By: Michael T. Townsend
Vice President, Legislative and Regulatory Affairs, Charles Schwab & Co., Inc.

June 22, 2010


It's been an unseasonably warm June in Washington thus far, but that hasn't slowed policymakers from continuing work on a variety of issues of importance to investors. The past several weeks have been dominated by debate over a sweeping overhaul of the financial regulatory landscape.

The legislation, a response to the 2008 financial crisis, seeks to provide new consumer protections, close regulatory loopholes, crack down on some of the risky behavior of financial institutions, and give new powers to the government to resolve failing firms without taxpayers bearing the burden. The Senate passed its version May 20. In June, House and Senate negotiators began meeting to harmonize the two versions of the legislation. (The House passed its version back in December 2009.)

Lawmakers are working hard to put a final agreement together that can pass both chambers of Congress and be sent to President Obama to sign into law around July 4. The bill is 2,000 pages long and will have a broad impact on virtually every aspect of the financial services industry and our capital markets. I'll provide a detailed analysis of the legislation once the bill is finalized.

In the meantime, the financial regulatory bill isn't the only thing happening in Washington that will impact investors. Here are quick snapshots of other ongoing issues:

Congress, SEC focus on "flash crash"
In the wake of the May 6 "flash crash"—when a series of glitches across multiple markets sent the Dow Jones Industrial Average plunging nearly 1,000 points in a matter of minutes and then rebounding almost all the way back—both Congress and the SEC have been active in investigating the causes and possible responses.

The House and Senate each held hearings on the events of May 6, and there was considerable discussion about the increasing influence of high-frequency traders on our capital markets. Some members of Congress expressed concern that individual investors were at a disadvantage because computer-generated trading programs have the ability to see what's happening in the market and trade on that information fractions of a second ahead of individuals. For now, though, Congress has deferred to the SEC and the stock exchanges to put remedies in place.

The SEC moved quickly, taking several steps to remedy the problem—including directing the exchanges to devise rules for curbing trading in a quickly moving market (up or down). The SEC also set up a joint taskforce with the Commodity Trading Futures Commission (CFTC) to discuss market issues and coordinate responses.

Most significantly, the SEC fast-tracked exchange rules that impose a circuit breaker on any stock that experiences a 10% drop or rise in price during a five-minute period. The rule went into effect June 11 as a pilot program for S&P 500 stocks.

Incredibly, the circuit breakers were triggered for the first time a few days later, on June 16, when The Washington Post Co. (WPO) saw a sudden increase of more than 100% as the result of three trade errors. It's expected that the circuit breakers will be imposed market-wide later this year.

Meanwhile, the SEC held a roundtable discussion on market-structure issues in early June, which focused on the flash crash, the role of high-frequency traders and the increasing presence of "dark pools," private trading platforms that lack the transparency of traditional exchanges. SEC Chairwoman Mary Schapiro has indicated that further rule proposals on these issues are likely later this year.

SEC proposes new rules for target-date funds
One of the SEC's other initiatives this year has been to increase its focus on target-date funds. Target-date funds are an increasingly popular retirement savings vehicle in which the investment mix is automatically changed to become more conservative as the investor approaches retirement.

Most target-date funds include a date in their name—the intended retirement year. The SEC and the Department of Labor (which has jurisdiction over employer-sponsored retirement plans) have been concerned about the wildly varying performance in recent years by funds that have the same retirement target date. Earlier this year, the two regulators issued a joint "investor alert," providing more information about what target-date funds are and how they should be used.

On June 16, the SEC proposed new rules on how target-date funds can be named and requiring more disclosure to investors about how the asset allocation in the fund changes over time. A public comment period on the proposal will be open this summer, with the SEC expected to make a final decision on whether to implement the rule late in 2010.

IRA charitable rollover on verge of being renewed for 2010
As of mid-June, Congress was still wrangling over legislation to extend a number of tax breaks that expired at the end of 2009. Among these is the IRA charitable rollover, which allows an individual, once he or she reaches age 70½, to roll over up to $100,000 directly from an IRA to a charitable organization.

The provision was approved by the House in May, and is expected to be included in the final Senate bill. While jockeying continues over unrelated provisions in the bill, it seems likely—though not yet certain—that the IRA charitable rollover will be available for tax year 2010.

401(k) fee disclosure mired in political dispute
The same tax extenders bill has also inspired a mini-controversy over 401(k) fee disclosure. Rep. George Miller (D-CA), the chairman of the House Committee on Education and Labor, has long been a champion of increasing disclosure provided to 401(k) plan participants about the fees for each of the investment options in their plan and the impact those fees could have on long-term returns.

The House included 401(k) fee disclosures as part of the tax bill, but those provisions were stripped out by the Senate. Why? Because the Department of Labor has long been working on a regulatory proposal around fee disclosure to plan participants, which is expected in September.

The Labor Department's proposal is expected to require more disclosure about the various fees for each investment option in the plan, along with an easy-to-read chart for comparing the fees among all options. The Senate argued (and Department of Labor officials agreed) that the regulations, which are nearly ready for publication, would have to be scrapped and entirely rewritten to conform with the new language in the legislation—a process that could set fee disclosure back a year or two.

Once the Senate passes the bill, the House will have to pass the exact same bill in order to send it to President Obama for signature. Chairman Miller has threatened to hold up the legislation over the fee disclosure dispute, but, ultimately, we think that the regulatory process will move forward with rules proposed this summer.

Big tax issues won't be addressed until fall
With lawmakers scrambling to finish the legislation to overhaul financial regulation, and issues like the Gulf oil spill and confirmation of Supreme Court Justice nominee Elena Kagan expected to dominate July, the major tax decisions will be put off until this fall. With the Bush tax cuts set to expire at the end of 2010, Congress must act on income tax rates, the estate tax, and capital gains and dividend tax rates, among other tax issues. But don't expect any movement on these issues until September, and perhaps not until after the November elections.

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.