This report is current as of August 9, 2023

Congress is on its annual August recess, but a major confrontation between the two parties is looming—and it could lead to a disruptive government shutdown this fall. Meanwhile, the SEC has begun finalizing a series of high-profile rule proposals that could have an enormous impact on investors and advisors alike. Let's take a look at what RIAs should be watching closely as we head into the fall season.

The first half of 2023 was dominated by the debt ceiling debate. After a months-long standoff amid uncertainty about when the Treasury would run out of cash to pay the nation's debts, Congress finally passed legislation to suspend the debt ceiling in early June—just two days before the country would have defaulted. The deal takes this contentious issue off the table until mid-2025, well after the 2024 presidential and congressional elections. 

But the agreement sets up the next fiscal showdown this fall—and this one is shaping up to be even more polarizing. Congress is once again struggling in its annual effort to pass the 12 appropriations bills that fund every government agency and every federal program. Failure to pass these bills by October 1, the start of the government's fiscal year, would require Congress to pass a "continuing resolution" to temporarily extend funding. Without such an agreement, a government shutdown would begin.

In the debt ceiling deal, President Joe Biden and House Speaker Kevin McCarthy (R-CA) agreed to cap spending at roughly current levels, and Senate appropriators are developing their spending bills within those parameters. But House Republicans, frustrated that the debt ceiling deal did not go further to reduce government spending, have decided to fund government operations at 2022 levels, representing about a $120 billion cut in discretionary spending. Their bill has no chance of succeeding in the Democrat-controlled Senate. The extreme difficulty of resolving the differences between the two chambers has led to heightened concerns about a government shutdown. While shutdowns have not historically been big market movers, a shutdown this fall would likely have at least some negative repercussions for the markets.

SECURE 2.0 implementation proceeds, but concerns remain

On the retirement savings front, implementation is proceeding slowly on SECURE 2.0, with a number of the new law's major provisions set to go into effect on January 1, 2024. One provision that has gotten Washington's attention is the new requirement for employees earning more than $145,000 to make catch-up contributions to Roth accounts. A loose coalition of major employers, 401(k) recordkeepers, and payroll firms has formally requested a delay to the provision's effective date on the grounds that many companies may be unable to update their systems in time and that the Labor Department has yet to issue guidance on some key questions. Some companies have said they may have to eliminate catch-up contributions for all workers due to challenges in identifying which contributions must go into a Roth account and which can go into an existing 401(k) account. For now, it is unclear how Congress will respond or whether the provision will be delayed.

Another aspect of SECURE 2.0 causing consternation is a drafting error that appears to prohibit all catch-up contributions beginning in 2024. In a May 23 letter to Treasury Secretary Janet Yellen, the chairs and ranking members of the House Ways & Means Committee and the Senate Finance Committee sought to clarify that the glitch was unintentional. "Congress did not intend to disallow catch-up contributions," the four lawmakers wrote. "We intend to introduce technical corrections legislation to correct erroneous statutory language…so that the provisions carry out Congressional intent." This remains an issue to watch, as even technical corrections could be complicated this fall in a bitterly divided Congress.

IRS delays RMDs for inherited IRAs

A key concern for financial advisors and planners has been the ongoing uncertainty surrounding inherited IRAs. On June 14, the IRS issued guidance indicating that IRA beneficiaries subject to the 10-year rule would not be obligated to take required minimum distributions in 2023, resolving—at least temporarily—this vexing issue. The confusion stems from the original SECURE Act of 2019, which required all non-spousal heirs to distribute the assets from an inherited IRA within 10 years. Heirs and advisors interpreted the new law to mean that heirs had the flexibility to distribute those assets in whatever way they chose—including waiting until the very last day before the 10-year mark to distribute the entire account. But in a 2022 proposal that has faced heavy criticism, the IRS proposed rules that would require heirs to take annual distributions. The IRS did, however, indicate that individuals who inherited an account in 2020, 2021, or 2022 would not be penalized for failing to take distributions that they were not aware were required. In its most recent guidance, the IRS extended that through 2023. For now, the rules remain in limbo and there is no timeline for exactly when they will be finalized.

SEC proposes new rules for advisors using "predictive analytics"

On July 26, the SEC voted 3-2 along party lines to propose a new set of rules requiring advisors and broker-dealers to identify and eliminate conflicts of interest related to the use of emerging technologies in interactions with investors. According to an SEC fact sheet on the proposal, the rule would cover "a firm's use of analytical, technological, or computational functions, algorithms, models, correlation matrices, or similar methods or processes that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes of an investor." While analysis of the 243-page rule has just begun, it appears to have a sweeping impact on the use of technology in almost any interaction with an investor.

The SEC was deeply divided on the rule. Republican commissioner Hester Peirce stated that "the proposal reflects a hostility toward technology…Let's be honest about what we're doing: We're banning technologies we don't like." She and fellow Republican commissioner Mark Uyeda added that the rule will discourage advisors from embracing emerging technologies that could benefit investors because of the administrative costs and hurdles. Peirce argued that the rule was unnecessary since Regulation Best Interest already requires advisors to disclose and address conflicts. But SEC Chair Gary Gensler said, "I believe that investors deserve to be protected from predictive data analytics-driven interactions…that result from conflicts of interests, even in instances when those interactions may not amount to providing advice or recommendations." A public comment period is underway and will run through October 10.

SEC finalizes money market fund rule

On July 12, the SEC approved, also on a 3-2 party-line vote, a package of rules to improve the liquidity and resiliency of money market funds. The rule would increase daily and weekly liquidity requirements, expand reporting requirements, and eliminate the redemption gates that were a feature of the SEC's 2014 money market fund reforms. But the final rule contained a change with major implications: The commission decided not to proceed with its controversial "swing pricing" proposal. The rule as proposed in December 2021 would have required money market funds to adjust the NAV whenever there are net redemptions to ensure that the cost of redeeming a share is borne by the redeeming shareholder, not by investors who remain in the fund. Instead, the SEC is requiring institutional prime and municipal money market funds to impose a liquidity fee whenever redemptions exceed 5 percent of net assets. Schwab and many others in the industry had opposed the swing pricing proposal in comment letters for being operationally challenging and confusing for investors. While the industry is still reviewing the details of how the liquidity fee would work, the removal of the swing pricing proposal is seen as a big win for the industry.

The SEC's decision on swing pricing also has potentially significant implications for its November 2022 proposal on liquidity risk management for all mutual funds. That proposal also would impose the so-called "hard 4 p.m. close," which would likely require intermediaries to stop taking mutual fund orders well before market close. But the SEC's decision to drop the swing pricing proposal from the money market fund reforms would seem to make it unlikely that it will be adopted for all mutual funds. It's unclear how that would affect the hard 4 p.m. close proposal. 

The SEC is expected to finalize the mutual fund liquidity rules later this year—one of several major rules impacting investors and advisors that will be closely watched this fall. Also on that list are the four rules proposed late last year to overhaul equity market structure, including proposals to require most retail trades to be routed to an auction system at the exchanges, allow some stocks to trade in increments smaller than a penny, and enhance transparency around order execution. In addition, several rules specifically targeting investment advisors are in the pipeline, including proposals to increase ESG disclosure requirements, set new standards for due diligence for third-party vendors, and impose a bevy of new requirements for the custody of client assets. Like the latest proposal on analytic technologies, these rules impose a series of specific and rigid requirements on investment advisor activities. The hope is that some additional flexibility will be added to these proposals before they are finalized this fall.