Compliance September 15, 2011

Reactions to SRO Draft Proposal Pouring Out

FINRA and industry groups are weighing in this week on Rep. Bachus’ (R-Alabama) draft proposal for a new self-regulatory organization (SRO) to oversee financial advisers.  
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This past Tuesday, the Capital Markets and Government Sponsored Enterprises Subcommittee (part of the Committee on Financial Services) held a hearing to discuss Rep. Bachus’ proposal regarding oversight of registered investment advisers (see “Rep. Bachus Circulating New SRO Draft”).  The proposal calls for one or more self-regulatory groups to oversee retail advisers, under the authority of the Securities and Exchange Commission (SEC).

Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority (FINRA), said at Tuesday’s hearing that FINRA “would establish a separate entity with separate board and committee governance to oversee any adviser work, and would plan to hire additional staff with expertise and leadership in the adviser area.”

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Ketchum also pointed to the proposal to bring advisers and broker/dealers under the same “standard of care,” and said it would be only logical for the same organization to be in charge of regulation: “In FINRA’s view, harmonization of the standard of care is an important first step. However, just as critical is a consistent oversight regime to ensure investors are being properly protected. As the SEC’s study noted, ‘to fully protect the interests of retail investors, the Commission should couple the fiduciary duty with effective oversight,’” Ketchum said at the hearing.

FINRA’s complete testimony is available here.

Opposition to FINRA oversight 

Fiduciary360 (fi360), an organization for fiduciary education, said at the hearing that the SEC should be the sole body responsible for RIA oversight. "If there is any bright spot in this bill, it's that the proposed bill calls for more than one SRO, rather than just FINRA as the sole regulator," said Blaine Aikin, fi360's President and CEO. "However, we still believe that fully funding the SEC with enough resources to oversee the industry is the correct direction."

Also in opposition to the idea of an additional SRO for RIAs is the Financial Planning Coalition. It told Congress on Tuesday that the creation a new SRO for investment advisers is unneeded; would add a layer of regulation and costs that could be particularly burdensome for small business owners; and may not significantly improve protection for investors. The Coalition believes that supporting enhanced SEC oversight is the most appropriate solution.

The Coalition raised additional concerns with the proposed SRO legislation, including:

  • The SRO would have jurisdiction over state-registered investment advisers. This would create an anomalous situation in which the SEC, which does not regulate state-registered advisers, would have oversight authority over an SRO that oversees state-registered advisers. This would impose an additional layer of regulation on state-registered advisers, with potentially conflicting rules and enforcement mechanisms between federal and state regulators.   
  • The SRO would have broad rulemaking and enforcement authority, yet neither Congress nor the SEC has recognized problems related to the SEC's ability to establish and enforce rules under the Advisers Act.
  • The proposed rules of the SRO would not be subject to cost-benefit analysis or requirements under the Administrative Procedures Act.
  • The SRO would not be required to be a transparent body, subject to the Freedom of Information Act (FOIA), the Sunshine Act, or other open government laws.
  • The SRO is not required to provide its members with basic constitutional protections, such as due process rights.
  • While the SEC has approval authority over the SRO's fees, there are no clear limits or restrictions on the structure or amount of fees, potentially creating an unlimited tax on investment advisers.

The Financial Planning Coalition’s testimony can be read here.

Compliance September 15, 2011

Industry Groups Urge no Changes to Retirement Savings Tax Advantages

Witnesses before the Senate Finance Committee offered arguments against changing tax advantages for workers’ retirement plan savings.
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Dr. Jack VanDerhei, Research Director of the Employee Benefit Research Institute (EBRI), was one of the speakers at the hearing. VanDerhei said that if the existing level of allowable tax-deferred savings in private-sector 401(k)-type defined contribution retirement plans is changed, as some advocates have proposed, “highest-income workers generally would be the most affected if federal tax limits in 401(k) type plans were lowered. But the surprising result we found is that the lowest-income workers would also be very negatively affected, and many report that they would reduce contributions or stop saving in their work-based retirement plan entirely, if the current exclusion of worker contributions for retirement savings plans were ended.”  

VanDerhei also laid out detailed arguments against a proposal put forth by Brookings Institution Fellow William Gale, who also spoke at the hearing. According to EBRI, Gale’s proposal would replace existing 401(k) tax deductions with a flat-rate refundable credit that would serve as a matching contribution in a retirement savings account, using either an 18% credit or a 30% credit.  

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EBRI believes that Gale’s analysis assumes that workers will keep their aggregate retirement contributions constant and that employers will not make changes in their employer match in 401(k) plans. Under any cost-benefit analysis, VanDerhei said, it is very difficult to determine how workers not currently covered and/or participating in a defined contribution plan will react to the incentives under the Gale plan. 

Representing the American Society of Pension Professionals and Actuaries (ASPPA) was Director of Retirement Policy, Judy A. Miller. One of her messages to the Senate Committee on Finance was that the true cost of defined contribution tax incentives to the country has been overstated: “Current budget rules require that the cost of most tax incentives be determined on a cash flow basis. Because the tax incentive for retirement savings is a deferral, not a permanent exclusion, basing the cost on current cash flow analysis – taxes not paid on contributions and investment earnings for the current year less taxes paid on current year distributions – misrepresents the true cost of the retirement savings incentives. Using a present value method, which recognizes that taxes will eventually be paid on distributions, produces very different estimates – more than 50% lower than [Joint Committee on Taxation] or Treasury estimates for a 5-year budget window.”

Calling the private employer-based retirement system “the greatest wealth creator for the middle class in history,” ranking committee member Orrin Hatch (R-Utah) opened the hearing with some very optimistic statistics: “The Social Security Trust Fund holds $2.6 trillion in Treasury securities. But private, employer-based defined contribution plans hold $4.7 trillion. And IRAs hold even more: $4.9 trillion.”   

Senator Hatch said there is still room for improvement with 401(k)s and IRAs, yet he is discouraged by several proposals that have been recently introduced: “[A]ll of the reforms I read about lately seem directed toward reducing the amount of money that people may set aside in defined contribution plans and IRAs. For example, the National Commission on Fiscal Responsibility recommended capping pre-tax contributions at $20,000. The Congressional Budget Office, or CBO, describes a proposal to reduce annual contributions to 401(k)-type plans by $7,650 for older workers, largely by repealing the ability of workers at age 50 to begin making catch-up contributions. IRA contributions also would be cut by $1,500 for older individuals.   

“Many of these proposals are offered in the name of greater progressivity in the tax code, and helping lower wage workers. But this just doesn’t make sense. Trying to help lower wage workers save for retirement by reducing the 401(k) and IRA contribution limits is like trying to cure a headache with a guillotine. The cure is worse than the disease.”  

The Senator also remarked that Congress has already been down this road – but moving in the other direction. In 2001, Congress increased the amount a participant is allowed to contribute to a 401(k) plan.  

Committee member Max Baucus (D-Montana) also spoke at the opening of the hearing. He sees two areas of gravest concern – Americans are simply not saving enough to last throughout their retirement, and half of Americans don’t even have access to an employer-sponsored retirement plan.   

Complete statements from Senators Hatch and Baucus, as well as from EBRI and ASPPA, are available on the Committee’s Web site at http://finance.senate.gov/hearings/hearing/?id=ba387157-5056-a032-5252-c7bf71fc6c90.

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