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What We're Watching in Washington by Michael T. Townsend, Vice President, Legislative and Regulatory Affairs, Charles Schwab & Co., Inc. September 29, 2009
Key Points
After several early victories, the issues are getting much more difficult for the Obama administration.
The big three, of course, are financial regulatory overhaul, health care reform and efforts to fight climate change.
Other significant issues on the radar are changes to the estate tax, capital gains and dividend tax rates, contribution limits for 401(k)s and other retirement savings issues.
From town halls to tea parties, cash for clunkers to credit-card reforms, the first eight months of the Obama presidency have been anything but boring.
The president has enjoyed some significant victories, including approval of a massive economic stimulus plan during his first few weeks in office, an expansion of children's health care, and approval of his budget blueprint, which outlines his goals for the future.
Now, however, we're at "the end of the beginning" of the Obama presidency, and the issues are getting much more difficult.
Despite the advantage of having significant majorities of Democrats in both chambers of Congress, President Obama is finding progress to be much more challenging on three signature issues: health care reform, an overhaul of the financial regulatory structure and climate change.
Many other important issues are also waiting in the wings, so it's shaping up to be an incredibly busy fall in Washington. Here's what we're watching for:
Financial regulatory overhaul
In the wake of the financial crisis, President Obama issued a series of legislative proposals designed to overhaul the financial regulatory system.
Congress is expected to consider these proposals throughout the fall. Chances are very good that the House of Representatives will pass a comprehensive reform bill, but we expect that debate in the Senate will not be completed until early 2010.
Some of the key issues include:
Systemic risk regulator. While the administration favors giving the Federal Reserve more authority over "systemically important" financial institutions (so-called "too big to fail" institutions), Congress seems cool to the idea of giving the Fed additional power. A more likely outcome is that Congress creates a council of regulators, perhaps including the Fed, the Federal Deposit Insurance Corporation (FDIC), the Treasury Department, the Securities and Exchange Commission (SEC) and others.
Consumer Financial Protection Agency. Perhaps the most controversial element of the president's overhaul proposal is his call for creating a new federal agency with a broad mandate to provide consumers protection from unscrupulous financial institutions and set standards for disclosures and product offerings around such things as credit cards, car loans and mortgages. Both the financial services industry and key regulatory agencies have questioned whether this function needs to be housed in an entirely new federal agency.
Investor Protection Act. The administration has proposed imposing a fiduciary duty on brokers who provide advice, similar to the standard that applies to investment advisers.
"Say on pay." The House has passed legislation to give shareholders at public companies a nonbinding vote on the compensation of top executives, as well as give the SEC authority to prohibit excessively risky or inappropriate pay packages at financial institutions.
Resolution authority. Congress is looking at giving the FDIC the authority to unwind failing non-banks in the same manner as it does with banks.
Derivatives. Congress seems likely to pass legislation increasing regulation of derivatives, such as credit-default swaps, that have had little federal oversight up to now.
At the same time, the SEC is moving through the regulatory process on a number of issues important to investors.
The agency currently has these proposed regulations in the pipeline:
Reduce conflicts of interest at credit-rating agencies.
Increase transparency for money-market mutual funds.
Require hedge funds to register with the SEC.
Crack down on abusive short-selling; ban so-called "flash orders."
Increase the ability of shareholders to propose their own nominees for boards of directors.
Public comments are being collected on these issues, and the SEC should issue final rules on all of these matters either late this year or early next year.
Health care reform
Obviously, the most-watched issue of the year is health care reform, and how the effort plays out this fall will have a ripple effect on most other issues.
Many observers in Washington expect wrangling over health care reform to last most of the fall, with no resolution before November or December. If that's the case, it will push much of the rest of the legislative agenda into 2010.
There are literally hundreds of issues, large and small, that must still be worked out on health care reform to get a bill first through the Senate and then to reach a compromise with the House.
Among the biggest:
The ongoing debate over a public option.
The overall cost of the plan and how to pay for it.
Whether to mandate that individuals have insurance and that employers must offer it to their workers.
How much assistance to provide people who can't afford coverage.
While the task ahead sometimes seems Herculean, we continue to believe that the odds are in favor of some significant health care reform legislation being signed into law before the end of the year.
Climate change
Earlier this year, the House narrowly passed legislation to cap the overall level of carbon emissions and implement a "cap-and-trade" system allowing manufacturers and other companies to trade pollution allowances. The Senate is still working on a draft bill, and the cap-and-trade proposal is highly controversial in that chamber.
Given the intense negotiations and the other major issues already queued up for this fall, we think it likely action on climate change legislation will be mostly deferred until next year.
Beyond the "big three," we’re watching a number of other issues that could impact investors, including:
Estate tax fix. Under current law, the estate tax is scheduled to disappear in 2010 and then return in 2011. Congress will not let that happen. President Obama has floated a proposal that would make the estate tax permanent at its current level—an exemption of $3.5 million per person and a tax rate of 45% on the value of the estate above that level.
Some in Congress would like to tweak those numbers—perhaps raising the exemption to $5 million and/or lowering the tax rate to 35% or 40%. We think the most likely outcome is that Congress will pass a one-year extension of the current law, to ensure that the rate doesn’t go to zero in 2010.
That would line up the estate tax with the rest of the Bush tax cuts, all of which expire at the end of 2010, and set the stage for major tax legislation next year.
Capital gains and dividends. The 15% rate on capital gains and dividends is set to expire at the end of 2010, along with the current income tax rates. President Obama has proposed increasing the top two rates (currently 33% and 35%) to 36% and 39.6% in 2011, and then taxing capital gains and dividends at 20% for filers in those top two tax brackets only.
Other taxpayers would continue to have a 15% rate on capital gains and dividends, and individuals in the lowest bracket would continue to have a 0% rate. This issue will be front and center in 2010, but we don't expect any action in the remainder of 2009.
Lower contribution limits for 401(k)s? Each October, the IRS calculates the contribution limit for 401(k) plans based on a formula derived from the inflation rate in the third quarter of the year as compared to the same quarter the previous year.
As a result of the low inflation rate this year, there's increasing concern in Washington that this year's calculation may actually result in the contribution limit for 401(k) plans for 2010 declining from the current cap of $16,500 to $16,000, with the additional "catch-up" contribution for individuals over the age of 50 dropping from $5,500 to $5,000.
The IRS is scheduled to make its announcement October 15. At least one prominent member of Congress has said that Congress should consider passing legislation this fall to ensure that the contribution limit does not fall next year. We'll be watching to see whether that sentiment gains momentum if the IRS does announces a decrease in the contribution limits (IRAs would not be affected).
Retirement savings issues. We don't expect major action this fall in the retirement savings area, but we are watching several issues expected to ripen next year. Among these are President Obama's proposal for creating "Automatic IRAs"—payroll deduction IRAs that would give workers whose employers don't provide a retirement savings plan to have the opportunity to save for their retirements.
Also on the agenda is legislation to increase and simplify fee disclosure for retirement plan participants, so they can more easily compare the fees of the different investment options in their plan. And Congress and the Department of Labor are working on parallel legislative and regulatory tracks to set rules for how conflict-free investment advice can be provided to retirement plan participants.
Finally, both the SEC and the Labor Department are looking at target-date funds, and whether the disclosure and investment make-up of these funds is appropriate.
Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
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