With an election year on the horizon, Congress is expected to be less active than usual. However, significant regulatory activity is anticipated from the Securities and Exchange Commission (SEC) and the Department of Labor (DOL).
These agencies are preparing to introduce and finalize rules that could profoundly affect the retirement and investment sectors. This includes the SEC's proposal on climate disclosure and the DOL's new fiduciary standards.
In 2023, the SEC was criticized by industry leaders and Republican members of Congress for its broad range of proposed and finalized rules, including those focusing on artificial intelligence and short-sale data. Christopher A. Iacovella, CEO of the American Securities Association, expressed concerns over the unprecedented scale of these rule-making efforts, considering the absence of a financial crisis.
The SEC's momentum is not expected to wane, with upcoming rules potentially subject to the Congressional Review Act (CRA). This act enables Congress to overturn a federal agency's rule with a simple majority vote if the rule has been in effect for fewer than 60 legislative days. Jillien Flores, of the Managed Funds Association, anticipates an acceleration of SEC rule-making in the first half of the year due to the CRA's implications.
A notable event was the House Republicans' failure to overturn a DOL rule that allowed retirement plan fiduciaries to consider Environmental, Social, and Governance (ESG) factors in investment decisions. Despite passing a joint resolution under the CRA in both the House and Senate, they could not override a presidential veto.
The DOL is also contemplating significant changes this year, particularly in its approach to the financial services industry. Michael Kreps of Groom Law Group highlighted the department's proposal to redefine "fiduciary" and include rollover advice under this definition. This proposal has sparked considerable debate and is expected to lead to litigation.
The DOL's proposal, termed the "Retirement Security Rule," aims to amend the criteria determining when financial professionals are treated as fiduciaries under the Employee Retirement Income Security Act (ERISA). The proposal would classify one-time advice, like rollovers or annuity purchases, as fiduciary activity if certain conditions are met.
Other DOL proposals on the horizon include modifications to the qualified professional asset manager (QPAM) exemption and changes to prohibited transaction exemptions. These proposals are designed to expand the types of misconduct that disqualify financial institutions from using the QPAM exemption and increase disclosure requirements for plan sponsors seeking prohibited transaction exemptions.
For the SEC, several high-profile rule proposals are due for finalization in 2024. This includes the contentious climate disclosure proposal, which mandates public companies to report various climate-related information. SEC Chair Gary Gensler defends the proposal, emphasizing its goal to standardize disclosures already made by many companies.
Another controversial SEC proposal involves predictive data analytics, requiring broker-dealers and investment advisers to manage conflicts of interest arising from certain technologies. Industry critics argue that the proposal's broad definition of "covered technologies" could hinder technology use in financial services.
The SEC's regulatory agenda indicates a focus on finalizing these rules, though the exact timeline remains flexible.
Litigation is also a significant theme, with several industry groups suing the SEC over various 2023 rules. These lawsuits challenge the SEC's authority and approach, particularly regarding rules on private fund adviser disclosures and short-sale data reporting. The Supreme Court case Jarkesy vs. SEC, questioning the constitutionality of the SEC's administrative law judges, is another critical litigation to watch. A ruling against the SEC could slow its enforcement process and make settlements more challenging.
In summary, wealth advisors and RIAs should closely monitor these developments, as the outcomes of these regulatory changes and legal challenges could have far-reaching impacts on the industry.
