During the Trump Administration’s first year in office, it has implemented major new policy approaches and engaged in significant reversals of Obama Administration policies in many areas. In contrast, the Administration to date has taken what might be considered to be a measured, deliberate approach in addressing potential financial regulation reform, and has proposed only relatively modest financial services legislative and regulatory initiatives.
Upon the inauguration of President Trump, it was widely expected that the Administration and the Republicans controlling both houses of Congress would move aggressively to roll back important elements of the Dodd-Frank Act and its related regulations. This article reviews how financial regulation reform initiatives have unfolded over the course of the year.
The House of Representatives moved quickly to pass sweeping financial services legislation. On June 8, 2017, the House (on a 233-186 party line vote) passed the Financial CHOICE Act of 2017 (CHOICE Act), which would cut back substantially on the financial stability powers contained in the Dodd-Frank Act. Among other provisions, the CHOICE Act would: (i) repeal significant elements of the authority of the Financial Stability Oversight Council (FSOC), including its ability to designate nonbank financial companies as systemically important financial institutions (SIFIs); (ii) repeal the Orderly Liquidation Authority (OLA) provisions of the Dodd-Frank Act and establish new Bankruptcy Code provisions for large bank holding companies and nonbank financial companies; (iii) allow large banking organizations that meet certain capital requirements to elect a status that would exempt them from a wide range of banking law restrictions; and (iv) repeal the Volcker Rule.
As a practical matter, final Congressional action on major financial services reform legislation will require 60 votes in the Senate. There currently is no indication that enough Democratic Senators would be prepared to support broad legislation of the type represented by the CHOICE Act, or that Senate Republicans would be prepared to make a major effort to pass broad financial services reform legislation. The potential for some type of regulatory reform legislative that might pass Congress recently emerged, as the Senate Banking Committee on December 5, 2017 approved the Economic Growth, Regulatory Relief, and Consumer Protection Act on a bipartisan basis. That bill would provide a range of regulatory relief directed at community banks.
Action by the Administration
Given the barriers to action by Congress, the focus for potential action on financial services regulatory reform is now on the Trump Administration and the financial regulatory agencies. These agencies are increasingly headed by appointees of President Trump. This suggests that the prospects for the Administration and the financial regulatory agencies to work together on financial services reform efforts will increase significantly in 2018.
Executive Order on Core Principles for Regulating the U.S. Financial System
The Administration began its financial services regulatory reform program with the issuance, on February 3, 2017, of an Executive Order on Core Principles for Regulating the U.S. Financial System (Order). The Order identified a number of key principles for the Administration’s regulatory approach (Core Principles), which include: (i) empowering Americans to make informed choices in the marketplace, save for retirement and build wealth; (ii) preventing taxpayer-funded bailouts; (iii) fostering economic growth and vibrant financial markets; and (iv) advancing American interests in international financial regulatory negotiations. The Order called for the Secretary of the Treasury (Secretary) to report to the President on the extent to which existing laws and regulations promote the Core Principles, and to identify laws and regulations that inhibit U.S. financial regulation in a manner consistent with the Core Principles.
Presidential Memoranda on FSOC and OLA
Three months after the issuance of the Order, the President took two additional actions in regard to a review of financial services regulation. On April 21, 2017, he issued a Presidential Memorandum to the Secretary regarding FSOC designations of SIFIs (SIFI Memorandum). The SIFI Memorandum directed the Secretary to review the process by which nonbank financial companies are considered for designation as SIFIs, and to make recommendations (if appropriate) for improvements in the FSOC’s process or for legislative changes. On the same day, the President issued another Presidential Memorandum to the Secretary regarding OLA. The second Memorandum directed the Secretary to consider certain matters regarding the impact of OLA and potential alternatives to OLA, and to make recommendations for improvement, including legislative changes.
Treasury Reports on Financial Services Reform
The Treasury Department (Treasury) decided to respond to the Order with a series of four separate reports. To date, the Treasury has issued three reports (Reports). The Reports generally provide Treasury’s perspective on the strengths and weaknesses of the current ways in which various regulatory sectors operate and how they correlate with the Core Principles. The Reports contain some specific recommendations for legislative or regulatory agency action, and in many instances set forth general principles for future legislative or regulatory action.
Report on Banks and Credit Unions
The Treasury’s first report, which addresses the regulation of banks and credit unions (Banking Report), was issued on June 12, 2017. The Banking Report generally supports the relaxation of certain prudential steps that were taken in, or in connection with, the Dodd-Frank Act. While the Banking Report acknowledges some of the approaches contained in the CHOICE Act, the report generally appears to support less sweeping actions. For example, rather than supporting outright repeal of the Volcker Rule, the Banking Report takes a far more limited approach – it recommends exempting smaller banking organizations (those with less than $10 billion in assets) from the requirements of the Volcker Rule and taking other actions to reduce regulatory burden associated with the Volcker Rule.
The Banking Report calls for Congress to change the structure and authority of the Consumer Financial Protection Bureau (CFPB). This would include: making the Director of the CFPB subject to removal at will by the President; increasing Congressional oversight of the CFPB; returning consumer law supervision of large banks to the bank regulatory agencies; and returning supervision of nonbank entities to state regulators.
Report on Capital Markets
The Treasury’s second report, which addresses the regulation of the capital markets (Capital Markets Report), was issued on October 6, 2017. The Capital Markets Report contains a series of recommendations aimed at expanding companies’ ability to access capital and to improve the operation of equity markets. It also recommends certain changes to the requirements related to securitizations. The Capital Markets Report further offers a series of recommendations concerning the regulation of derivatives.
Report on Asset Management and Insurance
The Treasury’s third report, which addresses the regulation of the asset management and insurance industries (AM Report), was issued on October 26, 2017. The following are key recommendations set forth in the AM Report:
Regulators should continue the current FSOC approach to focus on systemic risks associated with asset management products and activities, rather than entity-specific evaluations.
While the FSOC should maintain primary responsibility for addressing systemic risk in the U.S. financial system, the Securities and Exchange Commission (SEC) should remain the primary federal regulator of the U.S. asset management industry.
Congress should repeal the Dodd-Frank Act provisions that would require registered investment companies, and registered investment advisers with more than $10 billion in consolidated assets, to perform annual stress testing and report their results to both the SEC and the Federal Reserve Board.
With respect to the SEC’s liquidity risk management rule, Treasury supports the 15 percent limitation on illiquid assets, and calls for the SEC to adopt a principles-based approach to liquidity risk management rulemaking and any associated bucketing requirements. It also recommends that the SEC postpone the currently scheduled December 2018 implementation of the rule’s bucketing requirement.
In regard to the SEC’s pending derivatives proposal, the SEC should consider adopting a rule that includes a derivatives risk management program and an asset segregation requirement. However, the SEC should reconsider what, if any, portfolio limits should be included in any final rule, as well as the scope of assets for purposes of the asset segregation requirement.
The SEC should withdraw its proposal on business continuity and transition planning, as a principles-based rule is already in place.
The SEC should move forward with a “plain vanilla” ETF rule that allows new registrants to access the market without the cost and delay of obtaining exemptive relief orders.
The Volcker Rule agencies (Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, SEC and Commodity Futures Trading Commission) should continue to refrain from enforcing the rule’s proprietary trading restrictions against foreign private funds that are not “covered funds” under the rule, until a permanent solution is identified with respect to issues related to such private funds. Further, the Volcker Rule agencies should allow banking entities (other than depositary institutions and their holding companies) to share a name with funds they sponsor, provided that the separate identity of the fund is clearly disclosed to investors.
The United States should continue to play a leading role in international standard setting organizations such as the Financial Stability Board and the International Organization of Securities Commissions, and should promote transparency and accountability in such organizations.
With respect to the Department of Labor’s (DOL) “Fiduciary Rule,” Treasury supports the DOL’s efforts to reexamine the rule’s implications and to delay full implementation until the relevant issues are addressed, with the participation of the SEC and other regulators. The SEC and DOL should work together in developing standards of conduct for financial professionals advising retirement investors.
Report on Nonbank Financial Institutions and Financial Innovation
Treasury plans to release a final report that will address the regulation of nonbank financial institutions, as well as financial technology and financial innovation.
Treasury Report on SIFI Designations
On November 17, 2017, Treasury issued its report in response to the SIFI Memorandum (SIFI Report). The SIFI Report’s recommendations strongly favor having the FSOC address financial stability concerns through activities-based initiatives at the product or industry level, and reserving an entity-based approach to circumstances where the FSOC finds that notwithstanding activities-based regulation a company could pose a risk to financial stability. The SIFI Report makes a series of recommendations intended to respond to criticisms of the FSOC’s SIFI designation process. The SIFI Report would require strong empirical evidence suggesting that a particular company is actually likely to pose a threat to U.S. financial stability in order to justify a designation. It also calls for the FSOC to engage in a cost-benefit analysis regarding a potential designation, which would require a finding that expected benefits of a designation outweigh the associated costs.
The Administration has engaged in a comprehensive examination of the current approach to U.S. financial services regulation. It seems likely that Treasury in 2018 will put significant efforts into pursuing the regulatory actions recommended in its reports – either based on its own authority or by working with financial regulatory agencies. It is also possible that the Administration will seek to work with Congress in 2018 to implement the legislative recommendations contained in the Reports.