In an election year, Congress will be less productive than usual, experts said, but there is no shortage of activity coming from key regulators in Washington.
Both the Securities and Exchange Commission and Department of Labor have a number of proposals on the table that would significantly impact various aspects of the retirement and investment landscape, such as the SEC's climate disclosure rule and the DOL's fiduciary proposal.
Industry leaders and Republican lawmakers on Capitol Hill have been critical of the SEC for a slew of rules the agency proposed or finalized in 2023, which range from a focus on artificial intelligence to short-sale-related data.
"There's been no crisis that would precipitate this level of rule-making," said Christopher A. Iacovella, president and CEO of the American Securities Association, a Washington-based trade association representing regional financial services firms.
And the SEC is not expected to slow down any time soon.
Depending on how the election fares, the Congressional Review Act could pose a real threat to the SEC's future rules, according to Jillien Flores, head of global government affairs for the Managed Funds Association, a Washington-based trade association representing alternative asset managers.
The CRA allows Congress to invalidate a federal agency's rule, with a simple majority vote, if the rule has not been in effect for more than 60 legislative days.
"We anticipate a lot of (SEC) rule-making moving into final form in the first half of the year for that reason," Flores said.
In March, House Republicans failed to nullify a Labor Department rule allowing retirement plan fiduciaries to select investments based on ESG factors. The lawmakers were unable to overturn a presidential veto following the approval of a joint resolution, under the CRA, in both the House and Senate to invalidate the rule.
But the DOL has a number of other controversial items on its agenda for this year, as well.
"I think this is going to be a big year for resetting the department's relationship with the regulated community," said Michael Kreps, a principal at Groom Law Group and chair of its retirement services group.
"The department has proposed several different things that would radically change their relationship to financial services," Kreps said.
The DOL's newest proposal, which it issued Oct. 31, would amend the definition of the term "fiduciary" and require rollover advice to be in the best interest of the saver.
Specifically, the proposed "Retirement Security Rule" would amend the five-part test used to determine when a financial professional is considered an investment advice fiduciary under ERISA. Those changes would pull one-time advice, such as rollovers or annuity purchases, into the definition of a fiduciary if other parts of the test are met.
"That is a rule that is geared entirely toward pulling more investors into (the department's) jurisdiction," Kreps added.
Though the comment period didn't close until Jan. 2, the department held a public hearing on the proposal Dec. 12 and 13, where opinions over the new proposal varied greatly.
Kreps said that litigation pertaining to the rule is "inevitable," given that "the department's goals and views on the subject are inherently inconsistent with the views and goals of a large section of the retirement industry."
"The idea that someone selling an annuity has to make a best interest determination and act as kind of a fiduciary in selling that annuity — that's incompatible in many ways with how the industry operates," he added.
ASA's Iacovella was adamant that if the department "(continues) along this path," the trade association will pursue legal action over the rule.
"(The DOL) cannot override the will of Congress through a rule-making, and we will make sure that the court reminds them of that fact, again, if we have to," Iacovella said.
According to Melissa Kahn, managing director of retirement policy for State Street Global Advisors' defined contribution team, the DOL is "clearly pushing to get (the rule) finalized sooner rather than later," and she thinks the final version will come out by early May.
Other DOL proposals that both Kahn and Kreps said are top of mind are those making modifications to the qualified professional asset manager exemption, or QPAM exemption, and prohibited transaction exemptions.
The former proposal would expand the types of misconduct that disqualify financial institutions from using the QPAM exemption, while the latter would require more disclosure from plan sponsors and other entities applying for prohibited transaction exemptions. The QPAM exemption allows institutions to engage in transactions involving U.S. retirement assets that are otherwise prohibited under ERISA, and is required whenever a money manager's affiliates or parent company is convicted on criminal charges.
For the SEC, there are a number of high-profile rule proposals that the commission is set to finalize in 2024.
The controversial climate disclosure proposal is one still awaiting finalization. Originally proposed in March 2022, the proposal would require public companies to disclose a host of climate-related information, including greenhouse gas emissions, in their registration statements and periodic reports.
Iacovella said the SEC lacks the authority to enforce such a requirement and feels it would be an "unnecessary burden" on public companies.
"If they go forward with this, it will be a huge mistake, and it will be a massive stain on the chair's legacy," he added.
SEC Chair Gary Gensler has publicly defended the proposal and repeatedly said it's meant to bring consistency and comparability to disclosures that many companies make already.
Another controversial proposal that the American Securities Association, along with many industry groups, have asked for the SEC to withdraw altogether is its predictive data analytics proposal. That proposal, issued in July, would require broker-dealers and investment advisers to "eliminate or neutralize" conflicts of interest arising from the use of certain technologies in investor interactions.
Industry critics say the proposal's definition of "covered technologies" is overly broad and would stifle technology use in financial services.
In its most recent regulatory agenda, the SEC slated both rules for finalization in April, though sources noted that the timelines are arbitrary and could be pushed back.
According to MFA's Flores, the SEC's updated agenda is "the first time in a while there aren't a slew of new (items) that have been added," which likely means the commission is focused on seeing things through to finalization.
The SEC is currently involved in several lawsuits, as industry groups sued the agency over a number of rules it finalized in 2023.
On Sept. 1, six industry organizations, including MFA, asked the 5th U.S. Circuit Court of Appeals in New Orleans to set aside the SEC's private fund adviser rule, contending that the SEC overstepped its authority, failed to prove the need for such a rule, and made significant changes to the original rule proposal without soliciting public feedback.
The rule requires increased disclosure from private fund advisers, mandating they supply investors with quarterly statements, including information on performance, fees and expenses; obtain an annual audit for each fund they manage; and acquire a fairness opinion in connection with an adviser-led secondary transaction. It also prohibits advisers from engaging in several activities and practices, such as certain types of preferential treatment, unless they disclose such activities, or in some cases, receive investor consent.
"The fate of that rule will be pretty important," according to Groom Law Group's Kreps.
On Dec. 12, MFA, National Association of Private Fund Managers and Alternative Investment Management Association sued the SEC over its rules requiring increased disclosure of short-sale-related data and securities lending data.
In another request for the 5th Circuit to invalidate the rules, the lawsuit said the SEC ignored the interconnectedness of the rules and took a contradictory approach to regulating interrelated markets.
One rule would require certain institutional investment managers to report short-sale-related data to the SEC, and the regulator would then publish such data, on a slightly delayed basis, aggregating by security and keeping manager information confidential. But the other rule requires parties to securities lending transactions to disclose information on those transactions to the Financial Industry Regulatory Authority, and FINRA must make certain information it receives public by the morning of the next business day.
According to the lawsuit, while the former rule maintains manager confidentiality and publishes data on a delayed basis, the latter rule discloses individual transaction information on a daily basis "in a manner that effectively serves as a proxy for short-sale activity."
Sources also underscored the importance of the Supreme Court case Jarkesy vs. SEC, which challenges the constitutionality of the SEC's administrative law judges that handle administrative enforcement cases in-house. Following oral arguments on Nov. 29, the Supreme Court appears likely to rule against the SEC, which could mean a slower enforcement process for the agency and more difficulty obtaining settlements, according to attorneys.
The court is expected to release a decision on the case before its term ends in June.
