President Trump has paved the way for sweeping a regulatory overhaul by signing an executive order giving the the Treasury broad powers to scrap rules that do not comply with the administration’s ‘core principles’.
Part of the core principles are defined in the executive order as enabling “American companies to be competitive with foreign firms in domestic and foreign markets” and “advance American interests in international financial regulatory negotiations and meetings”.
A promise to prevent future taxpayer-funded bailouts is also included.
The executive order stipulates that the Treasury shall consult with the Financial Stability Oversight Council and report periodically to the president “on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other government policies promote the core principles”, and identify any that “inhibit” these core principles.
Vocal Republican critics of regulation introduced after the 2008 financial crisis, including Trump, have repeatedly accused the Dodd-Frank Act of hamstringing US capital markets.
The new executive powers therefore brings the future of these frameworks into question.
While still on the campaign trail, Trump’s transitional website, greatagain.gov, listed dismantling the centrepiece of financial services reform in the US as a primary objective.
Commenting on the executive order, Securities Industry and Financial Markets Association (SIFMA) president and CEO Kenneth Bentsen said: “SIFMA has long called for a cumulative review of financial regulations including those put in place since 2008 and we commend the Trump administration taking this action. Our capital markets are the envy of the world and also among the most regulated sectors in the US economy.”
“It is imperative to ensure that our financial regulatory framework does not unnecessarily impede capital formation that drives job creation, economic growth and investor opportunity in this country.”
Bentsen continued: “There is early evidence that regulation is negatively impacting capital markets that spur economic activity. A 2016 report by the Financial Stability Board found evidence that liquidity is declining in sovereign and corporate bond markets.”
“The bond markets are a vital funding source for businesses looking to grow and invest in their future. A 2016 Federal Reserve report also concluded that bonds are less liquid during times of stress due to the Volcker Rule.
Dodd-Frank still has its champions. Speaking at the University of Maryland’s Robert H Smith School of Business Center for Financial Policy following the election, Rick Fleming, a Securities and Exchange Commission investor advocate, defended Dodd-Frank, saying: “The protection of investors must serve as the first principle guiding our financial regulations.”
“We should think of those regulations not as a burden to be repealed or picked apart haphazardly, but as the essential nutrient for flourishing capital markets for a growing economy.”
At the same time, Trump signed a separate executive order ordering a review into whether the Fiduciary Duty Rule, which ensures that pensions advisors advocate act primarily on behalf of their clients’ interests instead of the profits of their firm, should be rolled back.
The review must investigate whether the rule is “likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information”.
According to critics of the rule, its repeal would allow investors to see greater returns and allow asset managers to act more freely in the market.