Washington heats up: Stimulus packages, regulations, and upcoming elections

RIA Washington Watch

Key Points

  • HEROES Act halted: The Senate presses pause on the HEROES Act, but a new COVID-19 aid bill is still expected this summer. 

  • Retirement savings incentives: Keep an eye on whether additional retirement provisions will be part of the next stimulus act.

  • Reg BI: The SEC chairman released a statement on the Regulation Best Interest rule. It’s worth reviewing.

  • New DOL rules: The Department of Labor rolled out new e-delivery rules, guidance to open up 401(k) investment in private equity options and a new fiduciary proposal.

  • Election outlook: The fight for the White House isn't the only big election. The battle for the Senate is what markets are watching.


As summer began, the country remained roiled by a trio of culture-altering events: the ongoing coronavirus pandemic, unprecedented economic upheaval, and nationwide activism around social justice. Yet, from late March to July, the markets showed astonishing positive momentum. For investors it’s a confusing and challenging time that underscores the importance of access to solid investment advice and financial planning. 

Congress is back to full-time work. But it’s not business as usual. Because of COVID-19, lawmakers are taking precautions, including social distancing, more remote and virtual committee proceedings, and—for the first time ever—proxy voting in the House of Representatives. With an election in less than four months, lawmakers are scrambling to get work done before a possible change in the political balance in 2021. There are several key developments for investment advisors and investors to follow.  
 

Is another coronavirus aid package coming?

Topping the list of policy items to watch is the next coronavirus aid and economic stimulus package from Congress. Lawmakers came together in March and April to produce four bipartisan aid packages totaling roughly $2.8 trillion. However, action nearly halted in May and June. The House of Representatives narrowly approved the $3 trillion HEROES Act on May 15, but unlike its four predecessors, the bill was not the result of bipartisan negotiations. Instead, House Democrats drafted and passed the bill as a wish list with only one Republican vote. House Speaker Nancy Pelosi (D-CA) acknowledged it was merely a starting point for negotiations with the Republican-controlled Senate.  

The HEROES Act includes about $900 billion for state and local governments, the top priority for Democrats. Among dozens of other provisions, the bill also features funding for the following:

  • Direct payments to low- and middle-income taxpayers
  • Hazard pay for frontline workers
  • Money for assistance with rent, mortgage payments, and utilities
  • Funds for hospitals, health care providers, coronavirus testing, and contact tracing
  • $25 billion for the Postal Service 
  • Forgiveness for up to $10,000 in student loans for certain borrowers

But the bill was a nonstarter in Senate, where Republicans not only refused to consider it but by early July had not put forward an alternative proposal. Some Republicans argued that a significant portion of the funds allocated under the CARES Act, the largest of the four aid packages, have only recently begun making their way into the economy. They wanted to wait and see how that money affects the economy before passing additional legislation. 

For example, the Fed's $600 billion Main Street Lending Program, which is targeted at midsize businesses with between 500 and 15,000 employees, did not get off the ground until late June. Republicans also pointed to lower-than-expected unemployment numbers in May and June and an uptick in retail sales as evidence that the economy may not need another boost so soon. Democrats, however, pushed for quicker action, particularly to help states and municipalities with their growing budget shortfalls.

All of the posturing aside, both sides have said that another major bill will be passed this summer. Republican leaders have argued for a bill of about $1 trillion. President Trump said in mid-June that he would support a $2 trillion package, roughly splitting the cost difference between the Republican suggestion and the HEROES Act. Republican priorities include liability protections for business, a return-to-work bonus for employees, and a more targeted round of stimulus payments to low-income taxpayers. They are expected to present an alternative to the HEROES Act in late July, after the two-week recess. Why then? Enhanced unemployment benefits, which were approved in the spring, are set to expire on July 31.

Investment advisors should keep an eye on the discussions for additional retirement savings incentives. The CARES Act waived required minimum distributions (RMDs) for 2020 and allowed penalty-free hardship withdrawals from retirement accounts. The HEROES Act would retroactively waive RMDs for 2019. It would also remove the rule that prevents monthly RMD installments from being rolled back into a retirement account more than once a year. It is uncertain whether these incentives will survive negotiations with the Senate. But a bipartisan group of Senators is working on other retirement savings changes for the next aid bill. Ideas in the mix include waiving RMDs for 2021, enhanced catch-up contributions, and changes to multiple-employer plans. Stay tuned in July to see whether any of these provisions make it into the final package.

Regulatory developments

The final months before an election are often busy, as regulatory agencies race to finalize proposals before a potential change in the administration. This year is shaping up to be no exception. Developments of note:

  • SEC issues statement on launch of Regulation Best Interest (Reg BI). SEC Chairman Jay Clayton outlined a number of important thoughts about the formal compliance date of June 30 for Reg BI. Clayton's full statement is worth investment advisors’ time to review. Among other things, Clayton announced a new educational, investor-focused client relationship summary (Form CRS) website. He also referenced the new regulation’s applicability to rollovers and withdrawals from 401(k) and other retirement plans, including the new hardship withdrawal rules from the CARES Act. Meanwhile, in late June, a federal appeals court rejected a challenge to Reg BI brought by seven states and a financial planning network. The new rules went into effect as scheduled at the end of June.

  • Department of Labor (DOL) proposes new fiduciary rule. The DOL is taking another stab at implementing a fiduciary standard for retirement accounts. The previous rule was vacated by the courts in 2018, but on June 29 the agency proposed a redrafted rule to govern investment advice in retirement accounts. The proposal would provide exemptions under the Employee Retirement Income Security Act (ERISA) to allow fiduciaries to receive compensation for advice if they act in the retirement savers’ best interests. The proposal reinstates the five-part test under ERISA to determine who is a fiduciary. The DOL reportedly collaborated with the SEC to ensure the proposal harmonizes with Reg BI. The proposal is currently in a public comment period, but the DOL hopes to finalize the rule this year.

  • New electronic delivery rules passed. On May 21, the DOL passed a much-anticipated rule that allows employers to deliver certain information to participants by email and on a website, but participants can still choose to receive paper notifications. This move by the DOL may increase pressure on the SEC to accelerate its rulemaking on e-deliveries.

  • DOL issues guidance making it possible for 401(k) plans to invest in private equity funds. The opening of defined contribution plans to private equity investment options is not without controversy. And it remains to be seen how many plans will make it an option. Pension funds have long had the ability to invest in private equity. The new guidance will "level the playing field for ordinary investors," according to Labor Secretary Eugene Scalia. The DOL move was made in coordination with the SEC’s own efforts to make it easier for investors to invest in private equity, including a proposal to redefine "accredited investor." That proposal is still awaiting final action by the commission.

Voting uncertainty may dominate the months ahead

As we move through the summer, the election will increasingly become front and center. Former Vice President Joe Biden has secured the Democratic nomination. He is expected to select a running mate by August. Both parties will hold their conventions in late August (significantly modified because of the coronavirus), and then the campaign for the White House will move into high gear.  

For investors, the part of the election that may be the most important is the battle for control of the Senate. Republicans hold a 53–47 advantage at the moment, but there are 23 Republican-held seats up for re-election this November, compared with just 12 Democratic-held seats. While a Democratic majority is far from a sure thing, momentum in recent weeks seems to be favoring Democrats. Republicans have very tough battles on their hands to hold seats in Arizona, Colorado, Maine, and North Carolina. Seats in Georgia, Iowa, and Montana are looking increasingly competitive. Republicans are favored to pick up a seat currently held by a Democrat in Alabama, and they are hopeful about a seat in Michigan. Right now, there are few other opportunities for Republicans on the Senate map. Democrats are heavily favored to retain their majority in the House of Representatives. The policy agenda in 2021 will be determined by whichever party controls the Senate and the White House. We’ll have a more in-depth preview in our fall commentary.

The X factor now is what impact dramatic changes in voting may have on the fall election. Because of the pandemic, many states will be encouraging voting by mail rather than in person. The rules for voting by mail vary widely from state to state, which may increase turnout in some areas while confusing some voters and dampening turnout in others. The process for authenticating and counting ballots could be slower and more challenging. The possibility exists that we will not know who won the White House or which party controls the Senate on election night or for days afterward. 
 

This report is current as of 07/17/20. Look for another roundup next quarter from Schwab's D.C. insider Michael Townsend.

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