Panel: Trump, GOP Congress positive for deregulating PE, other industries

Donald Trump’s election as U.S. president is good news for financial-industry players looking to reverse regulations implemented after the global financial crisis, said panelists at IA Watch’s post-election regulatory conference on Nov. 18.

While a full repeal of reforms mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act is unlikely, “I do think it could be nibbled on pretty severely,” said Neil Simon, vice president for government relations for the Investment Adviser Association.

The Republican Party’s establishment arm, led by Speaker of the House Paul Ryan (R-Wisconsin) and Senate Majority Leader Mitch McConnell (R-Kentucky), has long sought to roll back segments of Dodd-Frank, including rules subjecting PE firms to SEC scrutiny.

Cross-pollination

Trump occasionally struck a similar tone. He pledged to dismantle Dodd-Frank — while simultaneously calling for wide-ranging rules that would force banks to separate commercial and investment-banking platforms.

“You’re going to see a lot of cross-pollination between the Washington establishment and this populist” administration, said panelist Daniel Crowley, a Washington partner for K&L Gates’s public-policy practice. Despite the president-elect’s promise to — in his words — “drain the swamp,” Crowley said, many veteran congressional staffers may join the administration in coming weeks.

That said, proponents of financial deregulation will likely have to temper expectations given Trump’s frequent public-policy pivots, the panelists said. They’ll also have to reckon with populist enthusiasm for Trump, which could curdle if his administration is perceived to engage in the type of political cronyism he often lambasted on the campaign trail.

“If there’s one thing that the extreme right and the extreme left of this country can agree on, it’s that Wall Street stinks,” said panelist Gregory Merz, of counsel to Gibson Dunn. So any effort to deregulate PE and other financial industries will “have to be done on a stealth basis.”

In the short term, panelists said, the GOP’s consolidation of power could result in a variety of “rifle shot” reforms in the vein of HR 5424, which passed the House earlier this year.

That bill, the Investment Advisers Modernization Act of 2016, eliminated certain disclosures PE firms must make to investors and regulators. The law received strong support from PE lobbying and advocacy groups like the American Investment Council and the Association for Corporate Growth.

While the House also approved more sweeping efforts to unwind Dodd-Frank’s PE provisions, several sources said the targeted approach taken by HR 5424 as having a greater chance of success in the Senate, where Democrats maintain more control.

Even so, “politically I can’t see President Trump just letting private equity off the hook completely,” Merz said on the panel.  

“Republicans don’t have the mandate to tear up Dodd-Frank and start all over again,” he added. “It’s all going to be done underground; it needs to be done stealthily. Otherwise the political backlash will be too strong and people will start listening to” Sen. Elizabeth Warren (D-Massachusetts), “who’s already very popular.”

Carried interest

Similarly, even as Trump considers PE executives like Blackstone’s Jonathan Gray, Wilbur Ross of WL Ross & Co and Gerry Parsky of Aurora Capital for high-profile roles in his administration, IA Watch panelists said carried interest’s treatment as a capital gain will likely be at risk should Congress move forward with comprehensive tax reform.

The president-elect has said carried interest, a PE firm’s share of profits generated by its funds, should be taxed as regular income. He shares that opinion with political progressives like Warren and Sen. Bernie Sanders (I-Vermont), who often cite it as an example of a tax-code loophole benefiting the wealthy.

The prognosis for comprehensive tax reform improves with Trump in the White House and Republicans in control of both houses, sources told Buyouts. Carried interest would likely serve as a bargaining chip for the Trump administration, Ryan and congressional leaders as they structure a package to appeal to traditional Republicans, populists and Senate Democrats.

“Trump’s going to really have to struggle to balance his pragmatism, if you can call it that, with his populism,” Merz said, later adding. “Trump has to be careful how much he can roll back the promises he made during the election. He unleashed the hounds of you-know-where.”

Action Item: More about IA Watch events: www.regcompliancewatch.com/ch/Investment-Adviser