February 20, 2017Client Alert

Trump Administration Issues Executive Order on Core Principles for Regulating U.S. Financial System – What Does the Future Hold for Dodd-Frank?

On Friday, February 3rd, President Trump issued an executive order (Executive Order) that, although it doesn’t directly mention the Dodd-Frank Act (Dodd-Frank), will start the predictably long process of revising or repealing various aspects of Dodd-Frank. 

While the Executive Order is very short and general in its scope, it sets the tone and lays the groundwork for the Trump administration’s goals regarding Dodd-Frank. The Executive Order declared it the policy of the Trump administration to regulate the United States financial system in accordance with certain “Core Principles,” which include, among other things:

  • empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
  • fostering economic growth and vibrant financial markets;
  • enabling American companies to be competitive with foreign firms in domestic and foreign markets; and
  • making regulation efficient, effective, and appropriately tailored.

The Executive Order also directs the Secretary of the Treasury (newly-appointed Steven Mnuchin) to consult with the heads of the member agencies of the Financial Stability Oversight Council (FSOC) and report back to President Trump by or before June 3, 2017. That report from the FSOC (which is chaired by the Secretary of the Treasury) will identify the extent to which existing laws, regulations, and other policies and requirements promote the Core Principles, what actions have been taken (and are currently being taken) to promote and support the Core Principles, and what actions are inhibiting the implementation and support of the Core Principles.

Short-Term Impact of the Executive Order

The immediate impact of the Executive Order will likely be relatively small. Because of the other items on the Trump administration’s agenda (e.g., healthcare) and the inherent delays built into the regulatory and political system, substantive changes to Dodd-Frank will take months, if not years, to enact and implement. 

In addition to the Senate, one of the major obstacles of the Trump administration will be persuading independent agencies, such as the Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corp. (FDIC), the Federal Reserve Board and the Comptroller of Currency, that are responsible for implementing Dodd-Frank to ease back on its regulations. All of the heads of these agencies were installed by the Obama administration, are likely to serve out their remaining terms and are not likely to ease back on the Dodd-Frank regulations during the length of their respective terms.    

Nonetheless, an important aspect of the 120-day mandated review period for the FSOC is that it will give financial regulators an opportunity to review all financial rules and regulations in order for them to determine the best ways to minimize unnecessary burdens and promote economic growth, while also ensuring the safety of the financial system.

Long-Term Impact of the Executive Order

The long-term impact of the Executive Order could be much larger than the immediate impact, especially once the Trump administration has the chance to appoint new heads of the regulatory agencies. 

The Senate will always be a major hurdle to getting new legislation passed to revise or repeal sections of Dodd-Frank, but the Trump administration could get around this obstacle once it appoints new heads of regulatory agencies charged with implementing the rules and regulations of Dodd-Frank. Regulatory policy can change drastically depending upon who the specific regulators are, because of the new enforcement priorities that would implemented by each regulator. 

If the Trump administration appoints regulators who value the same Core Principles and are willing to implement regulations in accordance with those principles (which seems like a fairly safe assumption), then the regulatory environment could change fairly drastically, even if new legislation isn’t passed, and we could start to see some real changes in the financial system: burdens on smaller community banks might be reduced; reporting and recordkeeping requirements might start to get peeled back; and consumers who have the wherewithal to get a mortgage will be able to actually get a mortgage within a reasonable amount of time without having to jump through various hoops. A complete overhaul of the Dodd-Frank rules is unlikely, but specific changes like the aforementioned changes are more realistic.

Financial Choice Act

Although President Trump’s Executive Order was not long or detailed, House Financial Services Committee Chairman Jeb Hensarling (R-Texas), who introduced the Financial CHOICE Act last year as a replacement for Dodd-Frank, has stated that the Executive Order has very similar provisions to those proposed in his original legislation. 

New legislation is expected to be introduced very soon by Representative Hensarling.  Some reports have said that the new legislation will likely be more aggressive than the original Financial CHOICE Act. This remains to be seen, but it will be interesting to follow in the coming days and weeks.      

According to reports, two of the major changes from the original Federal CHOICE Act are directed at the CFPB, and will include (i) making the head of the CFPB a political appointee who can be dismissed at will rather than the director of an independent agency, and (ii) stripping the CFPB of its authority to bring cases against financial institutions.

This alert is the first of a series of alerts related to Dodd-Frank that we plan to send out throughout the year, and we will continue to update you about the key aspects of new legislation if and when it is introduced, as well as the general progress being made by the Trump administration.    

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