It would be easy to believe that the entire regulatory framework erected around the financial services industry after the Great Recession is on the verge of being leveled. President Trump swept into office with vague but foreboding promises to “do a big number” on the Dodd-Frank Wall Street Reform Act. He followed that up by directing the Treasury Department to conduct a thorough review of the legislation and, subsequently, ordering a review of Dodd-Frank’s “too-big-to-fail” provisions, which give regulators the authority to shutter large firms whose financial troubles could pose a threat to the financial system.
President Trump has not been alone in his tough talk. His Treasury Secretary, Steven Mnuchin, has vowed to “kill” Dodd-Frank’s Volcker Rule, which prevents many forms of proprietary trading by banks, as well as other parts of the law. Meanwhile, over in the Capitol Building, the chair of the House Financial Services Committee, Rep. Jed Hensarling (R-Texas) has been busy crafting a legislative rollback of Dodd-Frank. His Financial Choice Act would repeal the Volcker Rule, the Department of Labor’s fiduciary duty rule, and the CEO pay ratio rule, among other changes up for consideration.
In a recent Webcast, Patrick Oot, partner at Shook, Hardy & Bacon, noted that Financial Choice Act, if implemented, could fundamentally change the very way the Securities and Exchange Commission approaches enforcement actions. Against this background, the passage of the Financial Choice Act in the House feels like the beginning of a deregulatory wave.
But has the death of Obama-era financial regulation been exaggerated? The Financial Choice Act, after all, must get through the Senate—a less-than-certain possibility. And when we consider specific policies, at least two holdovers from the Obama administration appear immune to deregulation: the SEC’s whistleblower program and the Disclosure Effectiveness Initiative.
Whistleblower program. By many accounts, the SEC’s whistleblower program has been a critical success since its implementation back in 2010. The whistleblower program was established by Congress to incentivize whistleblowers who possessed “specific, timely, and credible” information about federal securities law violations to report to the SEC. While it is possible the SEC could weaken or gut the program altogether, due to the strong support for the program from the financial industry and the public at large, it is not a probable course of action for the Trump administration.
“This was one of the few provisions of Dodd-Frank that had any level of bipartisan support,” explained Scott Kimpel, a partner at Hunton & Williams. “There is a provision in the Choice Act that would make a minor revision to it to prohibit any parties that have unclean hands, co-conspirators in effect, from seeking an award. But the program itself, by any estimation, has been very successful, leading to an increased number of leads for the agency.”
It appears that President Trump’s initial expeditious executive orders may not have foreshadowed the pace of possible change. Indeed, steps are being taken to roll back financial regulations implemented under President Obama, but they certainly won’t be undone overnight—or any time soon.
“The whole history behind it was to try and centralize the process for the way tips, referrals, and complaints came in and to counter some of the negative impact of the SEC not taking the whistleblower seriously regarding the Bernard Madoff situation,” Kimpel said.
The program has been widely successful from the SEC’s perspective, he added, noting the SEC has awarded in excess of $150 million to more than 40 whistleblowers since the program’s inception. Whistleblowers are awarded 10 percent to 30 percent of money collected when the monetary sanctions ordered exceed $1 million.
“The SEC likes it, Congress likes it; I don’t see a lot of changes around the margins,” Kimpel said. Yet, the whistleblower program does present compliance challenges for companies, he added.
“There are various anti-retaliation provisions that come into play. The SEC has been actively enforcing that provision, bringing enforcement cases against several companies whose confidentiality agreements were perceived to prohibit whistleblowing,” Kimpel said.
The whistleblower program has been a significant focus of the SEC’s enforcement division in recent years and this will likely continue for the remainder of Trump’s administration. “Other than nip and tucks around the margins, I don’t foresee any widespread changes to it,” Kimpel added.
Disclosure effectiveness changes. From late 2015 through 2016, the SEC issued a flurry of releases linked to the SEC Disclosure Effectiveness Initiative to monitor and streamline the disclosure process—an initiative implemented by former SEC Chair Mary Jo White.
In July 2016, the SEC issued a major proposal, “Disclosure Update and Simplification,” aimed at removing redundant and overlapping disclosure requirements contained in SEC rules and regulations and those required under U.S. GAAP or International Financial Reporting Standards and at updating and modernizing other disclosures.
Critics have said this project could be a wolf in sheep’s clothing, expressing concern that streamlining will take away disclosures that companies would otherwise have to give. While Clayton has not spoken definitively on the issue, he will likely continue to support the initiative based on what we’ve seen so far.
“One of the things [Clayton] said during his confirmation hearing was the SEC has a tripartite mission: protecting investors, facilitating capital formation, and ensuring fair and orderly operation of the capital markets,” Kimpel said.
With decisions still lingering around policy shifts, issuers remain concerned with the SEC’s impact on anticipated changes and developments to current regulations under the new administration and changes to SEC reporting and disclosure requirements.
The Trump administration has brought with it a new level of uncertainty, including executive orders out of the gate that signaled an aggressive stance toward securities deregulation—a position that has largely received applause from public companies across the board.
But as the industry seemingly remains in a “hurry up and wait” mode, it appears that President Trump’s initial expeditious executive orders may not have foreshadowed the pace of possible change. Indeed, steps are being taken to roll back financial regulations implemented under President Obama, but they certainly won’t be undone overnight—or any time soon.