RIA Washington Watch: SEC approves new rules, retirement savings bill passes House: what’s next?
RIA Washington Watch features the insight and analysis of Michael Townsend regarding issues and topics that affect Registered Investment Advisors (RIAs), their clients, and the industry.
Regulation Best Interest: The SEC has approved this rule, along with three related regulatory initiatives.
Retirement savings legislation: The bill known as the SECURE Act passes the House and awaits its day in the Senate.
Stories out of Washington continue to dominate news cycles. Current headlines include a series of ongoing investigations of the White House, major trade disputes with China and Mexico, and a looming debt-ceiling crisis that Congress is struggling to fix ahead of a September deadline. Amid these, two issues that directly affect advisors and their clients are also on the front burner.
On Capitol Hill, Congress is making progress on an important retirement savings bill that could have a significant impact on retirement and estate planning. Meanwhile, at the Securities and Exchange Commission, regulators approved rules that could redefine the relationship between a client and a provider of investment advice.
Here’s a look at the latest developments on both issues.
New advice rules to go into effect next year
The SEC approved the controversial Regulation Best Interest and three related regulatory initiatives on June 5. Commissioners voted 3–1 (the fifth seat on the board is vacant) in favor of finalizing the rule, with Commissioner Robert Jackson Jr., a Democrat, issuing a strongly worded dissent. He said that the rules “fail to arm Americans with the tools they need to survive the Nation’s retirement crisis.”
The new rules represent a significant shift in the advice landscape. Here’s a closer look at each:
- Regulation Best Interest—The new rule requires broker-dealers making a recommendation to a retail customer to act in the best interest of the customer at the time the recommendation is made. Broker-dealers also must disclose conflicts of interest, and, importantly, mitigate or eliminate those conflicts. As stated repeatedly at the open meeting where the commissioners voted, disclosure alone will not satisfy this obligation.
- Client Relationship Summary—RIAs and broker-dealers must provide to retail investors a short document that outlines the client relationship, the standards of conduct that apply, the services provided, the fees, and key conflicts of interest.
- Fiduciary Duty Interpretation—The SEC reaffirmed and clarified the elements and scope of fiduciary that RIAs owe to their clients, including when making recommendations about rollovers from retirement accounts or recommending other accounts. Some in the industry may view this last point as breaking new ground.
- Solely Incidental Interpretation—The SEC also clarified when a broker-dealer’s advice is deemed to be “solely incidental” and thus exempt from the definition of “investment advisor.”
Firms will have until June 30, 2020, to comply with these new rules.
These rules initially generated thousands of comments and letters when they were proposed in April 2018. They remain a source of contention, drawing criticism from consumer advocates and Democrats on Capitol Hill. Like Jackson, opponents argue that the rules are confusing and won’t protect investors. The rules likely will be challenged in court, just as the Department of Labor’s fiduciary rule was challenged before it was thrown out by the courts in 2018 following implementation.
The new rules comprise more than 1,300 pages of text, and Schwab experts are sifting through the details. Look for further communications in the weeks ahead to help you understand the ramifications of the new regulations.
Retirement savings legislation moves forward
On May 23, the House of Representatives approved the Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act. The bill received overwhelming bipartisan support during a vote that went 417–3 in its favor. The legislation is now pending in the Senate.
Key elements of the bill:
- Increasing the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement accounts from 70½ to 72
- Repealing the age limit on making contributions to a traditional Individual Retirement Account after the age of 70½
- Allowing part-time workers who have worked at least 500 hours in three consecutive years to be eligible to participate in an employer-sponsored retirement plan
- Allowing penalty-free withdrawals from retirement accounts for birth or adoption expenses
- Requiring benefit statements to include lifetime income disclosures that illustrate how an individual’s savings would translate to a monthly income in retirement
- Making it easier for businesses, especially small businesses, to offer a retirement savings option to their employees
From an estate-planning perspective, this legislation would change the rules for inherited retirement accounts, often known as “stretch IRAs.” If approved, the new rules would require inherited retirement account assets to be distributed within 10 years of the account owner’s passing. Exceptions would be provided for a surviving spouse, individuals not more than 10 years younger than the account owner, individuals with a disability, and minor children.
If and when the bill is signed into law, the IRS, the Department of Labor, and other regulatory agencies would need to provide guidance and rules to spell out how these and other provisions would work.
In the Senate, a similar—but not identical—bill is under consideration. While many provisions overlap, there are some important differences. The Senate bill, for example, does not increase the RMD age. It would treat inherited accounts differently, requiring the assets to be distributed within five years, but add a $400,000 per-beneficiary exemption. These differences need to be reconciled before the bill can be signed into law, as each chamber must pass identical legislation.
Shortly after the House passed the bill, Senate leaders attempted to “hotline” the bill, a procedure in which the Senate approves a House-passed bill without making any changes. Following several objections by various senators, negotiations are underway to resolve their concerns. There is no timetable for when the bill might get a vote in the Senate.
Advocating on behalf of investors
The retirement savings bill and the new SEC rules were top of mind on June 13, when Charles Schwab and the Investment Adviser Association joined forces at the annual Adviser Advocacy Day on Capitol Hill. Four independent advisors joined with Schwab executives for a series of meetings with lawmakers and staffers from both the Senate and the House.
“It was a terrific day,” says Schwab Advisor Services Executive Vice President Bernie Clark, who was in Washington for the day of meetings. “The advisors had the opportunity to share the story of their firms and the important role they play in helping their clients build and preserve wealth. Then we were all able to share our perspective on both the retirement bill and the new regulations governing standards of conduct for financial professionals.”
Clark says this kind of advocacy is critically important for the profession. “There’s real value in meeting with elected officials and their staffs,” he says. “It’s an opportunity to help lawmakers understand how their decisions impact advisors and their clients.”
This report is current as of June 25, 2019. Look for a future RIA Washington Watch from Schwab’s D.C. insider Michael Townsend.
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