Tag: Financial Choice Act

The Republican Agenda and Private Real Estate

Since President Trump is deep in private real estate, maybe there will be some good things coming to the industry during his administration. 

There were six major themes that President Trump campaigned on the most:

  1. Immigration and the wall
  2. Trade fairness
  3. Tax changes
  4. Healthcare changes
  5. Dodd-Frank changes
  6. De-regulation in general

Other than immigration, President Trump has proven himself to prefer to make policy through the 140 characters in Twitter, instead getting deep into the policy weeds. We need to look to Congress for a legislative blueprint, since President Trump does not seem to have one.

What does the Republican leadership in Congress want do? Specifically what do Paul Ryan in the house and Mitch McConnell in the Senate?

What can they convince the House and Senate to do? 

That is the big question right now with the American Health Care Act. The Republican house is torn between those who think the bill goes too far and those who think it doesn’t go far enough. Many campaigned on just the repeal part. Many others learned that what their constituents didn’t like about Obamacare is that is too expensive. The American Health Care Act only does one of those.

Speaker Ryan has promised a vote on the Republican healthcare bill on Thursday to coincide with the 7 year anniversary of the Affordable Care Act. We’ll see if Speaker Ryan is able to shepherd this very unpopular bill through the House and get enough votes.

Then what?

Most likely tax reform. Speaker Ryan published his “A Better Way” white paper in June of 2016. Unlike the American Health Care Act, legislators have been able to look at this already. Here are some of the highlights. 

  • Biggest change is the Border Adjustment Tax (unlikely to affect real estate directly.
  • Fewer tax brackets
  • Top rate of 33% for individuals 
  • Limit pass-through income from partnerships and LLCs to 25%
  • Lower corporate tax rate to 20%
  • Eliminate deductibility of interest expenses.
  • Individuals only taxed on half of their dividend and capital gains
  • Immediate cost recovery for investments instead of a depreciation schedule. (not clear on real estate)
  • Net Operating Losses can be carried forward and be adjusted for inflation
  • Eliminate the Alternative Minimum Tax,
  • Eliminate the estate tax
  • Eliminated Obamacare taxes (the last one is the healthcare bill)

President Trump mentioned removing favorable treatment of carried interest during the campaign. That is not Speaker Ryan’s blueprint. It’s been threatened before and survived.

After that, or during that, is financial de-regulation. Chairman Jeb Hensarling of the House Financial Services Committee has been working hard on his Dodd-Frank off-ramp for the last six years pushing bits of legislation through his committee and on to the House floor. The  Financial Choice Act has been floating around for a year and packages that work into one package.

“As the dust begins to settle on the post-crisis response, however, there has been a growing recognition that financial regulation has become far too complex and too intrusive and places too much faith in the discretion and wisdom of bank regulators.”

Here are some highlights:

  • Pitch is to help community banks.
  • Adjust capital requirements – removing Basel requirements
  • Make credit more available
  • New Bankruptcy code for financial institutions
  • Repeal FSCO’s Systemically Important Financial Institution designation powers
  • Reform Consumer Financial Protection Bureau
  • Federal Reserve Reform
  • Repeal the Volker Rule
  • Repeal Dodd-Frank registration requirements for private equity firms
  • Expand definition of accredited investor: Same income and net worth tests, but adds financial services experience or some sort of qualifying experience.

As much as the Republicans are campaigning against de-regulation the Financial Choice Act does not define “private equity firms” and requires the SEC to promulgate a new regulation to define it. SEC registration was on the edge during Dodd-Frank, The house version of the bill and the Senate version of the bill took opposite approaches on whether to subject private equity firms to SEC registration. During hearings, private equity kept being equated to leveraged buyouts that bankrupted companies and put people out of work to enrich corporate raiders.

 

I presented the above to PartnerConnect East 2017 yesterday. 

 

Sources:

A Better Way” white paper

Financial Choice Act

Congress is currently occupied with health care. That is just one item on the agenda for the Republican leadership in Congress and President Trump. All have mentioned in one way or another to undo some of the evils of Dodd-Frank.

The big questions is how long will it take to move the American Health Care Act through Congress and deliver a bill that President Trump will be willing to sign. The second question is whether Congress will be able to move forward with any other legislation while dealing with health care.

Whenever Congress is ready to work on other legislation, Jeb Hensarling, Chairman of the House Financial Services Committee, has a law he is ready to move forward: The Financial Choice Act.

The Financial Choice Act is the bill that he sees as undoing many of the evils of Dodd-Frank.

“As the dust begins to settle on the post-crisis response, however, there has been a growing recognition that financial regulation has become far too complex and too intrusive and places too much faith in the discretion and wisdom of bank regulators.“

It has many of the things you might expect: repealing the Volker Rule, adjusting bank capital requirements, limiting the powers of the Consumer Financial Protection Bureau, limiting the powers of the Financial Stability Oversight Council, limiting regulatory limits on community banks.

Two items struck me as particularly relevant to private funds: SEC Registration and the definition of accredited investor.

Section 452 changes the definition of “Accredited Investor.” It keeps the two current brightline tests of income and net worth. I think those are key tests given the illiquid nature of private placements. It fixes those standards and removes Dodd-Frank’s requirement that the SEC adjust the amounts every four years.

The bill adds in a third test, allowing anyone licensed as a broker or investment adviser to also be an “accredited investor.” It adds a fourth test, allowing the SEC to create a regulatory regime for individuals to prove that the knowledge, education or job experience to allow them to invest in private placements.

We have seen from SEC Acting Commissioner Piwowar that he on board with opening up the definition of accredited investor.

The bigger change for private equity funds and probably for real estate funds is that it exempts “private equity fund” managers from the registration and reporting obligations of the Investment Advisors Act.

As you might expect, the bill does not take the time to define “private equity fund.” It gives the SEC six months to issue a rule for the definition.

The arguments are that private equity should be treated like venture capital. Private equity does not pose systemic risk. Private equity investors are generally sophisticated. The SEC would be more effective focusing its exam efforts on retail investment advisers.

Obviously this bill is a long way from being enacted. These two small provisions could easily be eliminated from the final law during the legislative process. I expect health care is going to bog down Congress for a long time.

Sources: