United States: Dodd-Frank And Other Laws Facing Indefinite Future In 2017

As 2017 begins, financial markets and the regulators that oversee them are facing significant uncertainty. When President-elect Donald Trump assumes the Oval Office on Jan. 20, all indications suggest that it will mark a shift to an entirely disparate approach to market oversight from the outgoing administration. While President Obama and his cabinet have overseen an era of unprecedented growth in regulatory scope, the incoming executive has promised an economic regime focused on reducing restrictions and promoting growth.

The transition also comes as the U.S. economy appears to be showing some of the strongest signs yet of recovery. The final employment report of 2016 showed that the national unemployment rate had dropped to 4.6% – its lowest point in nine years. The Federal Reserve also raised short-term interest rates for only the second time since June 2006, another much-anticipated signal of restored confidence in the economy. In September, Fed officials suggested two quarter-percentage-point rate increases could be expected in 2017, although that was before the election. While markets responded with an overnight plunge in the initial aftermath of Trump's victory, they then rallied to post record highs for much of December.

Nevertheless, ambiguity remains over what specific changes can be expected in the year ahead, many of which will have a direct impact on fund managers and the environment in which they operate.

What Becomes of Dodd-Frank?

Foremost among the issues facing Wall Street is the future of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"). Passed in 2010 and designed to prevent the kind of conditions that contributed to the financial crisis, the legislation was the cornerstone of the Obama administration's efforts to enhance market oversight. During the campaign, Trump said "Dodd-Frank has made it impossible for bankers to function" and "very hard for bankers to loan money for people to create jobs, for people with businesses to create jobs." If elected, he said his plans would include a "close to dismantling of Dodd-Frank," a promise he appears set to keep after his transition team announced it "will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation."

What exactly those policies will entail remains unclear. They may draw upon a previous proposal from Rep. Jeb Hensarling, chairman of the House Financial Services Committee, which included repealing key aspects of Dodd-Frank – including the federal government's role in dismantling failed banks – canceling the Volcker Rule's restrictions on banks' trading and investments, and curtailing the role of the Consumer Financial Protection Bureau, which was created in the wake of the crisis. Hensarling's proposal would also exempt "private equity funds" (to be defined by the Securities and Exchange Commission (the "SEC")) registration and reporting requirements under the Investment Advisers Act of 1940. Hensarling was among the candidates considered for Treasury secretary, suggesting his previously outlined plans could match Trump's. The post ultimately went to former Goldman Sachs executive Steven Mnuchin, who has said he will "strip back" Dodd-Frank, which he indicated is "way too complicated and cuts back lending."

The transition team has also outlined several related policies, including a moratorium on new market rules until existing measures have undergone a review and changes to make taxes "lower, simpler, fairer and pro-growth." J. Christopher Giancarlo, the likely future head of the Commodity Futures Trading Commission, has also indicated the agency should move on from the 2010 reform law to address current trends facing the financial markets.

Despite the promised end of Dodd-Frank, the entire 2,300-page law won't be easily or quickly dismantled, making it more likely that some sections are either revoked or adjusted to address specific concerns. The law's negative effects on small community banks have received particular attention and could be a logical target for change.

Perhaps fearing the undoing of their recent efforts, some SEC officials have pre-emptively touted Dodd-Frank. For example, SEC investor advocate Rick Fleming emphasized many of the accomplishments of the outgoing regime, defended the need for robust market oversight and highlighted some of the remaining rules the commission has yet to complete. It remains to be seen which objectives it will be asked to complete as the new administration rolls out its priorities.

SEC Leadership Changes

The White House isn't the only place in Washington, D.C. coming under new management, as the SEC will also have a new leader. Chair Mary Jo White announced she will step down in January from the position she has held since 2013. Enforcement director Andrew J. Ceresney and Trading and Markets director Stephen Luparello also announced plans to leave the regulator. The vacancies provide an opportunity for a sharp change of course for the new administration to pursue its regulatory agenda.

With two SEC commissioner seats already vacant, the departure of White and others also means the commission is unlikely to launch any controversial rulemakings and enforcement cases until appointments can be made and a new legislative direction can be established – a process that could take several months.

In contrast, Fed chair Janet Yellen has publicly stated she intends to complete her term as chair, which runs until January 2018, despite being the target of criticism from Trump, who has openly discussed replacing her in the role.

Fiduciary Rule

Another significant piece of regulation facing an uncertain future is the Department of Labor's Fiduciary Rule, currently set to become effective on April 10, 2017. As with Dodd-Frank, the incoming government has said it will either halt or dismantle the rule, which introduces several new requirements for brokerages and asset managers managing retirement investments. The rule has received considerable criticism from the industry for its cost and potential impact on small investors, with Merrill Lynch deciding to end commission-based options for retirement savers altogether. Members of the Republican-led Congress have also promised to halt its implementation.

Although most observers expect its demise is a foregone conclusion, reversing the rule will be complicated. Brokerages have already spent millions to comply with its requirements and, while he's spoken out against it, some suspect it is low on the president-elect's list of priorities. In addition, delaying the rule is unlikely to happen before Senate confirmation of a new Labor secretary, which is far from certain to occur before the rule goes into effect on April 10. Once in effect, amending or repealing the rule would be an extended process, due to the need for a public comment period on a new rule and input from other federal agencies. As a result, the outcome may not be as straightforward as has been widely predicted.

Changes to Accredited Investor Definition

Finally, proposed changes to the "accredited investor" definition appear likely to be adopted at some point in 2017 after the House passed legislation broadening who could fall under the designation. Under the bill, which was strongly supported by a 391-2 vote, the definition would be expanded to include individuals with securities-related licenses and anyone with education or experience related to a specific investment. However, due to the significant time constraint as the lame-duck Congress prepared to adjourn, the widely supported reforms will likely be reintroduced in the new year.

The legislation followed an SEC staff report in December 2015 that recommended, among other options, that the definition be revised "to allow individuals to qualify as accredited investors based on other measures of sophistication" beyond the current measures of income and net worth. It suggested that individuals with a threshold level of investments or a professional certification could become eligible, as well as those with experience investing in exempt offerings, "knowledgeable employees of private funds" or anyone who passes a test.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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