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Regulation and Compliance > Federal Regulation > SEC

Secure Act, Fiduciary Rules Set Up a Doozy of a Compliance Year

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Along with new sweeping retirement planning rules ushered in under the Setting Every Community Up for Retirement Enhancement (Secure) Act, advisors and broker-dealers will have new fiduciary-related rules to comply with in the new year.

President Donald Trump signed the Secure Act into law on Dec. 20 as part of the year-end spending bill, the Further Consolidated Appropriations Act of 2020 (FCAA).

Along with retirement planning changes, the new law also allows tax-free 529 college savings plan distributions to be used to pay for registered apprenticeship programs and up to $10,000 in student loan payments.

The new changes under Secure will “give rise to questions in the coming days,” with more federal guidance “needed to resolve certain matters” ushered in by the new law in 2020, notes recordkeeper Ascensus in a recent brief.

The FCAA also includes bills that provide disaster relief and new health and welfare provisions. The most significant health and welfare measure repeals the controversial “Cadillac Tax.”

Stretch IRA Limits, RMDs

As popular advisor and Nerd’s Eye View blogger Michael Kitces notes, the elimination of the so-called “stretch” provision “for most (but not all) non-spouse beneficiaries of inherited IRAs and other retirement accounts” will have repercussions for advisors’ clients.

Under current law, Kitces explains, non-spouse designated beneficiaries can take distributions over their life expectancy, “but for many retirement owners who pass away in 2020 and beyond, beneficiaries will have only 10 years to empty the account.”

On the one hand, Kitces continues, “without any other distribution requirements within those 10 years, designated beneficiaries will have some flexibility around the timing of those distributions; however, certain types of ‘see-through’ trusts that have been drafted to serve as beneficiaries of retirement accounts may find that they are no longer able to make annual distributions to the trust under the new rules (only to suddenly have both the IRA and trust forcibly liquidated at the end of the 10-year window).”

Secure also lifted the restriction on making contributions to a traditional IRA after 70 1/2, as long as “there is earned income to contribute in the first place,” Kitces notes, “and an age increase for the onset of RMDs” from age 70 ½ to 72.

Kitces adds that, as was the case with the IRS’ recent proposals to update the RMD life-expectancy tables, “since only about 20% of retirees take no more than only the amount that they’re actually required to take, any changes in the rules around RMDs will have little effect on the remaining 80% who are already withdrawing more out of their accounts than the IRS requires.”

The SEC and Regulation Best Interest

The new year will also bring at least one new face  — as of press time — to the Securities and Exchange Commission.

The White House is expected to nominate Caroline Crenshaw, an attorney at the SEC, to fill Commissioner Robert Jackson’s Democratic seat next year, according to Reuters. Crenshaw currently works as an attorney in Jackson’s office. Senate Democratic leader Chuck Schumer has sent Crenshaw’s name to the White House as a nominee for the post, Reuters reported.

Jackson’s term expired in 2019, but commissioners can stay on up to 18 months after their term expires or they are replaced. The term of Commissioner Hester Peirce, a Republican, expires in 2020. The commission has two seats for Democrats and two for Republicans, plus the chairman.

SEC Chairman Jay Clayton’s term expires in 2021, but depending on how the 2020 presidential election turns out, his stay at the commission could end sooner.

Sen. Sherrod Brown, D-Ohio, ranking member on the Senate Banking Committee, said during a Dec. 10 SEC oversight hearing that the Trump administration has dismantled many of the protections Congress put in place after the last financial crisis, “putting our financial system and hardworking Americans at risk.”

The SEC “has flown under the radar,” Brown told Clayton, “but often the agenda has been the same: taking Wall Street’s side over and over instead of standing with investors saving for retirement or college.”

Brown continued: “You’ve done so much damage by adopting what you call ‘Regulation Best Interest.’ Under that rule, brokerage firms can merely disclose but don’t have to eliminate firm-level conflicts. It should be simple: Investment firms need to work for the people whom they serve; Americans need to have confidence that the professionals that they’re trusting with their hard-earned money or working for them are not scamming them to line the firm’s own pockets.”

The SEC, Brown said, “could have simply followed Congress’ guidance in Dodd-Frank to create a uniform fiduciary standard for brokers and advisors, which would be the best way to give investors confidence that their interests comes first. But you didn’t do that.”

The Financial Industry Regulatory Authority, the enforcer of Reg BI, held a one-day conference on the new rule in Washington on Dec. 18. “There’s a great deal for firms and regulators to do before the implementation deadline,” Robert Cook, FINRA’s CEO, told attendees.

Firms must be in compliance by June 30, 2020. It remains to be seen if the two lawsuits against Reg BI — one brought by seven states and the District of Columbia, the other by Kitces’ XY  Planning Network — will derail that compliance date.

Todd Cipperman of Cipperman Compliance Services said during a recent Human Capital podcast that “those lawsuits have to  be heard; I think that will delay implementation” of Reg BI.

In her comments at FINRA’s Reg BI conference, Dalia Blass, director of the SEC’s Division of Investment Management, explained the importance of Reg BI and the advice-standards package this way: “If I’m a client walking into an advisor or if I’m a customer walking into a broker-dealer, what all this does is, at the time of the broker’s recommendation or advisors’ giving advice, they are required to act in the best interest of the client and customers.”

That best interest, Blass added, “does not depend on which professional you go to.”

New DOL Fiduciary Rule

Also expected early in the new year is a new fiduciary rule by the Labor Department that “aligns” with Reg BI.

Sen. Elizabeth Warren, D-Mass., told Labor Secretary Eugene Scalia in a Dec. 11 letter that she was concerned “DOL may simply copy the wholly inadequate standards of conduct framework” developed by Reg BI, “including the Investment Adviser Interpretation and Form CRS disclosure.”

Said Warren: “That would be a costly mistake — those standards not only allow broker-dealers to give clients advice that is not in their best interest, but significantly water down the longstanding fiduciary standard that has protected the clients of investment advisers for decades.”

State Fiduciary Rules

After a preliminary comment period, Massachusetts Secretary of State William Galvin, the state’s top securities regulator, signed off in early December on the state’s fiduciary rule.

”There will now be a formal comment period and hearing before the regulations can be promulgated,” a spokesperson for Galvin’s office told ThinkAdvisor.

As the law firm Baker McKenzie notes in a recent client alert, the Massachusetts proposal is an updated version of a pre-proposal originally circulated on June 14, 2019.

The state’s pre-proposal was issued shortly after Reg BI was adopted by the SEC on June 5.

The Massachusetts pre-proposal “immediately became part of the ongoing debate surrounding Reg BI’s sufficiency,” the law firm states, and now joins two other state fiduciary regulatory proposals: Nevada (proposed on Jan. 22, 2019) and New Jersey (proposed on April 15, 2019).

All three proposals, the law firm states, “lead to questions about federal preemption.”

Baker McKenzie attorneys anticipate that the Massachusetts proposal will proceed “on an accelerated basis.”

The rule proposal notes that dates for the hearing and comment deadline will be provided at a later date. “Hearings have a 21-day advance public notice requirement, which would mean the hearing could occur as early as January 2020,” the attorneys state. There is no administrative rule governing how much time needs to pass between the hearing or close of public comment period and the effective date of the regulation.

Galvin has stated that he’s proposing the standard because the SEC “has failed to provide investors with the protections they need against conflicts of interest in the financial industry” with Reg BI.

Galvin’s “public statements lend further credence to our expectation that the Massachusetts proposal may be adopted fairly expeditiously,” the Baker McKenzie attorneys write.

While the Massachusetts plan is a standalone regulatory initiative, “its interrelationship with the Reg BI rule set will remain apparent in the upcoming months for three reasons,” according to the attorneys:

  • Firms are in the process of implementing applicable Reg BI rule set components (Reg BI and Form CRS for broker-dealers and broker-dealer reps, Form CRS for investment advisor reps of SEC-registered investment advisors) alongside the expected rulemaking process for the Massachusetts plan;
  • Aspects of the Massachusetts plan, particularly the discussion on conflicts, interact with Reg BI obligations; and
  • The existence of the Reg BI rule set will be a core argument in any federal preemption debate.

— Check out What to Expect From SEC’s Reg BI Exams: Driscoll on ThinkAdvisor.


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