November 14, 2016
President-elect Donald J. Trump campaigned for sweeping regulatory reforms in order to encourage economic growth. Although a cornerstone of his campaign was built around deregulation, many of the details of the President-elect’s plans remain unknown. This Client Alert discusses what the upcoming Trump years might entail for the financial services industry and the derivatives markets. Currently, much of the landscape is unclear, because, although the general election was marked by negative sentiments towards both Wall Street and the regulatory agencies that supervise its activities, few specific policy proposals articulated what reform would entail.
Since the enactment of Dodd-Frank in 2010, Republican members of Congress have introduced legislative proposals to amend many of its provisions. Although the President-elect has remained largely silent on specific regulatory reform measures, recent proposed legislation in Congress seeking to reform derivatives markets and market regulators may provide a template for future reform efforts.
Within the derivatives space, Congress has, to date, enacted few changes to Dodd-Frank. One, repealing the so-called "swaps push-out" rule, was included very late in the consideration of a must-pass appropriations bill. Two others–creating new exceptions from certain clearing and margin requirements–were passed for commercial end-users. This past summer, U.S. Representative Jeb Hensarling (R-Texas), Chairman of the House Committee on Financial Services, introduced H.R. 5983, The Financial CHOICE Act of 2016 (the Financial CHOICE Act), which would repeal a multitude of Dodd-Frank provisions and introduce numerous Commodity Futures Trading Commission (CFTC) reforms.
In particular, these reforms would include: introducing enhanced procedures governing the issuance of no-action relief, guidance and interpretive rules; introducing a technology plan and internal risk controls; limiting the duration under which the CFTC or staff may issue subpoenas; and mandating that the CFTC issue a comprehensive cross-border compliance rule in accordance with formal notice and comment rulemaking procedures. Notably, the Financial CHOICE Act also reflects Congress’s increased attention to agencies’ cost-benefit analyses, and would both impose heightened cost-benefit requirements and provide for direct appellate review of rulemakings for challenges to the application of those heightened standards.
President-elect Trump has vowed to "issue a temporary moratorium on new agency regulations that are not compelled by Congress or public safety." As part of this moratorium, the President-elect has called for a systematic review of federal regulation, whereby he would ask "every federal agency to prepare a list of all of the regulations they impose on Americans which are not necessary." Since it is very early in the transition, it is unclear at this time what regulations will be a part of the moratorium. We would anticipate that the transition team for the independent financial regulatory agencies led by former Republican Securities and Exchange Commissioner Paul Atkins would gather and present information relating to a moratorium to the financial regulatory agencies.
The President-elect has stated that his presidency will "be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation." In particular, the President-elect has stated that "under Dodd-Frank, the regulators are running the banks. The bankers are petrified of the regulators. And the problem is that the banks aren’t loaning money to people who will create jobs." Moreover, it appears that the Trump transition team is considering, among others, Representative Hensarling as a possible candidate for Secretary of the Treasury.
In addition, the 2016 Republican platform stated support for a "21st Century" Glass-Steagall Act, which would separate the investment and commercial activities of banks. Although the President-elect has not explicitly stated his desire to "break up the banks" in order to address the Too Big To Fail issue and has previously said publicly that he disagreed with the idea, certain campaign speeches indicated his agreement with the Republican platform on the "21st Century" Glass-Steagall concept.
Some members of Congress have also pushed for regulatory relief for financial institutions that focus on community lending by calling for an increase to the regulatory thresholds for certain aspects of Dodd-Frank compliance. In particular, U.S. Senator Mike Crapo, who will chair the Senate Banking Committee in the 115th Congress, has consistently expressed his support for raising the threshold for heightened prudential regulatory standards to $100 billion in assets, which would benefit community and mid-sized regional banks. Similar sentiment was expressed in 2014 by Federal Reserve Governor Daniel Tarullo, when he stated that Dodd-Frank testing and planning provisions "do not seem . . . to be necessary" for banks with between $50 billion and $100 billion in total assets.
President-elect Trump has also made it clear of his intent to rein in the powers of the Federal Reserve. As part of an anticipated overhaul of Dodd-Frank, the President-elect has explicitly noted the need to hold the Federal Reserve accountable; in particular, the need for a congressional audit of its activities. In addition, the President-elect has expressed his intent to replace Chair Yellen, but her term runs until February 3, 2018, and it is not at all clear who would be her successor. Further, it is unclear as to whether Vice Chair Fischer would continue to serve as Vice Chair under the Trump presidency after his term ends June 12, 2018. Although terms as Chair and Vice Chair are limited to four years, both Yellen and Fischer would continue to serve as members of the Board of Governors until January 31, 2024 and January 31, 2020, respectively.
During his campaign, President-elect Trump sought the advice of several financial executives, including Steven Mnuchin, a former Goldman Sachs executive who founded hedge fund Dune Capital Management, John Paulson, a well-known hedge fund manager, and Stephen Feinberg, CEO of private-equity firm Cerberus Capital Management. As President-elect Trump transitions into office, David Malpass, who served under the Reagan administration, is leading the transition strategy for the Treasury Department, while Paul Atkins (discussed above) will lead the transition of independent financial regulatory agencies. It is believed that Mr. Mnuchin is another potential candidate for U.S. Treasury Secretary.
In the coming years, we expect a shift in the way financial institutions are regulated, and how such institutions interact with their corporate end-users. In particular, we will likely see a Congress that, while emboldened, is unable to repeal or substantially alter Dodd-Frank, but may be able to pass bipartisan amendments to the statute–perhaps to reduce regulation of community and regional banks and end-users. As noted above, we also likely will see financial regulators halt current rulemaking efforts and engage in new efforts to relax or clarify some of the more restrictive aspects of their current regulatory regimes.
A Republican presidency and Republican-controlled Congress will likely usher in a new flurry of legislative activity designed to reduce financial regulation. We believe that the House and possibly the Senate will focus on addressing the concerns raised by many regarding certain aspects of Dodd-Frank, effecting administrative changes to the operations and structure of market regulators, and curtailing the powers of certain financial regulatory agencies.
Undoing Dodd-Frank in its entirety would be an onerous process, but Chairman Hensarling’s Financial CHOICE Act serves as a potential means of moving towards that end. As noted below, the exact nature of reform is unknown, but given general Republican sentiments towards the jurisdictional overreach of regulatory agencies, we should expect, at minimum, reform with respect to the extraterritorial application of current and proposed regulation. For example, the much-discussed CFTC cross-border regulations have been a partisan point of contention for quite some time. The Financial CHOICE Act would limit the jurisdictional reach of the CFTC and rein in excessive government regulations by implementing heightened cost-benefit requirements for rulemaking and limiting the extraterritorial reach of the swaps compliance regime.
In addition to a slowing of agency efforts to finalize Dodd-Frank requirements, we are likely to see administrative changes to market regulation. In particular, we expect increased scrutiny and pressure on financial agencies to prepare more detailed and robust cost-benefit analyses for their proposed regulations and structural changes to agency staffing, enforcement and funding. Notably, increased emphasis by Congress on agencies’ use of cost-benefit analysis is a viable mechanism to effect the President-elect’s intent to place a moratorium on regulations. Although financial industry observers have already been quick to note that it would be difficult for the President to stop independent agencies such as the Federal Reserve and Consumer Financial Protection Bureau (CFPB) from enacting new regulations, heightened cost-benefit standards and scrutiny would serve as an implicit barrier to extensive rule promulgation where such standards are statutorily mandated. Noting the significant overlap and alignment of sentiment between Congress and the President-elect on this issue, it is possible that we will see near-term legislative reforms to the administrative procedures agencies undergo prior to enacting new regulations.
With respect to reform of the financial regulators themselves, we have seen sentiment from both the President-elect and Congress expressing the need to curtail the powers of independent agencies. For example, in June this year, the House Financial Services Committee introduced and passed the Fed Oversight Reform and Modernization Act (FORM Act), H.R. 3189, which is designed to bring greater accountability and transparency to the Federal Reserve. In addition to Federal Reserve reform, a 2015 White Paper by CFTC Commissioner Giancarlo also may serve as a roadmap for changes to the CFTC’s swaps trading regime. In particular, the White Paper called for greater flexibility in trade execution methods, which could help with market fragmentation, liquidity and innovation issues. Similar, if not identical, legislation and rulemakings could be introduced in the short term given President-elect Trump’s statements with regard to reducing the footprint of regulatory agencies.
A part of the President-elect’s economic recovery plan centers on an increased access to credit. Reform within this space could include modifying certain capital, liquidity and other prudential standards, but it may also entail additional reforms to financial institutions’ use of derivatives. If loosened prudential standards result in increased lending, as intended, financial institutions will increase their hedging of these positions with derivatives. Republicans in Congress have already been a strong proponent of making derivatives work for end-users of these products; going forward, we can expect to see similar Republican support in both the House and Senate on proposals to encourage community banking and overall business lending.
Traditionally, Congress and the regulators have been sympathetic to the concerns of the commercial end-user community. In the early years of Dodd-Frank, the end-user community served as the canary in the coal mine example for overregulation and government intrusion. With the likely overhaul of the current regulatory regime and an increased focus on domestic economic growth, we can expect to see increased prominence for the end-user community. Given the President-elect’s desire to stimulate business lending, we should expect Congress and the White House to be paying close attention to the downstream effects of financial markets regulation on commercial end-users.
A consistent message of the Trump campaign has been to create an environment where banks can lend to American businesses. In that regard, we should expect the resulting architecture of any changes to the existing regulatory regime to create an environment that makes lending and engaging in financial transactions in the United States appealing from a regulatory standpoint when compared to foreign jurisdictions, such as the European Union. This appeal might be particularly strong for banks and businesses looking to move their London operations as a result of Brexit.
As noted above, while the President-elect has signaled his intent to repeal Dodd-Frank, actual repeal is likely impossible given the composition of the Senate. Nevertheless, continued Republican control of both the House and Senate means we are likely to see a number of proposals to overhaul or at least significantly curtail the reach of Dodd-Frank. Although many Republicans in Congress have called for the repeal of Dodd-Frank, the prospects of a repeal bill passing the Senate are extremely slim. In the 115th Congress, the U.S. Senate will have two more Democrats, leaving Republicans holding either a 51-49 or 52-48 majority. That is not a recipe for the passage of legislation almost certain to be filibustered.
Moreover, the President-elect’s exploration of a new Glass-Steagall regime, coupled with his support of the Volcker Rule, suggests that Dodd-Frank is not likely to disappear entirely. That said, some changes seem reasonably likely. The House is almost certain to pass a host of amendments to Dodd-Frank. And the Senate, with a number of Democrats on the Senate Banking Committee up for reelection in red or purple states, may be amenable to targeted reforms.
The President-elect has remained largely silent with respect to the CFPB. While quick to denounce the CFPB’s architect, Senator Warren, the President-elect noted his commitment to "helping African American businesses get the credit they need" during his call for financial reform. Although it is too early to tell, this sentiment may indicate a willingness to work within a modified construct of the CFPB in executing his presidency’s reform of Dodd-Frank. A reworked CFPB could result in the agency taking on a traditional commission structure similar to the CFTC or SEC, whereby it would be reliant on congressional appropriations and the authority of its Director limited.
The sudden shift in political power has caught many of the agencies by surprise. As a number of Dodd-Frank provisions have yet to be finalized, we will likely see agency progress on many proposed rulemakings grind to a halt. The CFTC, for example, may well slow its work on its current regulatory initiatives, which include the recent Cross-Border Proposal and the Supplemental Proposal to Regulation AT. Interestingly, however, we have heard that the CFTC is still moving forward internally with its review of a draft of its final Position Limits Rule. We also have heard that, notwithstanding the election results, the CFTC may be set to adopt this final rule sometime in either the first or second week of December. Given President-elect Trump’s statements regarding placing a moratorium on non-essential agency actions, it is very unlikely that this rule would become effective even if the current CFTC commissioners adopt it. Similarly, there is the potential for further delay and modification of the SEC’s final security-based swap rules.
More generally, it is likely that the President-elect will follow the practice of the last several Administrations in issuing a directive on day one of his presidency, calling on executive departments and agencies (1) not to finalize any rules by sending them to the Federal Register unless they have been reviewed by a Trump appointee, (2) to withdraw from the Federal Register final regulations that have not been published, and (3) to postpone the effective dates of any regulations that were published in the Federal Register but have not taken effect. The Trump equivalent of the "Card" and "Emanuel" memos likely would take an equally aggressive position on midnight regulations.
Also of relevance is the potential invocation of the Congressional Review Act (CRA), which provides expedited procedures for Congress to rescind federal regulations with which it disapproves. The CRA has been used successfully to overturn only one final agency rule–the Ergonomics Rule–but its design makes it particularly applicable in just this circumstance–where the presidency changes parties and the incumbent’s party controls both congressional chambers. The CRA is potentially applicable to any final rule submitted to Congress after May 16, 2016, including rules promulgated by independent agencies. Hence, the President-elect, acting in concert with Congress, may choose to seek to overturn certain agency rules using this procedure.
Deregulation, lower tax rates and an increased focus on cost-benefit analyses have been championed by the President-elect as the jump start that this economy needs. Although we have yet to see detailed plans of action, we can expect that regulatory reform by the President-elect will benefit community facing financial institutions and lending services. In the short-term, we will likely experience a moratorium on rulemaking as agencies transfer power. In the longer-term, it is expected that Congress will begin to chip away at Dodd-Frank. Although the President-elect has not included financial reform in his first 100-day Plan, it is expected that the Senate Banking and Finance Committee and the House Financial Services Committee will be working closely with the President-elect to provide a degree of regulatory relief to the financial industry.
 For information on the Financial CHOICE Act, see http://financialservices.house.gov/choice/.
 Donald Trump, Regulations, Trump-Pence Campaign, available at https://www.donaldjtrump.com/policies/
 Donald Trump, Address to the Detroit Economic Club (Aug. 8, 2016), available at http://time.com/4443382/donald-trump-economic-speech-detroit-transcript/; see also Donald Trump, Address to the New York Economic Club (Sept. 15, 2016), available at http://time.com/4495507/donald-trump-economy-speech-transcript/.
 In each instance that we’ve found, the President-elect has followed his "moratorium" charge with examples related to job and industry growth, with particular focus on the EPA and its emissions regulations. See id.
 Donald Trump, Financial Services, Great Again (accessed Nov. 10, 2016), available at https://www.greatagain.gov/policy/financial-services.html; see also Trump: Economic bubble about to burst, The Hill (Oct. 14, 2015), available at http://thehill.com/homenews/campaign/256851-trump-economic-bubble-about-to-burst.
 Ryan Tracy, Donald Trump’s Transition Team: We Will ‘Dismantle’ Dodd-Frank, Wall Street Journal (Nov. 10, 2016), available at http://www.wsj.com/articles/donald-trumps-transition-team-we-will-dismantle-dodd-frank-1478800611.
 Emily Stephenson, Trump calls for ’21st century’ Glass-Steagall banking law, Reuters (Oct. 26, 2016), available at http://www.reuters.com/article/us-usa-election-trump-banks-idUSKCN12Q2WA.
 Daniel K. Tarullo, Member, Board of Governors of the Federal Reserve System, Rethinking the Aims of Prudential Regulation, Remarks at the Federal Reserve Bank of Chicago Bank Structure Conference, Chicago, IL (May 8, 2014), available at http://www.federalreserve.gov/newsevents/speech/tarullo20140508a.pdf.
 See Chair Janet L. Yellen, Board of Governors of the Federal Reserve System (accessed Nov. 11, 2016), available at https://www.federalreserve.gov/aboutthefed/bios/board/yellen.htm; Vice Chairman Stanley Fischer, Board of Governors of the Federal Reserve System (accessed Nov. 11, 2016), available at https://www.federalreserve.gov/aboutthefed/bios/board/fischer.htm.
 See Client Alert, BREXIT Update – Finance and Derivatives Markets Focus, Gibson Dunn (June 29, 2016), available at http://www.gibsondunn.com/publications/Pages/BREXIT–Finance-and-Derivatives-Markets-Focus.aspx.
 In particular, we would note that during his primary bid, President-elect Trump voiced his implicit support for Dodd-Frank provisions related to proprietary trading. When asked if he approved of the Volcker Rule, President-elect Trump said, "Well I’m not sure if [Paul Volcker] likes it, but if he’s . . . happy, I’m happy." He went on to note that "He was a terrific guy. I’ve met him a few times. And I thought he was terrific. But I think his policy and his demeanor — there was something very solid about him. His demeanor were [sic] very good." Patrick Brennan, Is Donald Trump Starting to Sound a Little Serious? National Review (Aug. 4, 2015), available at http://www.nationalreview.com/corner/422041/donald-trump-starting-sound-little-serious-patrick-brennan.
 Tim Hains, Trump Proposed "New Deal for Black America" in Charlotte, Real Clear Politics (Oct. 26, 2016), available at http://www.realclearpolitics.com/video/2016/10/26/trump_proposes_new_deal_for_black_
 See, e.g., Assistant to the President and Chief of Staff, Regulatory Review Plan, 66 Fed. Reg. 7702 (Jan. 24, 2011) ("Card Memo"), and The White House Office, Memorandum for the Heads of Executive Departments and Agencies, 74 Fed. Reg. 4435 (Jan. 26, 2009) ("Emanuel Memo").
 Here Is What Donald Trump Wants To Do In His First 100 Days, NPR (Nov. 9, 2016), available at http://www.npr.org/2016/11/09/501451368/here-is-what-donald-trump-wants-to-do-in-his-first-100-days.
The following Gibson Dunn lawyers assisted in the preparation of this client update: Michael Bopp, Arthur Long, Carl Kennedy, Jeffrey Steiner and James Springer.
Gibson Dunn’s Financial Institutions Practice Group lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, or the following:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Carl E. Kennedy – New York (+1 212-351-3951, [email protected])
Jeffrey L. Steiner - Washington, D.C. (+1 202-887-3632, [email protected])
© 2016 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.