Trump Executive Actions Forecast Major Potential Changes to Financial Industry Regulation

On February 3, President Trump issued a pair of executive actions that together constitute the first official statements from the new administration on how President Trump’s frequent criticism of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the broader financial regulatory climate following the financial crisis may be translated into actual reform efforts. The first, an executive order (Executive Order⁾¹, sets out seven “Core Principles” to serve as broad guideposts for regulatory reform without making any specific policy recommendations. Second, President Trump issued a separate memorandum (Memorandum)² directing the Department of Labor (DOL) to re-examine the “Fiduciary Rule”³ it issued in April 2016 and to revise or rescind the rule as necessary following this re-examination if the DOL finds that the Fiduciary Rule will have an adverse impact on or is inconsistent with the priorities of President Trump’s administration, as described in the Memorandum. As written, the Fiduciary Rule would significantly expand who, by virtue of providing “investment advice” for a fee to plans, plan fiduciaries, plan participants or beneficiaries, individual retirement accounts (IRA), or IRA owners, is considered a “fiduciary” for purposes of the Employee Retirement Income Security Act of 1974 and the prohibited transaction provision of the Internal Revenue Code of 1986, thereby materially affecting, among other things, the manner by which financial advisors can recommend proprietary investments or receive certain types of transaction-based compensation.

A Trump Framework for Financial Regulation

Since announcing his candidacy, President Trump has expressed a desire to make significant changes to the financial regulatory framework established by the Dodd-Frank Act and related initiatives following the crisis. The Executive Order states that it shall be Trump administration policy “to regulate the United States financial system in a manner consistent with” the following seven Core Principles:

• Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;
• Prevent taxpayer-funded bailouts;
• Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;
• Enable American companies to be competitive with foreign firms in domestic and foreign markets;
• Advance American interests in international financial regulatory negotiations and meetings;
• Make regulation efficient, effective, and appropriately tailored; and
• Restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

The Executive Order also directs the Secretary of the Treasury to consult with the heads of each of the member agencies of the Financial Stability Oversight Council (FSOC) and report to the President within 120 days of the Executive Order “on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles.” Going forward, the Treasury Secretary must periodically report to the President pursuant to the same instructions.

The Executive Order is unlikely to have an immediate impact on the laws and regulations that financial institutions must abide by on a day-to-day basis, but it may influence future reform. The White House has directed regulatory review to run through FSOC, a panel of financial regulators headed by the Treasury Secretary that is broadly tasked with identifying systemic risks to the financial system. Recent statements from the Director of the White House National Economic Council, Gary Cohn, also appear to be focused on the process for identifying financial system risk, with explicit calls for further review of the Orderly Liquidation Authority in Title II of the Dodd-Frank Act, the extent to which non-banks should be designated “systemically important financial institutions,” and the living wills process for large banks, among others.⁴ Others have speculated that the Volcker Rule may also be a target of any reform efforts.

Fiduciary Rule Faces Uncertain Future

The Memorandum requires the DOL to conduct an examination to review the Fiduciary Rule, with specific consideration of:

• Whether the anticipated applicability of the Fiduciary Rule has harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice;
• Whether the anticipated applicability of the Fiduciary Rule has resulted in dislocations or disruptions within the retirement services industry that may adversely affect investors or retirees; and
• Whether the Fiduciary Rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.

The Memorandum expresses President’s Trump concern that the Fiduciary Rule “may significantly alter the manner in which Americans can receive financial advice, and may not be consistent with the policies of my Administration.” If the Labor Secretary makes an affirmative determination of any of the above criteria or finds the Fiduciary Rule inconsistent with any administration priority, the Labor Secretary is directed to rescind, revise or propose a new rule to remedy the shortcoming.

Ostensibly, the Memorandum only calls for a review of the Fiduciary Rule, but the White House has given strong indications that it disagrees with the Fiduciary Rule as written. It is unlikely that the Fiduciary Rule will take effect on April 10, 2017, as currently scheduled. While nothing in the Memorandum specifically calls for a delay to its implementation, the DOL has already indicated it will consider its legal options to delay the applicability date in order to comply with the Memorandum.⁵ An earlier draft of the Memorandum reportedly had included language regarding a delay, but that language did not appear in the final version.

¹ The Executive Order has not yet been published in the Federal Register. See Presidential Executive Order on Core Principles for Regulating the United States Financial System, February 3, 2017, available at https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states

² Presidential Memorandum on Fiduciary Duty Rule, February 3, 2017, available at https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-memorandum-fiduciary-duty-rule

³ “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule—Retirement Investment Advice,” 81 Fed. Reg. 20,946 (Apr. 8, 2016).

⁴ Michael C. Bender & Damian Paletta, Donald Trump Plans to Undo Dodd-Frank Law, Fiduciary Rule: White House Adviser Gary Cohn Says Banks Burdened by Rules Added After Financial Crisis, Wall Street Journal (Feb. 3, 2017), available at https://www.wsj.com/articles/trump-movesto-undo-dodd-frank-law-1486101602?tesla=y

⁵ U.S. Department of Labor, US Department of Labor to Evaluate Fiduciary Rule (Feb. 3, 2017), available at https://www.dol.gov/newsroom/releases/opa/opa20170203

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