Why The Regulatory Pendulum is About to Swing Back Toward Deregulation

The message is clear: by electing Donald Trump, Americans voted for change. Although few specifics were articulated on the campaign trail, President Trump voiced intentions to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act, and generally free the financial sector from burdensome regulations. After eight years of increased regulation, it appears the regulatory pendulum is about to swing back toward deregulation. Wall Street and investors didn’t just cheer, they backed up their belief that deregulation would benefit the financial sector by bidding up financial stocks on the day after the election. On Nov. 9 the NASDAQ Bank Index rose 4.9%.

President Trump will have an opportunity to appoint the Chairperson of the Federal Reserve (most likely replacing Janet Yellen), Labor Secretary and has nominated Wall Street insider Steven Mnuchin as his Treasury Secretary. He's also named hedge fund billionaire Wilbur Ross as his commerce secretary. President Trump will also fill two vacancies on the Securities and Exchange Commission as well as appoint one of the Commissioners as Chairperson. It is expected these appointments will be “business friendly” and likely shape and greatly influence the regulatory environment for at least the next four years.

It is noteworthy that President Obama made two appointments in February to fill the vacancies on the Commission but the Senate held off on confirmation. No more than three of the five Commissioners can be from the same political party so one was a Democrat and one was a Republican. The Commission would have been comprised of three Democrats and two Republicans. It is likely President Trump will appoint two Republicans to the Commission giving Republicans a three to two advantage. (For related reading, see: DOL Fiduciary Rule: Everything You Need to Know.)

Although the election was a clean sweep for Republicans, who now control the White House, Senate, and the House of Representatives, this does not necessarily mean President Trump will have carte blanche to effect legislative reforms. The Republican Party has factions such as the Tea Party, and President Trump has significant detractors within the GOP. Moreover, a repeal of Dodd-Frank would require 60 votes in the Senate, meaning it would require bi-partisan support. Many people believe an outright repeal of Dodd-Frank would be too disruptive but certain elements such as the Consumer Financial Protection Bureau and Volcker rule could be targeted for change.

Certain actions would not require congressional involvement. For example, one item being mentioned in the media is the possible repeal of the Department of Labor’s Conflicts of Interest Rule (otherwise known as the 'fiduciary rule') that is scheduled to take effect on April 10, 2017. President Trump has not commented on this rule specifically so there is much speculation, especially since a new Labor Secretary has not been named.

The pre-election rhetoric was notoriously light on substance, such that we really don’t know what to expect in the financial services industry. This was highlighted by the fact that the Dow Jones Industrial Average futures were down by almost 800 points at one point on election night when it appeared Trump might win the election, but the markets were actually up the following day. Volatility is a symptom of uncertainty in the markets and it is likely we will see heightened volatility in the markets until investors gain some clarity as to how change will impact the economy and markets.

When faced with uncertainty there is a tendency to procrastinate. It is natural to wait and see what will happen before deciding upon a course of action. This may be appropriate when dealing with short-term events but we are likely to experience long-term change and the timing is unknown since President Trump has not stated his priorities once he takes office. The prudent response is to proceed based upon the best information available currently and be prepared to adjust as change occurs. For example with regard to the DOL Conflicts of Interest Rule we are advising clients to set a time table for implementation and proceed, until and if, any changes are required. (Click here to sign up for Core Compliance & Legal Services' webinar: 'Creating a Robust Compliance Program.')

Most people in the financial services industry believe there was an over-reaction to the financial crisis of 2008 and that excessive regulation has been impeding business for the past eight years. President Trump has made his views clear and indicated he intends to roll back many burdensome regulations. This is consistent with his business background and de-regulation is a core Republican value for which the President is likely to receive broad support from Congress as well as the financial services industry. Change is coming.

This article was written by Craig Watanabe, senior compliance consultant of Core Compliance & Legal Services, Inc. Investopedia enlists experts in a variety of fields to comment on a wide range of subjects.

This article is for information purposes and does not contain or convey legal or tax advice. The information herein should not be relied upon in regard to any particular facts or circumstances without first consulting with a lawyer and/or tax professional.