THE TRUMP TRANSITION: CONSEQUENCES FOR SECURITIES AND FINANCIAL REGULATION

Federal—A Change in Course for Financial Regulation and the SEC?

President-elect Trump gave few specifics on how he would handle financial regulation and the SEC during his campaign. His comments regarding Dodd-Frank, including his promise to “dismantle” it, imply a new era of reduced regulation. But he also repeatedly criticized his opponent for being “owned” by big banks, and his website called for a “21st Century Glass-Steagall,” referring to the law that required separation between investment and commercial banking until its repeal in 1999. Trump’s choices during the transition, however, have now clarified his approach.

To lead the transition team’s efforts on financial regulation, Trump chose former SEC commissioner Paul Atkins. Atkins is a staunch libertarian, according to reporting by The Wall Street Journal, and he has long been critical of aggressive financial regulation.  Atkins’s role signals that the SEC will not likely follow the Labor Department’s footsteps in promulgating a tougher fiduciary duty rule. Atkins criticized the Labor Department rule, stating in a 2015 congressional hearing that the Labor Department “should go back to the drawing board.” Speculation is rampant about other potential changes, including scaling back corporate auditing requirements, shifting SEC focus from large corporate penalties to holding individuals accountable, and requiring whistleblowers to first report to their companies (for which Atkins advocated in 2011).

Answering those questions during his confirmation hearing is Trump’s selection to chair the SEC: corporate attorney Jay Clayton. Clayton is a partner with Sullivan & Cromwell in New York focusing on M&A and capital raising, along with representing clients in regulatory and enforcement actions. Commentators view this pick as signaling a shift in focus away from enforcement to other SEC goals. Critics note Clayton has spent years as a “Wall Street insider,” but outgoing Chair Mary Jo Wright praised Clayton as “very smart, very thoughtful, very knowledgeable of the markets and the securities laws and I think a terrific person.” Regardless, the general trend appears to be friendlier to Wall Street. Anthony Scaramucci, a hedge fund manager advising the transition team, said the new head of the SEC needed to “get back to reffing the game properly and end the demonization of Wall Street.”

Finally, the Director of the Consumer Financial Protection Bureau (created by Dodd-Frank), Richard Cordray, may be forced to step down under Trump, despite language in Dodd-Frank preventing the CFPB director’s removal except for cause. The statute creating the CFPB prohibits removal of the director of the agency except for cause during his five-year term, which would insulate the director from political change. In October, however, the D.C. Circuit Court of Appeals held that structure unconstitutional because it gave too much power and autonomy to the sole director. The Obama administration is appealing that ruling, but some legal scholars believe Trump can simply withdraw the appeal after his inauguration, leaving the D.C. Circuit’s ruling intact and allowing Trump to immediately remove Cordray. Trump certainly seems open to firing Cordray, as he met with Representative Randy Neugebauer from Texas, a strong CFBP critic, about possibly replacing Cordray.

State—Regulators Fear Federal Preemption of Enforcement

Paul Atkins has also allegedly been discussing “ways to ensure that federal securities laws preempt state [Blue Sky] laws” such as the New York Martin Act, as reported by Fox Business. This news, along with Trump’s comments regarding Dodd-Frank, has prompted state regulators to push back and assert their authority. “You need a national regulator; and if they can’t, the states need to do the job and should,” said William Galvin, secretary of the commonwealth of Massachusetts. “It sounds like we’re going to be under the same type of problems there were prior to the Great Recession, with securities and financial services being ‘lightly regulated,’” Galvin explained. “I think that’s a problem.”

Other state regulators have echoed Galvin’s sentiments. Mike Rothman, Minnesota’s commerce commissioner and president of the North American Securities Administrators Association, commented: “Any attempt to weaken the investor protections provided by state ‘Blue Sky’ laws would erode investor confidence and remove a vital first line of defense for all investors working to provide a secure future for themselves and their children.” And New York Attorney General Eric Schneiderman warned that “any attempt to gut these consumer and investor protections would severely undercut state police powers and only embolden those who seek to defraud and exploit everyday Americans.” “At a time of regulatory uncertainty at the federal level, it is essential that we maintain the very laws that have helped state and local law enforcement keep consumers and investors safe for over one hundred years,” he said. Schneiderman’s office recently reached a $25 million settlement agreement in New York’s case against Trump University for violation of state education laws, among other things.