A look ahead at what RIA firms can anticipate for Fall 2022
This report is current as of August 12, 2022
With the midterm elections just three months away and inflation at a four-decade high, it has been a busy summer for lawmakers and regulators in Washington. Early August saw Democrats pass the "Inflation Reduction Act," a surprise bill that combines measures to combat climate change with some health care provisions, a new corporate minimum tax and a boost in funding for the IRS – all of which is projected to result in a modest reduction in the budget deficit. It's a significantly scaled-down version of the president's long-sought economic package but still represents a win for the White House.
Meanwhile, retirement savings legislation continues to percolate on Capitol Hill and regulatory agencies, particularly the Securities and Exchange Commission (SEC), have been busy. Here's a brief look at some of the key developments affecting advisors and investors.
Retirement savings makes progress in Senate
Among the key issues to watch as we head into the fall is retirement savings legislation. The House of Representatives voted 414–5 to approve the SECURE Act 2.0 in March. That bill would increase the required minimum distribution (RMD) age from 72 to 73 next year, to 74 in 2030, and to 75 in 2033. The legislation also would increase the catch-up contribution limit to $10,000 for individuals ages 62 to 64. And it includes numerous provisions to boost employer-sponsored plans, making it easier for businesses to start and operate plans and for employees to participate.
This summer, the Senate has made progress on its version of the legislation. Two different committees—the Senate Finance Committee and the Senate Health, Education, Labor and Pensions Committee—unanimously approved bills that track the House-passed legislation. But numerous differences will need to be ironed out. For example, the Senate wants to jump the RMD age to 75 all at once—but not until 2032. And the $10,000 catch-up contribution would apply to individuals ages 60 to 63.
Normally, the Senate would combine the bills from its two committees into one bill, pass that through the full Senate, and House and Senate negotiators would meet to produce a final compromise. However, the chambers are reportedly modifying that approach by negotiating behind the scenes, with the goal of reaching an agreement before any further votes. Then each chamber could vote on the final product.
A key question for advisors is how the different approaches to increasing the RMD age will be resolved. Our sources tell us that the final agreement is likely to look more like the Senate version—a single jump to age 75 several years down the road.
We believe that the retirement savings legislation won't see final action until after the November elections. It is likely to be combined with other spending measures in a larger package, so a December timeline remains a strong possibility. That's how the original SECURE Act passed in December 2019.
Tax increases on individuals off the table for 2022
Deciphering the political winds when it comes to potential tax increases has been a rollercoaster ride over the last 12 months. A year ago, key Democrats on Capitol Hill were floating an increase in the top individual income tax rate, a new top rate for capital gains, changes to the estate tax, and more. Later last fall, various wealth tax proposals picked up momentum. But the year ended without any tax increases when the Build Back Better Act, an economic package focused on climate change and social programs, collapsed in the Senate.
Fast-forward to summer 2022. A July agreement to shore up the Medicare program by expanding the 3.8% Net Investment Income Tax to apply to income earned from pass-through businesses like LLCs and S corporations seemed to gain momentum, only to be dropped when the Inflation Reduction Act came together. In the end, the legislation included no direct tax increases on individuals. Instead, the final package created a 15% corporate minimum tax and imposed a 1% tax on stock buybacks. With the midterm elections in sight, individual tax increases look to be off the table for this year. And with Republicans optimistic about their chances to recapture the majority in the House of Representatives in 2023, it may be a while before individual tax code changes are part of the discussion on Capitol Hill.
SEC continues breakneck regulatory pace
This summer the SEC welcomed two new commissioners to the agency. Jaime Lizárraga, a longtime aide to House Speaker Nancy Pelosi (D-CA), was confirmed as a replacement for Democratic Commissioner Allison Herren Lee. And Mark Uyeda, a former staff counsel to the Senate Banking Committee, was confirmed to fill the vacancy created when Republican Commissioner Elad Roisman resigned in January. The two new commissioners will be busy from the outset, as the SEC continues its aggressive regulatory agenda. In a late June update on its regulatory priorities, the agency listed 53 priorities: 27 in the proposed rule stage and 26 in the final rule stage, meaning that the rules have been proposed and a public comment period completed.
Of particular note for advisors and investors, SEC Chair Gary Gensler used a June speech to outline a major initiative to overhaul equity market structure. He called for the creation of an order-by-order auction mechanism for retail trades run by the stock exchanges, which would be a fundamental change to the way trades are handled today. He also called for changes to best execution rules, payment for order flow rules, the treatment of odd lots, and the consideration of sub-penny pricing, among other ideas. This was just a speech, but we expect a package of rules to be formally proposed in the coming weeks. There are potentially significant impacts here for retail investors, depending on the details.
Climate-related disclosure continues to be a hot topic at the SEC. The agency's controversial proposal to require public companies to disclose more about their climate impact and the risks they face from climate change spurred about 3,500 comment letters, with many commenters concerned that the proposal increases legal liability and imposes significant costs. There are also questions about whether the SEC has the legal authority to promulgate such a rule.
The SEC also recently proposed revisions to the long-standing Names Rule, which governs how funds can use certain words in their names. While the proposal ostensibly tries to create standards for using words like "green" and "sustainable" in a fund name, the language of the proposal could impact the use of a broad array of terms, including "growth," "value," and "international."
Finally, the SEC proposed new disclosure rules for Registered Investment Advisors (RIAs) that consider ESG factors as part of their advisory services. Advisors would need to provide clients with details on the ESG criteria or methodology they use to evaluate, select, or exclude investments. Notably, the rule proposal does not provide definitions of "E," "S," or "G." While it may be logical to avoid putting specific definitions around these factors, given the evolving nature of the marketplace, the lack of specificity requires subjective judgments that could elevate risk for advisors.
All three of the ESG and climate-related rules remain in the consideration phase, with the SEC reviewing comments and considering whether changes need to be made before voting for a final rule. While there is no specific timeline for moving to final rules, Gensler has indicated that he would like to finalize as many of the proposals on his long agenda as possible by the end of 2022. Also likely this fall are final rules on money market fund reform and increased disclosure requirements for private funds that are designed to increase transparency for investors.
In early August, the SEC issued a staff bulletin that addressed conflicts of interest for broker dealers and RIAs. The bulletin warned advisors against taking a "check the box" approach to conduct rules and urged firms to pay particular attention to potential conflicts involving compensation and pay incentives, providing a lengthy list of examples. The bulletin includes a number of questions and answers for RIAs about managing conflicts under Regulation Best Interest. The bulletin, which RIAs should take the time to review, is available here.
Last but not least, no Washington update for RIAs is ever complete without a brief update on the Department of Labor's unending quest to update the fiduciary rule. The Biden administration has made it clear that it intends to take another run at redefining who is a fiduciary in the retirement savings context. However, the growing sense in Washington is that competing priorities and the lack of Senate confirmation for the long-delayed nominee to head the DOL's Employee Benefits Security Administration have made another attempt at a fiduciary rule overhaul unlikely before 2023.