Washington Outlook: Seven Initiatives to Watch
March 9, 2021
The change in Administration is bringing major changes to the regulatory and legislative environment for the investment advisory industry.
In the opening session of the 2021 IAA Investment Adviser Compliance Conference – Hot Topics from Inside the Beltway – Rana Wright, Partner, Chief Administrative Officer and General Counsel at Harris Associates, Langston Emerson, Partner at Mindset DC, and Neil Simon, Vice President, Government Relations at the IAA, talked about the initiatives that they expect will lead the revamped agenda. The session was moderated by Karen Barr, President & CEO of the IAA.
Diversity, equity and inclusion. The first initiative to move into the spotlight could well be diversity, equity and inclusion.
In March, the House Financial Services Committee’s Subcommittee on Diversity, chaired by Joyce Beatty (D-Ohio), will be making requests for information about racial justice and diversity and inclusion within corporate entities. Asset managers could well be included in this initiative, cautioned Emerson, who added that request would likely address D&I efforts within a company, diversity in third-party vendors, and board diversity.
At roughly the same time, the SEC’s Asset Management Advisory Committee is likely to release its recommendations on the subject, added Simon.
But, while diversity issues are “clearly a focus,” remarked Wright, it’s less clear what specific actions might be taken.
Standards of conduct. The appropriate standard of conduct for both investment advisers and broker-dealers will continue to be a subject of debate, predicted the panelists.
“It’s a complex landscape that remains complex,” noted Wright, explaining that this isn’t just an SEC issue. “You’ve got the DOL landscape, and the states doing their own thing.”
At the SEC, the two Democratic commissioners have expressed reservations about the recent rulemaking package, as has Gary Gensler, who has been nominated to become the next head of the agency. And, in his confirmation hearings, Marty Walsh, who is the nominee to head the Department of Labor, stated that a re-examination of the DOL rule will be a priority.
“Neither agency will go back to the drawing board,” predicted Barr, while Emerson added that legislation on the subject is unlikely.
However, FAQs, other interpretive guidance, and enforcement actions from the regulators, combined with Congressional hearings, are likely to keep the issue front and center.
Our Hot Topics from Inside the Beltway Panel: IAA President & CEO Karen Barr; Rana Wright, Partner at Harris Associates; Langston Emerson, Partner at Mindset DC; and Neil Simon, IAA Vice President, Government Relations
Climate change and ESG. The Biden Administration’s focus on climate change will have an impact on the asset management industry, the panelists agreed. As evidence, the SEC has joined the other regulatory agencies in designating a senior policy advisor for climate change, noted Barr.
The DOL has been specifically instructed to review the November 2020 “financial factors” rule which prohibits ERISA fiduciaries from considering non-pecuniary factors when making investments for retirement plans. The Biden Administration is concerned that this rule may conflict with the national priority to address climate change. In addition, the DOL might revisit its recent proxy voting rule, suggested Barr.
New regulations from the SEC are likely, predicted Wright. In the meantime, ESG disclosure will be a priority for the Division of Examinations. The exam staff has already conduct “mini sweeps” on the issue, she added.
Financial stability. In a “blast from the past,” the panelists concurred that financial system stability concerns will return to the headlines, after four years of receiving relatively little attention.
Emerson warned that measures related to financial stability could be included in the infrastructure package, which will be the next big piece of legislation that Congress takes up after the COVID relief package. “Financial stability is part of recovery,” he noted.
Of particular concern to asset managers, the Financial Stability Oversight Council (FSOC) might again start designating non-banks as “systemically important financial institutions” (SIFIs). The trickle-down effects of those designations would be significant, cautioned Simon, even to smaller firms.
Money market funds. In the financial stability arena, the SEC is taking “another bite at the money market fund apple,” Wright explained. The agency has published a request for comment on suggestions to improve the resiliency of money market funds.
The SEC request follows up on a report from the President’s Working Group highlighting structural vulnerabilities in prime and tax-exempt money market funds. The report specifically notes that these funds were severely impacted by the market volatility of March 2020, despite the post-financial crisis reforms.
“There’s more to watch in this space,” added Wright.
A complete recording of Hot Topics from Inside the Beltway is available on the IAA’s YouTube Channel and on the IAA Today Videos page.
Retirement savings. “I believe that there will be retirement legislation in this Congress,” Simon forecasted, noting that there could be bipartisan support for legislation building on the 2019 SECURE Act.
Specific provisions of any legislation could include increasing the incentives for employees to participate in employer-sponsored retirement plans, further raising the age for required minimum distributions (RMDs), expanding investment flexibility for 403(b) plans, and shifting toward e-delivery of information to plan participants.
How legislators would offset the costs of these benefits isn’t clear, cautioned Simon.
Tax changes. Speaking of offsets, Emerson suggested that any infrastructure bill would likely include tax increases that would fund at least a portion of its costs.
Some of the tax items that have been floated include imposing a financial transaction tax, changing the taxation of carried interest, raising corporate tax rates, raising capital gains tax rates, and imposing a tax on the “uberwealthy.” In addition, Democrats were frustrated by the failure to raise the minimum wage and, as an alternative, have proposed a tax on employers who fail to adequately pay workers.
There has been considerable push back on many of the provisions. For example, the financial transaction tax is strongly opposed by the IAA and many others in the financial industry.
However, a major tax overhaul is unlikely, Emerson predicted.
TAGS: Compliance Conference, Takeaways, Karen Barr, Neil Simon, Rana Wright, Taxes, Climate Change, Retirement Savings, Diversity & Inclusion, Financial Stability, Money Market Fund