As the Donald Trump administration and a new Congress take control in Washington, advisors can expect widespread easing of the regulatory reins around such areas as retirement, tax and investing policies.
Debates are in full swing regarding the fate of the U.S. Labor Department’s fiduciary rule on retirement accounts, leadership of the U.S. Securities and Exchange Commission and the anticipated full-frontal focus by the Trump administration and Congress on tax reform — both individual and corporate.
Even ways to reform entitlement programs such as Social Security were being floated by lawmakers before year-end. U.S. Rep Sam Johnson, R-Texas, chairman of the House Ways and Means Social Security Subcommittee, introduced legislation that he argued will cut Social Security benefits and permanently save the program.
Johnson has said that his “common-sense plan is the start of a fact-based conversation” about how to save Social Security, and he urged other lawmakers “to also put pen to paper and offer their ideas about how they would save Social Security for generations to come.”
In the tax arena, Trump and the Republican-led Congress have vowed to pass reforms in 2017.
Andy Friedman of The Washington Update points out that Trump’s campaign materials call for a top individual tax rate of 33 percent on ordinary income (down from close to 40 percent) and a top tax rate of 20 percent for capital gains and dividends (down from close to 24 percent). Trump and Congress “would repeal the 3.8 percent surtax on investment income instituted under Obamacare,” Friedman said.
While the effective date of tax reform is uncertain, Friedman, a former tax attorney, said he believes lower tax rates would apply retroactively to the beginning of 2017. “Rates early next year could reflect the full rate reduction, or a reduction to somewhere between the old and new rates,” he said.
Either way, “investors would be well advised to plan for lower taxes next year,” Friedman said, and investors should “redouble their efforts to defer income into 2017 and accelerate deductions into 2016.”
Lower tax rates won’t last forever, Friedman warned, as congressional procedural rules are likely to require that the lower rates “sunset” in 10 years.
“Before then, a Democratic Congress — or any Congress concerned about outsize deficits in future years — could raise tax rates again. Thus, investors must plan for ‘tax volatility’—the concept that over time tax rates ebb and flow,” Friedman said.
As for corporate tax reform: “It’s coming,” said Greg Valliere, chief global investment strategist for Horizon Investments. The top corporate rate will plummet from 35 percent to about 20 percent, he said in a recent commentary, “but there are lots of close calls on specific provisions. There’s already fierce lobbying over issues like ‘border adjustability,’ which would reward U.S. exporters and punish importers.”
Any business tax reform will put the U.S. tax code in sync with codes in “most of the developed world,” Valliere said. A reform bill “will adopt a ‘territorial’ system that would only tax the profits of U.S. firms’ business in this country, a dramatic reform that should eliminate tax inversion deals that have seen U.S. companies relocate around the globe.”
However, Valliere notes that such reform “could be complicated by the hottest theme in corporate taxation — border adjustability — which would tax goods on where they are consumed rather than their exports.”
New leadership at the SEC, Labor Department
Ex-U.S. attorney Debra Wong Yang, a partner in Gibson, Dunn & Crutcher’s Los Angeles office, is reportedly a leading contender to lead the SEC under Trump. Yang was a lead attorney involved in the internal investigation that cleared New Jersey Gov. Chris Christie in the “Bridgegate” affair.
SEC Chair Mary Jo White announced she would resign at the end of the Obama administration in January. She told lawmakers in recent comments that the agency will not propose a uniform fiduciary standard rule before her departure.
Republican SEC Commissioner Michael Piwowar is said to be the acting chair once White departs.
At the Labor Department, Trump has named fast-food industry chief Andrew Puzder as his pick to lead the agency.
Trump transition officials along with members of Congress have vowed to repeal, delay or curtail DOL’s fiduciary rule.
A December report from the GroverParkGroup found that while most Trump supporters want fewer regulations, they support keeping the Dodd-Frank Act intact, and they also want the new administration to leave the SEC alone. Sixty-five percent said they supported keeping the Labor Department’s fiduciary rule in place.
Industry officials have urged advisors to comply with the rule by its April effective date.
Rep. Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, has promised to advance his Financial Choice Act in the next Congress. The bill, which Hensarling has said Trump supports, is designed to roll back Dodd-Frank.
While all eyes will be on Puzder, Trump’s choice to be the next Labor secretary, regarding fiduciary rule changes, Duane Thompson, senior policy analyst at fi360, said that the assistant secretary of Labor’s Employee Benefits Security Administration who replaces Phyllis Borzi “may have an even greater influence on pension regulations and any modifications” to DOL’s fiduciary rule.
While implementation of the rule will continue to take center stage in the new year, advisors are also anticipating new anti-money laundering rules for advisors from Treasury’s Financial Crimes Enforcement Network.
However, it remains to be seen “where that ends up with a change in administrations,” said Skip Schweiss, head of advisory advocacy for TD Ameritrade Institutional.
Schweiss is also waiting to see if the SEC moves to finalize the plan requiring registered investment advisors to adopt and implement written business continuity and succession plans, which has already gone through a comment period.
Whether the agency will require advisors to receive third-party audits also remains up in the air. “I don’t expect that [proposal] to go anywhere,” Schwiess said. Piwowar and Commissioner Kara Stein, a Democrat, are opposed to it.
A few months before White’s departure, the chairwoman had this to say about third-party exams and a uniform fiduciary rule: SEC commissioners are currently reviewing staff recommendations on a rule to require “independent compliance reviews” for advisors, or third-party exams, as well as a “detailed outline” on a uniform fiduciary duty rule for brokers and advisors which is “before the commissioners for their consideration.”
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