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During his first month in office, President Trump set an ambitious anti-regulatory goal to eliminate “75%–maybe more” of existing regulation in an attempt to address his ubiquitous campaign cries of “roll back job-killing regulations” and “dismantle Dodd-Frank.”

Trump said repeatedly during his campaign that the Dodd-Frank Act was preventing banks from lending, which he stated in turn made it harder for consumers to access credit and ultimately for the economy to grow. Economists and academics have expressed mixed views on this assessment.

However, while “Dismantle Dodd Frank” may be a rallying cry for the populist movement that swept Trump into office, the challenges of delivering on that pledge is formidable, with perhaps the biggest obstacle being procedural.

Challenge

A full-scale repeal of Dodd-Frank requires Congressional action and a replacement plan, which could take years to finalize. Trump’s early efforts to “deconstruct the administrative state” have focused on regulatory reform through executive orders like adopting a “2 for 1” regulatory policy and asking the incoming treasury secretary and financial regulators to consider rolling back Dodd-Frank with suggested rule revisions. But, dismantling or even weakening Dodd-Frank is not as simple as signing an executive order. Dodd-Frank is extremely complex, so dismantling it will be difficult if not politically improbable – for two main reasons.

First, Dodd-Frank is extremely broad in scope and 75% of its initiatives have already been implemented. These completed components include rules that deal with bank bailouts, higher capital requirements, preventing depository-taking operations from making speculative investments (Volcker Rule), imposing bank stress tests, and regulating the derivatives and swaps markets. The rule also reformed mortgage and consumer protection by creating the Consumer Financial Protection Bureau (CFPB). In addition, amending portions of the rule will require Congressional approval, and while Republicans enjoy a majority in the House and the Senate, without a “filibuster-proof” Senate majority, Trump could face a difficult ideological fight from progressives like Senators Bernie Sanders (D-VT) and Elizabeth Warren (D-MA), who helped create the CFPB.

The second reason deals with the philosophical conflicts of dismantling Dodd-Frank. Aside from the logistical challenges of repealing portions of the Act, Trump’s populist message during the campaign included condemnation of the bankers and financial executives that caused the financial crisis. This seems at odds with the repeal of Dodd-Frank, which would seemingly benefit those same bankers.

Trump’s executive actions may be more sizzle than substance, given they have limited scope, do not possess any long term funding, are subject to judicial review, and in many ways represent standard opening moves by a new incoming administration.

Ultimately, executive orders are subject revocation by future administrations.  

 Procedural challenges represent the biggest hurdle towards the dismantling of the regulatory state. 

Federal Rules-Making Process

While there are two paths rules and regulation can take to enactment, the formal process, which requires a congressional hearing on the record and the blessing of a panel of judges, is used far less than the informal process. Should Trump embark on the path to dismantle and replace portions of Dodd-Frank, it is far more likely he will use the informal process.

The GSA Reg Map provides an overview chart of the informal (agency) rulemaking process.

The process kicks off with a step colloquially known as “Notice and Comment,” which involves the Office of Information and Regulatory Affairs (OIRA), Office of Management and Budget (OMB) and the Executive Branch (Office of the President). This process involves the appropriate jurisdictional Federal Agency and takes years to complete.

Steps include:

  • Gathering evidence
  • Engaging with stakeholders, including constituents, policy makers, academics, and the public
  • Notice of proposed rulemaking
  • OMB proposed rule review (cost-benefit analysis)
  • Soliciting public comments (minimum period of 120 days is customary)
  • Preparing final rule, reviewing and possibly incorporating public comments
  • OMB final rule review
  • Publication of final rule, binding regulatory framework
  • Drafting the implementation, disclosure and reporting requirements of the final rule
  • Agendas for rules under development or review

This process works both ways; the president cannot simply issue an executive order rescinding unsavory regulations, and federal agencies must go through the same lengthy notice and comment process to undo existing regulations.

Sympathetic presidential appointees leading executive branch federal agencies are a small fraction of the federal workforce, whereas career civil servants, many of whom have spent the last decade building our existing regulatory framework, do most of the work. They are influential in controlling the pace of the process and can impede an already slow pace.

Judicial Review

The new administration will also have to contend with the courts. Life-tenured federal circuit judges decide many deregulatory actions after careful consideration of procedural and substantive issues.

The evidentiary record, based on a specific need and through use of a sound logical approach, is the justification for creating new regulations or repealing existing ones. Absent a change in the underlying record justifying a repeal, an agency changing an existing regulation opens itself up to charges of “arbitrary and capricious” action.

Congress

Congress controls the most potent weapon influencing regulatory action and enforcement: legislative funding. Congressional cooperation could be a game-changer by effectively defanging existing legislation or by sidestepping the federal agency notice and comment process. House Republicans could repeal regulations legislatively by passing laws that overwrite, delay, or defund existing rules. The Department of Labor’s fiduciary rule is a prime example of this, as House Republicans introduced “The Protecting American Families’ Retirement Advice Act” requesting a two-year implementation delay to the rule set to take effect in April 2017, with the OMB passing a six-month funding delay proposal in early March as a first step along that process.  

A simple majority in the House would suffice, but not in the Senate where a filibuster-proof 60 vote majority is required for passage.

The less known and little used Congressional Review Act can overturn very recent regulations and indefinitely prohibits an agency from issuing a “substantially similar” rule, providing a durable ban against regulation within specific areas.

Significantly, two bills recently passed in the House would give Congress unprecedented authority in the regulatory process and make it much harder for agencies to create new regulations. It’s unlikely either bill passes the Senate, despite helping to strengthen Trump’s near-term agenda.

While Trump ran and won on a platform unlike any seen before in recent history, his administration is still subject to the same organs of government his predecessors faced. As such, plans to roll back, dismantle, or augment the Dodd-Frank Act will take considerable effort and face barriers not only at the political level, but at the technical as well. 

In my next article, I’ll explain Trump’s options for enforcing or replacing the details of the Dodd-Frank act.          

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Corporate Strategy Analyst, Global CTS Specialists
Fran joined FactSet in 2015 as an experienced capital markets professional with extensive fixed income trading, structuring and sales expertise at top-tier investment banks like Morgan Stanley, UBS, Lehman Brothers and Barclays Capital. Fran is an industry author and speaker on topics including debt capital markets, financial regulatory reform, housing reform and public policy matters. Over his career, Fran has managed institutional trading and sales teams for large complex investors like the U.S. Government Sponsored Enterprises (GSEs), European Supra, Sovereign and Agencies (SSAs), central banks, commercial banks, hedge funds, insurance companies and asset managers.

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