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Advisors to Lobby Washington on Priority Regulatory, Tax Issues

By Rita Raagas De Ramos June 13, 2018

Advisors are raising key regulatory and tax issues with their legislators in Washington, D.C. today. Among the key issues the advisory industry plans to discuss with legislators are broker-dealer titles, advisor licensing and continuing education requirements, taxes and data storage for investor information, according to executives from Charles Schwab.

The Investment Adviser Association, which represents the interests of SEC-registered investment advisor firms, is set to hold today its 11th annual “Adviser Advocacy Day,” which will be full of in-person meetings between advisors and legislators.

Congressional focus on topics that impact advisors has shifted in the Trump administration, according to the IAA, citing the major tax overhaul, renewed efforts to reform the Dodd-Frank Act and initiatives to streamline and modernize regulation.

“That focus is likely to intensify after this November’s midterm elections,” according to the IAA. “To advance their interests and allow their businesses to prosper, it is critical that advisers make their voices heard on Capitol Hill.”

Advocating and lobbying on behalf of the advisory industry is important because Congress has oversight power over the SEC, according to Jeff Brown, Washington, D.C.-based head of Charles Schwab's legislative and regulatory affairs office.

It’s crucial advisors share their perspectives with Congress so that the legislators and their staffs can learn more about how regulations, rules and laws impact the advisory business, according to Brown. Through lobbying and advocacy, “what you are really doing is laying groundwork for future [legislative] hearings,” he says.

Lisa Hunt, Washington, D.C.-based executive vice president of business initiatives at Charles Schwab and chair of Sifma, says regulations, rules and laws that “have really hindered business development” should be discussed with legislators.

The Charles Schwab executives believe that issues surrounding the SEC’s proposed Regulation Best Interest package, the tax reforms and the pending Consolidated Audit Trail need to be discussed and addressed.

The SEC’s proposed package establishes a best interest standard of conduct for broker-dealers, interprets the fiduciary standard for advisors, and creates a new Customer Relationship Summary form that will clearly state to clients if they are dealing with a broker-dealer or an advisor. Advisors have long been held to fiduciary standards.

The clarification of the relationship between a client and a financial professional – whether the client is dealing with a broker-dealer or an advisor – is the motivation for the SEC’s proposal to prohibit broker-dealers from using the advisor/adviser title.

Charles Schwab’s Brown says making sure that clients are fully informed of the nature of the relationship they have with a financial professional is “redundant” and will “overburden” broker-dealers. It’s going to be particularly challenging for broker-dealers who are dually registered as investment advisors, he says.

While broker-dealers who are also registered as investment advisors can keep their advisor title under the proposed SEC rule, they will have to clearly inform the customer whether they are acting as a broker-dealer or as an advisor when they are making a recommendation. That could lead to confusion, Thomas Holly, Washington, D.C. head of the U.S. asset and wealth management practice of PwC, told FA-IQ previously.

The SEC’s request for comments, meanwhile, on whether advisors should undergo federal licensing and continuing education suggest that the watchdog is considering these questions. Federal securities laws don’t require advisors to become licensed or to meet qualification requirements, but most states impose registration, licensing, or qualification requirements on advisors who have a place of business in those states. The SEC also requires advisors to be registered with the commission.

Every broker-dealer has an obligation subject to Finra rules, such as licensing requirements and continuing education, Charles Schwab’s Brown notes. The SEC is basically asking, “Should that apply to advisors? That’s a good question,” he says.

When it comes to tax reform, of particular interest to the advisory industry is the removal of relevant miscellaneous itemized deductions.

Among the changes that resulted from the Tax Cuts and Jobs Act of 2017 is the removal of the miscellaneous itemized deductions, which were previously allowed for amounts in excess of 2% of adjusted gross income. That included tax preparation expenses, unreimbursed employee business expenses, and the deduction for investment advisory fees. The investment advisory fees were often communicated by advisors to their clients as a benefit.

That puts added pressure on advisors, many of whom have small businesses, as well as on investors who were benefitting from the deductions, says Peter Roberson, Washington, D.C.-based vice president for legislative and regulatory affairs at Charles Schwab.

Roberson believes legislators shouldn’t do anything that would impact the ability of independent advisors to grow their business or prohibit or delay the ability of individuals to invest for retirement.

Charles Schwab’s Hunt raised the consolidated audit trail (CAT) as a concern, meanwhile, because of the amount of personal identifiable information (PII) to be stored in the system. The CAT is a single, comprehensive database expected to store an unprecedented amount of sensitive trade data and PII.

Jeff Brown

National securities exchanges, Finra, alternative trading systems and broker-dealer firms have been required to submit information on trading activities – including customer information and prices – to the CAT daily since November 15, 2017. Large broker-dealers will be required to start submitting information to the CAT by November 15, 2018, while small broker-dealers are expected to do so by November 15, 2019.

The CAT is expected to take in 58 billion records daily – including orders, cancellations, modifications, executions and quotes for the equities and options markets – and maintain data for more than 100 million customer accounts and their unique customer information, according to parties involved in the CAT.

Hunt says the broker-dealer industry is trying to find a “compromise” on the deadlines and the extent of information stored in the CAT. “We carry their protection in our minds,” she says, referring to investors.