What Does Trump Mean for FinReg? (Part 33 ⅓)

In his first 95 days in office, President Trump has signed 69 executive actions. We take a closer look at what his last three actions mean for financial regulation.

I understand that President Trump recently took additional action on financial regulation. What exactly has he signed?

Last Friday the President signed three executive actions:

  1. A presidential memorandum requesting a review the FSOC’s (Financial Stability Oversight Council) Non-bank SIFI Designation Process
  2. A presidential memorandum requesting a review of the OLA (Orderly Liquidation Authority) under Dodd-Frank
  3. An executive order requesting a review of all major 2016 tax regulation

Much like the last round of action on FinReg, these are requests for impact assessments and have no immediate effect on the existing financial regulatory framework.

Fair enough.  Can you give some more detail on what the President signed?

Sure, let’s start with the executive order. One of President Trump’s policy initiatives is to overhaul the US tax system, so this review is in keeping with this policy.  However, it has raised some eyebrows because the biggest tax regulation from last year was designed to tackle so-called “tax inversions.”

A tax inversion is when a US company, in order to cut its US tax bill, moves its headquarters abroad through a merger with a non-US company.  After a spate of tax inversions in the last few years, the Obama administration implemented a new regulation designed to stop the practice.  President Trump’s actions have led some to speculate that he might reverse the Obama-era rules, which could lead to another wave of inversions.

Wouldn’t reversing the tax inversion rules run counter to the President’s “America First” stance?

On the face of it, yes.  At this point he is only requesting a review, so it’s probably best not to think too hard about it.

Fair enough. What about the other two actions?

Both memoranda address key elements of Dodd-Frank.

Dodd-Frank gave the FSOC powers to designate non-banks (insurers and asset managers) as a SIFI (Systemically Important Financial Institutions).  This power has proved controversial, with critics claiming the process is opaque and arbitrary.

The OLA is from Title 2 of Dodd-Frank and gives financial regulators the authority to take over a failing financial firm in order to liquidate it. Critics of the OLA contend that it guarantees a bailout for firms instead of handling failing financial institutions with the normal bankruptcy laws.

Both memos direct the Treasury to suspend the use of the OLA and FSOC non-bank SIFI designation process pending the completion of the reviews.

Whoa, isn’t that last part significant? 

Not really. It’s largely symbolic because it gives the Treasury Secretary the ability to override the suspension in the event of an emergency. For example, if we were to face a situation where a SIFI bank were to fail, then the Treasury Secretary could overrule and use the OLA to wind down the troubled bank.

Oh, okay.  By the way, these two issues seem very familiar.

They should. When we spoke last November, they were highlighted as key elements of US Congressmen Jeb Hensarling’s Financial CHOICE Act.

Ah, that’s right. What’s the latest on that?

The CHOICE Act was proposed last summer but never got off the ground. Undaunted, the House GOP has decided to try again and recently released a proposal for what it has dubbed CHOICE 2.0.

Are there any big changes in CHOICE 2.0?

CHOICE 2.0 is broadly in line the original proposal. The biggest change in CHOICE 2.0 is its approach to reorganizing the CFPB (Consumer Financial Protection Bureau), which would become the CLEA (Consumer Law Enforcement Agency). Beyond the name change, CHOICE 2.0 replaces the CHOICE Act’s proposal for a commission to run the CFPB (similar to the SEC and CFTC) with a single CLEA director who is removable at will by the president. There are a few other key changes around the CFBP, a good rundown of which can be found here.

What are the prospects for CHOICE 2.0?

It faces the same uphill battle as its predecessor. While it may get out of the House as written, it has almost no chance of being approved by the Senate.  In order to get the requisite 60 votes needed to pass the bill, it would need support from at least 8 Democratic Senators, which seems unlikely.

By the way, did I hear that there is a Senate proposal for 21st Century Glass-Steagall Act? 

Yes, it seems that the Glass-Steagall revival movement continues to linger.  Recently a group of Senators put forth a proposal for a new 21st Century Glass-Steagall Act. However, before you get too excited, this isn’t the first time we’ve seen a proposal. A similar bill was proposed in 2013 but never amounted to anything.

Still, this means that there’s a chance for the 21st Century Glass-Steagall Act to become a reality? 

Not really. There does not appear to be a groundswell of support for a new Glass-Steagall in the Senate, which means the proposal is not likely to progress.  Even if it did, it is very unlikely that the House of Representatives would progress a similar action.  Once again, I’d advise not to hold your breath on a revival of Glass-Steagall.

Once again you’re telling me that not much has changed since last time?

Pretty much, yes.

So you’re saying we’re going to have to do this again in a few months?

Afraid so.  The Treasury is due to deliver its report of US financial regulatory framework in June.  At that point we may have a more concrete idea of what the Trump administration may propose.