In recent days, the rumors were intense. The Trump Administration was preparing executive orders, crafting memorandum, and pushing legislative goals that would gut the Dodd-Frank Act, dramatically overhaul the Consumer Financial Protection Bureau, and kill the Labor Department’s controversial “fiduciary duty” rule.
Given the President’s aggressive nature—on plentiful display during his first two weeks in office—his campaign rhetoric, and brusque cadre of insiders, it made perfect sense that a promised regulatory overhaul would be more axe than scalpel.
Evidence of that brash approach was on full display when leaked copies of a Feb. 3 memorandum to the Labor Department freely circulated. It called for a 180 –day moratorium on the fiduciary rule and retreating from the government’s defense of a lawsuit challenging it.
A funny thing happened as the day drew to a close. The final executive order, once it was made public and official late on the Friday afternoon, proved to be more strategic—and, dare we say, more philosophical—than the bonfire of Federal Registers pro-regulation alarmists feared.
The Executive Order “On Core Principles for Regulating the United States Financial System,” lays out “the Administration’s “core principles” of regulation. Among them, to:
Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
prevent taxpayer-funded bailouts;
foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
enable American companies to be competitive with foreign firms in domestic and foreign markets;
advance American interests in international financial regulatory negotiations and meetings;
and restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.
A directive to the Treasury Secretary requires them to consult with the regulatory heads who comprise the Financial Stability Oversight Council and report within 120 days should be preserved, revised, or eliminated.
Created by the Dodd-Frank Act, the FSOC is comprised of federal and state regulators and an independent insurance expert appointed by the President. SIFIs are required to conduct regular stress tests, prepare credit exposure reports, and draft “living wills” that document resolution and liquidation plans.
“Importantly, the Treasury secretary has been delegated the portfolio for financial regulatory reform, and through his role as chair of the FSOC has been charged with the task of identifying at the administrative level regulatory relief that will have the effect of making the U.S. financial system safe, sound and competitive,” says Joseph Lynyak III, a partner at the international law firm Dorsey & Whitney. “Clearly, this will include modifications to Dodd-Frank Act rules that have been repeatedly criticized by the industry as being burdensome, costly, and ineffective.”
Lest the order be viewed solely as a political exercise, its broad scope ensures that the nation’s entire web of regulatory regimes may be reviewed. “This is not just Dodd-Frank; this is the world,” says Oliver Ireland, a partner at law firm Morrison Foerster. “It is everything.” As he sees it, the President’s choice to charge the FSOC with the initial, 120-day review “is a perfectly logical way to go at this under the existing architecture.”
Checks and balances ensure that an executive order cannot force independent agencies to take presidential commands. “If the agency head is only removable for cause, and you tell them to do something on a policy basis, there is a question as to whether or not they have to do it,” Ireland explains. FSOC, however, is a one-stop-shop of agency heads anyway, making it a sensible place to begin the initiative.
Expect an important, rigorous, and contentious debate to precede the 120-day report and subsequent updates. “The core principles are going to have to be balanced against each other in some cases,” Ireland says.
“I’m not saying there is a lot of momentum at this point but, when you raise the possibility of rationalizing the entire regulatory framework, there is a lot of thought that can go into how we do it here versus how other jurisdictions around the world with functioning banking systems do it.”
Thomas Delaney, Partner, Mayer Brown
The Trump Administration is presenting a set of principles “and saying these are the things we value,” he adds. “They want to review the regulatory structure in light of those values. It is going to be a process and part of it will go through the regulatory agencies that adopted all these things to begin with. There will be limits to what can be done without legislative changes and, even within those limits, there will be debates.”
As changes are made to Dodd-Frank rulemaking, that deep dive is long overdue, many critics say. “It is just sound public policy to evaluate, seven years after inception, the impacts of the Dodd-Frank Act, particularly since no cost benefit review was done before it was enacted, and none has been done since,” says Thomas Vartanian, a partner with the law firm Dechert. “We need to regulate financial institutions as smartly as we can. Having all the information about its impact—and our eyes wide open—is the best way to do that.” Areas likely to get attention and review include FSOC’s structure and operations, the structure and jurisdiction of the CFPB, the “efficacy and global liquidity impact” of the Volcker rule, the effect of Title II’s Orderly Liquidation Authority on markets, and the efficacy of Living Wills, he says.
That the Trump Administration moved so swiftly on regulatory reforms, with so many other priorities in the offing, was surprising, says Thomas Delaney, a Mayer Brown partner and co-leader of its global financial services regulatory and enforcement practice. Nevertheless, the process, thus far, is a sensible one.
“I think he has done what you should do if you are thinking of broad revisions,” Delaney says. “You want to lay out your general principles and then ask your responsible people to come up with those rules that meet the principles and those provisions that don’t as a way of determining what your next plans of action might be” … There will be a lot of discussion to form the “good list” and the “bad.” Delaney offers a reminder that, back in 2010, the Dodd-Frank Act initially had a similarly ambitious goal of reforming the nation’s regulatory structure, but those ideas were quickly beaten down by the agencies themselves.
“We know from experience that they do a very good job of defending their turf,” he adds.
One area where a reassessment of regulatory agencies might garner debate is the Federal Reserve. “Some people have questioned why you have a regulatory process embedded with the central banking function of the Federal Reserve,” Delaney says. Among the suggestions is placing those regulatory functions under the Treasury Department and “letting the Fed be the central bank, without a mixed set of principles to apply.”
“I’m not saying there is a lot of momentum at this point but, when you raise the possibility of rationalizing the entire regulatory framework, there is a lot of thought that can go into how we do it here versus how other jurisdictions around the world with functioning banking systems do it,” he says.
The sausage making of regulatory reform may burden U.S. companies with greater uncertainty until relief is ultimately at hand. “There is a great deal of uncertainty, but there is also a great deal of optimism that we will have some form of regulatory relief,” says Sanford Brown, a partner on the financial services & products team at Alston & Bird. “The notion is that there will be something and an attitudinal shift at the regulatory agencies.”
“It is hard to argue with the executive order’s core principles of financial regulation,” he adds. “The message is to let industry try to solve problems with as little government intervention as possible. Hopefully, a thoughtful analysis of what works and what doesn’t will give the banking agencies a lot more discretion in how they manage the industry.”
A fiduciary rule review
In April, the Department of Labor finalized a new rule that creates a fiduciary duty for brokers and registered investment advisers who offer retirement advice. A presidential memorandum issued on Feb. 3 details the process by which the rule will be reviewed.
It “may significantly alter the manner in which Americans can receive financial advice and may not be consistent with the policies of my Administration,” Trump wrote.
The Labor Department is ordered to review the rule “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” As part of this examination, it is directed to prepare an updated economic and legal analysis concerning the likely impact of the rule. That analysis will consider, among other things:
Whether the anticipated applicability of the rule has harmed or is likely to harm investors due to a reduction of Americans' access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
whether it has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and
whether the Fiduciary Duty Rule 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.
If the Labor Department concludes that the rule is “inconsistent” with Administration priorities, it is instructed to “publish for notice and comment a proposed rule rescinding or revising the rule, as appropriate and as consistent with law.”
“They are leaving it to the Labor Department to decide if they need more time, given this request coming from the White House, to assess whether the rule is achieving its purposes,” says Lennine Occhino, a partner with Mayer Brown. “What harm is it bringing to retirement investors? It is really more a directive to the Labor Department to dig in, reevaluate the rule, and make a determination as to whether it makes sense to continue with it, amend it, or withdraw it.”
Whether and how long to delay the applicability date of the rule, April 1 for the time being, will be in the agency’s own hands. “If they can work very quickly and make their determinations in a short period of time they may start efforts to amend or withdraw the rule,” Occhino says.
While the final memorandum eliminated the 180-day moratorium in the leaked draft, a message was nonetheless delivered. “The draft is probably what the Administration expects the outcome to be,” says Erin Sweeney of the law firm Miller & Chevalier.
As was the case with recent financial regulation actions by the White House, the memorandum was likely revised as a concession to the limits of presidential powers.
“It is common for agencies to request a six-month delay based on pending litigation, but it has to come from the agency,” Sweeney says. “Ultimately, the draft memo telegraphed where the Administration wants to end up. It is not just the 180 days, or the stay of litigation [several lawsuits against the rule remain pending and, for now, defended against by the Justice Department]. There was also a directive in the draft that said the Labor Department had to consult with the Attorney General to determine whether or not the rule itself violates the Administrative Procedures Act or any applicable statute. That is a pretty broad demand. Ultimately the memorandum we received was scrubbed down.”