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Trumped Expectations: Alternatives and the Next Administration

December 8, 2016

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As the dust begins to settle in the aftermath of the U.S. presidential election, which saw Republican candidate Donald Trump unexpectedly prevail against Democrat Hillary Clinton, the time has come for firms to prepare for the Trump administration. Given the lack of clarity that has surrounded many of Trump’s policies, concerns of contradictory and unpredictable policy directions have been increasingly prevalent.

For the alternative investments industry, hedge funds and private equity have been lumped into the unfortunate caricature of the Wall Street “enemy” during this past election cycle. Trump’s campaign rhetoric drew a striking contrast to the traditional pro-business line of establishment Republicans, to the extent of even echoing the far-left sentiments of Democratic primary candidate Bernie Sanders. As the presidential inauguration draws near, tensions are exacerbated by the uncertainty of what is to come, as any Trump administration policies remain merely speculative.

Insight into Trump’s transition team will shed more light on how his policy agenda will manifest for the alternative investment industry. In an organizational chart of the Trump transition team that was leaked in mid-November and made the rounds amongst K Street lobbying firms, the individuals tapped may offer valuable clues of what to expect in 2017.

At the forefront of the Economic Issues team are Bill Walton and David Malpass. Walton is the chairman of private equity firm Rappahannock Ventures, a senior fellow of the Center on Wealth, Poverty and Morality at the Discovery Institute, and vice president of the Council for National Policy. Walton’s involvement in private equity may bode well for the alternative funds industry. Malpass is a Trump economic adviser and former Republican Senate candidate for New York, and the founder and president of economic research and consulting firm Encima Global.

Heading the SEC team will be Paul Atkins, who currently serves as the CEO of Patomak Global Partners LLC, a strategic advisory firm, and was previously an SEC Commissioner from 2002-2008. Atkins has been a vocal proponent of deregulation and a strong critic of Dodd Frank.

In the Policy Advisory team, Brian Johnson is expected to head the financial services team. Johnson currently serves as the Chief Financial Institutions Counsel for the House Natural Resources Committee, Oversight and Investigations Subcommittee.

Policy areas of particular interest for alternative funds are Trump’s plans for tax and regulatory reform.

Tax Reform

We are likely to see an attempt at tax reform at the beginning of 2017. Trump’s tax reform proposal includes the following:

  • Elimination of carried interest, which Trump wants to be taxed as ordinary income. This would involve raising the tax from 23.8% to 33%.
  • Repatriation of foreign income at a tax rate of 10%.
  • Lowering the business tax rate from 35% to 15%.

Regulatory Reform

Trump has been vocal about his desire to dismantle Dodd Frank, which he feels is too stifling for the economy. Dodd Frank imposes a significant regulatory burden that critics contend is unfair to community banks and smaller businesses. However, Trump’s transition team has privately indicated that some individual provisions will be scaled back instead. Indeed, a total overhaul of Dodd Frank is something that many firms are opposed to, especially considering the extent to which Wall Street and foreign investment banks have already invested in compliance. Additionally, industry groups favor the retention of certain provisions such as Title VII, which creates a framework for the regulation of swap markets and business conduct standards that increase transparency.

With the involvement of Paul Atkins on the transition team, we can expect a push for deregulation and the repeal and replacement of certain provisions in Dodd Frank which are seen to be particularly onerous. This will certainly result in a marked contrast with the current state of affairs in the SEC. However, one area of common ground lies in Atkins’ preference to hold individuals accountable in enforcement actions, a stance that accords with the current push towards individual accountability in the SEC and FINRA.

Indications from the transition team selections and a softening of Trump’s rhetoric after the election point to a move towards the center in his policy agenda. However, investors are likely to be on high alert for protectionism and Wall Street vilification, among other things, which may result in economic risks that would undermine business confidence and weaken the dollar. But despite the most thorough analyses from pundits and academics alike, if there is one lesson to be gleaned from this election, it is that of the illusion of certainty.