Financial Regulatory Rollback Proceeds

By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.

During the presidential campaign, Trump called for outright rollback of the Dodd-Frank financial regulatory regime– without providing much in the way of details.

So far, he’s not achieved that objective– although the House of Representatives did comfortably pass the Financial Choice Act in early June. The measure is pending in the Senate– and is unlikely to displace  healthcare and tax reform from the top of the legislative agenda.

Yet no new legislation is necessary for the administration to proceed with plans to loosen financial regulation in many key areas.

Enforcement

No legislative or statutory changes have been necessary for the Trump administration to pursue enforcement priorities that don’t include coming down hard on Wall Street.

Indeed, as Yves posted last week in Quelle Surprise! Financial Firm Fines Are Way Down Under Trump, there has been a major drop off in financial sector enforcement in the first six months of this year– and that against the rather pathetic benchmarks set by the previous administration:

The Wall Street Journal published a solid, well-researched article on how much various Federal financial regulators have levied in fines in the first half of 2017 versus the first half of 2016. The decline is so large, a full 2/3, that it demonstrates that the Trump business-friendly stance, and the large number of ex-Goldmanites on his team, is proving beneficial for large financial firms.

I should mention in passing, nor has the administration pursued vigorous prosecution of environmental matters, with enforcement actions way down in that area as well, according to this article I crossposted yesterday from demogblog, In First 6 Months Under Trump, Polluters Already Paying Lower Fines to EPA.

Congressional Review Act Deployment

Congress and the President have aggressively wielded the Congressional Review Act (CRA) to overturn regulations that have targeted financial firms, most recently, in July, when the House voted to overturn the Consumer Financial Protection Bureau’s ban on mandatory arbitration clauses, as I discussed in House Votes to Overturn CFPB Mandatory Arbitration Ban. Such clauses require consumers to submit to mandatory arbitration to settle disputes and to forego their rights to pursue class action lawsuits.

CRA allows for use of streamlined procedures to overturn a regulation; crucially, if a CRA resolution of disapproval is passed and signed by the President (or if there are sufficient congressional votes to override a presidential veto of such a resolution), the agency is prevented from revisiting the subject of the overturned regulation until new statutory authority is provided. That means regulation in the area is indefinitely stymied– absent passage of new statutory authority.

The Wall Street Journal last week published an editorial– Republicans for Richard Cordray— that criticised Trump for not firing CFPB director Richard Cordray, who is soon expected to announce plans to run for governor of Ohio. That piece suggested in passing that the Senate may not, after all, opt to overturn the ban on mandatory arbitration:

Yet the repeal resolution has hit a snafu in the Senate, where Sen. Lindsey Graham (R., S.C.) is opposed, no doubt as repayment to lawyers who have donated millions to support his long career blocking tort reform. Lisa Murkowski (R., Alaska) and Susan Collins (R., Maine), who recently voted to preserve Obama Care, are undecided. Their opposition means the arbitration repeal wouldn’t pass the upper chamber, and Mr. Cordray could begin his nationwide trial-bar fund-raising tour as a conquering hero.

I’m not so sure the Senate won’t opt to follow the House and scupper the ban, especially given the  full court press I expect the financial industry to mount.  Where I agree with the Journal is that the CFPB is likely finally to finalize another long-delayed rule, covering payday lending,  before Cordray resigns. Yet as I wrote in Payday Lending and the CFPB: Another Pending Cordray Fail, that rule, too, would be likely to be kayoed by the CRA process.

Other Regulatory Rollback

The WSJ in another recent article Trump Chips Away at Postcrisis Wall Street Rules, highlighted other areas targeted for regulatory relaxation, including the Volcker rule restrictions on bank proprietary trading, and rules applying to systemically important financial institutions.  The details of how– or even if– regulations will be relaxed are not yet clear, and will follow after deliberations by the relevant regulatory agencies. This process has been somewhat slowed by Trump’s failure to staff key positions.

As the Journal reports:

The SEC and the four other federal agencies that wrote the Volcker rule agreed in recent weeks to give banks leeway on aspects of the regulation while beginning private discussions about how to rewrite it.

The Office of the Comptroller of the Currency, the chief agency that regulates federally chartered banks and which is temporarily led by a Trump appointee, took the first tangible step toward potentially rewriting the rule when it reopened it for comments from the public.

Treasury Priorities

In June, the Treasury Department produced the first blueprint on how the administration proposes to dismantle Dodd-Frank, A Financial System That Creates Economic Opportunities: Banks and Credit Unions.

As reported in The Hill:

Trump had long promised to “dismantle” Dodd-Frank without providing details on what he’d like to change. The Monday report contains the first proposals offered by the administration on how to reshape financial regulation.

The recommendations came in a report released by the Treasury Department on Monday evening, the first of four analyses mandated by orders Trump signed on April 21. The memoranda directed [Treasury Secretary Steve] Mnuchin to review Dodd-Frank for changes that would boost economic growth.

Among other issues, the report discusses banking regulation issues include stress test procedures; capital, liquidity, and leverage rules; and bank living wills. It also outlines changes in the structure of the CFPB.

SEC Agenda

As I wrote last month in SEC Punts on Unfinished Dodd-Frank Agenda, Thus Avoiding Congressional Review Act, new Securities and Exchange Commission chair Jay Clayton has lost no time in signing onto a deregulatory agenda. Although as its website makes clear, the agency  has a tripartite mission– “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”– Clayton made clear in his confirmation hearings that he would focus on the third, capital formation objective.

One major set of proposals that have apparently been abandoned are measures to to develop compensation rules that would discourage excessive risk taking. Since Dodd-Frank was enacted, regulators have been dilly dallying on designing any effective measures. Now regulators appear to have given up entirely on the project.

Instead, as the Journal reports in Trump Chips Away at Postcrisis Wall Street Rules:

The commission’s Trump-nominated chairman, Jay Clayton, has said he wants to lighten the regulatory burden on public companies, which are required to make public filings to keep shareholders informed about financial performance, business trends and potential risks.

Bottom Line

It’s not necessary for major new legislation to pass for the Trump administration to have a profound impact on financial regulation. The CRA has been used to rescind regulations recently enacted. Enforcement efforts have declined. And further future rule-making and policy rollback are front and center on the administration’s deregulatory agenda. Which is worrying, as Trump’s predecessor– and the financial regulators he chose– were not reknowned for their tough approach toward Wall Street.