Regulatory Changes to Watch: Taxes, Retirement, Fiduciary Rules

Complying with anticipated retirement and tax-related changes as well as fiduciary-related standards from the Securities and Exchange Commission and the Labor Department will top advisors’ and broker-dealers’ regulatory to-do lists in 2019.

While the House passed late on Dec. 20 a retirement and tax package, priming 2019 for much debate — and potentially big changes — for industry officials to digest in the new year, Senate passage of the measure was deemed unlikely at press time on Dec. 21.

House Ways and Means Chairman Kevin Brady’s 257-page package includes the Retirement, Savings, and Other Tax Relief Act of 2018 and the Taxpayer First Act of 2018.

Brady, R-Texas, said in a statement after House passage that the bill includes tax relief for Americans hit by natural disasters, permanent solutions to two temporary tax policies, retirement and savings provisions, “relief” from multiple Obamacare taxes, bipartisan IRS reform, and “a few minor time-sensitive technical corrections” to the tax overhaul passed in 2017.

The package, Brady said, “will continue to boost our economy by helping our communities hit by natural disasters rebuild, by making it easier for folks to save for retirement, by cutting taxes that drive up health care costs, by setting a new tone for how we handle temporary tax policies moving forward, and putting taxpayers first.”

Brady’s 257-page bill includes a host of retirement-planning related provisions, like use of 529 savings accounts to cover homeschooling costs as well as allowing an unborn child to be designated as a beneficiary, as well as provisions of the Retirement Enhancement and Savings Act (RESA).

The bill also includes provisions on multiple employer plans; pooled employer plans; rules relating to election of safe harbor 401(k) status; certain taxable non-tuition fellowship and stipend payments treated as compensation for IRA purposes; and repeal of maximum age for traditional IRA contributions.

Coming regulations advisors should brace for include an almost certain advice-standards rulemaking by the SEC in 2019, said Karen Barr, president and CEO of the Investment Adviser Association.

“Because advisors are already fiduciaries, the only major change they will have to make is to develop the new short-form disclosure [Form CRS] as well as analyze the final Advisers Act interpretation to ensure continued compliance,” Barr told ThinkAdvisor in mid-December.

Duane Thompson, senior policy analyst at Fi360, a fiduciary education, training and technology company, added that advisors and BDs may see “some surprises in the IA guidance for fiduciaries” coming out of the SEC advice rules, and “possibly some changes to the testimonial and solicitor rules later in the year.”

As for a Labor Department fiduciary rule, Thompson expects Labor “to pass a ‘fiduciary-lite’ rule comprising safe harbors for certain advisory activities after the SEC adopts Regulation Best Interest.”

Thompson also sees a continued crackdown by the SEC “on Form ADV disclosures that omit detailed information on 12b-1 and indirect compensation.”

In December, the securities regulator’s enforcement division “started sending letters to hybrid RIAs requesting information on fund sales loads, and is positioned to bring cases regarding 12b-1 fees and revenue sharing,” added Barr.

The SEC’s enforcement division sent request letters in mid-December to firms that didn’t self-report violations under the agency’s Share Class Disclosure Initiative “but perhaps should have,” Eversheds Sutherland attorneys said.

On Dec. 21, the SEC settled charges against two New York-based investment advisors —  American Portfolios Advisers Inc., PPS Advisors Inc., and PPS’ CEO and chief investment officer, Lawrence Nicholas Passaretti — for investing advisory clients in mutual fund share classes that paid 12b-1 fees to the firms’ investment advisor representatives, even though less expensive share classes of the same funds were available.

The firms and the CEO will collectively pay more than $1.8 million, which will be returned to harmed investors.

Continued SEC and congressional focus on proxy voting, “including how the system works (or not) and advisors’ use of proxy advisory firms to assist in voting mechanics, research and recommendations” will also continue in 2019, Barr said.

The SEC exam and enforcement divisions will expect advisors and broker-dealers to have “robust” cybersecurity policies and procedures, Barr said, given that the agency “believes it has put advisors on notice about cyber best practices in staff guidance, risk alerts and speeches.”

Next year will also bring proposed amendments from the SEC to its advertising and cash solicitation rules. IAA expects that a modified Advertising Rule would “enable more modern (read: social media) means of communications,” noted Barr.