RIA Washington Watch: Trump's next 100 days—deregulation and tax reform?
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.
As we pass the 100-day mark of the Trump administration, Michael Townsend offers his thoughts on what RIAs could anticipate in the months to come. Read his perspective on the impact the presidency might still have on the DOL rule, tax reform, the retirement system, and more.
If there is one certainty in Washington after the first 100 days of Donald Trump's presidency, it is that uncertainty seems to be here to stay. The president is learning how different governing is from campaigning, how challenging it is to turn campaign promises into reality, and how frustrating it can be to work with a slow-moving and bitterly divided Congress.
Amid the chaos, however, market performance has been strong. The roughly 6% increase in the market since the inauguration is the second-best performance in the first 100 days of a new president among the last seven presidents—dating back to President Carter's inauguration in 1977.
The first-100-days yardstick has always been arbitrary, and it remains too early to tell what the Trump administration will ultimately accomplish. How long markets will remain patient remains an open question if Trump's biggest promises continue to stall on Capitol Hill.
While much has happened in Washington over the last three months, two issues stand out as particularly critical to RIAs: new developments in the ever-changing saga of the Department of Labor (DOL) fiduciary rule and the beginning of what will be a long road toward reforming the tax code.
Here's an update on these two key issues and what to watch for in the weeks and months ahead:
DOL delays fiduciary rule to June 9
On April 7, 2017, the DOL delayed the April 10 applicability date of the fiduciary rule by 60 days. The effective date of the rule is June 9, and despite considerable pressure to delay the rule further, the DOL announced on May 23 that the June 9 date would stand, along with the part of the Best Interest Contract Exemption ("BIC") known as the "Impartial Conduct Standards." Other requirements of the BIC are deferred until January 1, 2018.
The rule, which redefines who is considered a fiduciary and cracks down on conflicts of interest in the retirement savings space, was finalized in April 2016—after nearly five years of discussion and debate in Washington. Since then, the financial industry has been focused on implementing the numerous changes required to comply by the kick-off date.
Door still open for fiduciary rule changes?
Although the fiduciary rule will become applicable on June 9, the DOL is considering the broader question of whether to revise, rescind, or rewrite the new rule. In an executive memorandum issued in February, Trump directed the DOL to examine whether the rule could negatively impact the availability of investment advice to retirement savers, increase costs, or increase the risk of litigation. If the DOL finds that the rule does have a negative impact, the memorandum directs the agency to propose a new rule. Comments regarding the rule examination were due April 17.
In a May 23 op-ed piece in The Wall Street Journal, new Labor Secretary Alexander Acosta wrote that the department "found no principled legal basis to change the June 9 date while we seek public input" on the fiduciary rule. But Acosta did indicate that the department would continue to collect public input about the rule and he left the door open to possible reconsideration at a later date. In a reference to the executive memorandum calling for a review of the rule, Acosta noted that the "Fiduciary Rule as written may not align with President Trump's deregulatory goals." While many in the industry are disappointed with the decision to proceed with the June 9 effective date, there are at least some indications that the issue is not completely resolved. Parts of the Best Interest Contract Exemption necessary for most firms to comply with the rule are not effective until January 1, 2018, so it is possible that further direction could come from the Labor Department between now and then.
"RIAs and others affected by the rule must be compliant on the June 9 applicability date."
Several legal challenges to the rule are also underway, and action from consumer groups and other pro-fiduciary organizations to prevent revisions to the rule is also a strong possibility.
In the meantime, Charles Schwab & Co., Inc., will be ready to comply with the June 9 date, and advisors and others in the retirement savings space who are subject to the rule should focus on being prepared to comply as well.
Tax reform wheels begin turning
Overhauling the tax code is one of the most high-profile issues on the agenda of President Trump and the Republican-controlled Congress. Comprehensive tax reform has not happened since 1986, and while both parties agree reform is long overdue, the two parties differ greatly on what that overhaul should look like.
With Republicans in the majority in both the House and Senate and a Republican in the White House, many Washington observers believe the stars have aligned for tax reform in 2017. Republican leaders are planning to pass a tax bill later this year using budget reconciliation—a complicated parliamentary tool that can be used to pass revenue-related legislation under special rules that limit debate, limit amendments and, most importantly, prohibit a filibuster. If it happens, the bill can be approved in the Senate with a simple majority. With Republicans holding a narrow 52–48 advantage in the Senate, budget reconciliation is likely the only way that tax reform can be approved.
On April 26, President Trump jumped into the fray, unveiling the broad principles of his own tax reform plan. Key features include:
- Reducing today’s seven individual tax brackets to three: 10%, 25%, and 35%
- Eliminating the estate tax and the Alternative Minimum Tax
- Repealing the Net Investment Income Tax, the 3.8% surtax on the investment income of wealthier filers that is part of the Affordable Care Act
- Preserving deductions for charitable contributions and mortgage interest, while eliminating all other tax deductions and doubling the current standard deduction
- Cutting the corporate tax rate to 15%
"Figuring out how to raise enough revenue to pay for tax cuts to individuals and corporations is one key issue. Another will be justifying the elimination of many popular tax credits and deductions."
However, the president's plan is short on details—and the devil is always in the details.
Figuring out how to raise enough revenue to pay for tax cuts to individuals and corporations is one key issue. Another will be justifying the elimination of many popular tax credits and deductions.
Keep in mind that the president's blueprint is simply a starting point. Most experts agree it cannot all be done. And while the president can use the bully pulpit to push his priorities, ultimately it is Congress that will decide how to draft the legislation and negotiate its passage through both chambers.
Trump's proposal may have grabbed headlines, but the bill that eventually begins to wind its ways through Congress will undoubtedly be very different. Expect many compromises.
Three keys issues for RIAs
As the tax reform debate begins in Congress, here are three other issues for RIAs to keep an eye on:
- Retirement savings—While no plans have been publicly released, Republicans are reported to be considering changes from a tax-deferred retirement system to "Roth treatment" for employee contributions. Essentially, instead of getting an up-front tax deduction for contributions to retirement savings programs, employees would contribute to Roth accounts in which the contribution is taxed but the growth and eventual withdrawals are not.
At the same time, lawmakers are reportedly considering several options to ensure that such a change does not discourage employees, particularly younger and newer workers, from saving for retirement. These options include increasing contribution limits, expanding the Saver's Credit for lower-income workers, and increasing the age at which individuals must begin taking required minimum distributions.
As of mid-May, however, it was not clear which—if any—of these provisions might be included in a draft bill.
- Corporate changes—President Trump’s plan would apply his proposed 15% corporate tax rate to so-called "pass-through entities," such as limited liability companies, limited partnerships, and S corporations.
Many RIA firms are structured this way, and clients who are business owners could also benefit. Like everything else in the president’s plan, it’s not clear whether this provision will be included in the draft legislation produced by Congressional Republicans, but it merits watching.
- Tax-exempt municipal bonds—There has been recent speculation in Washington about whether the tax-exempt status of muni bonds will be changed or eliminated. Nothing in the president's proposal indicated this was in his plans.
Whether the appeal of tax-exempt bonds will be influenced by other provisions in the bill remains to be seen.
We don’t expect draft tax reform legislation to be unveiled in the House of Representatives until this summer at the earliest, and the chamber’s hopes to complete work on a tax bill by August seem to be fading. The Senate is likely to move at an even slower pace. Republican leaders would like to send a bill to the president for his signature by the end of the year. Myriad factors could derail that plan, but as tax reform comes together, RIAs would be wise to closely monitor the developments.
This report is current as of May 24, 2017. Schwab Advisor Services™ is committed to keeping you abreast of the latest happenings in Washington. Look for future RIA Washington Watch updates on the Schwab Insights Hub®.
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