Regulatory action includes SECURE Act breakthrough, Reg BI deadlines, ad rule proposal and more.

Key Points

  • SECURE Act: A last-minute deal has the retirement savings bill poised to become law before the end of 2019.

  • Regulation Best Interest: The deadline for filing and distributing the Client Relationship Summary nears, but clarification is still needed.

  • Updates to the advertising rule: A new proposal seeks to ease advertising restrictions and bring requirements into the modern media age—could your marketing benefit?


  • Featuring the insight and analysis of Michael Townsend regarding issues and topics that affect Registered Investment Advisors (RIAs), their clients, and the industry.

    Throughout 2019, Congress remained bitterly divided. Despite a relatively light agenda, legislative activity slowed to a glacial pace. Deepening the divide, the impeachment inquiry consumed much of the oxygen in the nation's capital. Lawmakers struggled to agree on the annual appropriations bills that fund federal agencies and programs. And with tense election-year battles for the White House and Senate on tap, gridlock in Washington won't be letting up anytime soon.

    Election-year politics will make it difficult to move legislation through Congress in 2020. However, the regulatory environment should be much busier. Regulators often scramble to complete rules before a presidential election, since a change in who occupies the White House can mean scrapping in-progress rules and focusing on other priorities. And there are several rules in various stages of the rulemaking process that have potentially significant implications for RIAs.

    Here's a status report on some of the key issues affecting advisors and how they could evolve in the year ahead.

    SECURE Act poised to become law

    After the House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in May by a whopping 417–3 vote, there was considerable optimism that the bill would sail through the Senate and be signed into law. However that was not how things unfolded. Despite numerous attempts by Senate leaders to bring it to the floor for a vote this fall, objections from a handful of senators kept that from happening. But in a last-minute turn of events, the bill was added to a massive end-of-year spending package and was poised to become law right before the holidays.

    Key provisions of the bill include increasing the age at which individuals must begin taking required minimum distributions from their retirement accounts from 70½ to 72, as well as lifting restrictions on contributions to a traditional IRA after age 70½. The legislation also would require lifetime income disclosure, a sort of progress report that savers would receive annually, showing how their current savings would translate into a monthly income in retirement.

    The bill also makes a significant change to the so-called "stretch IRA" rules. Under current law, individuals who inherit a retirement account are allowed to distribute those assets over the course of their lifetime. The bill requires those assets to be distributed within 10 years, which could have major implications for estate planning.

    The giant government funding bill that includes the SECURE Act was slated to be approved by both the House and Senate late during the week of December 16. Once it passes both chambers, it is expected to be signed into law by the president. The retirement savings provisions mostly go into effect on January 1, 2020, though the Treasury Department and the IRS will need to write a number of rules and regulations to implement the bill fully. That process is likely to take months.

    Busy regulatory environment

    At the top of the list of regulatory developments to watch in 2020 is Regulation Best Interest. The rule package has a compliance deadline of June 30. In addition, the new Client Relationship Summary (Form CRS) must be filed with the SEC between May 1 and June 30. By that time, advisors must begin distributing the form to clients and prospects. As with any new regulation, several areas need clarification. And Schwab has been working closely with industry groups to get answers from the SEC.

    As the industry prepares for the deadline, a pending legal challenge to the rule itself could come to a head next year. In an echo of the 2018 overturning of the Department of Labor (DOL) fiduciary rule, a combination of advisory firms and state attorneys general is seeking to delay or throw out the SEC's new rule. Among the arguments plaintiffs are making is the idea that the Dodd-Frank Act gives the SEC the authority to impose a fiduciary rule on broker-dealers. But they argue that the new best interest standard for brokers is not a fiduciary rule. The case is pending, and the timing of a resolution remains uncertain.

    Meanwhile, the DOL says it plans to again propose its own fiduciary rule that will align with the SEC rule. One element of uncertainty is what role new Labor Secretary Eugene Scalia will play in the DOL rewrite. Scalia, who became labor secretary on September 30, was one of the lead attorneys for the industry in the successful challenge to DOL's 2016 rule. The department has said Scalia does not need to recuse himself from the rewrite. But there's no question his arrival has slowed the timing of the proposal. While the revised rule was expected to be proposed before the end of 2019, it looks like it won't happen until 2020.

    Long-awaited update to advertising rule

    In November, the SEC proposed updates to the advertising and solicitation rules for RIAs. The changes were a long time coming—the advertising rule hasn't been updated since 1961, while the solicitation rule has been on the books since 1979. The proposed changes are designed to bring the requirements into the modern media age and ensure that the same rules apply across all types of media. They adopt a principles-based approach that the SEC describes as more "permissive" than the broad limitations that have been standard for decades. SEC Chair Jay Clayton says the rule would "permit the use of testimonials, endorsements, and third-party ratings, subject to certain conditions, and would include tailored requirements for the presentation of performance results based on an advertisement's intended audience." Updates to the solicitation rule would expand the current rule to include agreements involving all forms of compensation, not just cash.

    The rules are outlined in a 500-plus-page proposal. Public comments are due February 10th. The proposed amendments represent a major shift in two of the industry's oldest rules. Advisors should invest time in understanding how the proposals would affect their RIA business. Meanwhile, policy experts at Schwab are reviewing the rule proposals and analyzing their impact.

    Softening the rules on who can invest in private markets

    Finally, another regulatory development worth paying attention to is the SEC's plan to change the definition of accredited investor. For years, retail investors have been shut out of investing in private funds, startups, and other nonpublic securities unless they meet an income or net worth test.
    Current qualifications included one of the following:

    • Annual income of at least $200,000 per year (or $300,000 household income) for the last two years
    • Net worth of at least $1 million (not including the value of an investor's primary residence)

    Clayton has long been an advocate of overhauling the rule, which appeared on the agency's priority list this fall. That's a sign a proposed rule could come in 2020. Capitol Hill is also interested in the issue, with multiple bills proposed to revamp the definition. One possible focus is opening up the rule so that individuals with qualifying educational or professional experience would meet the standard. For example, a doctor could invest in a health care startup under the new rules. Clayton recently pointed out that many defined benefit plans invest in private securities, yet those options are closed to individuals in a defined contribution plan. His hope is to push forward with a rule that will make nonpublic securities more accessible to a broader array of investors. Stay tuned—an update of the rule was scheduled to be proposed on December 18.

    This report is current as of 12/16/19. Look for another roundup next quarter 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.