A dolittle Congress has made it a little easier to follow the dizzying array of laws, rules and regulations impacting financial advisors in recent years.

The partisan gridlock in Washington has moved the center of action for advisors from lawmakers to regulators in the executive branch, said Neil Simon, vice president of government relations for the Investment Adviser Association (IAA) last week at TD Ameritrade’s National LINC conference in Orlando, Fla.

“As you know, Congress hasn’t been doing a whole lot,” said Simon. “If I started the session talking about the major accomplishments, there’s just one I will be talking about later, but otherwise we would go straight to questions and answers. There’s not much to discuss besides what is called the SECURE Act.”

Congress is being slowed down not just by what Simon deemed a “hyperpartisan” environment, but also by the Senate Banking Committee.

“There’s a saying that the Senate is where House bills (and perhaps impeachment) go to die,” said Simon. “The House Banking Committee has been passing legislation, bills are coming out and a lot of those bills have passed the House, but nothing is happening in the Senate.”

The intransigence of the Senate Banking Committee could have an impact on the regulation coming from federal agencies. In the coming weeks, a vacancy at the Securities and Exchange Commission will open when Commissioner Robert Jackson, an independent occupying a Democratic seat, steps down to return to a tenured position at the NYU School of Law.

When that happens, the committee might not be in any hurry to fill Jackson’s vacancy with another Democrat, said Simon.

“How likely is it that the White House is going to move rapidly in nominating another Democrat to the SEC? They’ll get it done, but not on a fast mode,” said Simon. “Even if they do, how likely is it that the Banking Committee will take up the nomination?”

The SECURE Act
The SECURE Act is a piece of retirement savings legislation that actually made it through Congress, said Simon, but not by direct means.

Though the House of Representatives passed the measure in May 2019, the Senate Banking Committee failed to pass it, said Simon, which meant the reforms languished until late last year, when they were included as part of a massive bipartisan spending package that kept the government open.

While many of the headlines about the SECURE Act have focused on permitting multiple-employer retirement plans for small businesses, expanding retirement plan eligibility to part-time employees and the potential inclusion of annuities in retirement plans, Simon said that the changes to IRAs are more dramatic.

For example, the measure eliminated the age cap of 70½ for traditional IRA contributions, which means Americans can now contribute to a traditional IRA at any age. It also extended the starting age for required minimum distributions from 70½ to 72.

“The bad news is the ‘pay-for’ for this version, because under House rules, if you propose something that’s going to cost money, [require] government expenditures or reduce revenue to the Treasury, which these proposals will do, it has to be offset by a ‘pay-for,’” said Simon. “The ‘pay-for’ in this measure estimated that it would cost a total of $16.6 billion dollars, and that would be covered by a measure that curtails the so-called stretch IRA technique that is used to stretch the taxation of [an inherited IRA’s designated beneficiary].”

Under the new legislation, the SECURE Act requires beneficiaries who inherit IRA assets to withdraw the entirety of those balances within 10 years. Before, the withdrawals could be “stretched out” for tax purposes.

Regulation Best Interest (Reg BI)
Since Congress is a non-player, more of the financial industry’s fate now falls in regulators' hands, said Simon, with the SEC’s Reg BI being the policy that most affects financial advisors.

Despite pending legal challenges to the regulation brought by a coalition of state attorneys general and the XY Planning Network, advisors should be prepared to abide by the June 30, 2020, deadline for compliance, said Simon.

“We’ll get to a decision, but I can’t tell you when,” he said. “There’s a chance the courts knock it down—the courts have not been reluctant to knock down agency rulemaking in recent years, but don’t count on it.”

The Ad Rule
The SEC has also signaled that it’s stepping in to modernize the “Ad Rule” guiding advisor marketing behavior.

The current rule, drafted in 1961, needs to be changed, said Simon.

“The rule was written three years before the fax machine and two decades before cable TV, three decades before Al Gore invented the internet, and of course before social media,” he said.

But while the SEC’s rulemaking might be a “step in the right direction,” Simon warned advisors that there might be issues with their social media presence.

That’s because the language of the Investment Advisers Act of 1940 considers any testimonial to be “misleading per se”—so clients who praise their advisor on social media platforms may cause the advisor to run afoul of the rule. Simon hopes that by modernizing the Ad Rule, advisors will be able to avoid issues with client testimonials online.

The proposed changes also clarify how advisors are permitted to present performance results, risks and benefits.

But the rule will also dramatically expand the definition of advertising, warned Simon.

“The proposal would impose additional requirements that we are not happy about, including expanding the definition of advertising to include investors in pooled investment vehicles and possibly even one-on-one communications with clients,” he said. “This would be especially problematic because it would require advisors to designate an employee to review and approve all advertisements prior to use. How burdensome would that be if it captures almost every communication you have with clients? This is a big deal.”

Proxy Voting
The SEC has also issued a “troubling proposal” regarding proxy voting, said Simon, affecting advisors who use proxy advisory firms to help them with voting.

“It’s a rule that would codify that proxy advisor firms are solicitors and require additional regulatory involvement in recommendations that they make to clients,” said Simon. “We view that as bad policy and a step backwards. We fear it impinges on an advisor’s ability to vote client shares in [the client’s] best interest, as they must given their fiduciary duty.”

Accredited Investors
The SEC recently amended its definition of accredited investors to include employees of private funds who want to invest in those funds, SEC and state registered advisors, and family offices with at least $5 million in AUM and their family clients—but the definition should be expanded further, said Simon.

“The SEC did not include our recommendations that all of your clients be considered accredited investors,” he said. “We believe that if a client, a taxpayer or an investor has an investment advisor managing their assets on a discretionary basis, that’s why they’re using a fiduciary, and they should be considered sophisticated. The SEC has not moved there.”

Other Areas Of IAA Advocacy
There are also signs that the SEC intends to revisit and further modernize its custody rule in light of the rise of digital assets and other advisor custody issues, said Simon, a process that the IAA intends to monitor closely.

The IAA is also lobbying Congress on some of the taxation provisions in the 2017 Tax Cuts and Jobs Act. For example, the law created new 20% deductions for the owners of pass-through businesses, but excluded most service businesses. The statute mentions investment advisors, but excludes real estate and investment brokers, creating a “fundamental unfairness,” said Simon.

He said he is also arguing that Congress should restore the deductibility of advisory fees, which the Tax Cuts and Jobs Act eliminated.

“There is also a bill called the Investment Adviser Regulatory Flexibility Improvement Act,” said Simon. “Way back during the Carter era, Congress passed something called the Regulatory Flexibility Act, which told federal agencies to pay attention to the impact of their proposals on small businesses.”

The SEC, however, only defines advisors as a small business if they have less than $25 million in AUM—which Simon said is out of sync with the $100 million AUM threshold for SEC registration. “In other words, the SEC doesn’t have to do any of the analysis required by the Regulatory Flexibility Act.”

The Investment Adviser Regulatory Flexibility Improvement Act would prevent the SEC from avoiding the rules of the already enacted Regulatory Flexibility Act by requiring them to “move up” the definition of a small business to a higher AUM or to use a different threshold altogether, by using a firm's total number of employees, for example.

Simon also asked advisors to be wary of one recent state regulation coming out of California that covers consumer privacy.

“We think it’s a mess,” he said. “It requires you to get consent from consumers before sharing their data with third-party providers. Now a whole bunch of states are going to follow suit, and all of them differently. It’s an area that cries out for a pre-emption from federal law.”