Controversial proposals. Ambitious plans. And the fiduciary question (again).

RIA Washington Watch

The midsummer focus in Washington is on whether lawmakers can find a path forward on the president's economic agenda. A precarious bipartisan deal was forged in late June on an infrastructure package that includes funding for roads, bridges, public transit, rail, water projects, broadband expansion, and more. At the same time, Democrats and the White House are trying to put together a second bill focused on social programs, and likely including tax increases, that can pass without Republican support. The outcome remains highly uncertain and it will probably be September before one or both bills are finalized—or collapse.

The key question for investors and advisors continues to be around the possibility of tax increases. The president has proposed paying for his economic priorities by increasing the corporate tax rate and raising the top individual tax rate back to 39.6%. Though the specific details are still being worked out, those proposals seem to have broad support among Congressional Democrats.

More controversial—and more directly applicable to investors and advisors—are the president's two other proposed tax increases. The White House has called for taxing capital gains and dividends as ordinary income for filers earning more than $1 million per year, a proposal that could mean a top tax rate of 43.4% for capital gains. The administration has also proposed ending the step-up in basis for inherited assets.

Both proposals are extremely controversial, even among some Democrats. Most observers think it's unlikely that Congress will tax capital gains at ordinary income rates for anyone. Instead, a compromise top rate of 28–30% has been suggested, but even that faces an uncertain climb in Congress.

Ending the step-up in basis likewise has engendered skepticism among Capitol Hill Democrats, some of whom have said publicly that they are worried about the impact on family farms and multi-generation family businesses. It's far from clear that such a proposal could capture the necessary votes to pass both the House and Senate.

At this point, the potential for tax increases this year remains cloudy. Advisors should stay tuned as the negotiations continue on Capitol Hill.

A rare glimpse of bipartisanship: Retirement savings

One of the few issues attracting bipartisan support on Capitol Hill is retirement savings. Legislation has been introduced in both chambers. The Securing a Strong Retirement Act was introduced by House Ways & Means Chairman Richard Neal (D-MA) and the committee's top Republican, Rep. Kevin Brady (R-TX) in May. Later that month, Senators Ben Cardin (D-MD) and Rob Portman (R-OH), who have collaborated on retirement issues for two decades, introduced the Retirement Security and Savings Act.

Both bills would slowly raise the required minimum distribution (RMD) age from 72 to 75 over the next decade, and both would exempt accounts with less than $100,000 from RMDs. Both would increase the catch-up contribution to $10,000 for near-retirees—the Senate bill for savers over age 60 and the House bill for individuals age 62 to 64. The two bills also take a number of steps to make it easier for small business to start a savings plan for their employees, to encourage lower-income workers to save, and to make it easier for companies to automatically enroll employees in their plan. Differences between the two bills are considered relatively minor and likely to be worked out with much difficulty if and when the bills pass their respective chambers.

The strong bipartisan backing in both chambers is a good sign for eventual passage, but the timing is less certain. Other issues are higher on the priority list at this time, so it could be late 2021 or even early 2022 before Congress turns its attention to retirement savings legislation. Nonetheless, advisors should keep track of the progress of these important bills.

SEC outlines ambitious regulatory agenda

After three months in his role as SEC Chair, Gary Gensler has outlined an extremely aggressive agenda for the agency, with potentially enormous implications for investors and advisors. The SEC released its regulatory agenda in late May, and Gensler provided more detail during Congressional testimony and multiple speeches in June. Here are the key issues the agency will be focusing on over the next 6 to 12 months:

  • Market structure overhaul: Gensler said that the ongoing retail trading frenzy in so-called "meme stocks" has brought to the fore a number of concerns about the structure of the capital markets. Gensler has asked the SEC staff to prepare recommendations for the commission on reforms to improve market efficiency. "Rules adopted mostly 16 years ago do not fully reflect today's technology," he said in a June speech. "I believe it's appropriate to look at ways to freshen up the SEC's rules." Gensler said he was concerned about whether too much trading was happening away from "lit markets," and also questioned whether the off-exchange markets were too concentrated in a small number of companies. "Market concentration can deter healthy competition and limit innovation," he said. "It can also increase potential system-wide risks." Gensler also said that payment for order flow raises "questions about whether investors are getting best execution" and that the national best bid and offer (NBBO) system may not "be a complete enough representation of the market." Finally, he suggested that shortening settlement times from today's T+2 system to T+1 or even same-day settlement "could reduce costs and risks in our markets." The issues outlined by Gensler in the speech are complex and controversial, so expect this regulatory process to be a slow-moving one. But the potential implications for investors are significant.
  • Cryptocurrency: On June 16, the agency announced that it was once again delaying a decision on an asset manager's application to launch the country's first Bitcoin Exchange-Traded Fund. Nearly a dozen asset managers have applications in the queue for approval, but the SEC has rejected all applications since the first one back in 2013. This time, however, the SEC did something different, putting out a request for public comment on the proposal and asking for feedback on a series of questions about whether cryptocurrency is too volatile, has adequate investor protections and is too susceptible to fraud and manipulation. With a comment period and a subsequent rebuttal period open until mid-August and the potential for a lengthy review after that, the SEC is unlikely to make any decisions on a Bitcoin ETF until late 2021 or early 2022.
  • Corporate disclosure: Perhaps the fastest-moving item on the SEC agenda is the push to require public companies to increase disclosure to investors on climate risk. Chair Gensler has also suggested companies should be more forthcoming on political spending, diversity and inclusion, and CEO pay and other workforce issues. A proposed rule is expected in the coming months.
  • Advisor custody rules. Also on the SEC 's forward-looking rulemaking agenda is a plan to "improve and modernize the regulations around the custody of funds or investments of clients by investment advisors." Little detail is available about the agency's plans, but it set an April 2022 target for issuing a rule proposal.
  • Definition of accredited investor. The agency also said it plans to revisit the accredited investor rule that was implemented less than a year ago, possibly by adjusting the income and net worth thresholds. The two Republican commissioners expressed frustration that changes were being contemplated to such a recent rule update.

Importantly, the SEC's regulatory agenda is an aspirational list, with aggressive and often unrealistic timelines. It remains to be seen how many of these agenda items the SEC will focus on in the coming months.

Department of Labor to revisit fiduciary definition … again

Finally, no Washington update about key issues for investment advisors would be complete without reporting on the latest developments in the seemingly endless debate over who is a fiduciary. The Labor Department's latest agenda indicated that the DOL will revisit the regulatory definition of "fiduciary," reopening a long-running battle in Washington over the regulation of investment advice for retirement savers. This is not a surprise—earlier this year, the Labor Department decided to allow a rule finalized at the end of the Trump administration to go into effect but said it expected to revisit the rule in the near future. The DOL has now spent more than a decade, under three different presidents, wrestling with how to define "fiduciary" and ensure that retirement savers get conflict-free investment advice. A rule defining who is a fiduciary went into effect during the Obama administration but was later invalidated by the courts. The Trump administration then reinstated a five-part test to determine whether the advice is considered "fiduciary investment advice." Now the Biden administration will take its shot at settling the fiduciary debate.