Legislation affecting advisers takes the long and winding road through Congress

Political gridlock makes most legislative roads impassable. If lawmakers want to get a measure through Congress, they have to find a must-pass vehicle for the journey. Sometimes the passengers, such as recent bills affecting financial advisers, go along for the ride in strange modes of transportation.

A recent example is the National Defense Authorization Act, a 1,349-page bill that provides for more than $800 billion in defense spending for fiscal 2023.  The House approved the NDAA with a strong bipartisan vote, 329-101.

Tucked into the bowels of the defense bill is a provision — known as a rider — called the Establishing New Authorities for Business Laundering and Enabling Risks to Security Act. It would expand the definition of a financial institution to include investment advisers. It would require advisers to establish anti-money laundering and due diligence programs, report suspicious transactions and identify and verify account holders.

This would be a major new compliance obligation, which the Investment Adviser Association says needs more work before it becomes law.

“We recommend that Congress tailor any new requirements to exclude advisers whose business models or activities do not raise money laundering risks,” IAA CEO Karen Barr said in a statement. “It should consider extending AML requirements only as necessary to fill any gaps in our anti-money laundering regime.”

But it’s not clear whether Congress will take the time to make such adjustments to the AML provision because it has caught a ride to the Senate on the NDAA, which has been approved by Congress each year for more than six decades.

“In contrast to any other policy bill of which we are aware, the NDAA is truly must-pass annual legislation,” Michael Canning, principal and founder of The LXR Group, wrote in a recent analysis.

If there’s one thing on which Congress can agree, it’s that the Pentagon’s funding apparatus must be renewed each year.

“It’s a natural place to include riders that have significant bipartisan support that need to make it to the president’s desk,” Canning said in an interview. “If you can get yourself onto that bill, you’re in a good place. It’s one of the few annual pieces of legislation that hasn’t come unglued in the last decade-and-a-half.”

That’s a potential problem. The lack of bipartisanship in Congress means that few bills pass through what’s called regular order — or, the Schoolhouse Rock process of a bill becoming a law by advancing in the House and Senate from the committee level up and then onto the president’s desk to be enacted.

That’s not how legislating has worked the past two decades or so. Instead, it’s catch as catch can. Hitch a ride on another moving vehicle and hope you arrive at your desired destination.

Sometimes hot bills careen along — like the AML rider — and sometimes it’s low-key measures,  such as a  provision that would establish a state-level grant program for senior investor protection, which also is included in the NDAA.

Before you get too concerned about new AML rules, keep in mind that it’s not clear which riders will stay in the NDAA and which will get kicked to the curb as it drives through the Senate.

Another example of the breakdown of regular order is the use of so-called reconciliation legislation to pass major tax and spending policy. Generally, each fiscal year, Congress can take up a reconciliation bill, which requires only a simple Senate majority and bypasses a filibuster. Sometimes, they can pursue more than one.

Congressional Democrats have been trying to approve a reconciliation bill known as Build Back Better. Various iterations contained tax increases on the wealthy.

It’s been whittled down to a bill that encompasses climate and health care spending and is paid for with a corporate tax, drug pricing reform, enhanced IRS enforcement and tightening rules on carried interest, according to a summary of a deal between Sen. Joe Manchin, D-W.Va., and Senate Majority Leader Chuck Schumer, D-N.Y., released on Wednesday.

A potential new 3.8% tax on pass-through businesses seems to have fallen by the wayside — likely to the relief of many financial advisers and their clients.

“The risk of enactment has gone down dramatically because there isn’t an available reconciliation vehicle to put the taxes on,” said Marc Gerson, a member at the law firm Miller & Chevalier and a former Republican tax counsel on the House Ways and Means Committee. “I don’t see an environment in which controversial tax increases will be considered.”

While the reconciliation bill shrinks, there’s another potentially big piece of legislation looming on the horizon — an economic package, including retirement savings reform, that could be considered during a lame-duck session of Congress after the election. That’s a favorite venue outside of regular order.

Who knows what’s going to happen in a lame duck, especially because we haven’t yet seen the legislative text of a retirement savings bill the Senate Finance Committee approved in June.

Significant adviser legislation could travel through Capitol Hill. Keep your eye on the traffic — especially vehicles where you wouldn’t expect to see an adviser bill getting a ride.