Jake Plenderleith, Editorial Manager, International Compliance Association
Dodd-Frank emerged in the aftermath of the 2007-2008 financial crisis, designed to prevent the kind of failures that led to the collapse of Lehman Brothers. It explicitly looked to address the problem of banks being ‘too big to fail’ and aimed to guarantee transparency and promote accountability in the financial services industry.
Despite its noble intentions, the act turned out to be one of the most divisive of the Obama administration, drawing vociferous opposition, as well as support, since its launch in 2010.
In the opposition quarters, Dodd-Frank is seen as a leash retraining American businesses. Opponents say it places too many restrictions on banks, making it difficult for businesses to acquire loans. Supporters, however, maintain that Dodd-Frank is a necessary bulwark against the irresponsible behaviour on Wall Street that exacerbated the 2008 financial crisis.
The fate of the act now rests in the hands of a Republican-controlled and hostile Congress and an outright adversary in the president. Trump vowed to ‘dismantle’ the act during his period as president-elect, and he is not an isolated voice in calling for change.
Texas Congressman Jeb Hensarling chairs the House Financial Services Committee and is a man whose opinion of Dodd-Frank is unequivocal: “I will not rest until Dodd-Frank is ripped by its roots and tossed on the trash bin of history.” Changes to banking regulation have to go through Hensarling in his position as head of this committee. As a Trump supporter and close pal of the vice-president, Hensarling’s views on Dodd-Frank are for the first time aligned with the thinking in the White House.
Dodd-Frank was a massive legislative act, affecting most areas of financial services, banking and trading. Here are three areas that will draw particular scrutiny from the Congress:
Section 1504: Anti-corruption
Despite the repealing threats so early into the Trump Administration, total repeal is less likely than substantial changes to the law.
True to his promise, the first step in Dodd-Frank’s unravelling was taken in a February, when Trump signed a Congressional Review Act revoking the obligation on US energy firms to publish payments made to foreign governments (known as ‘Publish What You Pay’).
This disclosure obligation was part of Dodd-Frank – Section 1504 – though it hadn’t yet come in to effect as oil groups including the American Petroleum Institute challenged the ruling in court. (Secretary of state Rex Tillerson was an opponent of 1504 during his time as head of ExxonMobil.)
But even if the President wished to do so, total rolling back wouldn’t be quite so straightforward: Congressional approval would be required to chip away at Dodd-Frank, which some Democrats in Congress are certain to oppose.
Similarly, though Hensarling is pro-Wall Street, his proposed Dodd-Frank replacement – the Financial CHOICE Act – would clear the way for the SEC to impose even larger fines on the banks.
The ‘rogue agency’
One of the most contentious parts of Dodd-Frank was the establishment of the Consumer Financial Protection Bureau. The CFPB was the brainchild of Senator Elizabeth Warren, who wanted it to be the ‘cop on the beat’, punishing misconduct in the financial sector that hurts consumers. For the opposition, it has been a lightning rod for criticism of the entire Dodd-Frank Act. A recurrent criticism of the bureau is that it is unaccountable. Hensarling reserves his most strident ire for the CFPB on this basis, describing the agency as a ‘benevolent dictator’ and a ‘rogue federal agency’.
The CFPB director is not accountable to Congress, and only the President can remove a director for ‘good cause’; neither of which factors endears the agency to elements in Congress. A federal appeals court ruled in October last year that the President should be able to fire the CFPB chief for more than good cause and that the agency was unconstitutional, which the bureau appealed. A panel of judges will consider the case in May.
Not even supporters of the CFPB could truthfully claim that the agency has not made mistakes, but with a Republican-majority Congress and a hostile President, the CFPB’s days could well be numbered.
Foreign Corrupt Practices Act
Oil and gas chiefs opposed Section 1504 of Dodd-Frank on the basis that bribery payments to foreign governments already came under the umbrella of the FCPA (1977).
The SEC witnessed a record year for penalties under the FCPA in 2016 taking $2.43 billion in fines, but with Trump on record as calling the FCPA a ‘horrible’ law – and his political agenda to relax regulation for American businesses – means the future is uncertain as to how frequently the act will be implemented.
Attorney General Jeff Sessions was specifically asked by a congressional committee about Trump’s comments concerning the FCPA, and Sessions responded by confirming he would implement it, along with the International Bribery Act (1998). For transparency and anti-corruption campaigners, these are reassuring signals.
Jay Clayton’s nomination as SEC chief had led to concerns that regulation was not a priority for the Trump administration, which led to outgoing SEC chairwoman Mary Jo White urging Clayton in her final speech to maintain the agency’s political independence.
Whatever happens to Dodd-Frank, the FCPA looks to be on firmer ground.
Dodd-Frank is simultaneously accused of stifling US businesses and being the only defence against another potential financial crisis. The truth, as ever, is more likely to fall somewhere in the middle of these two extremes.
Implementation of Dodd-Frank has been slow, and now nearly a decade on following the financial crisis, some of the excesses that led to it are fading from memory, meaning it’s more likely that Dodd-Frank will be stripped of its harder-hitting features.
Trump is nothing if not unpredictable, and so it is possible that Dodd-Frank will survive - though not without a substantial makeover.