What is RIA Washington Watch?

Every quarter, RIA Washington Watch brings you the most up-to-date information on registered investment advisor news and policy changes to help your firm make informed decisions.

This report is current as of September 15

The summer in Washington has been dominated by dramatic developments in the presidential race, from President Biden's disastrous debate performance in late June to the July assassination attempt on former President Donald Trump to Biden's decision a little more than a week later to drop out of the presidential race. Now all attention is focused on the reset race between Trump and Vice President Kamala Harris.

Democrats are clearly re-energized by the switch from Biden to Harris, as the Harris campaign has seen an explosion of fundraising and strong movement in the polls since she entered the race. But the race remains close and is likely to remain that way right through Election Day on November 5. Seven battleground states—Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin—hold the key to the outcome. Polls in early September showed all seven in the "toss-up" category, so expect the campaigns to focus their energy, time, and advertising on these key states.

But while much of the attention will be on the presidential race, the battles for control of the Senate and the House of Representatives are perhaps even more important to the markets. That's because while presidential candidates can and do make a wide array of policy promises on the campaign trail, it is ultimately Congress that has to turn those ideas into laws.

Republicans remain a strong favorite to capture the majority in the Senate. Democrats (including the four independent senators who caucus with the Democrats) have a narrow 51–49 majority, so Republicans need to flip just two seats in November to win the majority. There are 23 Democrat-held seats on the ballot this year, and just 11 Republican-held seats. Republicans are all but guaranteed to win the open seat in ruby-red West Virginia, where moderate Democrat-turned-Independent Senator Joe Manchin is retiring. And Democrats have tough seats to defend in Arizona, Michigan, Montana, Nevada, Pennsylvania, and Wisconsin. Republicans are likely to come out with a slim majority, though there is no sure thing in politics. Democrats, on the other hand, are optimistic about flipping the House of Representatives. Republicans hold just a four-seat majority, and Harris's entry into the presidential race appears to be benefitting down-ballot candidates in close races. We think Democrats are a slight favorite to win the House, but it is far from a slam dunk. If Republicans win the Senate and Democrats capture the House, it would be the first time in history that the two chambers flipped in opposite directions in the same election.

November's outcome will be critical in clarifying the path forward in 2025 for a key policy issue: taxes. All the 2017 tax cuts, including lower individual income tax rates, the higher standard deduction, and the larger amount of assets that can be inherited without triggering the estate tax, are set to expire at the end of 2025. That means a titanic battle is shaping up next year on what to do about those expiring provisions. And both parties are thinking about what other tax issues could be included in a large bill. In recent weeks, for example, both presidential candidates have endorsed ending the taxation of tip income. Trump has indicated support for eliminating taxes on Social Security benefits and overtime pay, while Harris has proposed new tax incentives for first-time homebuyers and small businesses. 

The taxation of wealthier individuals is likely to be one of the central points of debate during the campaign. Vice President Harris has endorsed most of President Biden's tax plan, which includes allowing the top individual income tax rate to return to 39.6%. But Harris recently proposed a capital gains rate much lower than Biden's, calling for a top rate of 28%, plus a 5% Net Investment Income Tax, for households earning more than $1 million. The plan also includes a controversial proposal to tax unrealized gains for individuals with net assets over $100 million. But if there is a divided Congress next year, few of these proposals has any chance of happening. Expect a lot of back-and-forth this fall about next year's tax debate, but until we know who will be occupying the White House and which party controls the House and Senate next year, it's impossible to predict how the complicated issue will play out.

Focus on the election has meant that Congress has found little time for significant legislative action in recent months, and we expect that to continue until after the election. Congress does face an October 1 deadline to fund government operations for the new fiscal year, but it is widely expected that lawmakers will pass a temporary extension to keep the government open and operating through the election. Congress will reconvene in November for what could be a busy lame duck session between Election Day and Christmas

Although Congress has been relatively quiet, there have been notable developments recently on the regulatory front.

Treasury Department adopts rule requiring anti–money laundering program for RIAs

In late August, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) adopted rules requiring RIAs to implement a risk-based anti–money laundering (AML) program. Advisors will also be required to file Suspicious Activity Reports when they suspect potential money laundering or terrorist financing activity and maintain records relating to the transmittal of funds. The AML program must have internal policies, procedures, and controls, as well as a designated individual responsible for the program. It must include employee training and is subject to independent audits, Certain midsize advisers, as well as pension consultants, will be exempt from the new rule. Treasury also narrowed the scope of the rule as it applies to foreign advisors, so that it applies only to advisory activities that take place within the United States or when services are provided to a U.S. person. The new rules will go into effect on January 1, 2026. A separate proposal from FinCEN and the SEC to require RIAs to have customer identification programs is also moving toward finalization.

Labor Department Retirement Security Rule rejected by the courts

In July, two different federal courts issued a nationwide stay of the Department of Labor's Retirement Security Rule, usually just referred to as the fiduciary rule. The rule was supposed to go into effect in September, but now will be delayed indefinitely and may ultimately be overturned entirely. Among the key issues has been whether one-time advice, such as advice to an investor who is rolling a 401(k) into an IRA, is covered by the fiduciary definition. The issue of whether annuity sales should be covered was also central. Both cases that resulted in the nationwide stay were brought by groups representing insurance agents.

The development is the latest twist in the 15-year saga for the DOL as it has struggled to craft a rule to clarify who is a fiduciary in the retirement savings context. A previous iteration of the rule, finalized during the Obama administration, was vacated by the courts in 2018. That decision, in fact, came into play in the 2024 cases, with one judge citing the substantial similarities between the new rule and the previous rule as the basis for his decision.

Federal Judge Reed C. O'Connor, of the U.S. District Court for the Northern District of Texas, Fort Worth Division, said that the plaintiffs in one case, the American Council of Life Insurers and several other trade associations, were "virtually certain to succeed on their claims that the Rule exceeds DOL's statutory authority." He added that the rule "is almost certainly unlawful for a broad class of investment professionals."

The DOL has indicated that it plans to appeal. While further legal wranglings proceed, however, the DOL's original 1975 five-part test for determining which advisors qualify as fiduciaries under ERISA will remain in effect.

Supreme Court decision likely to have dramatic effect on regulations

The DOL's arguments in defending its fiduciary rule took an additional blow when the Supreme Court issued an important decision in late June that will have a far-reaching impact on the regulatory environment. The court ended 40 years of adherence to the Chevron doctrine, a 1984 decision that said the courts needed to defer to the expertise of regulatory agencies when a law passed by Congress was unclear or vague.

The Supreme Court decision is likely to have significant ramifications for the SEC, an agency that has already seen several recent rules overturned in court. Earlier this year, an appeals court tossed out the agency's rule requiring more transparency and oversight of private funds. Implementation of its high-profile climate risk disclosure rule, which was approved in March and requires public companies to disclose more to investors about their contributions to climate change, has been paused in the face of eight legal challenges. The SEC has several other rules in the queue that could be impacted, including a series of proposals to overhaul retail trading. The agency has already signaled that it will be re-proposing its revised Custody Rule, as well as the proposal governing the use of predictive data analytics and other technology in investment-advice interactions. RIA-focused rule proposals on outsourcing and cybersecurity could also be candidates for legal challenges if they are finalized. It seems increasingly likely that the regulatory landscape in the years ahead will be determined in the courts.