On February 3 2017 President Trump issued two executive actions which constitute the first official statements from the new administration on how his frequent criticism of the Dodd-Frank Act and the broader financial regulatory climate following the financial crisis may be translated into actual reform efforts. The first action, an executive order,(1) sets out seven core principles which serve as broad guidelines for regulatory reform without making any specific policy recommendations. Second, Trump issued a separate memorandum(2) directing the Department of Labour (DOL) to re-examine the Fiduciary Duty Rule(3) that it issued in April 2016 and revise or rescind it as necessary if the DOL finds that it will have an adverse impact on or is inconsistent with the priorities of Trump's administration, as described in the memorandum. As written, the Fiduciary Duty Rule would significantly expand which parties – by virtue of providing investment advice for a fee to plans, plan fiduciaries, plan participants or beneficiaries, individual retirement accounts (IRA) or IRA owners – will be considered 'fiduciaries' for purposes of the Employee Retirement Income Security Act 1974 and the prohibited transaction provision of the Internal Revenue Code 1986, thereby materially affecting, among other things, the manner by which financial advisers can recommend proprietary investments or receive certain types of transaction-based compensation.
Since announcing his candidacy, Trump has expressed a desire to make significant changes to the financial regulatory framework established by the Dodd-Frank Act and related initiatives following the financial crisis. The executive order states that it will be Trump administration policy "to regulate the United States financial system in a manner consistent with" the core principles of:
- empowering US citizens to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
- preventing taxpayer-funded bail-outs;
- fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazards and information asymmetry;
- enabling US companies to compete with foreign firms in domestic and foreign markets;
- advancing US interests in international financial regulatory negotiations and meetings;
- making regulation efficient, effective and appropriately tailored; and
- restoring public accountability within federal financial regulatory agencies and rationalising the federal financial regulatory framework.
The executive order also directs the treasury secretary to consult with the heads of each of the Financial Stability Oversight Council (FSOC) member agencies and report to the president within 120 days of the executive order "on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles".
Going forward, the treasury secretary must periodically report to the president pursuant to the same instructions.
The executive order is unlikely to have an immediate impact on the laws and regulations that financial institutions must abide by on a day-to-day basis, but it may influence future reform. The White House has directed regulatory review to run through FSOC, a panel of financial regulators headed by the treasury secretary that is broadly tasked with identifying systemic risks to the financial system. Recent statements from White House National Economic Council Director Gary Cohn also appear to be focused on the process for identifying financial system risk, with explicit calls for further review of, among other things:
- the Orderly Liquidation Authority in Title II of the Dodd-Frank Act, the extent to which non-banks should be designated as "systemically important financial institutions"; and
- the living wills process for large banks.(4)
Others have speculated that the Volcker Rule may also be a target of any reform efforts.
The memorandum requires the DOL to review the Fiduciary Duty Rule, with specific consideration of whether:
- the anticipated applicability of the rule has harmed or is likely to harm investors due to a reduction of US citizens' access to certain retirement savings offerings, product structures and savings information and related financial advice;
- the anticipated applicability of the rule has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and
- the rule is likely to cause an increase in litigation and the prices that investors and retirees must pay to gain access to retirement services.
The memorandum expresses Trump's concern that the Fiduciary Duty Rule "may significantly alter the manner in which Americans can receive financial advice, and may not be consistent with the policies of my Administration". If the labour secretary makes an affirmative determination of any of the above criteria or finds the rule to be inconsistent with any administration priority, the labour secretary is directed to rescind, revise or propose a new rule to remedy the shortcoming.
Ostensibly, the memorandum calls only for a review of the Fiduciary Duty Rule. However, the White House has given strong indications that it disagrees with the rule as written. It is unlikely that the Fiduciary Duty Rule will take effect on April 10 2017, as scheduled. While nothing in the memorandum specifically calls for a delay to its implementation, the DOL has already indicated that it will consider its legal options to delay the applicability date in order to comply with the memorandum.(5) An earlier draft of the memorandum reportedly included language regarding a delay, but no such language appeared in the final version.
For further information on this topic please contact Michael E Borden, William S Eckland or David E Teitelbaum at Sidley Austin LLP's Washington DC office by telephone (+1 202 736 8000) or email (email@example.com, firstname.lastname@example.org or email@example.com). Alternatively, contact Beth J Dickstein at Sidley Austin LLP's Chicago office by telephone (+1 312 853 7000) or email (firstname.lastname@example.org). The Sidley Austin website can be accessed at www.sidley.com.
(1) The executive order has not yet been published in the Federal Register. See Presidential Executive Order on Core Principles for Regulating the United States Financial System, February 3 2017, available here.
(2) Presidential Memorandum on Fiduciary Duty Rule, February 3 2017, available here.
(4) Michael C Bender and Damian Paletta, "Donald Trump Plans to Undo Dodd-Frank Law, Fiduciary Rule: White House Adviser Gary Cohn Says Banks Burdened by Rules Added After Financial Crisis", Wall Street Journal, February 3 2017, available here.
(5) US Department of Labour, "US Department of Labor to Evaluate Fiduciary Rule", February 3 2017, available here.
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