Washington Watch
The SECURE Act, Regulation Best Interest, advertising rules update and more
Key Points
• SECURE Act: A last-minute deal saw the retirement savings bill become law just days before the end of 2019.
• Regulation Best Interest: The deadline for ling and distributing the Client Relationship Summary nears, but clari cation is still needed.
• Updates to the advertising rule: A new proposal seeks to ease advertising restrictions and bring requirements into the modern media age.
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 dif cult 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 signi cant implications for Registered Investment Advisors (RIA).
Here’s a status report on some of the key issues affecting advisors and how they could evolve in the year ahead.
SECURE Act becomes 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 oor for a vote this past 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 passed into 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 701⁄2 to 72, as well as lifting restrictions on contributions to a traditional IRA after age 701⁄2. 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.
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The bill also makes a signi cant 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.
After passing both the House and Senate in the nal week before the holidays, the bill was signed into law by the president on December 20. The retirement savings provisions mostly went 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 led 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 clari cation. 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 this year. In an echo of the 2018 overturning of the Department of Labor (DOL) duciary rule, a combination of advisory rms 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 duciary rule on broker-dealers. But they argue that the new best interest standard for brokers is not a duciary rule. The case is pending, and the timing of a resolution remains uncertain.
Meanwhile, the DOL says it plans to again propose its own duciary 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 10. 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 de nition 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 quali cations 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)
On December 18, the SEC proposed expanding the de nition, 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, a long time advocate of overhauling the rule, recently pointed out that many de ned bene t plans invest in private securities, yet those options are closed to individuals in a de ned contribution plan. His hope is to push forward with a rule that will make nonpublic securities more accessible to a broader array of investors. The proposed rule is now subject to a public comment period that will run through the end of February.
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Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
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