What Does Trump Mean for US FinReg?

Since the results of the US election nearly a fortnight ago, there has been a lot of speculation about what a Trump presidency means for US financial regulation. Though there are still a lot of unknowns, we try our hand at answering some of the key questions.

Is Dodd Frank doomed?

Probably not. In the days following the election there was a lot of speculation that there is going to be a bonfire of regulation. However, it seems unlikely that Dodd Frank will be completely repealed. Trump’s transition team has tried to manage expectations by saying that dismantling Dodd-Frank will not be a top priority for the Trump administration.

Okay, but can we expect to see any changes to Dodd Frank?

Probably. Dodd-Frank is unpopular with the Republican party. Since the Republicans will now control the House, Senate, and Presidency, there is a good chance that some type of Dodd-Frank reform will be proposed. The best proxy for what reforms may be undertaken is US Congressmen Jeb Hensarling’s Financial CHOICE Act that was proposed last summer. Some of the key aspects of the CHOICE Act are:

  • Repeal Title 2 of Dodd Frank , which gives financial regulators the authority to take over a failing financial firm and liquidate and create a new chapter of the bankruptcy code for large, complex financial institutions
  • Curtail the FSOC’s (Financial Stability Oversight Council) power by eliminating its ability to designate non-Banks as Systemically Important Financial Institutions
  • Repeal the Volcker rule, which restricts Bank Holding Companies from engaging in proprietary trading

However, it’s important to remember that any changes to Dodd-Frank will still need to go through the legislative process and will be subject to some level of negotiation and compromise.

Wait, repeal the Volcker rule?  I thought Trump was in favor of reinstating Glass-Steagall?

Well, yes it’s probably best not to think too hard about this contradiction. Suffice to say, a revival of Glass-Steagall is unlikely.

So what does this mean for asset managers?

On the face of it, not too much. Dodd-Frank reform is primarily focused on the banking industry. However, curtailing FSOC’s power would remove the specter of asset managers or funds being labeled as SIFI’s (Systemically Important Financial Institutions). Though, truth be told, the FSOC had moved away from that approach recently.

Got it. What are the implications for the SEC?

The most immediate implication is that the SEC Chairperson, Mary Jo White, has announced that she will step down at the end of Obama’s administration.

Whoa, that seems like a pretty big deal.

Not really. It’s customary for the head of the SEC to step down with the change of administration, especially when there’s a change in political party. What is a big deal is that White’s departure could leave the SEC with only two commissioners.

Go on …

The SEC is a nonpartisan commission that is led by five commissioners, one of whom is the chair. In order to finalize rules, there must be at least three commissioners in place. Currently there are two vacant seats. Unless these vacancies are filled before White’s departure, the SEC will be unable to progress on any new regulation.

Interesting. What do you mean by “nonpartisan commission”?

Basically, it means that no more than three commissioners may be from the same political party. The idea is that this helps safeguard the independence of the SEC. Not including White, there is currently one Democrat and one Republican SEC Commissioner. So, logic would hold, that the next appointment will be a Republican or, if Trump moves to fill all the vacancies, one Democrat and two Republicans.

Got it. So what could this mean for the SEC’s policy agenda?

Well, there are really two answers.

Short term there’s probably not too much of an impact. For example, the recently finalized mutual fund liquidity and reporting modernization rules are going to go ahead. There’s a mechanism of congressional review, which allows incoming presidents to reject any rules that are approved within 60 legislative days of the inauguration. However, neither of these rules were particularly controversial, so it seems unlikely that they will be slowed down.

Longer term, depending on who Trump appoints as chairperson, the focus of the SEC may change. For example: given the Republican rhetoric, it seems likely that the work on corporate disclosures around political donations and climate risk will be pushed even further on the back burner. Though, in all honesty, these weren’t exactly the top priority of the current SEC. Beyond that, we’ll have to wait and see.

What about the DoL Fiduciary Rule?

Here’s where it gets interesting. The implementation of the rule begins in April and expands the definition of “investment advice fiduciary” to all with financial professionals who work with retirement plans or provide retirement advice. The proposed rule has proved to be fairly controversial and Trump’s advisors have said that they want to repeal the rule.

However, this is not for certain. The rule starts coming into effect in April and firms have already started their implementation work. Furthermore, it’s politically tricky to repeal a rule that is painted as increasing investor protection.

Still, it could happen. It does not require Congressional action to kill the rule. The new Labor Secretary can simply propose a new set of rules that essentially repeal the original proposals.

So, you don’t think there will be a massive deregulation?

We’ll have a better idea in a couple months when the dust settles. Overall, it’s probably safe to say that those expecting a bonfire of regulation may want to bring a jacket along with them because they could be a bit chilly.