Financial Industry and Regulation

Wall Street Journal Calls for Withdrawal of NASAA Non-Traded REIT Proposal: The Editorial Board of The Wall Street Journal Tuesday called on the North American Securities Administrators Association (NASAA) to withdraw its proposal on non-traded REITs. They wrote:

“Individual investors aren’t having a great time in the markets at the moment, so the last thing they need is a new restriction on where they can invest their money. But that’s what NASAA is recommending with its proposal to cap, at 10% of liquid net worth, the amount that individual investors can put into real-estate investment trusts (REITs) that aren’t traded on public exchanges. While NASAA doesn’t promulgate regulations, its suggestions are often adopted in U.S. states and Canada.

“NAV REITs now represent 99.9% of money raised for REITs, according to Robert A. Stanger & Co., an investment bank that tracks alternative investments. In a letter to NASAA in September, Stanger Chairman and CEO Kevin Gannon wrote that NASAA seemed to be confusing the new REITs with the previous generation’s. The studies used by NASAA were “outdated” and “flawed,” Gannon wrote, and “mischaracterize the structure, performance, and liquidity” of the REITs it proposes to target.

“Efforts to ‘protect’ small investors from putting their money in REITs deprives them of a chance to earn better returns. Let’s hope this proposal is withdrawn,” said the WSJ Editorial Board.

Editor's note: ADISA submitted a comment letter to NASAA on Sept. 12 stating, "If NASAA is to have a positive impact on investing behavior for smaller and newer investors as well as those with substantial resources, it should look at ways to enhance and not limit the availability and usability of alternatives in investor portfolios." Further suggesting that they "encourage well-informed independence by making sure investors of all stripes have access to the greatest number of alternative investments while ensuring investor protections."

DOL ESG Rule Under White House Review: InvestmentNews reports that the Department of Labor has effectively finished its ESG rule for retirement plans and sent it to the White House last week for final approval. The final version of that rule, which has been in the works since last year, likely will not be published until next month. The final rule is arriving at a time of political polarization on ESG, with numerous Republican-led states taking measures to limit its use in the assets they oversee. That has included steps ranging from blacklisting sustainable investment managers to considering legislation modeled on the Trump-era DOL rules.

DOL Issues New Independent Contractor Rule: ThinkAdvisor reports that the Department of Labor released Tuesday a proposed rule that would replace the existing 2021 test under the Fair Labor Standards Act used to determine worker classification as either an independent contractor or an employee. The proposal would require that workers be considered a company’s employees, who are entitled to more benefits and legal protections than contractors, when they are “economically dependent” on the firm. The new DOL rule would replace the 2021 rule that went into effect as a result of a ruling in March by the U.S. District Court for the Eastern District of Texas that the DOL’s delay and withdrawal of its independent contractor rule violated the Administrative Procedure Act. The DOL’s new rule could threaten independent advisors’ ability to work as independent contractors, says the Financial Services Institute, an advocacy group. The DOL says it “believes the new rule would preserve essential worker rights and provide consistency for regulated entities.” The DOL is taking comments on the plan until Nov. 28.

FINRA Issues First Reg BI Enforcement Action: InvestmentNews reports that the Financial Industry Regulatory Authority Inc.’s first enforcement action related to Regulation Best Interest involved a six-month suspension and a small fine – $5,000 – but demonstrated the broker standard of conduct is giving the regulator more latitude to crackdown on excessive trading. FINRA charged a former broker, Charles V. Malico, with violating Reg BI “by recommending a series of transactions in the account of one retail customer that was excessive in light of the customer’s investment profile and therefore was not in that customer’s best interest,” the Oct. 11 settlement document states. Trading to generate revenue contradicted Reg BI because it benefitted Malico and Network 1 but not the customer, FINRA alleged. The standard of conduct prohibits brokers from putting their interests ahead of their customers’ interests.

IRS Delays New Rules for Inherited IRAs: The Wall Street Journal reports that the Internal Revenue Service said last week it would delay enforcement of new rules for taking required withdrawals from some inherited retirement accounts until 2023, after taxpayers complained the changes were confusing. The relief (Notice 2022-53) applies to taxpayers who inherited retirement accounts in 2020 or 2021 who the IRS said had to take annual withdrawals right away instead of waiting until the end of a 10-year period to deplete their accounts. The new guidance doesn’t say that the annual required minimum distributions are waived, but by offering penalty relief, it essentially means that this group of taxpayers doesn’t have to take RMDs for 2021 and 2022, an IRS spokesman said.

FINRA Issues Alert Regarding ACATS Fraud: The DI Wire reports that the Financial Industry Regulatory Authority released a regulatory notice alerting firms of a rise in fraudulent transfer of customer accounts through the Automated Customer Account Transfer Service, an automated system administered by the National Securities Clearing Corporation that facilitates the transfer of customer account assets from one firm to another. The notice warns that bad actors effect fraudulent transfers of customer accounts using ACATS and lists several existing regulatory obligations that may apply in connection with ACATS fraud. ACATS fraud usually occurs by a bad actor using the stolen identity of a legitimate customer from a carrying member. The bad actor will open a brokerage account online using a legitimate customer at the receiving member to create a new account using stolen or false information. After opening the new account, they will initiate a transfer through ACATS from the legitimate customer’s account assets.

Glitch Causes SEC to Reopen 12 Comment Periods: ThinkAdvisor reports that a technical error has prompted the Securities and Exchange Commission to reopen the comment period for 11 rule proposals and one request for comment. The agency said last week that a technological error affected comments submitted online as early as June 2021. The majority of the affected comments were submitted in August. The glitch resulted in some comment forms not being received by the Commission. The SEC reopened the comment periods for the affected releases until 14 days following publication of the reopening release in the Federal Register. Commenters who submitted a public comment to one of the affected comment files through the internet comment form between June 2021 and August 2022 are advised to check the relevant comment file on SEC.gov to determine whether their comment was received and posted, the SEC said. If a comment has not been posted, commenters should resubmit that comment.

SEC Scrutinizing Investment Funds, Advisors: Reuters reports that the Securities and Exchange Commission's scrutiny of how Wall Street handles work-related communications on personal devices and apps such as WhatsApp has expanded beyond broker-dealers to investment funds and advisers, according to people familiar with the inquiry. The SEC's enforcement unit has sent inquiries to a number of funds and advisers asking for information about their protocols for so-called "off-channel" business communications as recently as last week, sources told Reuters. The agency has asked firms to preserve and produce documents and share information on policies related to the use of devices and platforms. The SEC periodically conducts such sweeps to quickly gather information on issues it suspects may be widespread. Sweeps can sometimes, although not necessarily, lead to formal probes.

SEC Votes to Modernize Electronic Record Keeping: ThinkAdvisor reports that the Securities and Exchange Commission on Wednesday voted to adopt amendments that it said will modernize how broker-dealers preserve electronic records. The changes also cover the prompt production of records and third-party recordkeeping service requirements that are applicable to BDs, security-based swap dealers and major security-based swap participants, the SEC said. The amendments will also facilitate examinations of BDs, SBSDs and MSBSPs, the SEC said. The SEC’s BD electronic recordkeeping rule now requires firms to preserve electronic records exclusively in a non-rewriteable, non-erasable format, known as the write once, read many format. The amendments will add an “audit-trail alternative under which electronic records can be preserved in a manner that permits the recreation of an original record if it is altered, over-written, or erased,” according to the SEC.

Policy/Legislation

Congress Likely to Change Catch-Up Contribution Rules: The Wall Street Journal reports that while catch-up contributions have long allowed older individuals to funnel additional funds into their individual retirement accounts or workplace plans, now Congress is likely to increase the annual amount that those individuals can save using this method. Proposed modifications, which are mostly uncontroversial and bipartisan, passed the House earlier this year. The Senate Finance Committee recently sent its version to the full Senate. For traditional and Roth IRAs, both bills in Congress propose to keep the maximum elective catch-up the same as it is now: $1,000 a year above the $6,000 standard contribution limit. However, both proposals also would allow for increases in that $1,000 based on inflation indexing.

Biden Tax Hike Proposals Could Come Up Again: The non-partisan Tax Foundation reports that many of President Biden’s tax increase proposals may be considered again even though they were dropped from the recently passed Inflation Reduction Act. The proposed individual tax increases included an increase in the top income tax rate to 39.6%, a hike in capital gains taxes to 39.6% for those earning over $1 million, a repeal of step-up in basis, an increase in the estate tax, and a large increase in payroll taxes. For businesses, the President proposed a seven-point hike in the corporate tax rate to 28%, a new minimum book tax on corporate profits, and higher taxes on international activity. The Tax Foundation estimated these proposals would reduce the size of the economy (GDP) by 1.6% over the long run and eliminate 542,000 jobs. Advocates of raising taxes on higher earners and businesses will continue to make their case after the midterms and into the next presidential campaign season. Even larger tax hike proposals such as wealth taxes or taxing capital gains on a mark-to-market basis may also continue to garner interest, the Foundation says.