Trump begins promised dismantling of Dodd-Frank, DOL’s fiduciary rule

As expected, US president Donald Trump today took the first steps towards dismantling key elements of a package of financial regulations known as the Dodd-Frank Act, brought in in 2010 during his predecessor’s time in office, by signing an executive order that would rewrite a number of major provisions of the act.

However, observers and political opponents said the president would be unable to make the proposed changes without Congressional approval, which they said he could struggle to get.

A separate but widely seen as related development, also anticipated, saw him sign an executive order that that was widely reported to seek to postpone the implementation in April a new US Department of Labor (DOL) fiduciary regulation that aims to require brokers and others advising on retirement products to act in their client’s best interest. Within hours of the reported signing of this document on 3 February, however, it emerged that it didn’t actually call for a postponement of the so-called Fiduciary Rule, but for it to be analysed to determine the extent of harm it could be inflicting on the retirements products industry, in the form of increased costs that might get passed on to consumers.

A few days later, the DOL officially notified the US Government’s Office of Management and Budget that it wanted to delay the Fiduciary Rule’s implementation, in order to allow for time to carry out the analysis requested by the president.

The Fiduciary Rule for retirement products (it already exists in the US for financial advice) was years in the planning, and many US companies have spent millions of dollars preparing to comply with it. As a result, it’s widely expected that most of them will carry on preparing for the rule to take effect as scheduled on 10 April, particularly as there are thoughts efforts even merely to delay it could take longer than expected.

Nevertheless, the signing of the two orders was seen as in keeping with Trump’s campaign vows to slash regulations, and was welcomed in many quarters of the US financial services industry.

Consumer groups, think tanks and even some financial services industry executives, however, such as Vanguard founder John C Bogle, expressed concern.

Trump, who signed the documents following a meeting with top US financial services industry leaders, said the difficulties some of his friends had experienced in trying to obtain business loans was among his reasons for wanting to rein in certain of the Dodd-Frank regulations.

 

“We expect to be cutting a lot out of Dodd-Frank because frankly, I have so many people, friends of mine that had nice businesses, they can’t borrow money,” he was quoted as saying.

“They just can’t get any money because the banks just won’t let them borrow it because of the rules and regulations in Dodd-Frank.”

Dodd-Frank – formally known as the Dodd-Frank Wall Street Reform and Consumer Protection Act – had been introduced in the wake of the 2008 financial crisis, and was intended to ensure that some of the events that led to that crisis couldn’t happen again. Key elements of Dodd-Frank included tighter oversight of derivatives, the creation of a new consumer protection watchdog, and stress tests for banks that were considered “too big to fail”.

Another key element of Dodd-Frank is the Volcker Rule, which was named after the American economist and former US Federal Reserve chairman Paul Volcker, which bans US banks from making speculative bets from their own accounts, a practice known as proprietary trading. It is often described as being similar to the Glass-Stegall Act of 1933, which was brought in after the Depression, and repealed during the Clinton presidency, some said later inadvisedly.

Since taking office, Trump has referred to Dodd-Frank as “a disaster”, and referred to damage he said it had done to America’s “entrepreneurial spirit”.

As reported,  US insurance brokers and a number of major American financial services companies have strongly opposed the introduction of the DOL’s fiduciary rule, on grounds that it would increase their costs. Major players in the US debate have included Morgan Stanley and Wells Fargo. At least one retirement products industry organisation, the National Association for Fixed Annuities, actually filed suit in an effort to halt the rule’s implementation.

However, regulated financial advisers in the US have been held to a “fiduciary standard” since 1940, and many of them say they see no reason why being obliged to put their clients’ interests ahead of their own when selling them financial products should not be mandatory for those selling insurance products and retirement plans as well.

Currently, US insurance brokers are required only to meet a lesser “suitability standard”.

Late on Friday, a US investment publication was reporting that the “final version of a memo” Trump sent to the Department of Labor directed the agency “to review” the fiduciary rule, but did not contain “an explicit delay of the April 10 implementation date”, nor does it “tell the agency to consult with the Department of Justice to seek a stay of the litigation surrounding the rule”, suggesting there could be doubts within the Trump camp as to the wisdom of being seen to block what many see as a sensible regulation.

Australia recently adopted a concept identical to America’s fiduciary rule, as part of its Future of Financial Advice reforms, which came into force in 2013, but called it the “Best Interests Duty”, because it requires advisers to “act in the client’s best interests”. As reported,  Australia began to enforce this new rule last year, taking action first against an advisory business in Melbourne last  June, and later banning a Brisbane adviser for five years.

Backlash

In the US, meanwhile, some observers are predicting a consumer backlash if the fiduciary rule is axed, as the debate over the fiduciary role has found its way into consumer publications, such as Time Inc’s Money magazine.

In an article on its website today  – headed “Trump Wants to Kill the Fiduciary Rule. Here’s Why That’s a Big Deal for Retirement Savers” – Money tells its readers that “currently, if you work with a financial adviser who is a registered broker, he or she only has to recommend investments that are ‘roughly suitable’ for you”.

“That means if your adviser has the option between two similar mutual funds, but one pays out a higher commission, he or she can put you in that one, even if the other fund has lower fees and would boost your portfolio in the long run,” the article adds.

“The Trump administration wants to keep this system in place, arguing that the fiduciary rule will limit investment choices and burden the industry with unnecessary regulations.”

For this reason, as well as the fact that changing their businesses to comply with the fiduciary rule has taken them years and cost them millions, a number of large financial companies that would be affected by the back-tracking on the fiduciary rule have said that they plan to go ahead with plans to abide by it anyway, voluntarily. Among them is Merrill Lynch, which states on its website that “we view the Department of Labor fiduciary rule as a positive step for the industry, and great news for investors. We support it wholeheartedly”.

This story was  updated on 5 February.

ABOUT THE AUTHOR
Helen Burggraf
Helen Burggraf is the editor of International Investment. A US-trained journalist, she has worked in Rome, New York City and London, covering everything from the fashion and retailing industries to the global drinking water and water-treatment sector, private equity, and most recently, the international cross-border financial services/advice industry.

Read more from Helen Burggraf

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