As predicted during the campaign and after his win in November, President Trump has set his sights on overhauling the financial regulatory system. On February 3, 2017, President Trump issued an executive order on the “Core Principles for Regulating the U.S. Financial System,” which calls for a fulsome review of the financial regulatory system to determine consistency with the stated principles (the “Executive Order”). President Trump also issued a presidential memorandum focused on the Department of Labor Fiduciary Rule (the “Memorandum”). These moves are in addition to Congressional plans to revise the financial regulatory system.
The Executive Order
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was signed into law in July 2010 as the federal government’s response to the financial crisis. The last six and a half years have seen intense and contentious implementation efforts from both regulators and industry. The Dodd-Frank Act has been pilloried as a “job killer” by Republicans throughout its existence, and it has significantly increased banks’ compliance costs, which in many cases, burdens community banks disproportionately as compared to regional and large banks.
The Executive Order articulates President Trump’s seven quite broad and fluid “core principles” for financial regulation, which are: (a) empower Americans to make their own financial decisions and facilitate their ability to have choice in the marketplace, save for retirement, and build individual wealth; (b) prevent taxpayer-funded bailouts; (c) foster economic growth and vibrant financial markets, while mitigating systemic risk; (d) enable American companies to be competitive with foreign firms in U.S. markets and abroad; (e) advance American interests in international financial regulatory negotiations and meetings; (f) make regulation efficient, effective, and appropriately tailored; and (g) restore public accountability for U.S. federal financial regulatory agencies and rationalize the U.S. federal financial regulatory framework. In order to ensure these core principles are implemented, the Executive Order requires all heads of federal financial regulatory agencies to conduct a review of their rules, regulations, guidance, etc. to determine if they “prevent  regulation  in a manner consistent with the Core Principles.” The agency heads will report to and consult with the Secretary of the Treasury, who will provide a complete report to President Trump in 120 days on what action should be taken. Because the core principles are so broad, agency heads, Trump appointees, such as Gary Cohn, the president’s chair of the National Economic Council, and Treasury Secretary nominee Steven Mnuchin could all have differing views on how to best take action to “execute and support” the principles.
More than anything else, the Executive Order is a statement that the Trump administration supports a thorough review of the Dodd-Frank Act and likely a rollback of many regulations issued thereunder. Rep. Jeb Hensarling (R-TX), Chair of the House Financial Services Committee, has railed against Dodd-Frank since its passage and, last session, introduced an alternative in the Financial CHOICE Act, which is likely to be the Republican roadmap to financial regulatory overhaul. He has stated his intention to release a new version within the next few months. The original bill rolled back some of the Dodd-Frank requirements and provided alternative compliance structures for certain institutions that made “qualifying capital elections.” The bill also addressed the Consumer Financial Protection Bureau (the “CFPB”). Both the CFPB’s existence and its structure have been points of contention since 2010. It is unclear how a revised bill will address the CFPB, but it is still likely to be a target of any large scale reform. Among other things, the 2016 Financial CHOICE Act directed the SEC to exempt private equity fund advisers from investment adviser registration, which has been a source of consternation in the private funds industry.
In addition to the Financial CHOICE Act, there have been more concentrated attempts to revise or roll back certain Dodd-Frank requirements, including the designation of banks with over $50 billion in total assets as systemically important. Once a financial institution has reached that threshold, it is subject to more stringent regulatory requirements. Late last year, Rep. Blaine Luetkemeyer’s (R-MO) bill to revise the designation mechanism passed the House. Revising the threshold actually has bipartisan support and is likely to happen soon. The Board of Governors of the Federal Reserve System recently announced that it removed 21 financial institutions from the qualitative portion of the 2017 Comprehensive Capital Analysis and Review (“CCAR”). This move provides evidence that regulators may be ready to review what makes an institution systemically important, rather than base it solely asset size.
The Executive Order will not have any immediate effect and the Treasury Secretary’s report to the president may come after the introduction of Rep. Hensarling’s revised financial services bill, which will provide more guidance as to the future of financial regulation in the United States.
President Trump’s Memorandum places the Fiduciary Rule further in limbo. The Fiduciary Rule has been contested throughout the entire process with Rep. Ann Wagner (R-MO) being the lead Member of Congress advocating to eliminate the rule. Generally, the rule requires brokers to act as their clients fiduciaries when providing retirement advice. The industry claims it is unnecessary and limits the advice financial professionals can provide because it requires them to provide the least expensive option rather than the one they believe would be best for the client. The rule is already embroiled in litigation in Texas, where the judge has stated she will issue her opinion by February 10, 2017. Should she overturn the rule, the new administration is unlikely to appeal. If, on the other hand, she rules in favor of the Department of Labor, the Memorandum will become more important. The Memorandum requires the Department of Labor to review the rule to determine whether (i) it is likely to harm investors by restricting consumer access to various retirement products that covered brokers believe outside the scope of their fiduciary duty; (ii) it has “resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and (iii) it is “likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.” President Trump directs the entire review to take place in the context of his first core principle of “empower[ing] Americans to make their own financial decisions, facilitate[ing] their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses.”
The Fiduciary Rule is scheduled to become effective on April 10, 2017. The Memorandum and the pending court decision make implementation of the rule by April unlikely, but not impossible. Financial institutions should continue preparations for compliance.