The Washington Year in Preview What’s Ahead for Legislation and Regulation


The Washington Year in Preview: What’s Ahead for Legislation and Regulation

Elections. Taxes. Economic Stimulus. Diversity & Inclusion. Fiduciary Standards. ESG. More.

October 16, 2020

Reading the tea leaves in Washington is always a difficult business, but maybe never more so than in this high-stakes election year.

At the IAA’s Leadership Week conference this month, keynote speaker David Wasserman of The Cook Political Report and panelists in three separate sessions pulled out their crystal balls to provide attendees with insights about what to expect in November and beyond.

Here are the highlights of their “educated speculation:”

The Election

Of course, almost everything hinges on the election results.

Political Analyst David Wasserman, The Cook Political Report

David Wasserman estimated that Biden has an “80 percent chance of winning,” but that Trump could still defy the odds and pull out a victory. A coronavirus breakthrough or a credible attack on Biden’s image, combined with a strong get-out-the-vote effort, could give Trump the edge in the handful of counties that will determine the results in the electoral college.

Florida is the state to watch, he noted. “Florida has a robust infrastructure for counting absentee ballots,” so the state’s voting results will likely be available on Election Day – and will likely be decisive. “If Biden wins [Florida], it will be tough for Trump.”

The House of Representatives will almost certainly remain under Democratic control, argued Wasserman. “The Republicans will be lucky to hold onto the seats they have,” given the number of Republicans retiring this year.

The biggest question mark is in the Senate, where the Democrats are likely to gain seats. But it’s not clear that they will win enough seats to secure a majority. And it’s even less likely that they will be able to end up with the 52 or 53 seats needed for a “blue wave” able to drive through a Democratic agenda.

The Next Six Months on Capitol Hill

Panelists in the conference’s closing session, Policy Priorities in an Election Year: The Experts Speak, gave their thoughts about Congress’s agenda over the next six months.

Prior to the election, “the focus is on the Supreme Court” and little else, suggested Jim Febeo of Fidelity Investments.

Panelists agreed that the lame duck session between the election and the end of 2020 “is unlikely to produce much,” as panelist Jeff Brown of Charles Schwab phrased it, though he also noted that “an agreement of some sort” on a second coronavirus economic stimulus package might be possible. Neil Simon, VP of Government Relations at the IAA, noted that the lame duck session will need to finalize the 2021 Federal government budget.

The first few months of 2021 could be a lot more interesting – especially if Biden wins the election and the Democrats secure at least a simple majority in the Senate. Under those circumstances, the Democrats would be expected to use the Congressional Review Act to nullify Trump-administration rulemakings adopted in the last 60 legislative days of the previous Congress. “Rules that have a clear political underpinning” would be the most likely candidates for review, explained Mara Shreck of JPMorgan Chase.

In terms of a positive agenda, the Biden administration is likely to focus on stimulus and health care in the short-term, noted Adam Hodge of Ariel Investments, adding “that’s all they’ll have bandwidth for.”

Left to Right: Jeff Brown of Charles Schwab, Adam Hodge of Ariel Investments, Jim Febeo of Fidelity Investments, and Mara Schreck of JPMorgan Chase.

Longer-term, expanding the availability of retirement savings is on the Biden agenda, though the administration may not work on specific legislation until closer to the mid-term elections, suggested Adam Hodge. However, Jim Febeo cautioned, the Democrats are concerned that the benefits of the current system accrue primarily to the wealthy. And while there is “bipartisan support for private retirement savings,” noted Jeff Brown, the Democrats have proposed adding a public option.

Diversity, equity and inclusion in the industry are also likely to get increased attention in a Biden administration, suggested Adam Hodge. The House Financial Services Diversity Subcommittee has drafted legislation that would increase opportunity for minority-owned firms by mandating their inclusion in the adviser search process.

IAA Board Chair Chris Carsman of Affiliated Managers Group, speaking in the opening session, IAA Policy Priorities: Our Advocacy, Your Voice, explained that DE&I is also getting attention at the SEC’s Asset Management Advisory Committee. “We’re recognizing that we have a lot of work to do as an industry,” she said.

IAA President & CEO Karen Barr added that the IAA is helping with this work by co-sponsoring a survey on industry diversity with Cerulli Associates, which was released the week of the conference.

The Regulatory Agenda

In contrast to Congress, “the SEC shows no sign of slowing down,” said Mara Shreck. “They’re not treating the fall pre-election as anything like lame duck.”

For example, IAA General Counsel Gail Bernstein noted that significant rulemakings on advertising and solicitation are moving forward. The IAA commented extensively on both proposals and has met with SEC Commissioners and staff members to answer questions about their potential impact.

Issues related to the fiduciary standards remain on the regulatory agenda. The SEC continues to review the usefulness of Form CRS and refine their related guidance. The IAA has been encouraging the SEC to collect “empirical data on how this new form is working,” said Bernstein, and the SEC has announced that it will be holding a public roundtable.

Meanwhile, the Department of Labor has issued a revised version of its fiduciary rule, which “largely refers to the SEC fiduciary interpretation.” And some states are exploring adopting their own rules; IAA advocacy has been focused on exempting SEC-registered advisers from these state regulations. “It’s so important that we maintain that focus,” added Chris Carsman, “so that we don’t end up with duplicative, layering regulation.”

Like the SEC, the Department of Labor remains very active prior to the election, with two outstanding proposed rulemakings that are among the most controversial – on proxy voting and ESG investing.

Left to right: IAA Board of Governors Chair and Affiliated Managers Group Senior Policy Advisor Chris Carsman, IAA President & CEO Karen Barr, IAA General Counsel Gail Bernstein, and IAA Vice President for Government Relations Neil Simon.

As Bernstein explained, the DOL’s proxy voting proposal would require advisers voting proxies in ERISA accounts to make a vote-by-vote determination if the issue has economic impact. If the proposal has no economic impact, the adviser may not vote the proxy. If the converse is true, the adviser would be required to vote the proxy. The IAA believes that the DOL hasn’t computed the costs of this proposal accurately, as it explained in its recent comment letter.

At the same time, the ESG proposal would prohibit ERISA fiduciaries from considering ESG factors in investment decision-making unless they are clearly related to financial outcomes. However, Shreck explained, these factors are “not always easily tied to financial outcomes.” Carsman noted that the IAA will “always object to any action by regulators that would limit the ability of investment advisers to pursue ESG strategies – or any strategy – on behalf of their clients. . . Investment advisers are best-positioned to determine what investment choices are best for their clients.”

Finally, the challenges raised by the COVID-19 pandemic continue to be top of mind for both regulators and the IAA. The IAA has worked closely with regulators to obtain needed regulatory relief to adapt to the new working environment and will be pursuing opportunities to make some of this relief permanent.

Carsman noted that the pandemic has led to a growing consensus about the benefits of electronic delivery of documents, as opposed to paper mailings. “We don’t see this as a radical change,” added Jeff Brown. “It’s an evolution in disclosure.” 

The Tax Outlook

While the regulatory agenda may not change much post-election, the poll results will almost certainly have a dramatic impact on tax policy, as panelists discussed in the session titled Changes in Taxes Ahead! which was moderated by Michael Provine of Cary Street Partners. However, exactly what those changes will be is hard to predict.

Top to bottom: Nicole Elliott of Holland & Knight, Michael Provine of Cary Street Partners, and Brian Rebhun of PwC.

“Biden has an announced set of policy goals rather than a specific set of legislative proposals,” explained Kat Saunders Gregor of Ropes & Gray. In terms of taxes on individuals, Democratic suggestions have included increasing taxation of higher-income individuals, through some combination of higher tax rates in top tax brackets (for both income and Social Security taxes), higher tax rates on capital gains, the elimination of carried interest, the reimposition of limitations on the tax benefits of deductions, and less generous retirement savings incentives. Conversely, Biden would increase the benefits for working families, possibly by converting deductions to higher-impact tax credits.

A Biden administration might look to make “extensive changes in the estate world” as well, suggested Nicole Elliott of Holland & Knight, though their ability to do so will hinge on their position in the Senate. The two proposals that have been mentioned – significantly reducing the size of the estate tax exclusion and eliminating the step-up in basis at death – would both be big changes that could require adjustments to estate plans.

Similarly, Biden’s election might lead to increases in corporate taxation, suggests Brian Rebhun of PwC. Biden has proposed reversing the Trump corporate tax cuts and increasing the corporate rate to 28 percent. Also possible: a minimum tax of 15 percent for companies with $150 million and over in book income plus a doubling of the minimum tax on foreign subsidiaries.

By contrast, Trump has talked about specific tax measures without the context of an overall plan. He has talked about making the 2017 tax cut permanent, lowering the capital gains rate and lowering the corporate rate further.

With all this uncertainty, what’s a taxpayer to do? “Without a tangible change in the law, hopefully prospectively, we’re trying to encourage our clients to hold steady right now, since everything is so unpredictable,” explained Saunders Gregor.

Regardless of the outcome of the election, one tax-related item is high on the IAA’s advocacy agenda: the reinstatement of the deductibility of advisory fees which was eliminated as part of the 2017 Tax Cuts and Jobs Act. As Neil Simon discussed in the opening session on advocacy, the IAA is meeting regularly with key lawmakers on this issue, stressing how deductibility is good for taxpayers because it encourages them to use fiduciaries for advice.

Simon also noted that the IAA is opposing proposals to impose a financial transaction tax, which have surfaced at the state level.


TAGS: TakeawaysColumns, Taxes, Advocacy, Leadership Conference, Karen Barr, Gail Bernstein, Neil Simon, IAA Policy

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