Impact of the Trump Administration on Financial Services – the Opening Stretch Americas FS Regulatory Center of Excellence

Client Alert Americas FS Regulatory Center of Excellence

Impact of the Trump Administration on financial services – The opening stretch President Trump’s campaign platform of regulatory reform notably included a promise to “dismantle and replace” the Dodd-Frank Act1 in order to reduce regulatory burden and increase credit availability. There is no doubt that the industry is stronger and safer today, in large part due to the Dodd-Frank Act changes to strengthen capital, liquidity, risk and compliance management systems, disclosures, and interagency coordination. In fact, many companies have invested heavily to implement these changes and would like to keep a number of them in place. The challenge is to find a balance between regulation, risk, and profitability. The myriad of rules and intense on-site supervision that have emerged post-crisis have contributed to a regulatory environment, both in the United States and globally, that many firms—and presumably the new Administration—find to be unduly complex, extremely costly, intrusive, and sometimes inconsistent. Along with the Republican-controlled Congress, the early efforts of the Trump Administration have focused on issues outside of financial services, including immigration, trade, healthcare, and taxes. Nonetheless, through presidential actions, revised regulatory agendas, and proposed legislation, they have begun, on multiple fronts, to carry out a policy of burden reduction for financial services. The following briefly outlines the more significant steps taken by the Trump Administration and Congress since late January to facilitate this end.

The process used by the Financial Stability Presidential actions Oversight Council (FSOC) to designate President Trump has signed a number of nonbank financial companies as Executive Orders and Presidential Memoranda systemically important financial institutions that reflect a move toward reduced regulation. (SIFIs), including whether such designations Collectively, these presidential actions: will shield the companies from bankruptcy, and — Require Treasury Secretary Mnuchin, by October 2017, to assess and report on: Whether the Orderly Liquidation Authority (OLA) encourages excessive risk-taking, creates moral hazard, or exposes taxpayers

1 The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), P.L. 111-203, July 21, 2010.

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to potential liability, in addition to whether a President within 120 days (a due date of superior approach to resolution would be June 3, 2017). (Recent news reports possible through a new chapter to the U.S. suggest the Treasury report may be released Bankruptcy Code. after the due date and in multiple instalments.) The Treasury Secretary is further instructed to refrain from any new nonbank-SIFI — Require executive departments and agencies3 designations or use of the OLA during this to identify at least two existing regulations to time. (These directives will likely hold back be repealed for each new regulation they certain anticipated actions, including “publicly propose for notice and comment or designation of large asset management firms otherwise promulgate.” The order also as nonbank SIFIs and the release of final requires the placement of cost caps to limit capital rules for insurance companies that are the total incremental cost of all new currently designated as nonbank SIFIs.) regulations finalized during fiscal year 2017 to no greater than zero. — Require the head of each federal agency to designate a Regulatory Reform Officer to — Direct the Department of Labor (DOL) to oversee the implementation of regulatory review its Fiduciary Duty Rule to determine if reform initiatives and policies and to establish it “may adversely affect the ability of a Regulatory Reform Task Force to evaluate Americans to gain access to retirement existing regulations and recommend repeal, information and financial advice.” In replacement, or modification of regulations response, DOL issued a final rule extending that inhibit the administration’s pro-growth the initial applicability date of the rule. It policies. (Though they are not directly covered became effective June 9, 2017. by this directive, there have been very few Requirements of the rule that are scheduled proposed or final rulemakings issued by the to phase-in on January 1, 2018 are not financial services regulators in 2017.) affected. — Introduce high-level “Core Principles”2 for The DOL intends to complete the required regulating the financial system and require review prior to January 1, 2018, and at that Treasury Secretary Mnuchin to review how time to decide whether to make or propose the current financial regulatory system additional changes to the rule or associated supports these principles. The Treasury exemptions. Although some industry Secretary is directed to consult with the participants report having prepared to meet heads of the member agencies of the FSOC the original April 2017 applicability date, in a review of current “laws, treaties, there is support for a further delay based on regulations, guidance, reporting and the potential for investor confusion since recordkeeping requirements, and other DOL may yet decide to change or repeal Government policies” and to report to the the rule.

2 The "Core Principles" are to "(a) empower Americans financial regulatory agencies and rationalize the Federal to make independent financial decisions and informed financial regulatory framework." choices in the marketplace, save for retirement, and 3 Executive departments and agencies are headed by build individual wealth; (b) prevent taxpayer-funded members of the President’s Cabinet and report directly bailouts; (c) foster economic growth and vibrant to the President. The Department of the Treasury and financial markets through more rigorous regulatory the Department of Labor are among these executive impact analysis that addresses systemic risk and agencies. Independent agencies operating within the market failures, such as moral hazard and information Executive Branch of government and are subject to asymmetry; (d) enable American companies to be Congressional oversight but do not report directly to the competitive with foreign firms in domestic and foreign President. The Federal Reserve Board, Federal markets; (e) advance American interests in international Deposit Insurance Corporation, Securities and financial regulatory negotiations and meetings; (f) make Exchange Commission, Commodity Futures Trading regulation efficient, effective, and appropriately tailored; Commission, Federal Trade Commission, and the and (g) restore public accountability within Federal National Credit Union Administration are among the independent agencies.

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Regulatory agency leadership and revised Commission and a third position will open agendas when Commissioner Stein’s term expires in June 2017. The appointment of agency leads for the federal financial services regulatory agencies will — CFTC: Current Acting Chair J. Christopher influence the implementation and enforcement of Giancarlo has been nominated to serve as existing regulations as well as the policy agendas Chairman of the Commodity Futures Trading for future rulemakings. Quite a few positions Commission (CFTC). Three additional remain unfilled, delaying implementation of the positions remain open on the Commission. Trump Administration’s regulatory relief policies. — CFPB: Consumer Financial Protection Bureau At present, the leadership of the financial services (CFPB) Director Richard Cordray’s term regulatory agencies is as follows: expires in July 2018. — Treasury: Steve Mnuchin was confirmed as It is unclear how changes in leadership at the Treasury Secretary in February 2017. regulatory agencies will change U.S. participation — Federal Reserve: Janet Yellen's term as in the international standards-setting bodies, such Chair of the Federal Reserve Board ends in as the Bank for International Settlements’ Basel February 2018. President Trump, however, Committee on Banking Supervision, or adoption recently said that he would consider re- of international rules in light of the new financial appointing her. Stanley Fischer’s term as Vice services “Core Principles” and the Trump Chair ends in June 2018. Daniel Tarullo, who Administration’s “America First” stance. Some was not appointed but had effectively served countries, as seen in the UK with Brexit, may also in the role of Vice Chairman of Supervision put the international accords at risk of splintering. (created by the Dodd-Frank Act), stepped The potential for global regulatory inconsistency down in early April. There are now three and geopolitical disruptions will remain high. vacant positions on the seven-person board, including the position of Vice Chairman for Legislative proposals – Dodd-Frank Supervision. The Vice Chairman for Act/Financial CHOICE Act Supervision wields major influence on the As a longer-term approach to reducing regulatory development of financial regulatory policy, burden in the financial services industry, the including the relationship between U.S. and Trump Administration and Congressional global rules and standards. Republicans are seeking legislative solutions. Full — OCC: Comptroller Thomas Curry’s term repeal of the Dodd-Frank Act continues to be expired April 9, 2017, and he stepped down thought unlikely though the industry would appear on May 5. Keith A. Noreika, a financial to favor a partial repeal or revision of certain areas services attorney who also served as an of the law, some of which are outlined by the adviser to the Trump Administration’s Financial CHOICE Act. Transition Team on regulatory agency issues, Jeb Hensarling, Chairman of the House has been appointed to serve as the First Committee on Financial Services (Committee), Deputy Comptroller, a position that does not introduced the Financial CHOICE Act of 2017, or require Senate confirmation. He will serve as H.R. 10, in April 2017. The bill is a revised version the Acting Comptroller until a nominee can be of legislation previously introduced last year. It confirmed by the Senate. passed the full House of Representatives on June — FDIC: Martin Gruenberg’s term as Chairman 8, 2017 but is widely expected to struggle in the of the Federal Deposit Insurance Corporation Senate, increasing the potential for modifications. (FDIC) ends in November 2017. FDIC Vice The Senate is reportedly working on its own Chairman Thomas Hoenig’s term expires in package of financial regulatory reforms. April 2018. There is notable overlap between the Financial — SEC: The Senate confirmed Jay Clayton in CHOICE Act of 2017 and many of the presidential early May to serve as Chair of the Securities actions. Treasury Secretary Mnuchin has stated and Exchange Commission (SEC). Two that he “welcome[s] the reintroduction of the additional positions remain open on the CHOICE Act,” and it will be interesting to see

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© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 592774 Americas FS Regulatory Center of Excellence June 2017 how his report on financial regulatory reform exercise a lighter touch on capital and liquidity aligns with H.R. 10. Legislative solutions are stress testing for certain larger institution not frequently long, arduous journeys that in the end classified as global SIFIs by eliminating can be abandoned for lack of support or changed qualitative requirements in CCAR stress significantly through trade-offs and compromise. testing. The industry generally supports raising SIFI levels well above the $50 billion While H.R. 10 is unlikely to pass out of the thresholds and for lighter capital Congress exactly in its current form, it does give requirements); some insight into the reforms to the Dodd-Frank Act and other areas of law that may reshape — Changes in the governance and funding of the financial services regulation. As passed by the Federal Housing Finance Agency. the FDIC, House, the provisions of the bill would include the OCC, the National Credit Union changes to the rulemaking process for all federal Administration, and nonmonetary functions of financial agencies, including requiring cost-benefit the Federal Reserve; analyses, as well as: — Modifications to the enforcement authority of — Repeal of the Dodd-Frank Act Volcker Rule. the SEC that would allow defendants in SEC (Separate legislation to introduce Glass- administrative proceedings a right of removal Steagall-like requirements is currently working to federal court and prohibit “rulemaking by through Congress and, if passed, would enforcement”; an additional provision would negate the need for this provision); require a study of the SEC’s enforcement policies and practices; and — Repeal of the DOL Fiduciary Rule. (This would override any DOL action taken in response to — Significant modification to the structure and the February 3, 2017 Presidential authorities of the CFPB, such as: Memorandum); Establishing the CFPB as an Independent — Repeal of the Orderly Liquidation Authority in Agency with a sole Director appointed by the Dodd-Frank Act and replacement of the the President and confirmed by the provisions with a new chapter in the U.S Senate.4 The Deputy Director would be Bankruptcy Code that would specifically appointed by the President; address the failure of financial services Subjecting the agency to the appropriations companies; living will submissions would be process; relaxed, becoming a bi-annual requirement; Eliminating its supervisory/examination — Repeal of the Office of Financial Research; authority for banks and nonbanks; — Elimination of the FSOC authority to Eliminating its rulemaking and enforcement designate nonbank SIFIs. (This will affect authority for UDAAP (unfair, deceptive, or primarily insurance companies, asset abusive acts or practices). The federal management companies under consideration, prudential regulators would be required to and financial market utilities); promulgate regulations under Section 5 of — Exemption from the capital/liquidity/stress the FTC Act (unfair and deceptive acts or testing/resolution and recovery requirements practices, or UDAP); for qualifying banking organizations. (This Eliminating all authorities with regard to provision will affect primarily small- and small dollar credit; medium-sized institutions that are more likely to attain the threshold percentage. Limiting the agency’s authority to enforce Separately, the Federal Reserve has begun to the enumerated consumer protection laws

4 The text of H.R. 10 as of April 29, 2017 would amend contrast, the Executive Summary of H.R. 10 prepared the Dodd-Frank Act to state that the CFPB is an by the House Committee on Financial Services states independent agency and to remove the provision that that H.R. 10 would “restructure the agency as an permitted the President to remove the Director for Executive Branch agency with a single director inefficiency, neglect of duty, or malfeasance in office. In removable by the President at will.”

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to actions against nonbanks and insured best indicator of the administration’s preferences depository institutions and credit unions for the future regulatory landscape. Ultimately, with total assets in excess of $10 billion; the choice of regulatory agency leads and and additional board/commission members will further influence and solidify the Administration’s Prohibiting publication of the Consumer intended change. Complaints Database. Due in part to interest rate changes and the Legislative proposals – 21st Century Administration’s relaxed policy stance, financial Glass-Steagall services companies should experience improved financial results in the near term; tax reforms, Separate from Dodd-Frank Act reform, some which are expected to contain significant legislators favor the reintroduction of the Banking reductions in corporate tax rates, would reinforce Act of 1933 (commonly referred to as Glass- and enhance these results. In anticipation, many Steagall), which prohibited a single firm from companies are beginning to re-evaluate their engaging in both commercial and investment operating strategies, reinvest in the business, and banking activities. In April 2017, a bipartisan group redeploy excess capital and assets toward credit of senators, led by Elizabeth Warren and John availability and business growth, product McCain, introduced the 21st Century Glass- realignment, systems enhancements, and other Steagall Act, a “modern version” of Glass- technology and infrastructure investments. These Steagall. This legislation would prohibit financial efforts include repositioning regulatory strategies holding companies, including potentially the U.S. in certain areas, increasing cybersecurity and intermediate holding companies of foreign privacy protections, reducing compliance costs, banking organizations, from engaging in certain improving customer service, enhancing conduct financial activities and separate FDIC-insured and culture, and focusing on known supervisory banks offering savings and checking accounts priorities. from “riskier” financial services, such as investment banking, insurance, swaps dealing, Mindful that changes to the regulatory and hedge fund and private equity activities. The environment are certain, flexibility and bill is intended to make "Too Big to Fail" responsiveness in both systems and compliance institutions (generally, SIFIs) smaller and safer, programs will be critical to accommodating minimizing the likelihood of a government bailout, changes with minimal disruption. Many emerging and to protect depositors by eliminating banks’ technologies and digital solutions can facilitate conflict of interest arising from proprietary trading integration and automation, which should lead to profits, considered by many to be insufficiently reduced costs, improved efficiency and addressed by the Volcker Rule. effectiveness, and greater responsiveness to change --no matter the direction. Financial The chances for passage of this legislation are services companies should anticipate that the unclear despite support from President Trump expected economic and regulatory policy changes during the campaign, Treasury Secretary Steve may prompt developments and additional Mnuchin, National Economic Council Director changes to the industry, including increased Gary Cohn, and FDIC Vice Chairman Thomas competition from financial technology firms; new Hoenig, who has separately released his vision for technology applications for products, services, a similar regulatory framework. and operations (both client-facing and back office); and consolidation through mergers and Industry response/closing thoughts acquisitions activity. A lull in the pace of new The early, albeit temporary, actions of the Trump regulation and the potential for a reduction in Administration are consistent with campaign regulatory demands creates opportunity to invest statements that called for a reduction in time and resources toward compliance and regulatory burden for financial services companies process improvements. along with policies to increase credit availability. As we noted just after the election, “financial At that time, the details were limited and they institutions should continue efforts to improve remain so, though the proposed CHOICE Act operational effectiveness and efficiency; coupled with the presidential actions serve as the strengthen oversight, compliance, and risk

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management; maintain a customer-oriented focus; and meet the growing challenge from innovators and new market entrants. There are many drivers of change impacting the financial services industry and they will remain relevant independent of, and throughout, any regulatory changes currently being contemplated.” Many of these changes will also require technology solutions, making it more important now to also have an effective program for managing regulatory change.

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Deborah Bailey Amy Matsuo Managing Director Principal and National Lead Financial Services Regulatory Risk Practice Financial Services Regulatory Risk Practice Americas Financial Services Regulatory Center of T: 919-380-1509 Excellence Lead E: [email protected] T: 212-954-8097 E: [email protected]

The Americas Financial Services Regulatory Center of Excellence is based in Washington, DC, and comprises key industry practitioners and regulatory advisers from across KPMG’s global network.

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