Executive Branch

Future is cloudy for Dodd-Frank and financial regulatory agencies under Trump presidency

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Icon of a bank.

Throughout the course of his presidential campaign, there was a veritable laundry list of proverbial bogeymen that Donald Trump promised to vanquish if and when he got into the Oval Office. One of the biggest was the Dodd-Frank Wall Street Reform and Consumer Protection Act. The wide-ranging law, which was enacted in 2010 in response to the Great Recession, dramatically overhauled the nation’s financial system.

Among its many provisions, Dodd-Frank placed new regulations on banks and restricted the ways they could trade or speculate. The law also created the Consumer Finance Protection Bureau; strengthened legal protections for corporate whistleblowers; and established new guidelines for corporate governance, transparency and accountability.

“Dodd-Frank has made it impossible for bankers to function,” Trump told Reuters in May. “It makes it very hard for bankers to loan money for people to create jobs, for people with businesses to create jobs. And that has to stop.”

More recently, as president-elect, Trump reaffirmed his commitment to getting rid of the 2010 law. Trump’s presidential transition website states that, as a result of Dodd-Frank “big banks got bigger while community financial institutions have disappeared at a rate of one per day, and taxpayers remain on the hook for bailing out financial firms deemed ‘too big to fail.’” Trump’s transition team has promised to “dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”

Legal experts, however, doubt that the Dodd-Frank Act will be repealed in its entirety. While they all cautioned that trying to predict what the mercurial Trump might do is a gargantuan task, it pales in comparison to the herculean undertaking it would be to dismantle the massive financial infrastructure created by the law.

“I’d be shocked if he could get a total repeal of Dodd-Frank,” says Hogan Lovells partner William Regan. Regan pointed out that there are parts of Dodd-Frank that are fairly popular with the large segments of the country, including the CFPB and the Volcker Rule, which bans banks from engaging in proprietary trading and restricts other types of speculative trading. “The financial crisis that led to it is only eight or nine years old. It’s still fresh in the minds of a lot of people, and it hurt a lot of people, including many of his voters.”

Instead, Regan notes that if you take Trump’s words at face value, there’s a clear message that he intends to roll back some of the regulations—at least for some banks. “My guess is he tries to eliminate a lot of burdens of Dodd-Frank on smaller banks and financial institutions,” Regan says. “If you parse some of the language on his website, his focus is on the burden that Dodd-Frank imposes on lenders and all the red tape they have to go through. So I could see him keeping a lot of Dodd-Frank’s regulations as long as they don’t impose much cost on lending.”

Several experts pointed to the Financial Choice Act as a possible preview of what’s to come. The Financial Choice Act, which was authored by influential House Republican Jeb Hensarling of Texas, would ease some of the restrictions for small banks, allowing them to opt out of Dodd-Frank provided they maintain a certain percentage of capital on hand.

Robert J. Jackson Jr., a professor at Columbia Law School who helped draft several provisions of Dodd-Frank while working for the U.S. Department of the Treasury, points out that the Financial Choice Act leaves large parts of Dodd-Frank virtually untouched, including the sections on corporate governance and executive compensation that he helped draft. “I think the incoming president and his administration will give banks more choices,” says Jackson.

What Jackson is more concerned about is Trump’s rhetoric about making the Securities and Exchange Commission, the CFPB and other financial regulators less independent. “That comes from Trump and everyone down the list,” says Jackson, who points out that the Financial Choice Act would make the SEC more dependent on Congress for funding than it is now, a provision he finds extremely troubling. “It’s clear they don’t think much of the concept of independence. As every good corporate securities lawyer knows, the SEC is independent for a reason. They sometimes have to make hard choices regardless of the political consequences.”

On the other hand, Jack Sylvia, co-chair of the securities litigation practice at Mintz Levin Cohn Ferris Glovsky and Popeo, says that Trump’s impending presidency could provide an opportunity for lawmakers to reform and improve some parts of Dodd-Frank. Sylvia notes that there have been plenty of fair criticisms of Dodd-Frank and maintains that they can be addressed without having to throw away the entire law. For instance, he points out that Dodd-Frank’s stringent regulations has made it harder for some consumers to get residential loans.

At the macro-level, Sylvia says that an overhaul of the CFPB’s leadership structure might be a good idea. “In this country, it’s virtually unheard of to have so much regulatory authority placed in hands of one person,” says Sylvia, referring to CFPB head Richard Cordray. “That’s not a unique view of mine. Many have wondered why the CFPB isn’t modeled more like the SEC, which has a panel of bipartisan commissioners.”

The leadership structure of the CFPB is currently being challenged in court. The Supreme Court could weigh in at some point in the near-future—possibly with a new justice appointed by President Trump.

These lawyers all say that they’ll be watching, carefully, to see who Trump appoints to head the SEC. Until then, they, like everyone else, will have to deal with the unprecedented level of uncertainty that has taken hold of the country ever since Election Day. Jackson notes that his job is to study how regulations—or lack thereof—affect things like shareholder value and the way managers behave, and he expects that the new administration will give him plenty to study. However, he is also extremely mindful of what’s at stake.

“Elections have consequences and this one of them,” says Jackson. “This experiment could be very costly for real people. The SEC, for instance, oversees retirement savings for millions of Americans. I think this election represents a bet that significant deregulation is best for those families. I worry about what happens if we are wrong.”

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