Regulation: Trumpeting a change

Deregulation of the US financial services industry looks a step closer as Mary Jo White, chairwoman of the Securities and Exchange Commission, will stand down at the end of the Obama administration. Incoming president Donald Trump, who vowed to “reform the entire regulatory code to ensure that we keep jobs and wealth in America”, now has three roles to fill in the five-member commission.

While candidates for the positions had not been revealed at press time, recruitment was being headed by Paul Atkins, a former SEC Republican commissioner who has advocated deregulation policies. Hedge fund manager Anthony Scaramucci, who has made no secret of a similar stance, is also advising the overall transition team.

Bringing the SEC onside will add to already strong sentiment among the US political elite. Trump's calls for a repeal of the Dodd-Frank Act, for one, are by no means new. 

In fact, a bill that will unravel much of the most unpopular red tape put in place by the Act is currently passing through the legislative system, with the House Financial Services Committee giving its approval for the proposals in September.

While the Financial Choice Act would authorise the SEC to impose stricter penalties on big banks that misbehave, it would liberate community banks and credit unions to lend to small businesses more freely through a capital requirement carve-out. 

Most importantly for the private funds industry, the Financial Choice Act calls for the Volcker Rule to be scrapped. Since its introduction, banks have been offloading portfolios of private fund interests and there's still plenty to go: Goldman Sachs, for example, has more than $6 billion of investments which are subject to the rule. 

The bill will have to pass through the Senate and the – now favourable – White House, so it's likely to be softened as it progresses. But even if only the core elements become law, experts say the shift in financial regulation will be huge.

While repeal of the Volcker Rule would be good news for the industry, Trump's manifesto pledge to tax carried interest as ordinary income, thereby increasing the tax bill for private fund managers, is less positive.

Although much was made of the issue by both parties during the election campaign, sources say the administration may have a difficult time mobilising the plan, because it may be hard to distinguish private equity limited partnerships from similar arrangements.

“From a technical perspective, it may be difficult to carve out private equity limited partnerships from other types of limited partnerships, such as family businesses organised as a partnership, energy master limited partnerships, real estate partnerships and so on,” says David Larsen, managing director at independent valuer Duff and Phelps. “Changes that impact private equity could, in fact, impact all types of partnerships, which may not be desirable by tax policymakers.”

There is also the chance the Republican-controlled Congress will once again push back the proposal, as it has in the past. 

Of course, it's early days. But the signs certainly point to an easing of some legislation, which may be good news for compliance-weary fund managers.

Photograph by Jarek Tuszynski.