Lobbyist Sees Regulatory Reform Moving in Mostly Right Direction, But Slowly

The Trump administration is moving in the right direction on financial regulatory reform, a lobbyist for the financial services industry says, although cautions that reform won’t happen overnight. He also warns that a possible change to the tax-deductibility of retirement plan contributions could hurt individuals.

Anthony Cimino, senior vice president and head of government affairs for the Financial Services Roundtable, told participants at the 2017 SVIA Fall Forum in October that among the factors slowing the reform process are a fractious Congress and the Trump administration’s slow pace in filling positions within regulatory agencies, which in turn has slowed their ability to get things done. He also noted that when regulators change their mind they can’t just “flip a switch” to implement new rules. “They have to do their due diligence,” he said. “They have to propose their new rule. They have to open that new rule to public comment. And then, ultimately, they have to rewrite the rule. This is going to take some time.”

The hope that any rules will be rewritten at all stems in large part from a document issued by the U.S. Treasury in June 2017 detailing executive actions and regulatory changes the administration could make immediately. Among other things, the report suggests taking measures to reduce overlap and increase coordination between the country’s financial regulators, raise the size threshold under which banks are subject to the Volcker Rule, make changes to capital and liquidity requirements in the securitization market, and reduce the cost of bank lending.

The House of Representatives has been eager to push regulatory reform, too. This past summer it passed the Choice Act, which would overturn many of the banking reforms implemented in the wake of the 2008 financial crisis. Most political observers give the bill little chance of getting through the Senate, but Cimino urged his audience to take note of two key changes outlined in the legislation. One would require that every proposed new rule be subject to a cost-benefit analysis, and the other would require that if the impact exceeded a yet-to-be-determined threshold, Congress would have to ratify the rule. Without opining on whether this would be good or bad, Cimino noted that the latter rule would inject a new level of uncertainty—and delay—into the rule-making process.

Overall, Cimino said, he expects that any regulatory relief package that might emerge from Congress in the near future will be, at most, moderate in scope.
Meanwhile, the Trump administration is also pushing for tax reform. On that front, key areas of interest to the Financial Services Roundtable, Cimino said, include the possibility of a tax repatriation measure that would give U.S. companies a tax break when bringing foreign profits back to this country, a switch to a territorial rather than a worldwide tax system, the deductibility of interest payments from corporate income, and the so-called “Rothification” of participant-directed retirement savings plans such as 401(k)s and IRAs.

Contributions to traditional retirement savings plans are tax-deductible, and some consumer and financial services industry groups, including the Financial Services Roundtable, worry that Rothification—making some or all those contributions no longer tax deductible—would reduce the amount workers save for retirement and jeopardize their retirement security. On the other hand, Rothification would, at least initially, send more tax dollars to the U.S. Treasury, which could help pay for the tax cuts Republicans are promoting. That could push some in Congress to support the measure, Cimino warned.

“You don’t want to be in the industry that’s standing between Republican members of the House and Senate and tax reform,” Cimino said. “They have to go home to that activist base that they promised to do healthcare for, and that they promised to do tax reform for, and they don’t want to go home empty-handed.”
Cimino added that while he doubts Congress would pass a “full Rothification” measure, he wouldn’t rule it out. “If we get to the 11th hour, it’s going to be very difficult to argue against,” he said. “That’s why we’re trying to put up as many walls around it as possible.”

(Editor’s note: On October 23, President Trump tweeted that there would be “no change” to 401(k) plans, although a number of Republican Congressional leaders subsequently suggested they might pursue changes anyway.)