Don’t hate the players
Donald Trump is finally in the White House. But, as far as financial regulation is concerned, the new president might still struggle to change the game

In his presidential inauguration on 20 January, as he swore to preserve, protect and defend the US Constitution, President Donald Trump also claimed that the ceremony was “not merely transferring power from one administration to another, or from one party to another—but … transferring power from Washington DC and giving it back to you, the American people”.

His claim drew cheers from supporters, but, like much else in the new president’s campaign, it has left players in the financial markets scratching their heads. Before his success at the polls, Trump claimed he would transfer the balance of power back to Wall Street. And, significantly, following his shock victory he continued to be vocal in his scorn for the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In fact, shortly after the vote on 9 November, Trump’s transition website, greatagain.gov, listed repealing the act as one if the administration’s primary objectives. The post described the act as “a sprawling and complex piece of legislation that has unleashed hundreds of new rules and several new bureaucratic agencies”.

It went on: “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.”

A replacement for Dodd-Frank has already been proposed by Jeb Hensarling, the Texan Republican representative and chair of the House financial services committee.

Hensarling’s Financial CHOICE Act is intended to end bailouts for large financial institutions and provide regulatory relief for highly capitalised, smaller, banks. The act would effectively hand the reins back to Wall Street, introducing a threat of three-fold penalties for wrongdoing in return for more freedom for institutions to lend and do business with each other.

The bill was approved by the financial services committee in September, and is widely expected to pass the US House of Representatives within the next few months. If it comes into effect, it will mean certain repeals for parts of Dodd-Frank. However, in the Senate, the CHOICE Act is likely to meet some opposition.

According to Robert Taylor, CEO of the Louisiana Bankers Association, the political make-up of the Senate means negotiations around the effect the new bill will have on Dodd-Frank will be tentative. As of yet, the outcome is difficult to predict. The Senate requires 60 votes of support in order to cut off debate and move to a vote on the legislation.

Taylor explains: “This 60 vote margin means at least eight Democrats will need to support the bill, along with all Republicans. The negotiations will be driven by the need to get these democratic votes.”
He adds: “Yes, Dodd-Frank will be changed. What is unclear now is how much it will be changed.”

There is a sense that Trump’s contempt for Dodd-Frank may have abated in the months between his win and his inauguration. Bhawana Khurana, vice president for client solutions at The Smart Cube, a research and analytics provider, suggests that: “As the time has drawn closer for [Trump] to take office there is a growing consensus that Dodd-Frank only needs modifications and rollback of certain provisions.”

Khurana continues: “Changes to this act aren’t among the top priorities of the Trump administration, but many market experts believe that there will be an action in 2017 on this, since it may be easier to tackle than the tax reforms or the Affordable Care Act.”

Jim Myers, senior manager of business consulting, trading and risk management at Sapient Global Markets, has a similar sentiment. If all of Trump’s hype were to be believed, he says, it would be fair to assume that Dodd-Frank is in for some significant upheaval.

He says, however: “I believe that the legislative willpower does not exist at this time to make wholesale changes to Dodd-Frank, and that the healthcare debate will dominate the legislative agenda in 2017.”

Myers adds: “That being said, any action in 2017 with respect to Dodd-Frank will come from the agencies themselves, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).”

“I would not be surprised if we see no-action relief granted or pro-business rule changes in some areas. These rule changes will take time and would have to go through the established CFTC or SEC rule-making process.”

“By the end of the year, we should have a much better understanding of where the Trump administration is heading from a regulatory perspective, but it is difficult at this stage to think that wholesale changes are in store for calendar year 2017.”

Myers may believe that the SEC will be involved in such significant rule changes, however, the commission itself is, at the time of writing, in a state of upheaval itself.

In her final speech as chair of the SEC, Mary Jo White expressed concern about the way the regulatory landscape may be headed—and about the powers the SEC will have to change that.

Speaking at the Economic Club of New York on 17 January, White said: “There is a lot of discussion about how the new administration may weaken or even reverse many of the reforms that the commission and our fellow financial regulators have implemented since the financial crisis … this is a concern that I very much share.”

Jay Clayton, partner at Sullivan & Cromwell LLP, is Trump’s nominee to replace White in the chair position. Commenting on the nomination, and hinting at the direction the SEC could move in if confirmed, Trump said: “We need to undo many regulations which have stifled investment in American businesses, and restore oversight of the financial industry in a way that does not harm American workers.”

In her speech, however, White fiercely defended the independence of the SEC, saying that government mandates—and Dodd-Frank among them—are becoming increasingly specific, and far more prescriptive of the SEC’s actions and those of other independent bodies than any other time previously.

There is a noticeable trend towards “legislative proposals from Congress seeking to remake our rulemaking process”, she said.

“It is very eye-opening to contrast the broad directives of the 1975 Securities Acts Amendments with the highly detailed requirements set forth in Dodd‑Frank and the JOBS Act.”

White highlighted the SEC Accountability Act, passed in the House on 12 January, which is intended to “improve the consideration by the SEC of the costs and benefits of its regulations and orders”.

According to White, if implemented this bill would “impose conflicting, burdensome, and needlessly detailed requirements regarding economic matters in commission rulemaking that would provide no benefit to investors beyond the exhaustive economic analysis we already undertake.”

She also argued that the Financial CHOICE Act would “similarly undermine agency rulemaking as well as cripple our enforcement capabilities”. Such decisions would be best left to non-political agencies, which should, in turn, be allowed to be independent.

White said: “The strength and utility of the agency’s structure depends on an environment that rewards expertise and frank dialogue, not partisan affiliation and political games.”

“If the ability and resolve of commissioners to act independently diminishes, so too will the opportunity for solutions that, while politically unpopular, best serve investors and markets.”

While White advocates keeping politics separate from financial regulation, Trump’s commitment to a “government controlled by the people” perhaps calls for closer oversight. Indeed, while Dodd-Frank does retain dedicated supporters, they tend to concede that the act is imperfect.

Speaking out in defence of Dodd-Frank in November, Rick Fleming, an SEC investor advocate, said the industry should consider regulations “not as a burden to be repealed or picked apart haphazardly, but as the essential nutrient for flourishing capital markets for a growing economy”.

While he praised the elements of transparency and regulatory oversight that the act has made commonplace, Fleming questioned its overall impact. He said: “I think it is legitimate to question, six years after its adoption, whether the other pieces of the act have done more harm than good.”

Was Dodd-Frank a necessary measure to restore stability to the US markets following the financial crisis?

According to Myers: “There will be doctoral theses written on this topic for the next two decades.”

“Arguments can be made that post-crisis recovery was slow because the industry had to recalibrate to understand what went wrong with their pre-crisis worldviews and operating models. To be sure, capital that was invested in regulatory compliance was diverted from other areas of firms.”

Khurana adds: “The act has been largely successful in meeting its objective of stabilising the financial markets. However, like any major reform, the act was not a perfect solution and needs further fine-tuning.”

She names simplification to parts of the act, and greater regulatory consolidation as “desired fine-tunes”, and suspects that at least some of these changes may be on the agenda for 2017. Taylor focuses on the public concern about the use of public money to bail out some of the largest US institutions.

Such institutions are deemed to be systemically critical, and a threat to the economy and markets both in the US and elsewhere, he says, however “the framework to resolve an institution remains a work in progress”.

He adds: “Having a process in place that is credible, meaning markets believe bank regulators will in fact not bail out institutions and resolve them in an orderly manner, continues to be a part of the unfinished business mandated by Dodd-Frank.”

A theme that seems to be continuing into the New Year is one of uncertainty. Whatever changes are in store for Dodd-Frank, the very state of not knowing could mean a reluctance to invest and therefore a stagnation in the US markets. However, there is positivity to be found, too. Myers says: “Essentially, firms want to keep their ‘powder dry’ until they know what they are shooting at. However in this instance, we may see a departure from that trend because firms will believe that any changes to Dodd-Frank will be pro-industry.”

Trump’s pro-jobs, power-to-the-masses rhetoric could in fact bring some relief to the smaller banks—those that, as Taylor notes, “did not cause the financial panic in 2008, were nonetheless included in Dodd-Frank, and have had imposed on them regulations that have been onerous and counterproductive”.

Even so, any regulatory change will be a challenge. While Taylor predicts that “relief for ‘Wall Street’ could be a source of resistance by both republicans and democrats”, we know from experience that in matters of money and markets, pleasing all players is impossible.

White poignantly noted in her final speech as chair of the SEC: “My tenure has certainly been marked by hard decisions that have attracted criticism from both political parties.”

“We have been accused of both gutting regulation and suffocating the market with too much of it. A few have attacked us for letting the crooks off with a slap on the wrist, while others say we are too tough or have targeted others simply to pump up our numbers.”

“In short, the environment necessary for independent agencies to be able to do the jobs you all want us to do is not getting better.”

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