time frame for a final decision on the standards of conduct rule.

The proposal would require broker-dealers to act in the best interest of clients when making recommendations. It would also require broker-dealers and investment advisors to provide retail clients with a relationship summary document that details fees, conflicts of interest, standards of conduct, and other aspects of the relationship. And it would clarify and affirm that investment advisors owe a fiduciary duty to their clients. For now, however, the proposal continues to await final action.

SEC outlines exam priorities

In late December, the SEC outlined its exam priorities for 2019, noting that exam rates continue to rise. The agency reported that it examined about 17% of all RIAs in 2018, up from 15% the previous year—and more than double the 8% that were examined in 2012. In early March, an SEC official acknowledged that the agency was likely to fall short of that 17% figure in 2019 due to the partial government shutdown earlier in the year.

On the priority list for 2019 is disclosure of fees, expenses, and conflicts of interest to retail investors. The agency will have a particular focus on how advisors interact with senior investors, as it continues an agency-wide effort to crack down on exploitation of vulnerable seniors. Exams will also focus on advisors who recommend high-fee share classes to determine whether such recommendations are appropriate for investors. Digital assets, including cryptocurrency and initial coin offerings, also made the priority list. Clayton has been outspoken in his concern that such investments carry unreasonable risk for most investors.

This report is current as of March 12, 2019. Look for a future RIA Washington Watch from Schwab’s D.C. insider Michael Townsend. 

If you're thinking about becoming an independent advisor, consider a custodian that invests in your success. Contact us to learn more about the benefits of a custodial relationship with Schwab.

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