The 2016 U.S. presidential election was anything but a traditional campaign, and our new President-elect certainly was anything but a traditional candidate. So, it is difficult to predict how a Trump administration may reshape the regulatory compliance landscape for financial and investment management firms. Our crystal ball is particularly clouded by the fact that, as a candidate, Trump did not uniformly espouse a typical Republican anti-regulation platform, but rather voiced some populist, anti-Wall Street notions usually associated with progressive Democrats.
That being said, let’s look at some of the financial institution compliance issues that will face the President and Congress as a new administration comes into office.
Fiduciary rule. An immediate action item may be the Department of Labor’s Fiduciary Rule, which takes effect in April 2017. Under Labor Department’s new definition, anyone receiving compensation for providing advice that is directed to a particular plan sponsor, plan participant, or IRA owner will be deemed a fiduciary. As such, that fiduciary must provide impartial advice in their client's best interest and cannot accept any payments creating conflicts of interest (with certain exemptions). While it is possible that the rule might be changed once a new Secretary of Labor takes charge of the Labor Department, any moves in that direction must be made quickly as fiduciaries are already well along in their compliance efforts. Federal agencies can’t simply cancel a rule. Instead, the DoL would have to propose a new rule that could only be adopted after a comment period. The new president, however, could delay implementation.
One significant change from the current Administration is that the nation will have a President and Congress from the same political party, which may make for more cohesion in regulatory policy and streamline the passage of initiatives.
Financial CHOICE Act. President-Elect Trump has taken the position that the Dodd-Frank Act should be “dismantled.” The Financial CHOICE Act, sponsored by Congressman and House Financial Services Committee Chair Jeb Hensarling (a possible Treasury Secretary in the new administration), would go a long way in that direction, by (among other things) preventing bailouts of “Too Big to Fail” institutions, relieving some bank capital regulations, and limiting the powers of the Consumer Financial Protection Bureau, while imposing tougher penalties for financial fraud. However, the CHOICE Act does not address investment adviser registration for hedge and private equity fund managers. The CHOICE Act narrowly passed the House Financial Services Committee in September 2016, over Democratic opposition, and will surely be an issue for the next Congress.
Third-party adviser exams. An important issue held over from the last Administration is the proposal that registered investment advisers have examinations conducted by a third-party organization, introduced back in 2014 by then-SEC Commissioner Daniel Gallagher. This would remedy the situation in which the SEC is only able to examine about 10 percent of RIAs each year and would strengthen oversight of the industry through the use of outside resources. Gallagher currently serves as president of the consulting firm headed by Paul Atkins, a former SEC commissioner himself who advises Trump on financial regulation issues. SEC Chair Mary Jo White has indicated that the proposal currently awaits commissioner approval, which we expect once the new Administration is in place.
SEC Chair and regulation by enforcement. President-Elect Trump’s choices of key cabinet and administration officials will have a major impact on regulatory enforcement. (Remember the old saying in government circles, “personnel is policy.”) For the investment industry, the most significant personnel decision will be the choice of SEC Chair. Since 2013, that position has been held by White, who spent most of her career as a federal prosecutor and who has made enforcement the SEC’s top priority. Many compliance professionals believe that such a “regulation by enforcement” approach is sub-optimal, as it creates an adversarial climate, can lead to varying interpretations of case law, and supplants orderly and consistent rulemaking. In addition to the chair, there are currently two vacancies on the SEC, which certainly impedes effective financial regulation. Expect Atkins or Gallagher to significantly influence the SEC leadership either directly or through proxy.
According to an article in Compliance Week, Trump recently announced the nomination of Jay Clayton to replace current Chair White at the conclusion of her term. Clayton is currently a partner with Sullivan & Cromwell, and his nomination is subject to Senate confirmation. Please see, “What to expect from Trump’s SEC nomination” for further details.
One significant change from the current Administration is that the nation will have a President and Congress from the same political party, which may make for more cohesion in regulatory policy and streamline the passage of initiatives. That being said, the President-Elect and incoming members of the Senate and House have taken note of the populist mood of the country, which is hardly conducive to pro-Wall Street initiatives in Washington. So, financial and investment institution compliance teams should not expect a wholesale easing of regulatory burdens, even if the new Administration turns down the enforcement flames.
Todd Cipperman is the founding principal of Cipperman Compliance Services (CCS). CCS helps advisers, broker-dealers, and funds build a culture of compliance through the development, implementation, and operation of customized compliance programs.