Unease over China tariffs, movement on retirement legislation
SEC best-interest rules: The commission’s ongoing push to clarify the standard of conduct for broker-dealers and investment advisors drew more than 5,000 comments, but a final decision is unlikely before 2019.
China trade dispute: Escalating tariffs and the prospect of higher prices raise pressure on Congress to counter the White House’s trade strategy.
White House retirement savings initiative: Presidential executive order calls for review of required minimum distribution rules and aims to help small businesses band together on retirement plans for employees.
RIA Washington Watch is an ongoing series featuring the observations, insights, and analysis of Michael Townsend, vice president of legislative and regulatory affairs for Charles Schwab & Co., Inc., regarding issues and topics that affect Registered Investment Advisors (RIAs), their clients, and the RIA industry.
This fall is shaping up to be a fascinating time in the nation’s capital. There’s the confirmation battle for an open seat on the Supreme Court. Negotiations to avert a government shutdown at the beginning of October. An escalating trade dispute with China. And an epic midterm election that could change the balance of power in Washington.
All of these are unfolding as a cloud of controversy hangs over the White House in advance of the publication of special counsel Robert Mueller’s potentially game-changing investigative report.
Amid these rumbles and distractions, here’s a quick look at some of the key issues that advisors should watch as 2018 winds down.
SEC best-interest rules draw wide-ranging comments
No issue has greater potential to dramatically alter the landscape for investment advice than the proposed rules from the U.S. Securities and Exchange Commission (SEC) that seek to clarify the standard of conduct for broker-dealers and investment advisors. In April, following a court decision to invalidate the Department of Labor (DOL) fiduciary rule, the SEC proposed two new rules and some guidance:
- Regulation Best Interest. This proposed rule requires broker-dealers to act in the best interest of retail customers when making recommendations. Broker-dealers would need to disclose and mitigate or eliminate conflicts of interest. Unlike the DOL rule, which applied only to retirement accounts, the SEC proposal applies to both taxable and nontaxable accounts.
- Form CRS Relationship Summary. Investment advisors and broker-dealers would be required to provide retail investors with a document of no more than four pages that highlights the services being offered, applicable legal standards of conduct, the fees involved, and any conflicts of interest. Additionally, broker-dealers would not be allowed to use “adviser” or “advisor” as part of their title—a change that would help customers more easily distinguish broker-dealers from investment advisors.
- Investment Advisor Interpretation. The SEC’s proposed interpretation reaffirms and clarifies existing fiduciary duties that investment advisors owe to their clients. Unlike broker-dealers, investment advisors have a duty—depending on their agreements with clients—to monitor clients’ portfolios on an ongoing basis. With respect to conflicts of interest, advisors would need to consider the interpretation’s statement that disclosure alone is not always sufficient. The SEC also requested comments on whether it should propose new rules for advisors in areas that include continuing education requirements, mandatory account statements, and financial responsibility obligations such as net capital or fidelity bonding.
More than 5,000 comments were submitted to the SEC by the August 7 deadline; SEC staff members and commissioners also had held nearly 100 meetings with interested parties as of mid-August.
Schwab weighs in on rules
Schwab submitted a detailed comment letter that generally supports the rule package but also recommends a number of changes and improvements. Suggestions include reducing the four-page Form CRS Relationship Summary to a simpler one-page document that highlights the most important elements of the relationship between an investor and a broker-dealer or investment advisor. Schwab also provided a detailed rationale for why we oppose having any new broker-like rules applied to investment advisors. Schwab’s letter includes independent research commissioned by the firm to assess retail investors’ understanding of “fiduciary” and “best interest.” Researchers also asked investors about the type of content, method, and frequency of disclosures they prefer when it comes to terms relating to the investment advice they receive. See the full text of Schwab's letter.
The SEC is now reviewing all comments and determining what, if any, changes should be made to its proposal. Commissioners have not set a deadline for finalizing the rules, but the complexity and controversy of the proposal make a final decision unlikely until 2019.
One complicating factor is turnover at the SEC. Commissioner Michael Piwowar stepped down in July, and has been replaced by Elad Roisman, formerly chief counsel for the Senate Banking Committee. Commissioner Kara Stein also plans to step down at the end of this year, and her replacement has not yet been nominated. Ultimately, two new commissioners who were not part of the SEC when its best-interest rules were proposed will end up voting on the proposal’s fate.
Congress is in the midst of a busy September
On Capitol Hill, the nomination of Judge Brett Kavanaugh to the Supreme Court has dominated recent headlines. However, Congress has also been engaged in a less noticeable but very important task: approving the 12 appropriations bills that fund government operations.
Time is tight: The government’s fiscal year begins October 1, which raises the possibility of a shutdown of parts of the government that haven’t yet been funded. But Congress almost certainly will pass a temporary measure to avoid a shutdown and ensure that all agencies are funded at least through the November election. These temporary agreements have become annual rites of passage at this time of year, and while more progress than usual has been made on the appropriations measures, it looks like another last-minute deal will be necessary.
Lawmakers also have a wary eye on the ongoing trade dispute with China. As of early September, the United States had imposed 25% tariffs on $50 billion in Chinese imports and China had slapped its own tariffs on an equal amount of U.S. imports. The administration has tariffs on an additional $200 billion of Chinese imports in the queue, while China has readied its own countermeasures.
Those pending measures are likely to be more noticeable to consumers and investors, in the form of higher prices and more direct impact on affected companies’ bottom lines. If constituents start to complain about higher prices for popular goods and local employers continue to feel the pinch of the Chinese measures, Congress will start to feel real pressure at home to push back on the administration’s trade strategy.
Executive order on retirement savings
On August 31, President Trump signed an executive order directing his administration to take steps to improve retirement savings opportunities. He asked the Treasury Department to review the required minimum distribution rules for IRAs, 401(k)s, and other employer-sponsored retirement plans. The current rules—which the White House noted have not been updated since 2002—call for retirees to begin taking distributions from their retirement accounts at age 70½. A review may lead to an easing of the withdrawal requirements, and this could help retirees spread their savings over a longer period of time and keep more money invested.
The order also directs the Labor and Treasury departments to develop rules that make it easier for small businesses to join together to offer retirement plans to their employees. “We will try to find policy ideas that will make joining a 401(k) plan a more attractive proposition for small employers to the ultimate benefit of their employees,” Assistant Secretary of Labor Preston Rutledge said in a call with reporters to discuss the executive order. In addition, the order urges the two departments to consider ways to reduce paperwork and other administrative burdens that discourage businesses from offering retirement savings opportunities to employees.
There is also an effort on Capitol Hill to move retirement legislation before the end of the year, including some of the ideas announced in the president’s executive order. House Ways and Means Chairman Kevin Brady (R-TX) proposed a Tax Reform 2.0 bill to make permanent the individual tax cuts enacted at the end of 2017, which are set to expire after 2025. The bill includes several proposals to improve retirement savings, including expansion of open multiple employer plans, as well as provisions that would ease portability of lifetime income investments in plans, repeal the maximum age for contributing to a traditional IRA, and block loans from qualified employer-provided plans through credit cards. The legislation would also create universal savings accounts, also called rainy-day accounts, which give people another opportunity to save. While approval of a broad tax bill is highly unlikely, the retirement provisions are expected to receive strong bipartisan support and could be broken out into their own legislation this fall.
Midterm election preview
With less than two months to go before the November election, both parties are engaged in an intense battle for control of Congress. In the House of Representatives, Democrats are optimistic that they can pick up the 23 seats needed to win the majority. Republicans are battling both history—over the last 100 years, the party in the White House has lost an average of 30 House seats in the first midterm election—and the current atmosphere, in which Republicans are on the defensive.
The story is a little different in the Senate, where Republicans hold a narrow 51–49 majority. But just 9 Republican Senate seats are up for election this fall, compared with 26 seats currently held by Democrats and two independent senators who caucus with the Democrats. Ten of the seats held by Democrats are in states that Donald Trump won in the 2016 election; defending those seats is the top priority of Democrats this fall. Three of the seats currently held by Republicans—open seats in Arizona and Tennessee as well as Sen. Dean Heller’s seat in Nevada—are considered toss-ups in November. If the Democrats sweep those three Senate seats, however, they would still need to win at least 25 of the 26 House seats they are defending in order to emerge with a razor-thin majority. No matter which party holds the Senate majority, the margin will likely be extremely narrow. And that’s a recipe for more gridlock in 2019.
This report is current as of September 13, 2018. Look for a future RIA Washington Watch from Schwab’s D.C. insider Michael Townsend.
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