President Trump and Congressional Republicans began their assault on the Dodd-Frank Act on Friday, February 3, 2017. However, instead of a full scale charge, this assault looks more like a prolonged siege, chipping away at the fortress of financial regulation. The President signed two executive orders on Friday, one aimed dismantling Dodd-Frank itself, and another designed to remove the so-called “Fiduciary Rule,” an Obama Administration rule meant to supplement the Dodd-Frank Act. Congressional Republicans joined the President, axing the Cardin-Lugar Rule, a section of Dodd-Frank.
President Trump promised during his campaign to “get rid” of the Dodd-Frank Act, a body of regulations concerning financial institutions and banks. Though he may find a full repeal more difficult than anticipated, the President and Congressional Republicans took a first step on Friday. The President’s first executive order presented his vision for the use of regulations against American Corporations, and authorized the Secretary of the Treasury to use Dodd-Frank in a way that reflects President Trump’s vision. President Trump’s second executive order directed the Labor Department to conduct a review on how the Fiduciary Rule affects consumer access to full information on their investment options. The Labor Department also has the power to eliminate the Fiduciary Rule if it is found to harm consumer choice.
Republicans are chipping away at Dodd-Frank little by little.
Shortly before the President signed those executive orders, Senate Republicans used a procedural loophole created by the 1996 “Congressional Review Act” to repeal a Dodd-Frank Rule. The rule required oil companies to disclose payments made to foreign governments to the Securities and Exchange Commission (SEC), a requirement designed to increase corporate transparency to consumers. Republicans are chipping away at Dodd-Frank little by little. However, this Republican assault may require a great deal more than a presidential directive and procedural attacks to be effective.
Federal regulation of financial institutions in the United States has a rich history, mostly in the form of reactionary measures intended to stopgap financial crises. Congress created the Federal Reserve with the Federal Reserve Act of 1913 in response to a severe financial crisis in 1907. Responding to the Great Depression, Congress passed the Glass-Steagall Act in 1933, heavily regulating banks and securities firms. The desire or need for these acts decreased over time, leading to substantial erosion through deregulation, though their remnants still exist. This cycle has continued throughout the last century.
In another rendition of this cycle, Congress passed the Dodd-Frank Act in 2010 after a protracted battle between Republicans and Democrats in Congress. Dodd-Frank was passed in response to the 2008 financial crisis, designed to restrain banks and other financial institutions from dangerous and unfair lending practices, among other things. New federal regulatory agencies were created to provide oversight and risk assessment on the actions of financial institutions. Other federal agencies were given oversight of the liquidation and receivership of financial institutions. In other words, agencies such as the Federal Deposit Insurance Corporation (FDIC), SEC, or the Federal Reserve determines whether a bankrupt institution should be placed under a custodian on behalf of the federal government. Dodd-Frank also implemented the “Volcker Rule,” which limits financial institutions to using no more than three percent of their capital in hedge funds and private equity funds. In addition, the Volcker Rule limits financial institutions interests in hedge funds and private equity funds to no more than three percent of the total ownership interest.
These are simply examples of the types of oversight regulations contained within the 850 pages of the Dodd-Frank Act. In all, Dodd-Frank includes insurance regulations, the transparency and accountability of transactions on Wall Street, attempts to protect investors and consumers with funds tied up in these financial institutions. This last effort was supplemented by the creation of the Bureau of Consumer Financial Protection, designed to investigate and fight against fraud, scams, and unfair dealing in financial institutions. The current director, Richard Cordray, focuses his Bureau’s efforts primarily on mortgages, credit cards, and student loans, in an attempt to eliminate predatory practices in the most common consumer financing options. As might be expected in such a complex area, Dodd-Frank’s regulations are vast and very far-reaching.
Essentially, the rule makes advisors act as fiduciaries to their clients…
Surrounding Dodd-Frank are also rules promulgated by the Obama Administration and enforced by Executive agencies, designed to supplement the Dodd-Frank Act. One such rule is the “Fiduciary Rule,” which was intended to protect investors from unfair or dishonest practices among investment advisors. Essentially, the rule makes advisors act as fiduciaries to their clients, instead of mixing private interests with their client’s interests. This is achieved through requirements on advisors such as disclosure of any potential conflict of interests, including fees and commissions, and a duty to make recommendations based on their clients’ “goals, objectives, and risk tolerance.”
This is just a brief run-down of all the regulations and rules contained within and surrounding the Dodd-Frank Act. Many seem like common sense, if convoluted, rules for the protecting consumers and restricting risky or dishonest ventures by financial institutions. At face value, it may be somewhat surprising to learn that the need for these regulations is a hotly debated subject.
This debate centers around the level of regulations needed to keep financial institutions honest while retaining some sense of freedom to contract and invest, with varying points of view all arguing their positions. Obviously, there are still those who enacted the law in the first place, who believe the regulations need to remain in full effect, without being either repealed or watered down. In our post-2008 financial crisis world, distrust of financial institutions is still high. Many, primarily (if not wholly) Democrats, believe these institutions will continue to take advantage of unsuspecting consumers and make risky investments without some form of restraining government action.
Congressional Democrats’ opposition to repeal Dodd-Frank is sure to be fierce.
Congressional Democrats’ opposition to repeal of Dodd-Frank is sure to be fierce. Senate Minority Leader Charles Schumer (D-N.Y.) promised a “Democratic firewall in Congress” if Republicans attempt a wholesale repeal, and claims the Democrats “have enough votes to beat that back.” Senator Bob Casey (D-Pa.) accused the President of lying to his voters, claiming he would “drain the swamp” and then filling his administration with Wall Street insiders and killing consumer protections. It is safe to say Democrats are preparing for a protracted congressional battle on this issue.
However, on the other side of the aisle there are many who believe Dodd-Frank unnecessarily burdens financial institutions and other corporations. From a limited government perspective this makes perfect sense, as government interference and regulation on businesses restricts the way businesses can use their capital and benefit their investors. For instance, many Republicans are adamantly opposed to the Volcker Rule because it limits ways in which corporations can use their capital, and does not really provide a good reason. And while the Fiduciary Rule may seem to be common sense, many Republicans disagree with it because it tends to limit freedom to contract. Risk averse brokers offer their clients risk averse investment opportunities, and will not offer the riskier investments, even if their client would prefer those opportunities. The markets currently seem to agree with Republicans, as talk of deregulation has spurred a large amount of growth since President Trump’s election in November
Republicans have referred to Dodd-Frank as “Obamacare for banks,” and that seems to be the primary dispute between Democrats and Republicans on this issue; Republicans are looking for a limited government, low regulation solution while Democrats are convinced the only way to keep financial institutions honest is more government regulation, even at the cost of some economic freedom. For now the siege has begun, but as the President and his advisors unveil their plan for regulatory rollback, this fight is looking more like a campaign than a battle.