10 legislative and regulatory developments advisers need to know

1. Congress extends payroll tax deduction temporarily

After rejecting a Senate compromise to extend a payroll tax deduction for two months (HR 3630, (click here.), House Republicans capitulated Dec. 22 as the clock wound down on the 2011 congressional session. In a voice vote Dec. 23, the House also approved the Senate version of the legislation, which reduces the tax rate for the employee contribution to Social Security from 6.2% to 4.2% through February. The measure also extends enhanced unemployment benefits and adjusts the Medicare payment formula for doctors, among other provisions. What it does not do, however, is provide any clarity about where Congress is heading on tax policy. In fact, it ensures that lawmakers will start fighting about extending the payroll tax cut again shortly after they return to Washington late this month. Among the items on the tax agenda in 2012 are several so-called extenders that expired on Dec. 31: a research and development tax credit, the alternative minimum tax reduction and the state and local sales tax deduction. Rep. Nita Lowey, D-N.Y., has introduced a bill that would permanently increase the AMT exemption (HR 3747) ).

An additional tax on income above $1 million continues to bandied about in legislation, indicating that Democrats will press the issue through the election year. The latest iteration of the so-called millionaire’s surcharge emerged in one of the first Democratic proposals to extend the payroll tax cut (S 1917, click here.:). Sen. Robert Casey, D-Pa., proposed funding a reduction in the payroll tax from 6.2% to 3.1% by imposing a 3.25% tax on the portion of an individual’s income above $1 million. This bill was filibustered by Republicans Sen. Susan Collins, R-Me., and Sen. Claire McCaskill, D-Mo., who also introduced a payroll tax cut bill that was funded in part by a millionaires’ tax (S 1960, Click here.). It was referred to the Senate Finance Committee. The Senate GOP’s initial payroll tax measure (S 1931, Click here) would have paid for the payroll tax reduction by freezing the pay of federal workers. In the compromise bill, senators agreed to fund the tax cut raising by the fees that Fannie Mae and Freddie Mac charge to mortgage lenders.

3. SEC ekes out slight budget increase

When the dust settled from the latest congressional skirmish over the federal budget, the Securities and Exchange Commission was awarded a small budget increase. As a federal government shutdown loomed again in mid-December, Congress approved a budget for the remainder of fiscal 2012 (HR 2055, ), that gives the SEC a $136 million increase (See story here.). That number is still $86 million less than the Obama administration’s request for the agency and leaves it short of the funding level that officials have argued is required to conduct its usual market monitoring and investor protection activities while implementing the massive Dodd-Frank financial reform law.

4. Senate slows down the pace of crowd-funding legislation

After hurtling through the House in a matter of weeks and gaining approval by a 407–17 vote, legislation that would allow start-up companies to raise capital online in small increments has slowed down in the Senate, where lawmakers are expressing concern about small investors being subject to Internet fraud. The House bill (HR 2930, Click here) would allow someone with a new business idea to raise up to $5 million annually online. Individual investments would be limited to $10,000 or 10% of income, whichever is less. Sen. Scott Brown, R-Mass., introduced a bill (S.1791, Click here) that would allow a company to raise $1 million over any 12-month period and limit individual investments to $1,000. Both bills would exempt the securities offerings from registration with the Securities and Exchange Commission and would pre-empt state regulation, a provision that has generated opposition from the North American Securities Administrators Association Inc. A crowd-funding bill (S 1970, Click here), introduced by Sen. Jeff Merkley, D-Ore, in December would not pre-empt state authority. It would limit stock offerings to $1 million annually and cap individual investments at $500 for people earning less than $50,000, rising to a maximum of $2,000 of those with higher salaries. The Senate held two hearings in December that touched on investor-protection aspects of crowd-funding. More may be scheduled next month. Meanwhile, the Securities and Exchange Commission Dec. 21 approved a final rule (Download here) that defines an “accredited investor” as someone (or a couple) whose net worth is at least $1 million, not counting the value of a home. The new standard was required by the Dodd-Frank law. See related story (here).

5. House tries to rein in regulators

House Republicans advanced their efforts to rein in regulators by approving three bills in December that would give Congress more authority to reject proposed rules and require more rigorous cost-benefit analyses of them. On Dec. 7, the House passed the Regulations from the Executive in Need of Scrutiny Act, HR 10, which would require congressional approval of regulations that are likely to have an annual impact of $100 million or more on the economy, cause a major increase in costs or prices, or adversely affect employment, investment or productivity. Two other bills passed by the House — HR 527 (click here) and HR 3010 (Click here) — would require stepped-up cost-benefit analyses of the impact of regulations on small businesses and require agencies to identify the legal authority under which they are proposing a rule, define the problem the rule is trying to address and identify possible alternatives to the rule. The bills are similar to a measure introduced by Rep. Scott Garrett, R-N.J., HR 2320 (Click here) that focuses on reforming rule making at the Securities and Exchange Commission. The bills have little chance of being approved by the Democratic Senate. In addition, the White House has threatened to veto HR 10, calling it a “radical departure from the longstanding separation of powers between the legislative and executive branches.”

6. House bill restricts regulators’ access to insurance information

A bill that would limit the interaction of federal regulators with insurance providers is working its way through the House Financial Services Committee. A panel subcommittee Dec. 8 approved the Insurance Data Protection Act, HR 3559 (a href=http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.3559:>Click here), written by Rep. Steve Stivers, R-Ohio. The measure would revoke the subpoena authority of the Federal Insurance Office and the Office of Financial Research. The agencies would have to obtain insurance data from state regulators, another federal agency or from public sources rather than directly from insurance companies. Separately, insurance industry groups submitted comment letters to the FIO for an agency report to Congress on how to modernize and improve insurance regulation. See related story (Click here.).

7. Congress inserts itself into SEC settlement controversy

The House Financial Services Committee announced Dec. 16 that it would hold a hearing next year to explore the Securities and Exchange Commission’s practice of settling enforcement cases with agreements that allow investigation targets neither to admit nor deny wrongdoing (Click here). In late November, U.S. District Court Judge Jed Rakoff rejected a $285 million SEC settlement with Citigroup Inc. over a mortgage-backed securities investment fund. Mr. Rakoff criticized the agreement for letting the financial service giant off the hook with a minor penalty without having to admit it did anything wrong. The SEC appealed Mr. Rakoff’s decision to the 2nd U.S. Circuit Court of Appeals and asked Mr. Rakoff himself for a stay in the proceedings. Mr. Rakoff denied the stay in a Dec. 27 ruling (Click here).
Meanwhile, in late November, SEC Chairman Mary Schapiro sent a letter to the Senate Banking Subcommittee on Securities, Insurance and Investment in which she asked Congress to increase the statutory limits on the amount of penalties the SEC can levy for violations of securities laws.

8. SEC extends comment period on Volcker Rule

Regulators pushed back the comment deadline on the so-called Volcker Rule to Feb. 13. Originally, comments were due on Jan. 13. The proposed rule (Click here), which is mandated by the Dodd-Frank financial reform law, would place restrictions on proprietary trading — and relationships with hedge funds — by large banks and other financial institutions. The rule asks for public input on more than 400 questions embedded in its 530-page text. “This extension allows commentators the time to provide regulators with the necessary information to ensure crafting a rule that does not unnecessarily impede liquidity in capital and credit markets at the expense of capital formation and economic growth,” Kenneth Bentsen Jr., executive vice president of the Securities Industry and Financial Markets Association, said in a statement.

9. Finra hits back button on social-media reg

The Financial Industry Regulatory Authority Inc. has changed its mind about requiring brokers to make regulatory filings about social-media postings. It originally proposed the requirement in a package of public communications rules it submitted to the Securities and Exchange Commission. But in a Dec. 23 amendment, Finra stated that in response to comments, it is seeking to “exclude from filing requirements retail communications that are posted on an online interactive electronic forum.” See related story (here).

10. Finra aims to hike transaction fees

Finra is proposing an increase in the trading activity fee (TAF) that it assesses on the sale of securities from 0.00009 cents per share to 0.000095 cents per share and raise the cap for each trade from $4.50 to $4.75 (Read here). “Because of the recent decrease in trading volumes in the equity markets, Finra believes that the proposed rate change to the TAF is now necessary to ensure that Finra can continue to maintain a robust regulatory program and meet its regulatory obligations effectively while attempting to remain revenue neutral,” the regulator said in an SEC filing. In 2011, Finra pursued 1,411 disciplinary actions against registered firms and individuals, assessed more than $63 million in fines and ordered more than $19 million returned to harmed investors. See related story (here.).