The Trump era of light-touch regulation dawns


Imagine going to the races, betting 98 per cent of your stake on the favourite, which loses in the final stretch, and going home with huge winnings. That is about what happened to Wall Street in the last election. According to the Center for Responsive Politics, the non-profit research group, people in the securities and investment industry gave nearly $85m to Hillary Clinton’s presidential campaign, compared with $1.2m to Donald Trump’s campaign.

Yet the Trump administration has so far lined up with Wall Street’s analysis of the right way to regulate the US financial system. That is very good news for the asset management industry, which, contrary to what you might think from the pattern of its political contributions, had been dreading a Clinton administration.

In particular, Mrs Clinton had made all sorts of ominous noises about the “shadow banking system”. The economic populists of the Democratic party leftwing made clear they wanted more regulatory oversight of asset managers. One of the means the progressive economic policy people had in mind was the designation of large asset managers as systemically important financial institutions.

Also, the progressives would have been able to take key appointments at the Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Reserve Board, Treasury and elsewhere in the federal regulatory complex. Few ex-Wall Streeters or Wall Street lawyers would have been let in the door.

After Steven Mnuchin took office as Treasury secretary, he appointed Craig Phillips, a senior BlackRock executive and big Clinton donor, as a “counsellor” to oversee a set of presidentially mandated reports on “core principles for regulating the US financial system”.

For a largely unplanned presidency, the reports are a very systematic means to set guidelines for the governance of the financial system. The first, on banks and credit unions, was issued on June 12. The core principles reports for the asset management industry and capital markets should come out in September.

The asset managers’ lawyers and lobbyists are not, I believe, too worried about how that will turn out. The Securities Industry and Financial Markets Association’s asset management group submitted a 64-page letter to Mr Mnuchin on April 28 that laid out the industry’s collective vision and recommendations for the report.

Some of that group’s recommendations would require Congressional action, such as various controversial amendments to the Dodd-Frank law. Most of the recommendations, though, can be effected either by rulemaking by regulatory agencies, Treasury actions or presidential executive orders.

While financial regulators such as the SEC and the CFTC are independent agencies, they are headed by presidential appointees. And the Trump/Pence administration will be appointing at least four members of the Fed board of governors. As one top banking lobbyist says: “When prospective appointees are being considered by the White House personnel office, the core principles reports might be part of the interviewing process.”

Marcus Stanley, a progressive activist and policy director of Americans for Financial Reform, the investor group, grimly agrees with the lobbyist. “The Treasury incorporated about 75 per cent of the banking industry’s recommendations in that core principles report they just published, so I would expect them to be very responsive to Sifma on the regulation of asset managers.”

Not surprisingly, exemption from regulation as Sifis is at the top of the list of the recommendations. The report also may very well follow the asset managers’ recommendation that application of the Department of Labor’s fiduciary rule should be deferred. Eventually the asset managers want the rule shunted over to the SEC or Finra and turned into a “uniform best-interest standard that applies to personalised investment advice for all retail investors”.

However, the asset managers’ most important recommendations are those covered by SEC rulemaking. These include limits on the use of leverage by asset managers, proposed rules on the use of derivatives, rules on funds’ liquidity risk management, and an easier approval process for exchange traded funds.

While many key administration appointments have not been filled, Jay Clayton has already been confirmed as SEC chairman. The asset managers are pleased with his appointment.

One Washington securities lawyer with asset management clients says: “If I were a betting man, I would say the derivatives rule is not going to happen. It was too broad and intrusive. I don’t know that the SEC is going to back off on the liquidity rules, but the current proposals are overly complex and kind of a one-size-fits-all approach.”

He also thinks there will be accelerated approval for new ETFs. “Dalia Blass, who is supposed to be the new director of the [SEC’s] division of investment management, did a lot of work with ETFs when she was on the SEC staff.”

Also, while the SEC’s enforcement policies may not be part of the eventual core principles report, asset managers can expect a somewhat more discriminating approach to picking cases, or using particular violations as an indicator of deeper issues.

So, for the moment, the asset management industry can look forward to an era of light-handed regulation. Of course if there is a major market decline, or some sort of sudden liquidity shock, even a friendly administration may not be able to keep the mob at bay.

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