Trump Takes Aim At Dodd-Frank, Investor Protections Rule In Executive Action

By Yuki Noguchi,

Published February 3, 2017 at 12:52 PM CST

President Trump waits to sign an executive action directing the Treasury secretary to review the Dodd-Frank financial oversight law in the Oval Office on Friday.

President Trump signed two directives on Friday, ordering a review of financial industry regulations known as Dodd-Frank and halting implementation of a rule that requires financial advisers to act in the best interests of their clients, according to a senior administration official who briefed reporters on condition of anonymity.

Trump himself made his intentions clear in a meeting with small business owners Monday. "Dodd-Frank is a disaster," Trump said. "We're going to be doing a big number on Dodd-Frank."

These executive actions are the start of a Trump administration effort to reverse or revise financial regulations put in place by the Obama administration and seen by Trump and his advisers as onerous and ineffective.

Based on the description given by the administration official who briefed reporters, the directives the president is expected to sign Friday won't immediately do a big number on the law. The directive will instruct the Treasury secretary to meet with the agencies that oversee the law to identify possible changes.

"Americans are going to have better choices and Americans are going to have better products because we're not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year," said National Economic Council director Gary Cohn in an interview with the Wall Street Journal. Cohn, who was president and COO at the investment banking firm Goldman Sachs before joining the administration, added, "The banks are going to be able to price product more efficiently and more effectively to consumers."

The president of the nonprofit Wall Street watchdog Better Markets issued a statement blasting Friday's actions.

"The American people trusted candidate Trump when he said he was going to protect them from Wall Street's recklessness, but President Trump has betrayed that trust," Dennis Kelleher's statement says. "He is unleashing Wall Street on Main Street, which is exactly what the financial protections of Dodd Frank were put in place to prevent."

Hinting at where the administration might expect the review to lead, the official said that under the Obama administration, "some of the rules may have even been unconstitutional, creating new agencies that don't actually protect consumers."

That is an allusion to the Consumer Financial Protection Bureau, the consumer watchdog bureau which Republicans in Congress opposed from its very creation and was the subject of a years-long fight over its leadership and structure.

"This is not an attempt to undo Dodd-Frank," the administration official insisted before going on to explain that some of the work of changing regulations, including the so-called Volcker Rule to mitigate risks, could be done through personnel, putting Trump-allied people in charge at agencies like the Securities and Exchange Commission.

It isn't clear yet how long the review would take, but the official says every aspect of the law will be considered.

A second directive would call on the Department of Labor to defer implementation of an Obama-era rule, known as the Fiduciary Rule, requiring financial advisers to act in the best interests of their clients in retirement planning.

The deadline for implementation was supposed to be April. Echoing arguments of the financial services industry, the Trump administration official said the rule would have unintended consequences if allowed to go forward. The industry says the rule will make it harder for advisers to serve lower-income clients. Backers of the rule say it will prevent advisers from gouging customers by selling them inappropriate, high-fee products. Once the review is complete, the official said, it's possible the Labor Department could determine the rule is completely unnecessary.

This rule has been heavily lobbied and some financial industry organizations had been pushing for the Trump administration to delay it.

Key provisions of Dodd-Frank

Dodd-Frank, passed in 2010, is made up of many provisions across many different regulatory agencies, some of which — like the Labor Department's Fiduciary Rule — have yet to be implemented.

The intent of the law was to implement comprehensive safeguards to monitor and regulate financial institutions so their potential failures would not pose a risk to the entire economy.

Dodd-Frank established some key new institutions and rules:

The creation of new agencies, including the Financial Stability Oversight Council, made up of 10 regulators representing the Federal Reserve, Treasury Department, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission, among others. It also created the Consumer Financial Protection Bureau, which has broad authority to monitor and investigate financial institutions and enforce consumer rights.

The creation of a mechanism to unwind large financial institutions if they run into trouble. The law required all financial institutions designated as "systemically important financial institutions" to prepare so-called "living wills." These wills would give regulators more transparency into the bank or insurance firm's activities, in order to better mitigate risk.

The limitation of banks' ability to take risks, in part through a provision known as the Volcker Rule (named after Obama administration economic adviser Paul Volcker), which prohibits banks from making certain types of speculative investments with their own money.

The establishment of a structure for regulating a relatively new derivative market known as credit default swaps, which prior to the Dodd-Frank Act were largely unregulated. Major financial institutions traded these swaps, which functioned like insurance on mortgage securities, and as the underlying mortgages started to fail, it created enormous liabilities for firms like AIG.

The creation of new standards for mortgages, including provisions requiring loan underwriters to better vet their borrowers' ability to repay, and increasing consumer disclosure requirements to lenders.