Rethinking US Financial Regulation in Light of the 2016 Election

Reena Agrawal Sahni is a partner in the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling publication by Ms. Sahni, Bradley SabelGeoffrey B. Goldman, and Timothy J. Byrne. Additional posts addressing legal and financial implications of the incoming Trump administration are available here.

Throughout his campaign, Donald Trump wavered between populist and business-friendly policies and expressed seemingly conflicting plans for Wall Street—on the one hand advocating for less regulation with a repeal of the Dodd-Frank Act, the wide-ranging financial statute that was born of the 2008 financial crisis, but on the other hand proposing the introduction of a 21st Century Glass-Steagall Act, a law that could impose a raft of new restrictions on banks and limit their affiliation with investment banks. Since the election, President-elect Trump and his advisors, as well as Congressional Republicans and others, have suggested a variety of aspects of US regulations that are viewed as particularly onerous and should be rolled back. Although clarity is not expected for several months, it is possible to identify some likely areas of change, and at least some change seems likely because the Republican Party will control both houses of Congress and the presidency. The President-elect wants to encourage increased lending by reducing regulatory burden in some manner, the Republican leaders in Congress seem intent on achieving regulatory rollback in some form, the principal financial regulatory agencies will have Republican leadership, and the designated Secretary of the Treasury has intimate knowledge of banks and financial markets and appears to be amply equipped to develop and promote a reform agenda for the Trump Administration.

Possible Scope of Legislative and Regulatory Changes

One issue raised in the campaign was the level of regulation of smaller and community banks, as well as the larger financial institutions. Stephen Moore, one of Mr. Trump’s financial advisers, said while on the campaign trail, “one of the reasons we want to roll [Dodd-Frank] back is because we think it has had a very negative impact on small community banks … the regulatory costs and the compliance costs have contributed to a big consolidation of the industry and if it is not corrected in ten years we are not going to have community banks in this country. The regulatory burden can only be absorbed by big banks.” [1] Even for larger institutions, investors seem to be betting on deregulation that is favorable to banks, as indicated by the rise in bank stocks since the election.

Although there is much talk of deregulation, there may be limits to the demand for rolling back the Dodd-Frank Act, since Wall Street and other large financial institutions have spent considerable resources ensuring compliance with the Dodd-Frank Act and transforming the way in which they do business. As a result, many aspects of doing business under the Dodd-Frank Act have become familiar. As such, getting rid of the law (and its implementing regulations) in its entirety could be costly and may not be feasible, especially if it is to be replaced with different regulations, which would require banks to overhaul their current compliance efforts. On top of all that, other compliance priorities, such as anti-money laundering compliance, sanctions compliance and cyber-security imperatives, are all costly undertakings that arise independently of the Dodd-Frank Act, and would not be affected by rolling back the Dodd-Frank Act.

What seems more likely is for certain core provisions of the Dodd-Frank Act to be amended, such as in the way that Representative Jeb Hensarling’s Financial CHOICE Act proposes. Representative Hensarling is chairman of the House Financial Services Committee. His bill is broad in scope and would provide regulatory relief and otherwise change the regulatory landscape in a number of specific ways. In light of this and other proposals, one may expect the new administration and Congress to consider some of the following types of changes, short of a full repeal of the Dodd-Frank Act:

  • CFPB. Introducing structural changes to the Consumer Financial Protection Bureau (CFPB) by replacing the current single director structure with a bipartisan, five-member commission, similar to the SEC and CFTC. While Representative Hensarling believes that this will promote transparency and accountability, opponents of the reform argue that the current structure is transparent and that the proposed structure will paralyze the Bureau.
  • DoL Fiduciary Rule. Blocking or limiting the implementation of the new Department of Labor (DoL) fiduciary standard rule, which requires financial advisers to provide retirement investment advice that is in their client’s best interest. [2] The rule is set to go into effect in April 2017. Many opponents of the DoL rule are currently challenging it in court, alleging that the rule and the prohibited transaction exemptions overstep the DoL’s authority, while proponents of the rule see halting the implementation of the rule as exposing investors to increased harm.
  • Threshold for Heightened Supervision. According to some analysts, the most obvious regulatory rollback to undercut the Dodd-Frank Act would be to raise the $50 billion asset threshold at which banking organizations by law become subject to heightened prudential supervisory standards imposed by the Federal Reserve from $50 billion to $500 billion, or some other threshold above $50 billion, or to abolish it altogether, thus exposing fewer financial institutions to regulation. The House, on December 1, in fact passed a proposal to eliminate the automatic application of enhanced prudential standards on firms with over $50 billion in consolidated assets and replace it with a system of case-by-case determinations for all but the largest banks. However, initiatives such as this can be controversial. In this regard, one of the criticisms of the Dodd-Frank Act is that it has reduced the ability of banks to fund economic recovery due to these heightened standards. On the other hand, there appears to be a strong populist anger toward large banks, and relaxing regulatory standards could be seen as favoring Wall Street or inviting another financial crisis. Moreover, capital and liquidity standards are to a large extent the result of international agreements that are implemented at the national level by regulation. In this regard, while the Dodd-Frank Act mandates enhanced capital standards for larger banks, in general, actual minimum standards are the result of international regulatory agreements. Thus, regulatory discretion would likely continue to play an important role in the specifics of banking supervision.
  • Volcker Rule. Repealing the Volcker Rule, a key (but fairly self-contained) provision of the Dodd-Frank Act that limits the ability of banking firms to trade for their own proprietary accounts and invest in or sponsor hedge funds and similar investment vehicles. Proponents of repeal argue that the rule is anti-competitive, overly complex and hurts market liquidity, while opponents argue that repeal exposes customers to increased risk and promotes reckless trading and investments by banks. It is conceivable that the rule would be repealed as to all but the largest “Wall Street” banks, thus affording regulatory relief to community banks.
  • Glass-Steagall. Although implementation of a new Glass-Steagall Act was talked about during the election campaign, this is not an idea that has attracted much attention more recently, and it seems unlikely that this would be a major priority for the Trump Administration since it would not seem to ease regulatory burden or promote lending.
  • Derivatives Reform. Limiting the scope of further derivatives reform. A key feature of the Dodd-Frank Act was its attempt to comprehensively regulate the derivatives markets through dealer registration, clearing, exchange trading, margin and reporting. While many of these reforms have been implemented, and it may not be feasible or desirable to unwind them, the new administration is unlikely to expand regulation further. Proposals for regulation of high-frequency trading and security-based swaps, and proposed new position limits in particular, may be withdrawn or reconsidered.
  • FSOC. Repealing or limiting the Financial Stability Oversight Council’s (FSOC) authority to designate non-bank financial companies as systemically important financial institutions (SIFIs) and subject them to heightened supervision. In his opening statement during a recent hearing on oversight of the FSOC, Representative Hensarling argued that by “empowering FSOC to designate SIFIs, the Dodd-Frank Act allows the Federal Reserve to impose bank-like standards on non-bank institutions; in other words, to move institutions from the non-bailout economy to the bailout economy.” [3] Opponents of repeal argue that taking away this authority allows certain financial companies or some financial activities to continue without the scrutiny that they should be given. Although the topic has been less discussed, the Dodd-Frank authority under Title VIII for the supervision of financial market infrastructures, including clearing organizations and payment systems, could also be reconsidered.
  • Resolution. Repeal of Title II of the Dodd-Frank Act, which established an “orderly liquidation authority” under which the FDIC would be authorized to wind-down systemically important financial institutions outside of the normal Bankruptcy Code process. While never used, this authority has been criticized as potentially putting taxpayers at risk of supporting “too-big-to-fail” institutions, although that assessment is not universally shared. A related question would be whether amendments could be made to the Bankruptcy Code to facilitate bankruptcy proceedings involving large, systemically important financial institutions.
  • Exemptions for better capitalized institutions. A key aspect of Representative Hensarling’s Financial CHOICE Act proposal is allowing banking organizations that maintain a leverage ratio of 10% to be exempt from numerous other regulatory capital and liquidity requirements.
  • International cooperation and conflict. The Dodd-Frank Act was enacted against the background of the financial crisis and commitments among the G-20 countries to implement certain financial reforms. The implementation of the Act has involved a significant amount of conflict with other countries and complaints from internationally active institutions, including over suggestions that the US requirements have gone too far and have too much extraterritorial effect. The implementation has also resulted in disagreements between the US and EU in particular over equivalence of their respective regulatory regimes and cross-border recognition of registrants. Rolling back Dodd-Frank requirements may reduce some of this conflict, but may raise new questions as to whether US requirements are equivalent to those of other jurisdictions. It may also cause other countries to reconsider aspects of their own regulations.

New Leadership at Financial Regulatory Agencies

Amid the legislative and regulatory uncertainties in the months to come, there are known changes that occur as part of the transition of presidential administrations. Generally, in a presidential transition, it is typical to see the incoming president select new agency heads that are members of the new president’s party and whose views are in line with those of the president. In the case of the banking agencies, the agency heads’ terms generally extend on a schedule separate from the presidential administration, but the terms of many agency heads will expire reasonably soon after president-elect Trump takes office. Other financial agency heads customarily step down at the end of the current administration.

  • Treasury Secretary. The Secretary of the Treasury (and senior Treasury staff) will be replaced in the new administration. Steven Mnuchin, the Treasury Secretary designee, has a Wall Street and regional bank background and would not appear to be particularly populist in his approach to financial regulation.
  • SEC. Mary Jo White, chair of the Securities and Exchange Commission (SEC), has announced that she will leave the SEC at the end of the Obama administration. Michael Piwowar, the only Republican SEC Commissioner, will likely become the acting chairman until a permanent chair is named. The Commission currently has two vacancies. Traditionally, three of the five members of the Commission are from the president’s party, which is the maximum number of commissioners that may belong to the same political party.
  • CFPB. Richard Cordray, the Director of the Consumer Financial Protection Bureau (CFPB), has a term expiring in July 2018.
  • CFTC. Timothy Massad, head of the Commodity Futures Trading Commission (CFTC), has a term expiring in April 2017. Christopher Giancarlo, who is the only Republican Commissioner on the CFTC, will likely serve as acting chair until the president nominates him or another candidate as the permanent chair. Traditionally, three of the five members of the Commission are from the president’s party, which is the maximum number of commissioners that may belong to the same political party.
  • OCC. Thomas Curry, the Comptroller of the Currency, has a term expiring in April 2017.
  • FDIC. Martin Gruenberg, the Chairman of the Federal Deposit Insurance Corporation, has a term expiring in November 2017. There is already a vacancy on the FDIC board of directors, and the other members include the Comptroller of the Currency and the CFPB director. As a result, three to five members of the Board may turn over.
  • Federal Reserve Board. Janet Yellen, Chair of the Federal Reserve Board, has a term (as Chair) expiring in February 2018.
    • Stanley Fischer, Vice Chairman of the Federal Reserve Board, has a term (as Vice Chairman) expiring in June 2018.
    • There are currently two vacancies on the Federal Reserve’s seven-member board, including the position of Vice Chairman for Supervision.

Agency Actions Through and Following the Inauguration

Regulatory agencies may try to finish, or rush to completion, outstanding proposed regulations in order to adopt them before the change in administration. Already, key members of Congress have urged regulators not to take such steps, particularly with respect to controversial regulations.

It is expected that the new administration (like past administrations) will impose a moratorium on adoption of new regulations for some period following the inauguration. As a result, financial regulators may not be able to finalize new regulations during the early part of the new administration, even if they would otherwise be inclined to do so.

If rules have been adopted and published before the change of administration, it would generally be necessary to undertake a new rulemaking process for the new administration to reverse them (although certain regulatory repeal actions may be available under Congressional Review provisions of law).

If, as expected, the administration imposes a freeze on hiring, it could significantly limit the number of initiatives that the agencies undertake, especially at a time when several agencies are expected to experience a wave of senior staff retirements.

Summing Up

Although uncertainty remains about what the Trump presidency will mean for the regulation of financial institutions and financial markets, we have outlined above some areas to watch and many pieces are in place for potentially significant changes. Stay tuned for further analysis as regulatory initiatives evolve.


1Ian McKendry, Trump’s Surprise Victory Changes the Game for Financial Services, AMERICAN BANKER, Nov. 9, 2016, available at back)

2Shearman & Sterling, LLP, What’s Next for the DOL’s ‘Fiduciary’ Rule?, Nov. 30, 2016, available at back)

3Chairman Hensarling Once Again Calls on FSOC to ‘Cease and Desist’ Too-Big-to-Fail Designations Until Questions Are Answered, FINANCIAL SERVICES COMMITTEE, available at back)

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