Corporate America hates uncertainty. Look no further for proof than stock futures on Nov. 8, as late night Election Day returns poured in.
The Dow Jones industrial plummeted nearly 800 points in overnight trading as ballot counting showed a likely victory by presidential candidate Donald Trump. By comparison, on the first day of NYSE trading after 9/11, after a weeklong hiatus, the market fell just shy of 700 points, a record loss at the time.
By morning, however, stock prices had mostly rebounded, buoyed in large part by gains in the banking sector.
Those returns tell a story about what we know thus far about a Trump presidency as it pertains to public companies and the rules and regulations that govern them. There will be, for a time, confusion and uncertainty, but perhaps also benefits, especially for banks as the tide of post-recession, post-Dodd-Frank Act regulation rolls back.
A vision of the Trump Administration’s regulatory posture is coming into clarity. The most telling revelations, posted on a website launched to celebrate the transition from President Barack Obama, Great Again, confirms a not-so-shocking desire to gut the Dodd-Frank Act.
The Nov. 9 post, one of the very first to appear on the new site, reads in part:
“The proponents of Dodd-Frank promised that it would lift our economy. Yet now, six years later, the American people remain stuck in the slowest, weakest, most tepid recovery since the Great Depression.
“The big banks got bigger while community financial institutions have disappeared at a rate of one per day, and taxpayers remain on the hook for bailing out financial firms deemed ‘too big to fail.’ The Dodd-Frank economy does not work for working people. Bureaucratic red tape and Washington mandates are not the answer. The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”
Previously, the Trump campaign itemized its regulation-related checklist:
Ask all department heads to submit a list of all wasteful and unnecessary regulations that kill jobs and do not improve public safety, and eliminate them.
End the radical regulations that force jobs out of our communities and inner cities.
Issue a temporary moratorium on new agency regulations that are not compelled by Congress or public safety.
Cancel immediately all illegal and overreaching executive orders.
Decrease the size of our already bloated government after a thorough agency review.
The Trump team cited an April 2016 study by the Mercatus Center at George Mason University, a conservative think tank, that the U.S. economy today is 25 percent smaller than it would have been without the surge of regulations since 1980.
“With review of the PHH ruling no doubt ongoing, it likely will be some time before the President could exercise the power to remove [Director Richard] Cordray except for cause, which would be very difficult to do.”
Quyen Truong, Former Deputy General Counsel, CFPB
Every year, over-regulation costs the U.S. economy $2 trillion dollars and reduces household wealth by nearly $15,000 dollars, Trump claimed in a September press release. The statement added that President Obama has issued close to 400 new major regulations since taking office. In 2015 alone, federal agencies issued over 3,300 final rules and regulations, up from 2,400 the prior year.
As he sets out to cleave the Federal Register down to size, President Trump will have a clear, partisan roadmap of how to proceed.
Perhaps most importantly, there is House Financial Services Committee Chairman Jeb Hensarling’s (R-TX) Financial CHOICE Act, a Republican plan “to replace the Dodd-Frank Act and promote economic growth.” Doomed to veto under the Obama Administration, the proposed legislation has new life in the hands of a new president.
To end taxpayer-funded bailouts and “too big to fail,” the legislation seeks to create a new sub-chapter of the Bankruptcy Code tailored to specifically address the failure of large, complex institutions.
Other matters addressed in the bill:
Providing an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banks that choose to maintain high levels of capital.
Retroactively repealing the authority of the Financial Stability Oversight Council to designate firms as systematically important financial institutions.
Making all financial regulatory agencies bipartisan commissions and placing them on the Congressional appropriations process,
Ending the Securities and Exchange Commission’s administrative proceedings.
Repealing sections and titles of the Dodd-Frank Act, including the Volcker Rule, that limit capital formation.
Repealing non-material, specialized disclosures, such as the conflict minerals and pay ratio rules.
Speaker of the House Paul Ryan—should he remain in that post given his turbulent relationship with Trump throughout the campaign season—has a similar plan, on behalf of the Republican party, on the table. “A Better Way,” a litany of governmental reforms, includes many of the same objectives as Hensarling’s bill.
Also available to guide the new president is the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness and its recent report, “Restarting the Growth Engine: A Plan to Reform America's Capital Markets.”
The action plan, with more than 100 recommendations, outlines a full list of “critical issues that must be addressed by the next president and Congress,” as well as shorter-term action items that can be taken up in the first 100 days of the new administration.
Gutting the CFPB?
Since its conception in the pages of the Dodd-Frank Act, the Consumer Financial Protection Bureau has been a perpetual target for Republican critics. Being the brainchild of Democratic firebrand and consumer protection guru Elizabeth Warren hasn’t helped, nor has a unique structure that allows it to draw funding from the Federal Reserve without the usual Congressional appropriations process.
Hensarling’s Financial CHOICE Act proposes changing its name to the “Consumer Financial Opportunity Commission” tasking it with the dual mission of consumer protection and competitive markets. His legislation would also replace the Bureau’s single director with a bipartisan, five-member commission.
After spinning their wheels for more than five years, critical lawmakers may now have the traction they need to make good on their threats. Delivering a major setback to an agency that has, until now, successfully batted away challenges to its authority, a 2-1 ruling in October by the U.S. Court of Appeals for the D.C. Circuit found that the Bureau, as currently composed, is unconstitutional.
The ruling in the matter of PHH Corporation, et al v. CFPB invalidates a provision in the Dodd Frank Act, when it created the agency, which established a director who is removable only for cause. The President, the majority justices said, must have the authority to remove the CFPB’s director at will.
The ruling itself doesn’t mean the demise of the Bureau, but it does renew controversy just as the White House moves in its latest tenant.
“The reality is that there are a lot of longstanding consumer protection statutes, the Truth in Lending Act and others, that will need a home. I don’t think anybody is seriously suggesting that those consumer protections go away.”
Benjamin Olson, Former Deputy Assistant Director, Office of Regulations, CFPB
Despite the legal backdrop—and perhaps because of it—don’t expect a radical overhaul of the CFPB, its rules, or its enforcement activities any time soon, says Quyen Truong, former deputy general counsel at the CFPB and now a partner at the law firm Stroock & Stroock & Lavan.
“I don’t think there will be immediate change,” she says. “With review of the PHH ruling no doubt ongoing, it likely will be some time before the President could exercise the power to remove [Director Richard] Cordray except for cause, which would be very difficult to do.”
Legislation to change the structure of the CFPB would take time as well, she says. “The Republican majority in Congress is not so overwhelming that they could push through legislation at will … It is hard to predict exactly what Donald Trump would do as president where the CFPB is concerned or when, exactly, he would do it given a long list of goals.”
“We are looking at a situation where the new administration will come into power and need to make a decision. Do they push on this and attempt to remove Director Cordray and find themselves in a dispute like Marbury v. Madison [a similar, precedent-setting case of a new president trying to remove a prior administration’s appointee]?” asks Benjamin Olson, former deputy assistant director for the Office of Regulations at the CFPB, now a partner with the law firm BuckleySandler. “If it were to come to that, then we might very well see expedited consideration by the Supreme Court on this matter.”
A nuclear option: On the campaign trail Trump made references to possibly repealing Dodd-Frank in total, which, in effect, would abolish the CFPB. That strategy might be far easier said than done.
“The reality is that there are a lot of longstanding consumer protection statutes, the Truth in Lending Act and others, that will need a home. I don’t think anybody is seriously suggesting that those consumer protections go away,” Olson says. “If the CFPB is abolished, that authority has to go somewhere. It could go back to the Federal Reserve where it existed before, or to some other agency, but you would need a succession plan to transfer the work the CFPB does elsewhere.”
There will, by necessity, be a degree of political calculus behind any move.
“He was swept into office with the support of middle-class and underemployed voters in states like Pennsylvania, Ohio, Michigan, and Wisconsin. This is the very demographic that benefits from what the CFPB does in terms of obtaining relief for those who have suffered from deceptive mortgage practices and other lending practices that could be regarded as abusive to consumers,” Tom Delaney, co-leader of Mayer Brown's global financial services regulatory and enforcement practice, says. “If he goes after the CFPB, will he be seen as betraying or retreating from his commitment to this important part of his electorate?”
Rethinking the SEC
Beyond speeches, tweets, and website postings, assumptions about the new administration’s path forward for federal regulatory agencies can be gleaned by some of the names appearing on the transition team.
For example, former SEC commissioner Paul Atkins is now a part of Trump’s transition team and will advise him on filling current vacancies and, presumably, policy decisions pertaining to his former agency. During his time on the Commission, Atkins was known as a fierce critic of some practices and his more progressive cohorts. Among his causes was the SEC’s longstanding tendency to issue regulatory decisions that fail to adequately consider cost versus benefit. Atkins was also critical of Sarbanes-Oxley Section 404 internal control reporting requirements, another viewpoint that fits well with the less-is-more attitude toward regulation the president-elect espouses.
Personnel matters will force early consideration by the new president. Smart money is already calling for current Commissioner Michael Piwowar, a Republican cut from the Atkins mold, to eventually replace current Chairman Mary Jo White. On Nov. 14, White announced that she will vacate her post at the conclusion on the Obama Administration. An added bonus: As an economist, Piwowar’s thoughts on the financial burden of new and existing regulations would carry added weight.
For months, the SEC has operated with only three commissioners due to a confirmation battle waged by Senate Democrats displeased by a refusal by nominees Hester Peirce (a senior research fellow at the Mercatus Center), and Lisa Fairfax (a law professor at the George Washington University Law School), to embrace a rulemaking petition that would require companies to disclose expenditures on lobbying and other political activity. That would leave Trump with three new appointments to make (assuming Piwowar is promoted), one of which must be a Democrat. Given Peirce’s reputation as a staunch Dodd-Frank critic and Trump’s citations of her work at the Mercatus Center, one might assume that one of the available seats remains hers for the asking, if she still wants it.
“He was swept into office with the support of middle-class and underemployed voters in states like Pennsylvania, Ohio, Michigan, and Wisconsin. This is the very demographic that benefits from what the CFPB does in terms of obtaining relief for those who have suffered from deceptive mortgage practices and other lending practices that could be regarded as abusive to consumers.”
Tom Delaney, Co-Leader, Global Financial Services Regulatory and Enforcement Practice, Mayer Brown
As for the Chamber of Commerce’s recommendations for how the new president should reform the Commission, it targets the many ways it can impose requirements outside of formal rulemaking.
“Policy interpretations and applications are often found in SEC interpretive releases, exemptive orders, no-action letters, frequently asked questions, speeches by commissioners and senior staff and, of course, settled enforcement orders and releases,” the report says. “Too often, staff interpretations carry the weight of a rule, but have no input from commissioners.”
Create an accelerated conditional approval process for new investment products or services.
Reorganize the SEC and its management structure.
The Commission should supplement existing guidance to ensure that the SEC, Financial Accounting Standards Board, and Public Company Accounting Oversight Board use a common definition of materiality.
Develop 14a-8 reforms (the SEC “has abdicated its duty to determine if shareholder proposals will interfere with company ordinary business operations and if shareholder proposals on similar topics conflict with one another,” the report says).
Revisit the thresholds on repetitive shareholder proposals that have low or declining support.
Require more oversight over proxy advisory firms by requiring transparent processes around voting policies and recommendations.
Repeal rules unrelated to the SEC’s mission, including the Conflict Minerals Rule, Resource Extraction Rule, and Pay-Ratio Rule.
The next chair of the SEC should make a review of the existing disclosure regime premised on materiality as a top priority.
Rethink the SEC’s “bounty” program for whistleblowers to prevent co-conspirators from being “rewarded for misconduct.”
The SEC should reexamine its policy on requiring admissions in some enforcement actions.
The Chamber also suggests incorporating alternative case resolution methods to rapidly resolve minor technical infractions and to encourage and reward effective internal compliance and systems of internal controls. “Creative use of informal remedial actions, such as deficiency letters, desk injunctions, reports of investigations, and voluntary disclosure of internal investigations and remediation actions, will enable the SEC to devote its limited resources to major instances of misconduct,” it says.
As for the enforcement posture of the SEC and Department of Justice in a Trump Administration, “it might be easier to say what I don’t think will happen than what I do think will happen,” says Jordan Eth, co-chair of law firm Morrison Foerster’s securities litigation, enforcement, and white-collar criminal defense group.
One thing is clear, he says, the continuation and expansion of the regime envisioned by Senators Elizabeth Warren (D-Mass.) and Bernie Sanders (D-Vermont) is now off the table.
Nevertheless, he says, “we are in the realm of real speculation because in all of the debates, all of the tweets, and all of the platforms and campaign literature, I’m not sure we’ve seen anyone sketch out, in any detail, SEC enforcement.”
THE COST OF REGULATION
A graphic, from a website launched by President-elect Donald Trump's transition team, visualizes the regulatory burden faced by companies.
Things to watch for early on, Eth says, is how SEC budget requests are handled, as well as the enforcement philosophy of new commissioners. Most importantly, who will the new head of the Enforcement Division be?
Eth warns observers not to assume that Trump’s priorities will reflect traditional Republican objectives. “It could end up being that way, but the new president’s populist bent makes it difficult to predict,” he says.
Given his campaign pushback against political and Wall Street “elites,” it may be difficult for Trump to immediately give the latter a break.
“The obvious reaction would be, ‘He’s a big phony,’ ” Eth says. “But, on the other hand, if he says they are going to go after all the big Wall Street bankers, a lot of the Republicans around him will say, ‘What are you doing?’ ”
What of anti-corruption efforts, specifically enforcement of the Foreign Corrupt Practices Act by the SEC and Department of Justice? Writing on the Global Anticorruption Blog, Harvard Law School Professor Matthew Stephenson predicts a setback.
In a post entitled, “U.S. Anticorruption Policy in a Trump Administration: A Cry of Despair from the Heart of Darkness,” he writes that the FCPA “is likely to be substantially weakened, perhaps even repealed,” although conceding that the latter possibility “is still relatively unlikely.”
Trump is already on record as calling the FCPA a “horrible law,” he wrote. “It’s hard for me to imagine that the attorney general of a Trump Administration (Rudy Giuliani, perhaps?) would make prosecuting foreign bribery a significant priority, or would devote substantial resources to this area.”
Substantially weakening the FCPA or ratcheting back enforcement might be in tension with U.S. obligations under the Organisation for Economic Co-operation and Development’s anti-bribery convention. “And so it would,” he says. “But does anyone really think that a Trump Administration would care about this?”
Banking on a rule rollback
If Trump withdraws from the regulatory blitzkrieg banks have faced since the Great Recession, it will be welcomed news for financial institutions of all size. What firms in the financial world—from banks to brokers to trading houses—may not be so keen on is a full, and perhaps immediate, repeal of the Dodd-Frank Act.
“There has been a lot of time and money invested on the infrastructure,” Dan Berkovitz, a partner at law firm WilmerHale and former general counsel at the Commodity Futures Trading Commission, says, specifically addressing accommodations made by firms dealing in swaps and derivatives. Drastic overhaul or repeal “would just be totally destructive,” he says. “It not only leaves wasted investment in the front system but creates a period of great uncertainty.”
On a practical level, an outright repeal would affect relationships with trading counterparties.
“The current suite of standard agreements of terms and conditions and obligations on each party are all based upon the current regulatory system,” Berkovitz says, adding that the current regulatory system tells each party to a transaction what their obligations and rights are.
“If you just repeal the whole system, what agreements are everyone going to use? Some of the counterparties may like certain conditions and regulations and want to negotiate to keep those in. Others may want more or less,” he says. “You are really opening up a free-for-all in terms of what governs these transactions.”
Judging by Trump’s campaign rhetoric, banks may neither need to fear or celebrate a full Dodd-Frank repeal just yet. He has given tacit approval to both Dodd-Frank’s Volcker Rule (a ban on proprietary trading by banks) and a separate effort to reinstate the Glass-Steagall Act.
Ironically, a bill to do the latter, The 21st Century Glass-Steagall Act, is co-sponsored by Sen. Warren, one of Trump’s most vocal critics and the Democrat’s resident pit bull.
The legislation, also sponsored by Senators John McCain (R-Ariz.) and Angus King (I-Maine), would separate traditional banks—with savings and checking accounts that are insured by the Federal Deposit Insurance Corporation—from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities.
While Trump’s view of international intrusions into domestic affairs may mean a withdrawal from leverage and liquidity requirements imposed by the Basel III accord, the Financial CHOICE Act and other Republican proposals still view liquidity and the capital cushions as a deterrent to institutional failures. And, while the “stress tests” mandated by Dodd-Frank may be weakened or even eliminated for smaller institutions, neither they nor the Financial Stability Oversight Council—the supergroup of regulators serving as final arbiters of all things systematically important—will completely vanish. At least not immediately, and not without a fight.
A regulatory downsizing in financial services will be complicated, even with a majority in the House and Senate. That being said, not much will change for important Congressional committees.
Senate Banking Committee Chairman Richard Shelby (R-Ala.) will surrender that post, likely to Mike Crapo (R-Idaho), due to term limits.
“We expect the incoming chairman to maintain his focus on passing meaningful regulatory relief; pursue CFPB and Dodd-Frank reforms, particularly in the areas of the Volcker rule, swaps, and derivatives; and to focus on data breach and consumer privacy,” an advisory from the American Bankers Association says. The Committee’s partisan membership ratio will likely stay the same with 12 Republican and 10 Democratic seats.
The current leadership of the House Financial Services Committee will also remain mostly intact with Chairman Jeb Hensarling, author of the Financial Choice Act, retaining that post unless, as rumored, he is appointed to a cabinet position.
“Clear banking proposals put forward by Trump have been difficult to come by,” the ABA analysis says. “We expect the Trump administration will take cues from Hensarling and Crapo on banking priorities.”
Also affecting banks, the Trump Administration will appoint new heads of the Office of the Comptroller of the Currency and Federal Deposit Insurance Corporation in 2017. Federal Reserve Chairman Janet Yellen’s term expires in February 2018.
As for what the ABA wants from a Trump Administration, it is hoping for regulations tailored to the size of an institution, a departure from the current “one-size-fits-all” regime. Simplified mortgage rules are also on the wish list.
To encourage technological innovations, including those in the realm of FinTech, the ABA is calling for “a regulatory greenhouse” for testing new products before roll-out.” It also wants a national data protection and breach notification standard for all who handle sensitive personal financial information.
One of the Trump Administration’s most controversial priorities will also affect banks. A plan published on the campaign’s website explains that in order to force Mexico to foot the bill for a border wall, it would rely on an expanded version of the “know your customer” rule, a requirement that financial institutions verify the identity of their clients, seeking out relationships that might otherwise entangle them in a money laundering scheme or sanctions violations.
Trump’s plan would leverage the executive branch’s authority to issue and amend KYC regulations, adding a requirement that “no alien may wire money outside of the United States unless the alien first provides a document establishing his lawful presence in the United States.” In theory, protests in Mexico over a ban on remittances would force an agreement to foot the bill for a wall.
The threat to expand KYC requirements would be supplemented by other efforts, including trade tariffs and a threat to block visas for Mexican nationals.
The establishment of a fiduciary rule for investment advisers will inevitably spark a battle between the Trump Administration and the Department of Labor. Critics of the rule have demanded that the SEC be tasked with rulemaking instead.
Trump may also not be off to a great start with the National Labor Relations Board.
Throughout the Obama Administration, the NLRB has frequently sided with workers and unions in disputes. That will assuredly change. Expect controversial rulings regarding overtime pay, union organizing, and when franchise owners gain status as a “joint employer” to be challenged and reversed whenever a case to do so emerges.
The fight may also be a bit personal.
On Nov. 3, the NLRB ruled that the Trump International Hotel in Las Vegas violated the National Labor Relations Act when it refused to negotiate with a union representing 500 employees.
“I think the Trump Administration is going to take a hard look at a great deal of what has been done,” says Michael Lotito, co-chair of law firm Littler’s Workplace Policy Institute. “They will probably call a hiatus to any rules that are pending and start taking a very hard look at rules that are in various stages of implementation, including those that have been tied up and challenged through litigation.”
Reversing the Obama legacy in labor law will take time.
“The NLRB is an independent agency and it rules primarily through case-by-case determinations,” Lotito says. “There are two vacancies to the board right now, so President Trump will have an opportunity to nominate individuals that will switch the composition of the board from a 3-2 labor bias to a 3-2 management tilt.”
There may be a thorn in the new administration’s side in Richard Griffin, the NLRB’s general counsel. Unabashedly pro-labor, his opinions have advanced and codified the Obama Administration’s views on such matters as overtime pay, worker classifications, and union organizing. His term doesn’t expire until November 2017.
“It is easy to forget that for the first couple of years of the Obama administration, aside from Affordable Care Act, there was very little done from a labor and employment perspective that made any kind of radical or dramatic change quickly,” Lotito says. “It takes time for these processes to play out and the nature of our checks and balances are specifically designed to prevent these sorts of wholesale, immediate changes.”
A major battle that, now in the courts, will further unfold during the new administration is a so-called “blacklisting” rule for government contractors.
In October, the U.S. District Court for the Eastern District of Texas federal court issued an emergency injunction that temporarily halts implementation of the rule, which requires that federal contractors bidding on contracts over $500,000 disclose labor law violations they’ve had during the last three years. The requirements were initially slated to go into effect on Oct. 25.
“Does the new attorney general say to the Justice Department, with the administration’s urging, that the injunctions with respect to the implementation of these rules be accepted and there shouldn’t be any more appeals? We’ll see whether or not that happens,” Lotito says.
The elephant in the room where employee/employer relations are concerned is, of course, corporate responsibilities under the Affordable Care Act. Trump has pledged to repeal many, if not all, of the healthcare mandates (although he is open to preserving some of the law's consumer benefits).
The process of dismantling the ACA, however, will be complicated and time consuming .
“With Republicans short of the 60 Senate votes needed to end a filibuster, the path to dismantling the ACA will focus on the budget reconciliation process, which only requires a majority vote,” says Chiquita Brooks-LaSure, a managing director of Manatt Health, a group within the law firm Manatt, Phelps & Phillips. “In other words, Senate Democrats can block the wholesale repeal of the law, though there will be pressure on Democrats from more conservative states on cloture votes depending on the issue.”
Brooks-LaSure was part of the Democratic staff for the House Ways and Means Committee and played a key role guiding passage of the ACA and its subsequent implementation. “Reconciliation will take time,” she says. “While Congress is wrestling with that challenge, the new administration will have other levers to use, including state waivers to change Medicaid and Marketplace policy, as well as reversing executive orders and recently promulgated rules.”