President’s Opening Financial Services Salvo is On Target, But There’s Much More to Be Done

By Norbert Michel, Heritage Foundation Financial Regulations Expert

On January 30, President Trump pledged that his Administration would “be doing a big number on Dodd-Frank.” Four days later, just two weeks into his administration, the President issued two executive orders designed to get that process going. And they’re a great opening salvo in the battle to make the financial system work better for all Americans.

The first order lays out a path to rescind what’s known as the fiduciary rule, an Obama-era regulation designed to provide a single standard for anyone providing retirement investment advice.  The fiduciary rule was a bad policy because there was never really any evidence that there was a problem to fix, and because imposing a one-size-fits-all approach on advisers is likely to lead to less investment advice for average Americans.

Trump’s fiduciary rule executive order marks a welcomed break from the Obama administration’s paternalistic view that Americans can’t educate themselves on even basic investment issues.  Getting rid of these types of rules is the only way to empower Americans to make their own financial decisions, so for anyone who believes in economic freedom this executive order was a no brainer.

The second order is where things start to get more interesting. President Trump has said that he expects “to be cutting a lot out of Dodd-Frank,” and everyone understands that doing so ultimately requires Congressional action.  In his second order, the president shows clear signs of aligning with the House of Representatives, the only chamber that has put together a comprehensive bill to replace large chunks of Dodd-Frank.

This order makes it the official policy of the Trump administration to regulate the United States financial system in a manner consistent with 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.

Many of these principles closely track the ideas in the Financial CHOICE Act, the bill that Financial Services Chairman Jeb Hensarling, R-Texas, proposed to replace large parts of Dodd-Frank. So the table is set, so to speak, for much broader reforms that move in the direction preferred by the House.  That’s pretty clear.  But exactly where the White House goes next will send an even clearer message to the American people.

There are many possibilities, but here are two very strong actions that would be perfectly consistent with the President’s core principles:

  • Announce that the Financial Stability Oversight Council (FSOC) will not make any systemic designations – under either Title I or Title VIII of Dodd-Frank – while Treasury reviews the best way to dismantle Dodd-Frank.
  • Announce that the administration will not support any orderly liquidation authority (OLA) proceedings under Title II of Dodd-Frank while Treasury continues its review.

Despite the claims of its authors, Dodd-Frank did not end “too big to fail.” Indeed, it authorizes the FSOC to single out certain firms and activities as so systemically important that their failure could cause a crisis.  If the goal is to end too big to fail, it’s probably not a good idea to have the federal government publicly identifying the firms it views as too big to fail.

Dodd-Frank proponents also love to cite OLA as a major impediment to bailing out large financial institutions. The main problem – and there are others – with this claim is that OLA allows the Federal Deposit Insurance Corporation (FDIC) to resolve failed financial firms only after the government certifies that there are no private funding alternatives. That sounds a bit like taxpayers might be on the hook.

Given that the 2016 Financial CHOICE Act gets rid of Title II and the Title I/Title VIII systemic designations, signing executive orders to neuter them makes perfect sense.

The administration also faces a few key personnel decisions, and one of them deals with the crown jewel of Dodd-Frank: The Consumer Financial Protection Bureau.  Dodd-Frank created the CFPB so that a sole-director, appointed by the president for a five-year term, could only be removed for cause. The DC Circuit Court of Appeals recently held that this CFPB structure—a single director removable only for cause—is unconstitutional, but the CFPB is appealing that ruling. Since Dodd-Frank also gave the CFPB its own independent litigation authority, the administration cannot stop the appeal.

President Trump could, however, fire Director Richard Cordray. This move would obviously set up a legal showdown, so the president may want to start with a softer approach—by formally asking Cordray to resign. The President could also ask Cordray to clearly state whether he does, in fact, plan to run for governor of Ohio. The deadline to declare candidacy in the 2018 Ohio race is February 2018, and Cordray’s term at the CFPB runs to July 2018.  As the director of a federal agency, Cordray is prohibited from engaging in partisan politics, so it is only proper that he declare whether he is actually going to run.

Whichever approach the president and White House legal counsel decide to take, the president shouldn’t wait very long to get his own director at the CFPB.  The president should also take similar actions with the directors of the Office of Financial Research (OFR) and the Federal Housing Finance Agency (FHFA), both agencies that could be used to help implement his new policies.

President Trump clearly wants to move away from Dodd-Frank and the approach taken during the Obama administration, so it makes little sense to keep either of these directors around. The president could also take several steps to make the legislative effort to overhaul the financial regulatory system easier.  For instance, he could:

  • Issue an executive order to establish the President’s Working Group on the U.S. Financial System; and,
  • Ask Congress to revive the reorganization authority, used by past presidents of both parties, codified at 5 U.S.C. §§ 901 et seq.

The Working Group would serve as a replacement for the FSOC, giving the financial regulators a formal arrangement for sharing information.  It would also provide the President a formal mechanism to supervise the agencies charged with executing his financial regulatory reform proposals. The reorganization authority could help with a particularly sticky problem that Congress has repeatedly failed to solve: consolidating the regulatory agencies.

More than once, Congress has tried – and failed – to merge the Securities and Exchange Commission (SEC) with the Commodity Futures Trading Commission (CFTC). Former House Financial Services Chair Barney Frank (D-Mass.) once noted that:

“The existence of a separate SEC and CFTC is the single largest structural defect in our regulatory system. Unfortunately, this is deeply rooted in major cultural, economic and political factors in America.”

More than anything, politics has prevented Congress from completing this merger. Economically, though, it makes little sense to have two capital markets regulators overseeing many of the same types of financial activities. Merging the four federal banking regulators has proven nearly as difficult a task for Congress, and former Senate Banking Committee Chairman Chris Dodd (D-Conn.) eventually gave up during the drafting of Dodd-Frank. (Dodd tried to transfer the Federal Reserve’s regulatory authority to a single financial regulator called the Financial Institutions Regulatory Administration.)

So the President could ask for this reorganization authority to improve the effectiveness and efficiency of financial services regulation by merging the SEC with the CFTC and consolidating the banking regulators into one agency, thus removing much of the fight from Congress.

The remaining 800-pound gorilla is housing finance.  A glaring weakness of Dodd-Frank was that it did virtually nothing to address the housing finance problems that caused the 2008 meltdown. The president should make a strong statement on this as soon as he secures new leadership for Treasury, HUD, and the FHFA.

To remain consistent with his core principles, President Trump should implement policies to shrink the federal government’s foothold in housing finance.  An obvious place to start is to reduce the loan limits for FHA and Fannie/Freddie loans. Fannie and Freddie can purchase, and the FHA can insure, loans well above the median home price, making it obvious that these agencies do not primarily help low-income homebuyers.

There are many more policies that President Trump could initiate as he works with Congress to dismantle Dodd-Frank and restructure the housing finance system, but all Americans should be encouraged by the President’s opening executive actions.

Dodd–Frank relies on the federal government to plan, protect, and prop up the financial system, all of which are contrary to the principles that support free enterprise and maximize individual wealth. It was the wrong approach for America and its demise cannot come quickly enough.

*Originally published in Forbes, click here.

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