More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
As Washington becomes the nerve center of financial services, advisors will be forced to keep pace with the numerous laws, potential laws, Congressional hearings, and regulatory initiatives that stream from the nation's capital. To kick off the Washington-centric portion of our three-part monthly special report exploring how advisors can respond to the markets and economic crisis, we focus on the American Recovery and Reinvestment Act of 2009, the Obama stimulus bill that was signed into law on February 19, and the move in Congress to create a systemic risk regulator.
The stimulus bill includes a number of tax initiatives that are very relevant to advisors' day-to-day dealings with clients. Initiative number two from Congress--its self-proposed mandate to create a systemic risk regulator to oversee all financial services activities--is a work in progress, as Congress tries to define what systemic risk is, and determine which entity should act as a financial stability regulator.
On the law, "there are pieces that will become a mandatory part of conversations with clients," says Michael Kitces, director of financial planning at Pinnacle Advisory Group in Columbia, Maryland. For instance, advisors who are talking to their clients about a new home purchase should point out the first-time homebuyer tax credit. This credit gives first-time buyers an $8,000 credit to put down on a home, but Kitces says "if you're in a lot of areas along the coasts [$8,000] doesn't necessarily make a whole lot of difference in what you're buying." However, "there are areas . . . where $8,000 toward your home purchase is a material discount to how much it costs to buy a house."
Also of note is the extension of the Alternative Minimum Tax (AMT) patch for 2009. The exemption for 2009 is $46,700 for single taxpayers and $70,950 for married filing jointly. Since there have been one-year AMT patches for several years now--which usually take place in November and December--Kitces says "the fact that we actually got a patch at the beginning of  is a nice change." But moving forward, "we still have to deal with the AMT," he says, and uncertainty remains as to whether there will again be another one-year patch.
The "Making Work Pay" credit provides in 2009 and 2010 a $400 tax credit for individuals and an $800 credit for married couples filing their taxes jointly. There's also a new deduction for sales taxes paid on a new vehicle purchase. Kitces says he's "not sure what constitutes new," but "it does have to be a purchase; you can't do a lease."
Advisors also can't advise their clients about college planning without going over the higher education tax credit offered in the stimulus package. In 2009 and 2010, individuals attending college will get a credit of up to $2,500 of the cost of tuition and other expenses, however, $4,000 has to be spent in a full year to get the credit. There is a phase-out for taxpayers with adjusted gross income of more than $80,000 and $160,000 for married couples filing jointly.
Do you have clients who have been laid off from their jobs? The stimulus law also offers temporary subsidized COBRA premiums to workers involuntarily terminated between September 1, 2008, and December 31, 2009. Taxpayers with incomes less than $125,000 for single and $250,000 for married filing jointly will receive a 65% subsidy from the U.S. Treasury Department for up to nine months. Kitces says that a lot of clients are not even aware that COBRA exists.
As for Social Security, within 120 days of President Obama signing the bill into law, retirees and others getting Social Security will get an extra $250 per person.
The Systemic Risk Regulator
Besides digesting the stimulus package, advisors should be tuned in to the Congressional hearings taking place in Washington. A recent one held March 5 by the Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises, which is chaired by Rep. Paul Kanjorski (D-Pennsylvania), focused on the need to have a systemic risk regulator to oversee all financial services activities. Members of the committee as well as those testifying stressed that putting in place a systemic risk regulator is the first step in tackling financial services reform. Lawmakers said they want to move cautiously and "take the time to do it right," as Kanjorski noted, but Tim Ryan, president of the Securities Industry and Financial Markets Association (SIFMA) told Committee members they should set a goal of year-end to have a systemic risk regulator in place.
Before that can be done, however, Committee members agreed that they must first come to a consensus about what systemic risk really is, and whether the Federal Reserve should be given the systemic risk regulator title. Some committee members and those testifying agreed that the Fed should be given such power. But ranking member Scott Garrett (R-New Jersey), stated that the "Fed already has lots of responsibilities," and he questioned whether it was "wise to consolidate so much power in an entity that doesn't have to answer to the American people."
While the current financial crisis we're living through is a result of systemic risk, Kanjorski said during his opening statement that systemic risk is not confined to the banking sector, but also entails insurance, securities, and the capital markets. He asked rhetorically: "Does a financial services company pose a systemic risk if it is too big to fail, too interconnected to fail, or too leveraged to fail? Could the independent actions of many small players compound to create a systemic risk? Do only financial services providers pose a risk? For example, could the technology used in our financial markets pose a risk to the broader economy?" Moreover, Kanjorski asked "are there certain financial products, business activities, or industry segments more likely to cause risk than others? How can we distinguish which is which?"
Both Ryan and Steve Bartlett, president of the Financial Services Roundtable, both testified that a systemic risk regulator should really be dubbed a financial markets stability regulator. Ryan said that while it's unrealistic to believe that a financial markets stability regulator "will be the cure all and end all" and that it won't be able to "identify the causes or prevent the occurrences of all financial crises in the future," at present "no single regulator (or collection of coordinated regulators) has the authority or the resources to collect information system-wide or to use that information to take corrective action across all financial institutions and markets regardless of charter."
As the year progresses, Kanjorski said his subcommittee will hold more hearings on the issue of a systemic risk regulator. Given that President Obama recently called on Congress to "take swift action" in reforming financial services regulation, Kanjorski said he's committed to designating a systemic risk regulator in the 111th Congress. Other hearings will no doubt focus on clarifying the definition of systemic risk. "We had enough regulators with eyes on the situation [before the market meltdown] but they weren't seeing systemic risk," Kanjorski said. That's why there's "no call for a new regulator or super regulator" to fill the systemic risk regulator slot, said Bartlett with Financial Services Roundtable, "but rather someone to connect the dots."