Financial regulation—roughly, the law governing financial markets and institutions such as banks and investment companies—has many moving pieces. This essay focuses on one set of them: financial (de)regulation by the president and the executive branch within the first 100 days of the Trump administration. It looks at words, actions, and the gap between the two. Actions, in turn, include both those that are quite public and those that happen behind closed doors. A deregulatory theme runs throughout, as do reminders of the limits on unilateral presidential action.
I. Setting the Tone
A. Executive Order on Financial Regulation
In February, 2017, Trump signed an executive order announcing Core Principles for Regulating the United States Financial System. The order did not change the law on the books, but its seven principles set a tone and sent a message to Congress and financial regulators—the administrative agencies that do much of the rule-making and enforcement in the U.S. financial system.
The order begins with a general call to “empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth.” Although the remaining principles are similarly broad and open to interpretation, they can be roughly organized around three themes, with calls for deregulation woven throughout.
1 – Rationalization of U.S. Financial Regulation. The order calls for “rational[izing]” the existing network of financial regulators, which includes quite a long list—the SEC, CFTC, OCC, FDIC, etc. A companion principle calls for regulation to be made “efficient, effective, and appropriately tailored.” The word “tailored,” in particular, suggests that one size does not fit all and points to possible reduction to fit the intended particular model—in other words, potential deregulation.
2 – Financial Crisis Critiques. Two principles seem to be directed at unpopular government responses to the 2007–2008 financial crisis. One is to “prevent taxpayer-funded bailouts.” Another calls for “rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry.” The reference to systemic risk harks back to the earlier crisis, as may the reference to “moral hazard,” since a prominent critique of bailouts was that they created incentives to take risks knowing that someone else (i.e., taxpayers) would bear the costs.
On the other hand, the term “regulatory impact analysis” ordinarily refers to a review of the pros and cons of proposed and existing regulations. So, this announced principle may express the deregulatory impulse; imposing cost-benefit analysis has sometimes been a tool for slowing or shutting down rule-making.
3 – Promotion of U.S. Financial Interests Internationally. The third set of principles are those aimed at promoting U.S. interests internationally, specifically “advanc[ing] American interests in international financial regulatory negotiations and meetings” and “enabl[ing] American companies to be competitive with foreign firms in domestic and foreign markets.” Again, this last principle reflects a deregulatory agenda: critics argue that the costs of regulation have caused U.S. companies to lose global competitiveness.
Although its main function is to set the tone, the executive order does create a reporting obligation. It directs the secretary of the Treasury to meet with the heads of the Financial Stability Oversight Council’s member agencies, which includes most U.S. financial and banking regulators. The secretary must then report back to the president about whether regulation and other government policies comply with the announced core principles. The first report must be prepared within 120 days of the executive order—around early summer 2017.
B. The “Disastrous” Dodd-Frank
The Trump administration has also identified another target of financial deregulation: the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). This federal statute was passed after the 2007–2008 financial crisis. The Trump transition website said it would “dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.” In early 2017, the president labeled “Dodd-Frank” a “disaster,” and a few months later he promised “a very major haircut” for the statute.
Dodd-Frank would make a wonderful physical prop; it is a massive statute. But, the size of Dodd-Frank also makes it an ambiguous signal. Among other things, Dodd-Frank imposed clearing requirements on derivatives, regulated credit-rating agencies, revised the definition of “accredited investor,” created the Financial Stability Oversight Council and the Federal Insurance Office . . . and on and on, in a diverse set of provisions.
So, it is not enough to say that Dodd-Frank will be dismantled. We have to ask what pieces of Dodd-Frank will be cut. And to do that, we must look at Congress. Some hints may be found in the Financial CHOICE Act, proposed in the House earlier in 2016. The bill’s slogan on the Financial Service Committee’s website is “Growth for All, Bailouts for None,” shown against the backdrop of a waving American flag. The takeaway: Dodd-Frank is useful symbolic shorthand, but much of its fate ultimately rests with Congress.
Given the limits on what the administration alone can do to shape financial regulation, what actions have been taken?
A. Changing the Rules on the Books
Several interventions in rule-making about financial regulation stand out. The administration issued an order directing the Department of Labor to reexamine its rule that imposed fiduciary duties on investment advisors.1 That rule would have required those giving advice on retirement investments to act on behalf of investors. If they acted in self-interest, they could be sued. By delaying the rule’s implementation, the order keeps the status quo: buyer beware.
The Securities and Exchange Commission (“SEC”) will also revisit two of its rules: the conflict-minerals rule, which requires companies to investigate and disclose whether minerals had come from the Congo, and the pay-ratio rule, which makes companies figure out the median pay of its employees and then disclose the ratio of CEO pay to this median. Both of these SEC rules were provisions implemented through Dodd-Frank.
Later presidential memos from April, 2017 similarly identified aspects of Dodd-Frank for agency review. One directs the Treasury Secretary to review the program that identifies certain financial companies as “systemically important” (AKA too big to fail) and, thus, subject to additional restrictions. Another directs the Treasury secretary to review the Orderly Liquidation Authority, which provides for supervision of some financial firms under distress, further highlighting the anti-bailout theme.
We could think of this reexamination as part of Dodd-Frank’s “haircut.” It also, though, is a reminder that big change often depends on statutory amendment and, even where it does not, the effects are not immediate. Reexamining the SEC rules, for instance, starts with submission of public comments as part of a longer process of de- and re-regulating.
B. Behind the Scenes
The final point is that much of financial regulation takes place outside of public view and depends on how the law is enforced. The examples below from the SEC suggest areas worth monitoring for financial regulators more generally.
Who’s Running the Show? The nominee for the SEC Chair—Jay Clayton—has been publicly announced and vetted. Mr. Clayton’s nomination, however, demonstrates some below-the-radar shift in an SEC Chair’s prior employment. One possible shift is from leadership with roots in criminal enforcement to roots in private practice, often in defense work. For example, former SEC Chair Mary Jo White was a former criminal prosecutor, as were former heads of the enforcement division, while Mr. Clayton has spent the majority of his career representing prominent Wall Street firms in private legal practice.
Enforcement Policy. Enforcement is in some ways a black box, the civil equivalent of criminal prosecution. But, we get hints. Some reports indicate that contractors who assist in investigations have been fired in anticipation of a tightening budget. Other reports indicate that the authority to start investigations is being centralized, with the enforcement director calling the shots rather than more dispersed high-level (career) staff. As well as keeping an eye on such hints of change, to understand enforcement practices we must look at available evidence of agency practice (including agency settlement agreements, a main engine of enforcement) and establish the baseline under prior leadership. Maintaining the transparency that allows us this insight is key.
What happens on day 101 and beyond? Deregulatory language and impulse characterize the first 100 days, but taking action often requires passing legislation or unwinding existing rules and reregulating. More broadly, financial (de)regulation provides yet another example of the bigger challenge for making sense of the administration: we have to track words, public actions, and—to the extent possible—hints of what happens behind closed doors.
* Professor of law, University of Illinois College of Law. Her academic interests are in the area of business law and complex litigation. Her research focuses on corporate litigation, securities enforcement, and disputes that cross-legal systems.
1 81 Fed. Reg. 20946 (Apr. 8, 2016).