In the three weeks since the Inauguration of President Donald J. Trump, there have been many questions, but few answers for financial services practitioners. Uncertainty remains on matters such as the fate of the Dodd-Frank Act of 2010 and the many programs and regulations created under that law, including the Financial Stability Oversight Counsel (FSOC), the Consumer Financial Protection Bureau (CFPB), and the regulations for which the CFPB is responsible. President Trump has expressed a desire to revisit and change the Dodd-Frank Act (stating, for instance, that “We expect to be cutting a lot out of Dodd-Frank”), and leaders in the Republican-controlled Congress have long criticized the CFPB and articulated their desire to amend, or repeal, Dodd-Frank.
But thus far, it remains unclear what the future of financial services regulation will look like. This is due in part to unclear and sometimes inconsistent messaging from political leaders, and in part to the legal framework that, as of this writing, still constrains what those political leaders can do.
First, while President Trump and the Republican leadership have made critical comments about Dodd-Frank and aspects of financial regulation, no clear, detailed plan for an alternative approach has been presented. And Trump has made comments that appear to support some existing regulation, or even more stringent regulation. For example, while members of the Republican leadership have criticized the Volcker Rule, a Dodd-Frank provision that restrains banks’ ability to engage in certain investment activities, President Trump has also articulated a desire to re-institute the Glass-Steagall Act, which restrained banks’ ability to engage in certain investment activities. While the two provisions do not address exactly the same activities, it is not clear why Republicans would be against one and in favor of the other. (And though Glass-Steagall is sometimes mentioned in the same breath as Dodd-Frank, the Glass-Steagall Act was largely dismantled by the Gramm-Leach-Bliley Act of 1999, not by Dodd-Frank.)
Second, the current legal framework—under laws such as the U.S. Constitution—sets forth processes for, and procedural limits on, enacting, amending, and repealing laws. It does not allow a President to unilaterally create or repeal laws. Thus, President Trump could not simply ‘sign away’ the Dodd-Frank Act through an Executive Order (EO), such as he signed on February 3. While some anticipated that the EO would significantly alter Dodd-Frank, it turned out that the EO as signed was much more limited than some had anticipated. (Former Rep. Barney Frank (D-MA), the “Frank” in “Dodd-Frank,” remarked in an interview with Politico that the EO “has no specifics. In fact, it doesn’t do anything.”)
Rather, repeal of Dodd-Frank would take an act of Congress—like any other federal law. And despite the control Republicans have over Congress, it is not clear that actual repeal will be on their agenda. Some Republicans have introduced alternatives to Dodd-Frank, such as the CHOICE Act advocated by Rep. Jeb Hensarling (D-TX), Chair of the House Financial Services Committee. However, none have been enacted into law.
Further, Dodd-Frank and other financial laws are implemented and enforced by a number of agencies. The leadership and staff of those agencies will continue to have significant power over the day-to-day implementation and enforcement of financial laws and regulations under their current and long-held authority. The CFPB and the federal bank regulatory agencies—the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC)—are independent agencies, not subject to Congressional appropriations, meaning they are not beholden to Congress for funding their operations, and are not directly beholden to the President. They are staffed by career federal employees rather than political appointees, except for the persons at the very top of executive leadership—and even those leaders are somewhat more insulated from political winds than heads of some other agencies, as their terms are not coterminous with Presidential terms. Currently, the heads of each of these agencies all are appointees of President Barack H. Obama. Under their leadership, these agencies all have implemented provisions of Dodd-Frank through regulations, guidance, and examination procedures. For now, these agencies generally appear to be holding their course—in the CFPB’s case, aggressively so—rather than publicly retreating from implementing and enforcing Dodd-Frank.
Because of the agencies’ key role in the financial regulatory framework, it will be necessary for the President to work through those agencies to some degree if he wants to effect change in that framework. The Administration seemed to recognize this when it issued a communication to federal agencies stating an expectation that they will freeze rulemaking activities, and in Trump’s Presidential Memorandum to the Department of Labor on its Fiduciary Rule, the regulation that states that investment advice given to an employee benefit plan or an individual retirement account is considered fiduciary advice and therefore must be in the “best interest” of the investor. It does not repeal the Fiduciary Rule, but directs the Labor Department to “determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” The Secretary of Labor will be a Trump appointee and could potentially act to amend or withdraw the rule (which Trump’s memorandum alone does not do).
Because President Trump will eventually also be able to nominate heads of all the banking agencies and the CFPB, that is likely to be the time when significant change, if any, could come to the bank regulatory framework.
CFPB Director Richard Cordray’s term expires in July 2018 (and pending litigation is currently addressing whether the President can remove him earlier). FDIC Chair Martin Gruenberg’s term ends in November 2017. Tom Curry’s term as Comptroller of the Currency ends in April 2017. Janet Yellen’s four-year term as Fed Chair expires in February 2018, although her term as a Governor does not expire until 2024. Fed Vice Chair Stanley Fischer’s four-year term lasts until January 2020. The other Fed Governors, whose terms are for 14 years, are Daniel Tarullo, whose term expires in January 2022; Lael Brainard, whose term expires in January 2026; and Jerome Powell, whose term expires in January 2028.
Trump already has nominated one head of a financial agency—Steven Mnuchin as Treasury Secretary. But this nominee is not in a position to overhaul, on his own, the Dodd-Frank architecture. Certainly, Treasury does have several important roles to play in Dodd-Frank initiatives such as FSOC, as well as other aspects of the financial system. And unlike the independent banking agencies, Treasury is flush with political appointee slots, and so each Administration can staff it with many adherents to its agenda. But the power of Treasury is limited—it is not a direct supervisor of banks or other financial companies. Some bureaus of Treasury do serve such roles, such as the OCC, which charters and supervises national banks, and the Financial Crimes Enforcement Network (FinCEN), which, among other things, oversees money services businesses and issues anti-money-laundering rules. But the Treasury Secretary does not directly control the actions of those bureaus, which have their own leadership. Thus, if President Trump wants to more systemically reform the bank regulatory system from the inside out, he will need to appoint leaders of the independent banking agencies who will implement his agenda.
Of course, exactly what that agenda is (or will be), who will be nominated, whether those nominees would be confirmed, and whether any confirmed nominees will work to implement that agenda, remain among the numerous questions outstanding at the end of this third week of the Trump Administration—questions that may remain outstanding for some time.
Next Week: The CFPB and small-dollar lending: Where do we go from here?