RIA Washington Watch: A new Washington, a fresh outlook on advisor issues
"RIA Washington Watch" is an ongoing series featuring the observations, insights, and analysis of Michael Townsend, vice president of legislative and regulatory affairs for Charles Schwab & Co. Inc., regarding issues and topics that affect Registered Investment Advisors (RIAs), their clients, and the RIA industry.
• Preparing for new faces in the SEC and a shift in regulatory priorities
• Current regulation likely to undergo transformative change
• Prime time for comprehensive tax reform, and what to expect from the incoming administration
With President-elect Donald Trump poised to take the oath of office on January 20, and Republicans retaining control of both the House of Representatives and the Senate, 2017 will see the dawn of a new era in Washington. For only the third time since World War II, Republicans will control the agenda in the nation’s capital.
Exactly what will be on that agenda remains unclear. Trump released a plan for his first 100 days in office that included 18 “immediate” goals and 10 longer-term priorities. Once in office, however, Trump’s administration will need to work with Congress to prioritize those issues and set more realistic goals for what it can accomplish, in what order, and over what time frame.
As Trump builds out his administration and prepares for his tenure in the White House, his priorities for early 2017 are still largely unknown. But that has not stopped speculation—and perhaps a healthy dose of wishful thinking—about what could be accomplished. Here’s a snapshot of the key areas that RIAs should keep an eye on.
Federal Reserve interest rate increases could accelerate slightly
The mid-December decision by the Federal Reserve to increase interest rates by 0.25% was not a surprise and probably does not warrant any substantial changes in portfolio allocation by advisors. The Fed signaled confidence in the direction of the U.S. economy and modestly increasing inflation. One notable change is that the Fed’s forecast now calls for three rate increases in 2017; its September statement forecast just two. We expect the Fed to carefully monitor policy developments in 2017, as President-elect Trump’s plans for significant spending increases in areas like infrastructure, combined with possible tax cuts, could influence Fed policy decisions.
Beyond high likelihood of a delay, the DOL fiduciary rule’s future remains murky
One of the first issues the new administration will need to confront is the future of the Department of Labor’s fiduciary rule. The controversial new rule, which was approved earlier this year and is slated to begin taking effect April 10, 2017, redefines who is a fiduciary and cracks down on conflicts of interest in the retirement savings space.
The financial services industry is making a major push to persuade the president-elect’s transition team that the regulation should be delayed and then revisited. Outright repeal is unlikely, but the new administration could move quickly to delay the effective date of the rule and then use that time to consider whether to change it. President-elect Trump's nominee for Secretary of Labor, Andrew Puzder, has not made any public statement about the rule as of yet, but expct the issue to be a line of questioning during Puzder's confirmation hearings this winter.
If a delay occurs, or changes to the current DOL rule are implemented, it’s not clear what comes next. There is no single industry view on how to change the rule, as different business models will be affected in different ways. Moreover, many companies have already announced plans to change the way they deliver retirement products and advice to savers, and it could be difficult and costly for those companies to change course.
Schwab’s dedicated legislative and regulatory affairs team in Washington thinks the chances of a delay in the April implementation date are very high, but as of mid December, it was still uncertain. It’s important to understand that a delay cannot be achieved by a simple executive order from the president. The multistep process is complex and can take two to three months—or right up to April 10. As a result, investment advisors and other financial professionals should continue to prepare for an April effective date until the new administration clearly signals its intentions.
For only the third time since World War II, Republicans will control the agenda in the nation’s capital.
Other regulatory priorities could also shift
A key piece of the president-elect’s campaign platform was reducing regulation on American businesses, so we expect that the new administration will scrutinize the regulatory environment for opportunities to rewrite or roll back burdensome rules. A wide-ranging regulatory review will result in a significant shift in priorities at the regulatory agencies.
For SEC, new appointments likely to mean new priorities
Dramatic changes are already in the works at the U.S. Securities and Exchange Commission (SEC). Chair Mary Jo White has announced that she will step down at the end of President Obama’s term. Two of the five commissioner slots at the SEC have been vacant for more than a year, so with White’s departure, it is likely that the agency will have just two commissioners at the beginning of the new administration. It’s highly unlikely that the agency will be unable to propose or finalize regulations until at least one open seat is filled. Nominating and confirming a new chair and two new commissioners could take several months.
Republican appointees, with a 3–2 majority, are likely to influence the regulatory agenda and ultimately spark a reordering of priorities. For example, a delayed rule proposal for electronically delivering mutual fund prospectuses could get new life.
Republican support of third-party exams could drive up audit frequency.
While White indicated several times this year that the SEC staff was hard at work on a proposed rule to harmonize broker-dealers and investment advisors under a fiduciary standard, the sole remaining Republican commissioner (and likely interim chair), Mike Piwowar, has expressed skepticism about whether such a rule is necessary.
Republican support of third-party exams could drive up audit frequency
On the other hand, efforts to increase the frequency of examinations of RIAs by allowing third-party audits could gain momentum under a Republican-led SEC. One of the champions of the third-party exam idea is former SEC Commissioner Daniel Gallagher, who has been rumored as a possible candidate to chair the agency.
The implications of a Dodd-Frank rewrite and an overhaul of the Consumer Financial Protection Bureau
The Dodd-Frank Wall Street Reform and Consumer Protection Act is itself a top target of the incoming administration. On Capitol Hill, House Financial Services Committee Chairman Jeb Hensarling (R-TX) has drafted a major rewrite of Dodd-Frank called the Financial CHOICE Act. While most of its provisions address issues such as how large financial companies are designated as systemically risky, one aspect of the Hensarling bill to note is that it would overhaul the Consumer Financial Protection Bureau (CFPB).
Republicans on Capitol Hill have long loathed the CFPB for what they describe as its “unchecked authority” to oversee all aspects of consumer finance. The agency has a single executive director and is not subject to the Congressional appropriations process for its funding. Republicans will push in 2017 to have the CFPB run by a five-member commission, like the SEC’s, and to have tighter control over the agency’s funding. While the CFPB does not have direct regulatory authority over RIAs or securities products, its broad consumer protection mission and the common desire within all regulatory agencies to expand its jurisdiction makes the outcome of this dispute worth keeping an eye on.
The election outcome has created what may be the best opportunity for comprehensive tax reform in three decades.
Ushering in a new era of comprehensive tax reform
On the legislative front, tax reform is expected to be one of the highest-priority issues in 2017 and is likely to have a direct impact on RIAs and their clients. There has not been a broad overhaul of the tax code since 1986, but the code has since been modified and amended thousands of times. The election outcome has created what may be the best opportunity for comprehensive tax reform in three decades.
The tax reform plan Trump proposed during the campaign is similar—though not identical—to a blueprint unveiled earlier this year by House Republicans. His plan calls for significantly cutting the corporate tax rate as well as reducing the current seven individual income tax brackets to three: 12.5%, 25%, and 33%.
Trump also proposes repealing the estate tax, the gift tax, the alternative minimum tax, and the Net Investment Income Tax, which is the 3.8% surtax on investment income for wealthier filers that was part of the Affordable Care Act.
While his campaign plan did not specifically address retirement savings incentives, expect the industry to be aggressive in its effort to ensure that retirement contribution limits and other tax incentives encouraging saving are enhanced, or at least kept at the same level as today. Overall, few details were spelled out in Trump’s campaign proposal, and those nuances will be the focus of intense negotiations on Capitol Hill.
Putting together comprehensive tax reform legislation won’t be easy. Every aspect of the tax code has its champions and its detractors; creating a bill that draws consensus, even among Republicans, will be tricky. But if Republicans can come together around a plan, it has a real chance of success, due largely to the party’s ability to use the budget reconciliation process to pass the bill. Reconciliation allows revenue-related legislation to be fast-tracked and approved with limited debate, limited amendments, no filibusters, and a simple majority vote in the Senate—as opposed to the 60-vote supermajority that is often needed to advance legislation.
One thing remains clear amid the uncertainty of the coming weeks: Donald Trump’s presidency promises to be unlike that of any of his predecessors in both style and substance. As the political landscape evolves during 2017, we will continue providing up-to-date information and regulatory insights to inform you and your team of the short- and long-term implications of legislative shifts.
This report is current as December 15, 2016. For more on how Schwab Advisor Services has advocated on behalf of the industry on these proposals, visit our advocacy page.