President Donald Trump directed the Treasury secretary Friday to report to him within four months on laws and regulations that could rein in economic growth, hamper the competitiveness of businesses or narrow Americans’ ability to make financial decisions.
In an executive order, Trump said the Treasury secretary should consult with the heads of other federal regulatory agencies to determine what laws and regulations contradict what the order called “core principles” of regulation.
Trump’s order begins a sweeping review of financial regulation, particularly the 2010 Dodd-Frank law (PL 111-203), although it never mentions that law. The president signed the order while nearby stood House Financial Services Chairman Jeb Hensarling, R-Texas, who has frequently backed legislation aimed at repealing Dodd-Frank.
“We expect to be cutting a lot out of Dodd Frank, because frankly I have so many people, friends of mine, that have nice businesses and they can’t borrow money,” Trump said in a meeting Friday with corporate executives. “They just can’t get any money because the banks just won’t let them borrow because of the rules and regulations in Dodd Frank.”
The order directs the Treasury secretary to consult members of the Financial Stability Oversight Council, or FSOC, a panel established by Dodd-Frank and tasked with identifying risks to the financial system.
Hensarling said in a statement that the order “closely mirrors” the Dodd-Frank repeal bill he wrote and his committee approved last year.
“The president’s action shows a desire “to end Wall Street bailouts, end ‘too big to fail,’ and end top-down regulations,” Hensarling said.
The immediate effect of Trump’s order is limited, but it could result in the Treasury soon dropping its appeal of a case against MetLife, an insurance company that has been deemed too big to fail. The Treasury may also be able to identify ways to relax regulatory enforcement. But because many of the Dodd- Frank regulations were required by Congress, lawmakers would have to reverse them or regulatory agencies would have to amend them.
One of Trump’s core principles is to avoid tax-payer funded bailouts of institutions deemed too big to fail. Many congressional Republicans, however, say that Dodd-Frank has encouraged the growth of the biggest financial institutions, making them too big to allow to fail.
Among the results of the Dodd-Frank law is closer regulatory scrutiny of large financial institutions. The government is currently appealing a court ruling that removed insurer MetLife from the list of institutions that are too big to fail. That appeal looks vulnerable to Trump’s memo.
Giving up on the MetLife appeal is one thing that “could happen very quickly,” said Lisa Gilbert, director of Public Citizen’s Congress Watch division. She added that Friday’s memo is otherwise more of a “statement of intent” by the president.
The Trump administration is also taking the helm of the FSOC. Steven Mnuchin, the Treasury secretary nominee, would lead that body. The Senate hasn’t yet voted on Mnuchin’s confirmation.
Rolling back the regulations mandated by the 848-page act is easier said than done. Congress would have to pass legislation to do most of the work and Senate Democrats appear to have the votes to stall or block legislation.
Dodd-Frank has led to more than 250 rules on everything from securities and futures trading to derivatives and residential mortgages. To amend many of the rules would require time-consuming processes by a cadre of independent agencies the new president does not yet control.
A new law would be required to unwind the core of the act, which includes intense regulation of the 35 banks with $50 billion or more in assets, the requirement for “living wills” on how a large, failed bank would be wound down, and the enhanced ability of the Federal Deposit Insurance Corp. to take over a failed bank.
But Trump’s action nevertheless drew praise from the financial industry.
“A sensible and careful review of Dodd-Frank and other financial regulations can and should strengthen those goals while unleashing the power of the banking industry — from small towns and communities to our nation’s financial centers — to fuel the increase in economic prosperity that we all seek,” said American Bankers Association CEO Rob Nichols. “We look forward to working in a bipartisan manner with the administration, Congress and bank regulators on policy changes that will keep banks strong and focused on providing the capital that is so essential to rebuilding our economy.”
Investment Company Institute president and CEO Paul Schott Stevens also backed Trump’s action. The ICI represents regulated investment funds.
“From the onset, [ICI] cautioned that provisions in Dodd-Frank – particularly the potential designation of regulated funds and their managers as systemically important financial institutions (SIFIs) – were inappropriate and harmful to fund investors,” Stevens said in a statement.
The Trump administration may also find parts of Dodd-Frank it wants to keep.
Mnuchin has expressed support for the act’s so-called Volcker Rule, which prohibits federally insured commercial banks from certain risky trading activity.
Republicans in Congress support the Federal Reserve’s intense scrutiny of the eight largest and most interconnected U.S. banks. There is also wide support, though, for loosening regulation on the more than 5,000 smaller U.S. banks.
Two of the major Dodd-Frank rule-writing agencies – the Securities and Exchange Commission and the Commodity Futures Trading Commission – are headed by five- member commissions that are each three members short. Once a Trump appointee gets on each body, there presumably would be a GOP majority that could begin the long process of amending an existing rule.
Troy D. Graziano, senior fellow in constitutional law at the conservative Pacific Legal Foundation, said it may be simpler for Congress to roll back Dodd-Frank under the Congressional Review Act. The CRA allows Congress to review rules submitted in the last 60 legislative days of a Congress, but that 60-day clock doesn’t start ticking until Congress is sent a report on the new rule.
Graziano, who helped write the CRA in 1996, said federal agencies often neglect that report requirement. To roll back the rules, the Trump administration could belatedly submit the required report, starting the 60-day review period, and allowing Congress to pass resolutions overturning those rules, he said.
“The administration should take its time,” he said.
But Alan Kaplinsky, a Ballard Spahr attorney who closely tracks the Consumer Financial Protection Bureau, an agency established by Dodd-Frank, is skeptical. “I think it’s moot because I’m pretty sure that the CFPB filed all the reports on time,” Kaplinsky said.
The order “betrays the promises” that Trump made to stand up to Wall Street, said Lisa Donner, executive director of Americans for Financial Reform, a group supporting Dodd-Frank’s regulatory framework.
“But the President does not have the authority to overturn laws or tell independent agencies what to do,” she said. “And it’s flat-out illegal for the agencies to change rules by fiat without public input.”
Overregulation, a worry expressed by Donald Trump in the presidential campaign, diminishes freedom and stymies the economy. President Barack Obama is its champ. A major victory of his, therefore, was the hurriedly, recklessly passed Dodd-Frank financial reform law meant to prevent another 2008-style fiscal crisis.
Its failure is too big to ignore.
MetLife Inc. is ready to send its U.S. life-insurance business out on its own, but with no trace of its parentage or history.
On Thursday the New York company announced to employees that Brighthouse Financial will be the new name of the unit that it plans to divest in the coming months.
U.S. life insurance has been at the company’s core for more than a century and an important contributor to the company’s rise. MetLife announced in January that it would part ways with a large piece of that unit as part of a plan to slim down and respond to a shifting regulatory environment with higher capital requirements.
The operations being divested represent about a fifth of the company’s most recent annual earnings. MetLife hasn’t decided whether the divestiture will take the form of a spinoff, initial public offering or sale.
Some Wall Street analysts have said a spinoff is likeliest given the relatively large size of the U.S. unit and its capital requirements. Those factors limit the number of potential buyers.
An internal team of about 20 executives, managers and staff members settled on Brighthouse from a list of 1,500 possibilities, concluding it conveys the optimism and simplicity they want the new company to represent, a person familiar with the company’s thinking said. The team used online surveys and queries of about 1,300 consumers and financial advisers to winnow the possibilities, the person said.
Brighthouse will create life-insurance and retirement-income products for sale in the U.S. to consumers through securities brokerages, financial advisers and other outside sales forces.
“Our optimistic outlook on what we will create for people’s financial futures, coupled with our guiding principles of simplicity and transparency, are captured in our name, Brighthouse,” MetLife Executive Vice President Eric Steigerwalt, who will head the new company, said in a news release Thursday. The new company will be based in Charlotte, N.C.
MetLife will retain its longstanding Snoopy logo, at least for now. The company, which is in the middle of a multiyear contract for the use of Snoopy and related Peanuts’ cartoon characters, “will evaluate how, when and where to use all of our brand assets, including Peanuts,” a spokeswoman said.
The divestiture is part of an effort by CEO Steven Kandarian to separate the parts of the company with the best growth prospects, such as overseas operations, from parts where growth is either slower or the products require especially thick capital cushions. Regulators often require such cushions to better ensure an insurer can fulfill promises to consumers.
“As a separate entity, Brighthouse will benefit from greater focus and more flexibility in products and operations,” Mr. Kandarian said in the statement.
MetLife is proceeding with the divestiture even though a federal judge in March struck down the company’s 2014 designation as a “systemically important financial institution” by a panel of federal regulators. The panel is appealing the ruling.
In its Thursday release, MetLife said it continues “to evaluate options regarding the structure and timing of the separation.”
Backers including National Association of Insurance Commissioners file briefs with appeals court
Two insurance industry groups today offered their backing of the 12-nation Trans-Pacific Partnership trade agreement after the U.S. formally rolled out a proposal to tweak its language on financial data localization.
The American Insurance Association said it supports the proposal, which the U.S. wants TPP countries to adopt and will introduce for inclusion in trade talks on services with the European Union and in the Trade in Services Agreement, an ongoing negotiation solely related to services issues.
The move, led by the Treasury Department, comes after the Obama administration faced criticism from the financial industry and lawmakers over worries that the TPP as negotiated didn’t do enough to prevent countries from forcing financial companies to store data on servers on their soil.
“AIA offers its strong endorsement of the U.S. financial data proposal and looks forward to supporting ongoing efforts on the TPP, TiSA and TTIP,” Steve Simchak, the AIA’s director of international affairs, said in a Tuesday statement. “The reality is that, while the U.S. market is open, U.S. Insurers face enormous barriers in many markets abroad. These agreements have the backing of the U.S. insurance industry because of the enormous benefits they provide, including the new financial services data fix.”
Property and Casualty Insurers of America Vice President Dave Snyder separately called on Congress to pass the TPP, though he didn’t mention the data fix.
The Financial Stability Oversight Council (FSOC) suffered a well publicized defeat last week when a U.S. District Court rescinded the FSOC’s decision to single out MetLife, Inc. for special regulation.
The FSOC had argued that financial distress at MetLife could pose a threat to financial stability in the U.S., but the court decided that the FSOC, within the context of its own rules, “never established a basis for finding that MetLife’s material financial distress would ‘materially impair’ MetLife counterparties.”
The decision highlights a few other problems with FSOC’s designation process, particularly its lack of transparency and clear standards. The bigger problem, though, is the very existence of FSOC. Empowering a group of regulators to impose regulations tailored to specific firms, based on the notion that those companies might “pose a threat to the financial stability of the U.S.” is wholly incompatible with the functioning of a dynamic private capital market.
There appears to be little chance that Congress will get rid of the FSOC (or Dodd-Frank, the monster bill that created the FSOC) anytime soon, but there are many marginal improvements that could be made until a full repeal is possible. By the end of this week, the House will have voted on two such reforms.
One is H.R. 3340, introduced by Rep. Tom Emmer, R-Minn. The bill, known as the “Financial Stability Oversight Council Reform Act,” would subject the FSOC to the congressional appropriation process to increase transparency and accountability. Under this bill, large financial firms would still be assessed fees to fund the FSOC and the Office of Financial Research (OFR), but Congress would review how these funds are being used before releasing the money. The act would also require the OFR to provide a public notice and comment period for any of its proposed rule or regulations, a much needed change.
The second bill, H.R. 2947, introduced by Rep. Dave Trott, R-Mich., passed on Tuesday night. This bill, known as the “Financial Institution Bankruptcy Act of 2016,” would amend the bankruptcy code so that large insolvent financial institutions can be more easily resolved.
The approach is an improvement over the status quo and would make it much less likely that Dodd-Frank’s so-called orderly liquidation authority would ever be used. (Incidentally, the House Financial Services Committee is set to vote this Wednesday on H.R. 4894, a bill that would repeal Title II of Dodd-Frank, the section of the bill that created orderly liquidation.) While orderly liquidation sounds pleasant, it allows federal regulators to seize troubled financial firmsand close down their affairs with minimal judicial review.
Separately, Reps. Dennis Ross, R-Fla., and John Delaney, D-Md., introduced the Financial Stability Oversight Council Improvement Act of 2015, which passed out of committee 44 to 12 (29 Democrats and 27 Republicans) on Nov. 4, 2015.
This act would increase transparency in the FSOC’s designation process and also create a formal path for firms to avoid being designated by lowering specific risks.
All of these sensible proposals represent positive steps toward solving the “too big to fail” problem. However, any such marginal improvements should be viewed only as the very first step toward reforming financial market regulations. Dodd-Frank created new opportunities for unrestrained government intervention in financial markets, and it should be repealed.
It is indeed sad that 40 percent of millennials favor the government banning speech that some deem offensive, according to a recent Pew poll. Even more distressing is that college students have plenty of company with members of other age groups and professions who want to shut down speech they disagree with.
Take speech about personal finance. This is an area where there would certainly seem to be room for a diversity of opinion, given the complexity of the topic and differences in individual financial goals and circumstances. That’s why there is no shortage of books and radio and television shows with differing viewpoints about financial planning. If you don’t subscribe to what Suze Orman or others have to say, you can always read or tune in Dave Ramsey and even call into his radio show for advice.
At least, that is, for now. A growing group of regulators and financial professionals are declaring that financial advice, even if it occurs in a public forum, should be suppressed if they deem the advice “incorrect.” And they see a pending rule from the Department of Labor (DOL) as the perfect vehicle to make Ramsey and others who offer financial tips to the public zip their lips or face government sanctions.
A recent article in LifeHealthPro, a prominent online trade journal for insurance agents and financial advisers, calls for Ramsey to “be regulated and to be held accountable” by the government for the opinions he gives to listeners. And it opines that the DOL’s proposed “fiduciary rule,” likely to be finalized in the next few weeks unless defunded by Congress in spending bills in December, would be the ideal tool with which to muzzle Ramsey and other personal finance broadcasters.
“This rule would define Dave as an advisor and thus … he would be regulated as a fiduciary,” Michael Markey, insurance agent and owner of Legacy Financial Network, argues in the LifeHealth Pro article he authored. After going through a litany of financial tips given by Ramsey to callers on which Markey holds differing views—such as what type of life insurance to purchase (and I take no position on who is right, as these are not public policy issues)—Markey hails the DOL rule as ushering a new era in which “entertainers like Dave Ramsey can no longer evade the pursuit of regulatory oversight.”
Is it the case that the rule would do this? Or is Markey’s interpretation just wishful thinking on the part of someone who—like many of the demonstrators on university campuses—wants to shut down opinions he disagrees with?
Markey is right that the DOL rule does expand massively—and in my belief, probably illegally—the definition of the term “fiduciary” under the Employee Retirement Income Security Act of 1974. As I have written in National Review:
In the 40 years since ERISA was first enacted, DOL regulations have for the most part strictly applied the term “fiduciary” to managers of defined-benefit plans and those who provided individualized investment advice on a regular basis, such as registered investment advisers. Under the new rule, financial professionals who provide even one-time guidance or appraisal of investments could find themselves classified as “fiduciaries.”
Moreover, as I have noted in that article and in many blogs, the term would apply to many financial professionals who do not even give advice, such as custodians of self-directed IRAs. Since those deemed “fiduciaries” would have to follow the mandate to only handle investments that adhere to what the government deems as savers’ “best interests,” individual choice of holdings in IRAs and 401(k)s would be sharply restricted.
But until I read Markey’s article in LifeHealthPro, I never thought the rule would cover those who offer free advice in a public forum. So I asked Kent Mason, partner at the law firm Davis & Harman who has testified before Congress on the ill effects of the fiduciary rule, for his view. Though Mason strongly disagrees with Markey that Ramsey and others should be shut up, he told me Markey was mostly right in his interpretation of the ability of the fiduciary rule to muzzle financial personalities answering portfolio questions from callers or audience members.
“Under the proposed regulation, investment advice from a radio host to a caller regarding the caller’s own investment issues would appear to be fiduciary advice if the advice addresses specific investments,” Mason said in an email. It doesn’t matter that Ramsey and other hosts aren’t compensated by listeners, he adds, as the DOL rule explicitly covers those who give investment advice and receive compensation “from any source.” Mason agreed with Markey that the compensation Ramsey receives from radio stations that carry his show and from book sales are enough to define Ramsey as a “fiduciary” under the rule.
Though the rule does contain an exemption for “recommendations made to the general public,” this wouldn’t protect Ramsey and other radio and television personalities if they gave specific answers to callers or audience members, both Mason and Markey argue. Similarly, Mason adds, while the main part of investment seminars would be exempt, “if during the seminar, someone from the audience asks a question about his or her situation and the speaker answers the question with respect to specific investments, that answer would be fiduciary advice.”
And given how the rule would work for others deemed “fiduciaries,” this means that anyone conducting a personal finance event—be it a radio or television show or seminar—would be subject to fines and/or lawsuits if he or she answered questions from audience members that the government deemed to be not in their “best interests.”
Hopefully, were a financial broadcaster ever sanctioned under this rule, the courts would strike down such punishment as a clear violation of the First Amendment guarantee of free speech. But Congress should not let it come to that, as it has a clear Constitutional obligation to defund the fiduciary rule before it is ever implemented.
Even without this flagrant First Amendment breach, there are more than enough concerns about this rule for Congress to defund it in upcoming legislation for fiscal year 2016 spending. A recent letter coordinated by the Competitive Enterprise Institute and signed by 33 conservative and free-market groups warns about many Americans losing their current brokers and a projected $80 billion cost to consumers from loss of access to financial advice. Ninety-six House Democrats also wrote DOL expressing concern that the fiduciary rule could limit access to retirement planning for poor and middle-class Americans.
So why not create a “safe space” for free speech and financial freedom?
This article first appeared on the Competitive Enterprise Institute’s Open Mark blog. CEI Research Associate Rahul Gangan contributed to this post.
MetLife CEO Steven Kandarian has backed the Trans-Pacific Partnership (TPP) and urged the US Congress to ratify the free trade agreement.
“As one of the largest life insurers in the world, with operations in nearly 50 countries, MetLife has four key priorities in assessing any trade deal: improved market access, a level competitive playing field, ease of cross-border data flows and regulatory transparency,” he said.
“The TPP makes meaningful progress on all of them. We are confident that ratification of the TPP will lead to faster economic growth, greater choice and lower costs for consumers.”
MetLife has operations in eight of the 12 Pacific Rim countries represented under the TPP: Australia, Chile, Japan, Malaysia, Mexico, Vietnam, Singapore and the US.
“The agreement is not perfect – no trade deal is – but on balance the TPP represents a significant step in the right direction and deserves to be ratified,” Mr Kandarian said.
It’s no secret that the U.S. has a saving problem. Most Americans are generally in the dark when it comes to how much to save and what investments to make. Ask them about the Department of Labor’s (DOL) proposed fiduciary rule and you’ll get an even blanker stare. But interestingly, the proposed rule could have a big impact on many who are saving for retirement.
When it comes to saving for retirement, U.S. households need a lot of handholding. Whether it is due to behavioral reasons such as lack of self-control or discipline, or simply a lack of financial knowledge, many of us save less than optimal amounts. Widely embraced policies, such as automatic enrollment and automatic contributions within 401(k) plans, have been successful in helping overcome some of these issues. But with changing times, there comes additional problems.
These days, it is very rare to hear someone say, “after 30 plus years with the same company, I am retiring.” In fact, according to the Bureau of Labor Statistics, for wage and salary workers 16 years and over, the median number of years with their current employer was 4.6 years in January 2014. For those aged 25 to 34, the median number of years was three. This could mean as many as 15 different jobs for this generation over their working life. Many millennials see frequent job changes as a tool for career improvement. However, continuous circulation between jobs also has implications for their retirement savings.
When they change jobs, employees have the option of leaving their funds with their old employer, transferring it to a plan with their new employer, rolling it into an IRA, or taking cash out. According to a Government Accountability Office (GAO) report, some plan sponsors do not want to retain separated employees’ accounts due to administrative burdens, costs and legal liabilities. The paperwork that is required to roll into a new account can be a burden for some employees. Many young workers take the path of least resistance and take the cash out, especially if their account balances are low. For example, according to a 2011 AON Hewitt survey, 42 percent of terminating employees took a cash distribution.
Financial advice becomes crucial at the point of rollover, and helps keep savings intact. Employees are less likely to take cash distributions if they are guided by financial advice. In fact, one company found that when terminating employees were contacted by phone by a licensed representative of a financial company, they were 3.2 times less likely to take a cash distribution compared to a similar worker who received only written communications. However, the DOL rule could inhibit communication between licensed representatives like broker-dealers and employees by requiring the broker-dealer to become a fiduciary. Inhibiting these communications will increase the likelihood that terminating employees will cash out their crucial retirement savings. A new report by the American Council for Capital Formation takes a close look at the impact of the DOL’s rule. By some calculations, a lack of educational communications to transitioning employees could result in an additional $20 to $32 billion of cash outs annually, decreasing the retirement savings of affected individuals by 20 to 40 percent.
This is just one of the issues flagged by the critics of the rule. There is also the impact on small businesses that rely on financial advice to set up their retirement plans. In fact, when a financial adviser is involved, a small business with 10 to 49 workers is 50 percent more likely to set up its own retirement plan. Smaller businesses are twice as likely to set up their own retirement plan with the help of financial advisers. However, the DOL rule could hinder this ability since the seller’s exception under the proposed rule (when sellers clearly communicate that they are selling a product and not advising) does not apply to individuals and small businesses. Many experts think that the lack of a clear seller’s exception will limit or discourage many small businesses from starting their own plans, negatively impacting the public policy goal of increasing access to retirement plans.
U.S. retirement markets are continuously evolving, with changing demographics as well changing economic realities. A comprehensive retirement policy designed to maintain growth in savings, expand coverage and prevent leakage during job changes is imperative for retirement security. The recently re-proposed DOL fiduciary rule, meant to protect the retirement savings of individuals, might not be in consumers’ best interests. The DOL rule should be more fully analyzed and adjustments made to ensure that low- and moderate income individuals are not priced out of personalized guidance and advice.
Wilber, Ph.D. is a senior economist at the American Council for Capital Formation, a nonprofit, nonpartisan organization advocating tax, energy and regulatory policies that facilitate saving and investment, economic growth and job creation.
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