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Elections

Dodd-Frank, fiduciary rule likely to be first targets in expected GOP overhaul

Donald J. Trump's presidency is expected to drastically shake up things in Washington.

As Republicans gain control of the White House, Senate and House of Representatives for the first time in a decade, they face both the opportunity and challenge of turning their agen-da into reality.

For President-elect Donald J. Trump, it is an ambitious agenda that includes overhauling the U.S. tax code, dismantling the Dodd-Frank Wall Street Reform and Consumer Protection Act, and halting or undoing other regulations that he says burden businesses, such as the Department of Labor fiduciary rule. He also has pledged to invest heavily in infrastructure and other measures to stimulate economic growth.

Missing from the immediate agenda is retirement.

“Aside from a Trump campaign promise to strengthen Social Security that did not include details, I don't see retirement policy at the forefront,” said Will Hansen, senior vice president of retirement policy for the ERISA Industry Committee in Washington.

Republicans in the House and Senate, who retained their majority status, share the president-elect's interests, but have their own ideas on how to achieve them. In the Senate, Republicans' slim majority means they will have to work with Democrats to avoid filibusters. Both houses also will have to figure out how to work with Mr. Trump, who ran as a populist, even under the Republican banner.

“(Mr.) Trump is much less predictable,” than previous presidents-elect said Erik Knutzen, multiasset-class chief investment officer at Neuberger Berman LLC. “He is very inexperienced when it comes to governing.”

Mr. Trump's tax reform ideas illustrate the challenge. His campaign platform called for tax cuts that would cost $4.4 trillion in new federal revenue over 10 years. It includes popular ideas such as slashing corporate and business income rates to 15% from the current top rate of 35% and reducing rates for partnerships that use pass-through accounting, including private equity firms, but it also would end corporations' ability to defer paying taxes on their overseas income.

His campaign to end what he called “special-interest loopholes” includes getting rid of the special tax treatment of carried interest. It's the “proverbial political football,” said National Venture Capital Association President and CEO Bobby Franklin, who said Mr. Trump “misunderstands” the value of carried interest.

Michael Bresson, a tax partner with law firm Baker Botts LLP in Houston, sees the carried interest talk as mostly symbolic. “He was running as a populist and that was a popular proposal. It is not part of other Republicans' plans,” he said, noting that having one party in control doesn't guarantee success. “There is a variety of plans that have been floated, so everybody needs to agree on a plan. I'm sure there's going to be a lot of talk. Who knows if they can all come together?”

There is more consensus among Republicans about dismantling Dodd-Frank, but critics argue much of it already has been implemented, and wholesale repeal would attract a lot of unwelcome attention from Wall Street watchdogs like Sen. Elizabeth Warren, D-Mass., and Rep. Maxine Waters, D-Calif. Mr. Trump also will have to compare proposals with House Financial Services Committee Chairman Jeb Hensarling, R-Texas, an outspoken advocate for repeal.

The same is true for the fiduciary rule, scheduled to take effect in April 2017. “It's pretty likely that an emboldened Congress will take aim at things like the DOL rule,” said Robert Dannhauser, head of global private wealth management at the CFA Institute in New York. “We think that's regrettable.” Erasing it completely could be tricky because financial services most affected by the rule already have begun overhauling their systems, and investors are more aware of it, he said. “In some ways what we've gone through has been good in informing the marketplace and investors. I would hope that the whole process has opened everyone's eyes,” said Mr. Dannhauser.

A resolution to block the rule that was passed by both chambers along party lines earlier this year was vetoed by President Barack Obama in June, but could reappear now.

Delaying fiduciary rule

Delaying the rule's implementation is another option, said Kent Mason, partner in law firm Davis & Harman LLP who represents financial services firms. “It was always unrealistic to expect an entire industry to be structured in 12 months. Investors will be harmed if advisers are not fully ready on this unrealistic schedule.”

“This rule needs to be reviewed thoroughly so that it does not create an advice gap like the one that is occurring in the United Kingdom under a very similar rule. It would make sense for the new administration to step back and take a careful look at the issues,” said Mr. Mason, who points to the precedent set by Mr. Obama in 2009 in delaying a previous fiduciary rule.

Early in 2017, Mr. Trump and congressional leaders will have to make potentially unpopular decisions over how to fund the government, including raising the federal government's borrowing power, as the debt ceiling is expected to be reached by March. That will pit members of Congress against Mr. Trump's economic growth policies, which the Committee for a Responsible Federal Budget estimated would increase the national debt by $5 trillion, sending it from the current 77% of GDP to as high as 105%.

CRFB officials note the Congressional Budget Office projects that real, inflation-adjusted growth will average 2% over the next decade, while Mr. Trump said his plans would grow the economy by 4%, a rate of sustained growth not seen since the early 1970s. “(Mr.) Trump has argued the lower tax rates will stimulate more economic growth and thus pay for themselves. This will not happen, suggesting larger budget deficits and a higher debt load down the road,” said Mark Zandi, chief economist at Moody's Analytics, in a postelection analysis that called the Trump victory “a black swan” event.

Helping Mr. Trump navigate these deals will be some seasoned investment executives. Mr. Trump's national campaign finance chairman, Steven Mnuchin, a former Goldman Sachs Group (GS) Inc. executive who later formed hedge fund Dune Capital Management, is considered on the short list for Treasury secretary, along with Mr. Hensarling and J.P. Morgan Chase & Co. Chairman and CEO James “Jamie” Dimon. Economic post appointments are being handled by William Walton and former Bear Stearns chief economist David Malpass, a Treasury official under Ronald Reagan. Working with Mr. Malpass to place financial regulators at the Securities and Exchange Commission and the Commodities Futures Trading Commission is former SEC Commissioner Paul Atkins, a frequent critic of Dodd-Frank who is now chief executive of consulting firm Patomak Global Partners LLC.

Other members of the Trump economic advisory council include Thomas Barrack, executive chairman of investment firm Colony Capital Inc.; Anthony Scaramucci, founder of hedge funds-of-funds manager SkyBridge Capital, and John Paulson, president of hedge fund manager Paulson & Co.

Leading the labor transition team is lobbyist J. Steven Hart, chairman of Washington law firm Williams & Jensen PLLC. Mr. Hart brings a good understanding of benefits issues from previous stints at the Department of Labor and the Pension Benefit Guaranty Corp. It is a role he will reprise from Ronald Reagan's transition, where Mr. Hart was part of a reorganization task force on the Employee Retirement Income Security Act. A Williams & Jensen report on presidential transitions notes that “an incoming president faces significant challenges in rescinding regulations that were adopted and finalized before the end of the prior administration.”

4,000 political appointees

Installing a new administration is cumbersome, at best. According to The Partnership for Public Service, a non-partisan organization in Washington, there will be more than 4,000 political appointees to name, starting with 1,212 senior posts requiring Senate confirmation, such as cabinet secretaries and deputies, independent agency heads and ambassadors, and another 353 appointments, including White House staff, who don't need Senate confirmation.

Without a long-standing relationship with members of Congress, Mr. Trump is expected to rely on, and expect more, from his cabinet, said John Hudak, deputy director of Brookings Institution's Center for Effective Public Management, at a postelection briefing. “We're going to see cabinet secretaries really held accountable. You might see a lot of appointee turnover early in the administration.”

Steven Friedman, senior investment strategist at BNP Paribas Investment Partners in New York, sees potential for a pro-growth package to emerge in the first half of next year. “It depends on which Trump governs — Trump the populist or Trump the pragmatist. Until this becomes clear, we could be in a period where there is more of a political risk premium in markets,” said Mr. Friedman.

Experts at Mercer LLC are encouraged that the Republican sweep “could provide an opportunity to address the country's longer-term structural problems,” including the growth in entitlement programs and a complex tax system that dampens economic growth. “However, Trump's tax plans as presented would dramatically reduce government revenues and increase deficits. This could put upward pressure on inflation and interest rates,” they said in an analysis.

That could change the Federal Reserve's role significantly, including who succeeds Chairwoman Janet Yellen when her term ends in 2018 and who fills two other current vacancies. When it comes to bond markets, said Rick Rieder, managing director and global chief investment officer of fixed income at BlackRock (BLK) Inc. (BLK), in a statement, “we are probably going to see a significant shift from monetary policy stimulus to fiscal policy initiatives,” particularly in federal infrastructure investment.

“The ultimate economic impact will depend on what economic policies the new administration will actually pursue,” said Mr. Zandi of Moody's. “A Republican-controlled House and Senate will smooth the way for more policy becoming law.”