The potential effects and industry responses to the Labor Department’s fiduciary rule were addressed along with tax-reform issues in a panel including partner organizations of the Investment Program Association at the IPA’s 2016 Executive Leadership Summit, held in Washington, D.C., on April 19.
“This industry certainly at least wins to live another day,” because its advocacy led to the elimination of a list of specified assets that could be sold to holders of individual retirement accounts, he said.
Brown said it’s too early to understand the fiduciary rule’s full impact, although the Labor Department appears to top the list of “winners” in the aftermath, because it emerged with a rule that will have a dramatic near-term effect in how retirement is given.
“They got their way, by and large,” he said.
FSI had declared the rule “unworkable” after analyzing it last year, but Brown said some changes are “encouraging” and that the “larger players in the industry have the resources and wherewithal to figure out how to operationalize it.”
The rule’s “biggest looming unknown” is the liability risk that could result, particularly from such aspects as the rule’s best-interest contract exemption, Brown said. And another major concern is how small investors will fare under the rule, he said.
“Where will those investors go under the rule to find an adviser they can afford to do business with in a true mutually beneficial relationship?” he said.
The US Chamber of Commerce’s preferred path forward is engaging the Labor Department and Congress regarding any desired changes to the rule, with litigation being “the tool we like to use the least,” said David Hirschmann, president and CEO of the Chamber’s Center for Capital Markets Competitiveness and its Global Intellectual Property Center.
The Chamber would go to court over the issue only if it is persuaded that the rule is unworkable and that litigation is the only way to improve the rule, Hirschmann said. It plans to make its decision on the matter within a few weeks, he said.
Meanwhile, the issue of tax reform remains to be “much in the air” and is unlikely to be resolved until after this year’s presidential election, said Steve Wechsler, president and CEO of the National Association of Real Estate Investment Trusts. That’s because congressional Republicans and the current presidential administration have a fundamental disagreement on how to treat any tax revenue that tax reform would generate, he said.
“Is it plowed back into the system so the ultimate product is revenue-neutral, or is some of that money taken for spending purposes and initiatives by the government?” he said.
Four building blocks are likely to drive the “big picture” for taxation of real estate, he said:
- Choice of entity, i.e. the decision of whether to be a pass-through or a corporation; REITs can be like both, he said.
- Capital-cost recovery, particularly regarding the issue of economic depreciation.
- Debt equity, especially in light of recent Treasury regulations to curtail inversions. This involves the question of whether debt is treated differently than equity investments for tax purposes.
- Character of income, which determines whether income is taxed and at what rate.
Provisions “on the front lines” once lawmakers pursue tax reform will include Internal Revenue Code Section 1031, which addresses like-kind exchanges, Wechsler said. NAREIT is working with IPA and other groups to educate Congress about like-kind exchanges and make sure they remain available, he said, adding that they are now used beyond real estate for a wide range of transactions such as vehicle fleets and farm equipment.