We discuss what Trump’s recent actions mean for US financial regulation and key changes we could expect from his administration.
Do we have a better idea of what Trump’s plans are?
Although a specific plan hasn’t been released yet, it has become clear that Trump intends to pursue some level of deregulation of the financial industry. On 3 February, Trump signed an executive order on the overall US financial framework and a presidential memorandum on the DoL (Department of Labor) Fiduciary Rule. Both documents give some indication of the administration’s plans for financial regulatory reform.
Do these documents have a major impact?
No, at least not immediately. Both documents are simply requests for impact assessments. Neither has any direct impact on existing regulation. However, they serve as a public demonstration that the Trump administration intends to take on financial regulation.
Okay, can you give some more detail on what Trump signed?
Sure, let’s take them one at a time. The executive order is on the Core Principles for regulating the US financial system. It directs the Secretary of the Treasury to consult with the member agencies of the FSOC (Financial Stability Oversight Council) to produce a report in 120 days that reviews the current regulatory framework. The report will highlight areas of the US financial regulatory framework that do not comport with a set of core principles outlined in the executive order, and make recommendations for areas of reform.
What are the Core Principles?
There are six core principles in the executive order, which are:
- Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth
- Prevent taxpayer-funded bailouts
- Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry
- Enable American companies to be competitive with foreign firms in domestic and foreign markets
- Advance American interests in international financial regulatory negotiations and meetings
- Restore public accountability within federal financial regulatory agencies and rationalize the Federal financial regulatory framework
Do we know what kind of reform the Treasury will recommend?
Only in the broadest sense. Over the last few weeks, Trump has been clear he plans to “do a number” on Dodd Frank. On the day the executive order was released, Gary Cohn, White House Economic Council Director, identified areas such as living wills, the Volcker rule, and the Orderly Liquidation provisions contained in Title 2 of Dodd Frank as possible areas of reform.
This seems very familiar.
Yes, it should. When we spoke last time, we discussed how the Financial CHOICE Act can be used as a potential template for future reform attempts. So far, the statements by the White House are broadly in line with the CHOICE Act.
Wait, didn’t I just read that there is still some support around the creation of a 21st Century Glass-Steagall Act?
Probably, but I wouldn’t hold my breath waiting for a revival of Glass-Steagall.
Got it. So are we on the path to dismantling Dodd Frank?
It’s hard to say. Clearly there will be an attempt to reform elements of Dodd Frank. However, the Republicans don’t have a supermajority. Any substantive change will require cooperation from the Democrats. We can expect any attempt to repeal key elements of Dodd Frank to be met with stiff resistance.
Is there any common ground for reform that may get bipartisan support?
Believe it or not, yes. For example, there is consensus that the $50 billion threshold for US banks to be labeled as a SIFI (Systemically Important Financial Institution) is too low. The concern is that the higher regulatory burden, which comes with being labeled as SIFI, is putting a strain on community and regional banks. So far, the sticking point has been where the threshold should be set.
It’s also important to note that there are some elements of Dodd Frank that are not coming under pressure. For example, there have been no serious proposals to eliminate the central clearing of OTC derivatives, which is a cornerstone of the legislation.
Right. So what’s going on with the DoL Fiduciary Rule?
It’s under review. Trump’s presidential memorandum directed the Secretary of Labor to perform an analysis of the Fiduciary Rule to determine whether the rule has or is likely to:
- Harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice
- Result in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees
- Cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services
If the Secretary of Labor finds that the Fiduciary Rule does any of the above, the presidential memorandum directs him to rescind or revise the rule.
So, the implementation date wasn’t delayed?
No, at least not yet. It had been widely anticipated that Trump would delay the implementation of the Fiduciary Rule by six months. However, the presidential memorandum only calls for review.
What do you think will happen next with the Fiduciary Rule?
At the very least, it seems likely that the rule will be delayed by six months to a year. Both the administration and many congressional Republicans have been vocal critics of the rule. It seems unlikely that the administration would request a review of the rule if it didn’t expect to find issues.
Despite the rhetoric, it still seems as if some form of the Fiduciary Rule will remain. It would be difficult in the current environment to completely abandon regulations designed to protect Main Street investors. However, anything is possible since changing the DoL Fiduciary Rule doesn’t require approval from Congress.
One possibility is that the delay will give the SEC time to propose its own Fiduciary Rule, which many critics of the DoL Rule have contended should have happened all along.
Interesting, but where does this leave the industry?
In limbo. Despite the potential delay, the implementation is still slated for April 2017. Therefore, firms should still be making the necessary preparations to comply with the rule.
If it is delayed, it will be interesting to see how firms behave. Many have already made the necessary adjustments to their products to comply with the rule. Some may see a competitive advantage in continuing with implementation, even if there is a delay.
Despite these recent developments, you still don’t think there will be massive deregulation?
No. Any material change to Dodd Frank will require cooperation from the Democrats, many of whom do not have any appetite for easing financial regulation. In addition, the Trump administration needs to walk a tightrope on financial regulatory reform because anything seen as a giveaway to Wall Street could spark voter discontent. Given these two constraints, a bonfire of financial regulation still seems unlikely.
Fair enough. So, overall, not too much has actually changed since last time.
No. There’s still a long way to go before we have a clear idea about what will change.
So you’re saying we’re going to have to do this again in a few months?
Pretty much, yes.
To be continued…