RIAs, the Biden White House, and IAA’s Expectations

Karen Barr, the president and CEO of the Investment Adviser Association, discusses the legislative and regulatory changes that could impact the industry.

Karen Barr (Courtesy photo)

Karen Barr

(Courtesy photo)

A changing of the guard in Washington could bring about meaningful changes for registered investment advisors and their clients.

Karen Barr, the president and CEO of the Investment Adviser Association, says that a Biden presidency, along with possibility of both houses of Congress under Democratic control, could result in a slew of new investor-related taxes, including one on securities transactions.

But the new regime, Barr says, could also adopt sweeping bi-partisan legislation that enhances retirement savings, which will benefit advisors and investors alike. And Barr is hoping that Congress could allow for the return on tax write-offs for advisory fees.

Capitol Hill is just one Washington arena that advisors should be keeping an eye on. Barr says that the Securities Exchange Commission is on the verge of adopting a long-awaited rule to modernize ways in which advisors can advertise their services. The so-called advertising rule hasn’t been updated since 1961.

And next year, the SEC will start making headway in clarifying its byzantine approach to regulating custody practices.

[Like this article? Subscribe to RIA Intel’s’ twice-weekly newsletter.]

As the head of the IAA, Barr oversees a trade group that has 650 investment advisory firms as dues-paying members. A securities lawyer by training, Barr has led the IAA for the past six years and was the organization’s general counsel before that.

RIA Intel recently caught up by phone with Barr, who was in her Washington office. Here are excerpts of the interview.

At long last, the SEC is about to adopt a proposal that gives advertisers greater freedom in their advertising. Tell us where the rule stands now what it will allow.

The SEC’s Division of Investment Management has issued a proposal. There were significant comments, including comments from the IAA. It’s something that we have long advocated for – a modernization of a rule that hasn’t been changed in almost 60 years. We believe that the rule will be finalized by the five-member SEC before the end of the year.

What are some ways that advisors will be able to advertise going forward that they haven’t been able to do up until now?

Currently advisors can’t use testimonials, and that ban extends to social media. There has been a lot of consternation about whether clients can “like” or endorse on Linkedin or Facebook. That is currently viewed as a testimonial, which is now prohibited. So a change in that is huge. The new rule will allow for testimonials but there are priniciples that one has to abide by. An ad using testimonials has to be clear and not misleading. And an advisor can’t cherry pick the best recommendations when overall most recommendations are negative.

When will the SEC formally approve this proposal and when will advisors be able to use these new freedoms in the marketplace?

I anticipate the SEC will adopt the rule before Christmas but we don’t know yet when the new rule will go into effect. Once rules are enacted by the SEC, it can take anytime from 90 days to a year [before advisors can use the new rule in the marketplace].

Why has it taken close to 60 years for this rule to be updated?

Our first formal request for the SEC to modernize the rule was in 1999. It’s fair to say that some of these rules are bread and butter rules. Regulators tend to focus on issues that are brewing crisis of the moment. whether it’s the financial crisis or the coronavirus and the routine bread and butter rules get put off.

What might a President Biden mean for advisors and their clients?

Let’s start with taxes. If the Democrats win those two contested Senate seats in Georgia in the special January election, you’ll have a 50-50 tie and Democratic control of the Senate [because vice president-elect Kamala Harris will serve as president of the Senate and is a potential tie-breaking vote.] There has been talk about a financial transaction tax, which would be a tax on purchases and sales of securities. We strongly oppose that because it would then be passed onto investors and we don’t think it would generate as much revenue as its proponents believe.

Another concern is an increase in capital gains on the wealthy. But even if the Senate returns to being controlled by the Democrats, it will be hard for the Biden administration to get any significant tax legislation through Congress because moderates will have a lot of power in an evenly divided body. Still, even without major tax legislation, there may be some nibbling around the edges and we will use that as an opportunity to advocate for resuming the deduction on advisory fees. [This deduction was removed in the Tax Cuts and Jobs Act of 2017.]

What are the chances of the deductibility of advisory fees coming back? Could that be part of a compromise or is this wishful thinking on your part?

It’s more than wishful thinking but we definitely need an opportunity to tack it on to another piece of legislation. It won’t be a standalone bill. We believe that it’s important to incentivize investors to seek investment advice.

What are some positive things that a Biden administration can do for financial advisors?

I think we will see more help for retirement savers. There already was a bipartisan bill, the Securing a Strong Retirement Act, recently introduced by the leaders of the House Ways and Means Committee that, among many other things, would have a Baby Boomer catchup provision, which increases how much money people who have reached 50 years of age can contribute to their retirement plan. It would also promote automatic enrollment in 401(k)s. This bill will be reintroduced in the new Congress next year.

What is the chance that it will pass both houses of Congress?

It will be easier to get through the House and we are cautiously optimistic in the Senate because there are more hurdles to get legislation through the Senate.

I know that Jay Clayton is leaving his position as chairman of the SEC at the end of this year. Do you know who his replacement might be and do advisors have anything to worry about?

We don’t know who the next SEC chair will be. It also takes time for a new chair of the SEC to be nominated and confirmed. That process could take five or six months. In the interim, we anticipate that current Commissioner Allison Lee will be the acting chair while the confirmation process takes it course.

Do advisors have anything to be concerned about with Lee running the show?

We have a good relationship with her. She has been supportive with respect to taking environmental social and governance factors into account in investing and that is a positive. She also has expressed views on proxy voting that will be welcome by investment advisors.

Please fill us in on upcoming efforts to change the SEC’s so-called custody rule. I know you have referred to it as needlessly complex. Simplify the issues at stake for us.

What’s confusing is that the SEC lumps together a lot of different activities and calls it custody when it’s not really custody the way a normal person would view it. A lay person might think that custody might apply to a custodian like a Fidelity or a Schwab. The SEC uses the word custody to apply to virtually any situation where an investment advisor has access to client assets and might be able to move money. If you are a trustee on a client account, have the authority to move money on a client account, or have bill-paying authority, you have custody under the rules now. Even if you aren’t a custodian in the way most people understand the word, the SEC’s custody rule currently applies to you.

So how would you like to rule to be changed?

We want a rule that is simpler and less confusing and one that doesn’t call all these things custody. So if the SEC sees some risks on being the trustee on a client account, address those risks. If they see risks of transferring money, address those risks. In other words, we need to get away from lumping every kind of risk under the title of custody, with a one-size-fits-all approach to all those kinds of risk.

What is the timeframe for creating a new modernized custody proposal?

We are hopeful that they will have a proposal in the first quarter of next year. Once the proposal comes out, there is a period for comment. It may take another nine months to a year before the SEC approves it.

Indeed, the wheels move slowly at the SEC. Thanks for your time.

Subscribe to RIA Intel’s twice-weekly newsletter and follow the publication on Twitter and LinkedIn.