Inside the first days of the Trump administration’s deregulation plan, and a look at what’s to come.
President Donald Trump issued two directives last Friday aimed at rolling back the Dodd-Frank reforms put in place after the financial crash. He put agencies and policy makers to work on a crash effort to turn the administration’s deregulation into a workable outline, and set in motion a potential reversal of the Department of Labor’s “fiduciary rule” for brokers handling retirement accounts.
The directives face significant legal obstacles and could take months, or even years, to have much impact on Wall Street, legal and compliance experts said. The president lacks the legal power to erase existing regulations and will need to persuade Congress and independent agencies to enact many of his proposals.
The limit to the president’s legal power was made clear over the weekend in a separate development as a federal judge blocked his travel ban on residents from seven countries, and an appeals court affirmed the ruling.
More than just Dodd-Frank
But the new order issued by the president on Friday calling for a reversal of major provisions of the Dodd-Frank act was seen as a more carefully worded and legally cautious directive than prior executive orders. It made no specific reference to Dodd-Frank, conceded the need to work within existing laws in concert with agencies, and had its only requirement that federal agencies study and recommend cuts in regulation.
The scope of the review, however, is ambitious and ranges beyond the 2010 Dodd-Frank regulatory overhaul. It directs agencies and policy makers to study ways to eliminate virtually any regulations curbing banks’ ability to lend or undermining brokers’ role in advising and selling shares for clients.
The order directs agencies to review “all existing laws, treaties, regulations, guidance, reporting and record keeping requirements” that do not support Trump’s agenda aimed at making U.S. firms more competitive by cutting regulation. It directs the Treasury secretary to oversee the effort, as head of the Financial Stability Oversight Council, which brings together financial regulators.
“The order is largely symbolic, it just calls for study,” said Robert Plaze of Stroock & Stroock & Lavan, a former deputy director for the Securities and Exchange Commission Division of Investment Management. “But it is symbolism that could lead to things that are more substantive and this starts a process that could result a lot of change.”
No immediate change for financial firms
For financial firms, the two orders will do little to disrupt existing business practices anytime soon.
Trump’s memorandum on the “fiduciary rule” directed the Labor Department to study whether it would hurt investors’ access to retirement financial products or cause dislocations in the retirement services industry. If so, the department would have to revise or rescind the rule.
The Labor Department said on Friday it was considering legal options for delaying the rule beyond the current April 10 deadline for firms to begin complying. Many firms have already put in place changes to accommodate the rule.
The broader executive order directs financial regulators to consult with the Treasury secretary on bringing their agencies into line with the “core principles” of the Trump administration, which describes its agenda as “America First.” As applied to financial regulation, these principles are essentially the elimination of rules seen as hampering economic growth and the support for advancing “American interests” in international regulation.
Policy experts linked the broadly worded goals to specific, well-known targets of Trump’s deregulation agenda such as reducing bank capital requirements, and easing other rules on proprietary trading, stress testing, and too-big-to-fail designations. An item “to restore public accountability within Federal financial regulatory agencies,” for example, was seen referring to efforts to rein in the independence of the Consumer Financial Protection Bureau.
Compliance chiefs must wait and watch
Such changes require legislative action or administrative review by regulators, both of which are time consuming. Nor was there any indication that agencies should ease up on enforcing existing securities laws.
“It is way to early for compliance officers to think of making any changes,” said Plaze. “My advice is to assume nothing has changed at this point — and to do anything to change compliance based on the executive order would be foolhardy.”
The executive order “opens up the entire compendium of financial regulation,” said one lawyer with close ties to the Trump policy team. “But there really are a handful of obvious issues they are going to focus on — there is no radical agenda. Trump is pragmatic. Just look at his team.”
The economic advisers and top officials are established figures on Wall Street, including a number from Goldman Sachs. One ex-Goldman executive, White House National Economic Director Gary Cohn, told the Wall Street Journal that the fiduciary rule is being targeted because “It’s a bad rule for consumers.”
Future, more far-reaching change
While the fiduciary-rule memo froze a regulation that was about to take effect, the other order on financial deregulation cited the need to follow a deliberative process and take into account existing laws empowering agency decision making.
“These are the kind of orders that every administration puts into effect when they take office,” said Place. But the larger goals of the deregulation order point to more ambitious moves in the future.
The broader order calls for a review of “government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.” It suggests a strategic role for the Treasury chief to use the FSOC, created under Dodd-Frank to assure financial stability, to undo large portions of the act.
By the time the 120-day study period envisioned by the broad executive order ends, the proposals may find support from the Republican controlled Congress, which controls budgets for most of the agencies. The term of the most powerful independently-funded member of the FSOC, Federal Reserve Chair Janet Yellen, ends next year, giving the Trump administration the chance to appoint a Fed chief more willing to roll back regulations.
A conservative majority on the Supreme Court could also give the Trump administration a freer hand to make more fundamental change such as restructuring to “rationalize the Federal financial regulatory framework.” The newly appointed Supreme Court candidate, Neil Gorsuch, has been a strong advocate of curbing what critics call regulatory over-reach, and could help eliminate some legal roadblocks to Trump’s deregulation agenda.
Attainable goals that could find agreement
For now, the deregulation is likely to stick to more attainable goals. The expected head of the team, Treasury secretary nominee Steven Mnuchin, has been vocal about scaling regulation to the risk posed by firms and has called for easing controls on community banks. Those positions already have wide support in Washington.
The executive order, which Mnuchin helped draft, called for “more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry.” The shift to a more risk-based approach has been heard frequently from Securities and Exchange Commission officials and commissioners from both parties.
“There was an enormous amount of regulatory stuff that came out of Dodd-Frank, much of which there was debate about, but other parts of which were not controversial,” said Plaze.
“Political branches have rules to administer and can’t ignore just because there is a new administration. But rules can be changed. That’s why we have elections.”
About Thomson Reuters Regulatory Intelligence
This article was produced by Thomson Reuters Regulatory Intelligence, and initially posted on February 6th, 2017.
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