Here are several recent legislative and regulatory developments that are being analyzed and monitored by Diamond Consulting for their potential effects on financial services companies:
1. Senate Democrats replace Obama tax increases with millionaires’ tax
When President Barack Obama announced his jobs package in early September, he proposed paying for the measure with a series of tax increases on individuals making more than $200,000 and families making more than $250,000. Among them was a 28% cap on the tax exemption for municipal bond purchases and a hike in the tax on “carried interest” for private fund managers from the capital gains rate to the individual rate. In their version of the jobs plan, Senate Democrats replaced the Obama tax increases with a 5.6% surcharge on millionaires (SB 1660). The tax would apply to adjusted gross income less investment interest deduction above $1 million. Senate Democrats believe that the $1 million threshold more clearly delineates the difference between the middle class and the wealthy.
2. Obama’s jobs plan sliced, diced, stalled in Congress
In rallies around the country earlier this fall, Mr. Obama touted his jobs package and urged Congress to “pass this bill now.” By October, he was hoping that Congress would approve at least parts of it. It’s been slow going. The Senate blocked the entire $447 billion measure from getting to the floor. It was then diced up into smaller parts, funded by petite versions of the millionaires’ tax that also were blocked — for instance, SB 1723. The first portion of the package to get any traction was a provision to repeal a tax on government contractors that is set to go into effect in 2013. The bill, HR 674, approved by the House 405-16, would eliminate a 3% withholding tax set to be levied on vendors doing business with government at every level — local, state and federal. For instance, it would affect payments to advisers helping governments set up employee retirement plans. The bill’s prospects in the Senate are unclear, where there is a dispute over how to pay for it.
3. Bills to promote crowd funding, raise SEC registration thresholds pass House Financial Services Committee
A bill that is similar to another piece of Mr. Obama’s jobs package was approved by the House Financial Services Committee on Oct. 26. Rep. Patrick McHenry’s measure, HR 2930, would allow so-called crowd funding to finance startup companies by allowing the firms to pool small investments up to $5 million without having to register with the Securities and Exchange Commission. State regulators object, arguing that the bill would foster fraud. Another piece of legislation approved by the House Financial Services Committee on Oct. 26 was a bill authored by Rep. Dave Schweikert, R-Ariz., HR 2167, which would raise the total assets required for SEC registration from $1 million to $10 million and the threshold for total shareholders from 500 to 1,000. The committee also approved HR 2940. Written by Rep. Kevin McCarthy, R-Calif., it would amend Regulation D to allow small companies to solicit investors through advertising.
4. What is the Buffett Rule? Capitol Hill steps into the definition vacuum
As he ramped up his re-election effort this fall, Mr. Obama proposed a so-called Buffett Rule. Named after Warren Buffett, the Omaha, Neb., billionaire investor, the idea is that middle-class taxpayers should never fork over a higher percentage of their earnings to the federal government than the wealthy. The notion is based on Mr. Buffett’s suggestion that it is wrong for him to pay taxes at a lower rate than his secretary. Mr. Obama, however, has not defined exactly what the Buffett Rule is. Rep. Alcee Hastings, D-Fla., has offered a bill, HR 3105, that would impose an additional 5% tax on income from $350,000 to $500,000, 10% on $500,000 to $1 million, 15% from $1 million to $10 million and 20% on income exceeding $10 million. A group of Republicans have put forth a far different concept. Under the Buffett Rule Act, HR 3099 and SB 1676, taxpayers would be allowed to donate money — beyond what they owe in taxes — to the Treasury Department to help pay down the national debt.
5. Republicans try to set rates on capital gains and dividends at 15% permanently, get rid of Obamacare tax
House and Senate Republicans are attempting to bring some certainty to tax policy through a measure that would set capital gains and dividends rates permanently at 15%. The bills, HR 3091 and SB 1647, attempt to codify the 15% rate that will vanish if the Bush administration tax cuts expire on Dec. 31, 2012. If Congress does not extend the Bush tax cuts, the capital gains rate will rise to 20% and dividends will be taxed at ordinary income rates beginning in 2013. Sponsors of the bill are confident that it can win House approval. They’re not certain, however, that it will be considered in the Senate. Meanwhile, the GOP is trying to get rid of a 3.8% Medicare tax that will be assessed on investment income starting in 2013 to help pay for the health care reform law. Sen. John Cornyn, R-Texas, introduced the bill, SB 1738.
6. Legislation would allow borrowing from retirement accounts to pay mortgages
Retirement savings advocates are wary of a bill that would allow penalty-free withdrawals from tax-exempt pension and retirement plans in order to pay mortgages. The legislation, HR 3104 and SB 1656, so far has few co-sponsors. Meanwhile, Sen. Kent Conrad, D-N.D., Sen. Ben Cardin, D-Md., and Sen. Mike Enzi, R-Wyo., have offered a resolution in support of National Retirement Week, SR 266, that promotes tax breaks for retirement savings and tax-favored treatment of employer-sponsored retirement plans.
7. Finra suffers setbacks on the road to becoming adviser SRO
When it embarked on its effort to become the self-regulatory organization for investment advisers, the Financial Industry Regulatory Authority Inc. probably didn’t anticipate some of the setbacks that it has endured. The latest occurred Oct. 27 when the SEC for the first time ordered the broker-dealer self-regulatory organization to improve its internal compliance procedures. The SEC order was in response to the former head of Finra’s Kansas City, Mo., office altering three records of staff meeting minutes just before turning them over to SEC staff in August 2008. It was the third time that Finra doctored documents intended for the SEC. Finra said that it self-reported the incident and fully cooperated with the SEC investigation. Just a couple weeks before the SEC order, Finra withdrew a proposed rule that would have allowed it to expand its authority to non-securities related businesses. Observers said that the rule could be seen as an effort by Finra to expand its jurisdiction to include investment advisers ahead of the passage of legislation authorizing such oversight.
8. SEC approves proprietary trading curbs, eases private fund reporting, adds a commissioner
The SEC was one of several financial regulators to propose a so-called Volker rule to curb proprietary trading by banks and their affiliates. The regulation was called for by the Dodd-Frank financial reform law. Proprietary trading is seen as one of the causes of the financial markets crisis in 2008, as it has been alleged that banks made misguided big bets with their own money that wound up hurting investors. The impact on wirehouses is seen as limited, but it will affect their largest high-net-worth clients. The SEC also advanced another Dodd-Frank provision when it proposed a final rule that would require hedge funds and other private funds to report portfolio information to the agency that would help the Financial Stability Oversight Council determine whether the funds presented a systemic risk. The final rule requiring the completion of Form PF eases initial requirements and exempts registered investment advisers with less than $150 million in regulatory assets under management (“RAUM”). (See previous blog post for a definition of RAUM.) Finally, the SEC returned to full power Oct. 21 when the Senate confirmed the reappointment of Democratic Commissioner Luis Aguilar and the nomination of Daniel Gallagher Jr. to fill the Republican slot vacated over the summer by Kathleen Casey. On the same day, the agency appointed former Legg Mason executive Andrew Bowden associate director to lead the investment adviser examination program.
9. Finra tightens rules on private placements, telemarketing, allows grace period for operations professionals
It was another busy month for Finra rule making. The agency proposed a rule that would require brokers and their associates offering private placements to “provide relevant disclosures to each investor prior to sale describing the anticipated use of offering proceeds, and the amount and type of offering expenses and “offering compensation” provided to third parties. See http://www.finra.org/Industry/Regulation/RuleFilings/2011/P124600. The disclosures would be due to Finra within 15 days of the first sale. Currently, brokers and associates have to provide disclosures only when they sell private placements of their own securities. Transactions with institutional and sophisticated investors are exempt. The agency also proposed revising its telemarketing rules to make them similar to Federal Communications Commission rules. Finra members conducting telemarketing campaigns must display caller information, allow the recipient to place the number on a do-not-call list and avoid deceptive and abusive practices. Finra also proposed a rule that would allow operations professionals hired by brokers between Oct. 17 and Dec. 16 to work in their positions for 120 days before having to pass a qualifying exam by April 14.
The agency also is increasing minimum order quotation sizes in order to display more customer limit orders.
10. DOL set to return with guns blazing on fiduciary-duty rule
The Labor Department is making clear to the financial industry that it is not abandoning a regulation that would significantly expand the definition of “fiduciary” for investment advisers to retirement plans. The agency withdrew a proposed rule in September after a firestorm of protest from the industry and members of Congress from both parties, who asserted that it was overreaching, would increase regulatory and liability costs and would drive brokers out of the individual retirement account market because it would subject them to fiduciary duty for the first time. But, in an appearance before the annual meeting of the American Society of Pension Professionals and Actuaries on Oct. 25, Assistant Labor Secretary Phyllis Borzi emphasized that the rule will be proposed early next year and will include provisions addressing IRAs and revenue sharing. “What we’re trying to do in this regulation is focus on updating, modernizing and protecting people’s retirement security,” Ms. Borzi said.