FOR INSTITUTIONAL INVESTORS
Financial Regulation in the Trump Era
Enforcement, or Appeasement?
Government Turns a Blind Eye to Fraud and Misconduct, and Curtails its Crucial Oversight and Enforcement Role
By Julia Tebor
Although Trump the candidate claimed that hedge fund managers were "getting away with
murder," the Trump administration has taken a markedly anti-investor, pro-corporate, and bank-
In just one year, the Trump administration has made dramatic antiinvestor and anti-consumer changes to the federal regulatory environment. The administration's pro-Wall Street agenda may take some of his supporters by surprise because his campaign for the presidency was largely built on an antiWall Street platform. On the campaign trail, Trump claimed that hedge fund managers were "getting away with murder" and his closing campaign ad denounced "a global power structure that is responsible for the economic decisions that have robbed our working class, stripped our country of its wealth and put the money into the pockets of a handful of large corporations."
In the first year of his presidency, however, the Trump administration has taken a markedly anti-investor, pro-corporate, and bank-friendly tack. SEC enforcement actions are down; Trump has signed executive orders aimed at repealing large
portions of The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and restricting the power of the Consumer Financial Protection Bureau; and the Administration made new appointments to the Public Company Accounting Oversight Board that threaten to weaken oversight of accountants for large public corporations.
The SEC reduces enforcement under Trump
President Trump has already made dramatic changes to the SEC. As one of his first acts as President, Trump selected as head of the SEC former Sullivan & Cromwell attorney Jay Clayton. Clayton had worked for many large financial companies, including Barclays, JPMorgan Chase, and Goldman Sachs. Trump assured the public that Clayton would "ensure our financial institutions can thrive and create jobs while playing by the rules
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SEC Activity under Trump
1000 900 800 700 600 500
Enforcement Actions, Publicly Listed Companies
in $ Billions
4.5 $ 4.08 4.0
3.5 $ 3.78 3.0
at the same time," but many worry that interests above their own interests. The
based on Clayton's background, he will implementation of major parts of this rule
favor lax enforcement. For example, Sen- has been delayed repeatedly, and the
ator Sherrod Brown, ranking member of President's order provides a pathway for
the Senate's Banking Committee, said of the DOL to rescind or revise the rule by 1 Clayton: "It's hard to see how an attorney asking the DOL to re-analyze it, question-
who's spent his career helping Wall Street ing its utility yet again. Following Trump's
beat the rap will keep President Trump's executive order, the DOL stated that it
promise to stop big banks and hedge was delaying full implementation of the
funds from `getting away with murder.'" fiduciary rule from January 2018 until
July 2019 to make Trump's requested New studies also indicate that the SEC
assessment of the rule. under Trump is bringing fewer enforce-
ment actions and recovering smaller Trump is also attempting to use executive
fines for misconduct than under the prior orders to dismantle the Consumer Finan-
administration. These studies show that cial Protection Bureau ("CFPB"). The CFPB,
the number of enforcement actions has created under Dodd-Frank, was designed
dropped 13 percent, from 868 actions in to operate as an independent watchdog
2016 to just 754 in 2017. Enforcement ac- agency helping consumers nationwide.
tions dropped even further for publically Since its creation in 2010, the agency has
listed companies, falling nearly 33 per- already imposed huge fines on big busi-
cent from 92 to 62 actions over the same nesses for illegal practices. In 2015, the
period. Settlements are also down at the CFPB ordered Citibank to refund $700
SEC, decreasing from $4.08 billion in 2016 million to consumers and pay $70 million
to $3.78 billion in 2017. As the new admin- in fines for illegal and deceptive credit
istration gained a foothold and as 2017 card practices and, in 2016, it fined Wells
progressed, enforcement appears to have Fargo $100 million for opening sham ac-
weakened even more dramatically: From counts. In total, the CFPB has returned
the first half of 2017 to the second half of nearly $12 billion from financial services
2017, settlements in SEC actions against firms to their consumer victims.
public companies fell by over 80 percent. In the Trump era, however, the newly-
Executive orders aim to gut regulations on financial institutions
created CFPB is already facing existential threats from above. On the same day as his executive order seeking to rescind the
President Trump is also seeking to protect fiduciary rule, Trump targeted the CFPB by
financial institutions through executive signing the Presidential Executive Order
orders. For example, on February 3, 2017, on Core Principles for Regulating the
Trump signed an executive order paving United States Financial System. Trump's
the way for reversing the "fiduciary rule." order instructs the Treasury Department
The fiduciary rule is a new rule -- yet to to review the laws, regulations, guidance,
be fully implemented by the Department and policies of federal agencies and the
of Labor ("DOL") -- that would require extent to which they comply with the
investment advisors to put their clients' goals of the Executive Order, which in-
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clude to "rationalize" federal financial regulations. While the order does not mention the CFPB by name, the White House press secretary made clear that the order targeted the CFPB, calling it an "unaccountable and unconstitutional new agency." The administration's attacks continued in November 2017, when Trump appointed Mick Mulvaney as Director of the CFPB. Mulvaney has been quoted as saying that the CFPB is a "joke... in a sad, sick kind of way" and that "I don't like the fact that the CFPB exists." Tellingly, Mulvaney announced in January 2018 that the CFPB was requesting zero dollars in funding for the second fiscal quarter of 2018 and was reviewing its entire operation.
We are moving "in the opposite direction of the most urgently needed kind of Wall Street reform. De-concentrating financial power (and the systemic risk associated with such concentration) would be the best guarantee that we never have a repeat of 2008, in which all the biggest depository banks put the entire financial system at danger by acting like giant hedge funds."
Author and Journalist Matt Taibbi on the current effort to repeal key aspects of Dodd-Frank (January 20, 2018)
The Trump administration also announced in January 2018 plans to revise the Community Reinvestment Act ("CRA") -- an act created in the 1970s to protect the poor from banks that refuse to service impoverished, predominantly minority neighborhoods. While the exact changes to the law are yet unclear, the changes would likely make it easier for banks to avoid being penalized for non-compliance with the CRA. This move may ultimately be problematic for the Trump Administration given that, as stated by John Taylor, CEO of the National Community Reinvestment Coalition, this law benefits the "blue-collar people Donald Trump maintains he represents."
The SEC appoints a more auditor-friendly PCAOB
As part of the administration's deregulation campaign, it also recently changed the leadership at the Public Company Accounting Oversight Board ("PCAOB").
The PCAOB is a private-sector, nonprofit corporation created in 2002 to oversee audits of public companies. Even after some of the biggest and most destructive audit frauds in recent memory, such as Enron and WorldCom, audit fraud still remains rampant in corporate America today. A 2016 survey by the International Forum of Independent Audit Regulators, for example, found that 42 percent of the 855 audits studied did not meet inspectors' standards. In this environment, the importance of the PCAOB and its independence from regulatory capture by the industry it regulates cannot be overstated.
Unfortunately, and as discussed further in this edition of The Advocate (see page 12), the PCAOB was recently rocked by an unprecedented scandal in which one of the nation's largest auditing companies, KPMG, stole PCAOB information in order to evade and cheat its regulatory oversight. While this scandal illustrates the need for an independent PCAOB, recent
In the Trump era, the newly-created Consumer Financial Protection Bureau is already facing existential threats from above.
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House Finance Committee Chairman Jeb Hensarling (R-TX), sponsor of the "Financial Choice Act," -- legislation that aims to roll back certain provisions of Dodd-Frank. (Photo: Chip Somodevilla/Getty Images)
appointments under the Trump administration may erode such independence. Specifically, the SEC recently rejiggered the PCAOB's Board membership as part of a five-member shake-up. To boost the Board's independence from the industry it regulates, certified public accountants are prohibited from chairing the Board and are traditionally excluded as members as well. The SEC, however, appointed two CPAs as members, taking the unprecedented step of including as a Board member an accountant from one of the big four accounting firms. This change in personnel may foreshadow a more auditor-friendly Board.
Congressional Republicans push to repeal Dodd-Frank
Emboldened by Trump's agenda, Congressional Republicans are seeking to protect financial institutions through revision and repeal of many of the provisions of Dodd-Frank. Passed in 2010 as a response to the financial crisis of 20072008, Dodd-Frank aimed to protect investors, the financial system, and the broader economy. President Trump and the GOP Congress, however, are openly hostile to Dodd-Frank. Despite record profits for big banks, Trump recently opined that Dodd-Frank has made it "impossible for bankers to function." In November 2017, Trump stated that "[w]e have to get rid of [Dodd-Frank] or make it smaller...Banks are unable to lend. It's made our country noncompetitive. It's slowed down growth."
Frank's financial regulations. One of these, the "Financial Choice Act," has the ambitious goals of: (i) repealing the Volcker Rule, which prevents government insured banks from making certain risky investments; (ii) eliminating the fiduciary rule; and (iii) circumscribing the CFPB's rulemaking and enforcement abilities. The bill, sponsored by the Republican Chair of the House Financial Services Committee, Jeb Hensarling, would also provide banks leeway to avoid further regulatory burdens. While the Financial Choice Act passed in the House, the bill appears unlikely to pass the Senate.
The obvious and stated goal of the Trump administration is to create a less-regulated environment for banks and other financial businesses. To many, however, this course of action sets the country on a dangerous trajectory towards fraud, misleading financial statements, weaker securities markets, and potentially an economic downfall. In the words of Representative Maxine Waters, currently the top Democrat on the House Financial Services Committee, the Financial Choice Act and other such legislation is "an invitation for another Great Recession, or worse."
Julia Tebor is an Associate in BLB&G's New York office. She can be reached at email@example.com.
With this tone at the top, several Republican-sponsored bills have been introduced in an effort to chip away at Dodd
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