DC Deciphered

YOU get an executive order, and YOU get an executive order . . .!! The executive orders are flying left & right, and it seems like soon enough there might be one for each of us.  The  news today is that President Trump signed an order rolling back Dodd-Frank financial reform.   He also made another important change in the area of financial regulation, signing an order to undo an Obama-enacted rule called “the fiduciary rule.”

The Fiduciary Rule

Let’s start with the fiduciary rule.  In 2016, the Obama administration made a new rule, known as “the fiduciary rule” that would require financial advisors to adhere to the “fiduciary standard” when advising clients about their retirement accounts.  This means that the advisors would have to put the client’s interests ahead of their own profits when giving their clients advice.  And no, you’re not missing anything – prior to this rule, that was actually not a requirement.  (But don’t confuse “financial advisors” with “investment advisors.”  If you have an investment advisor you’re all good. According to the Consumer Federation of America, “investment advisor” is a legally defined term, and anyone who is considered an investment advisor is already held to the fiduciary standard.  “Financial advisor”, on the other hand, has no legal definition, so it can be used more broadly to cover anyone giving financial or investment advice.  But it is commonly used to cover people who work for broker-dealers or insurance companies as salespeople, and that’s where the potential conflict over profit motive comes in, because they are selling the very same products they are advising on. With Trump’s move, these advisors will not legally be held to any fiduciary duty to their clients).

Anyway, this new rule was not planned to go into effect until April of 2017.  And now Trump has overturned it with yet another executive order. (Because it was a rule, not a law, Trump is able to direct his agencies to reverse it without going through Congress). [Please read the correction and update to this section here.  The executive order actually called for the rule to be reviewed but not overturned – yet]. Trump’s National Economic Council Director (and former top exec at Goldman Sachs) said that this was great news for Americans, because now we’ll have more choices.  He explained that the Obama rule was like limiting the freedom to choose your own diet:  “This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” 

Of course, this is a silly comparison because, for the most part, people know how to choose healthy food if they so desire.  They have the knowledge to look at a menu and figure out, generally, which foods are good for them and which aren’t.  And when they’re not sure, that information (calorie count, fat content, etc,) is easy enough to find & straight forward enough to digest with minimal research.

When it comes to investment decisions, people have financial advisors specifically because they don’t have the knowledge to make those decisions for themselves.  We’re talking about a highly specialized field of knowledge where the client has to rely on the advisor to give them the best information possible.  If the advisor isn’t required to do that, the client has no way of determining for themselves what information is trustworthy.   In any case, now thanks to Trump’s executive order, Americans can continue to enjoy the freedom to make unhealthy investments!

Dodd-Frank

Dodd-Frank was passed by Congress in response to the 2008 financial crisis in order to  reform the way the entire U.S. financial system is regulated.  It was the largest overhaul of the system since just after the Depression.  The law was passed almost entirely by Democrats, with a very small handful of votes from Republicans.  The law is sprawling and complex, so I won’t even attempt to write about it here in any detail.   But the broad intent of the law was to decrease the risk in the financial system in order to prevent future crises and to add protections for consumers from the types of abuses that helped lead to the crisis.

Republicans, and many of the institutions covered by Dodd-Frank, opposed passage of the law, and have pushed back against it ever since.  Their opposition to the law is based on various factors, such as a general dislike for regulation (many Republicans), and claims that the regulations are overburdensome and expensive to comply with, that the regulations inhibit their profit making ability, and that the regulations hurts them vis a vis foreign competitors who aren’t subject to the same restraints.  And some argue that it’s unfair to subject community banks or smaller banks to thee regulations, when they weren’t responsible for the crisis.  In general, critics of Dodd-Frank argue that the law hurts economic growth.

The Consumer Financial Protection Bureau

One particular target of criticism by these institutions and many Republicans has been the Consumer Financial Protection Bureau (CFPB), which was created under a provision of Dodd-Frank.  So a big question in recent days has been whether – or more likely, how much – Trump will attempt to weaken the CFPB.  The CFPB is a government agency that is tasked with protecting consumers from abusive treatment by financial institutions.  It regulates credit card companies, payday lenders, mortgage lenders, credit reporting agencies, just to name a few.

When these companies engage in fraud or abuse against their customers, the CFPB can sue on their behalf.  The CFPB also investigates in order to prevent such behaviors in advance, and it provides information to consumers in order to help them avoid scams, frauds, etc.  Some example of the specific types of actions the CFPB takes on behalf of consumers:  the agency has gotten money returned to customers cheated by credit card companies, investigated predatory lending  & protected military families from illegal foreclosures.  Alexis Goldstein, a former Wall Streeter who left in 2010 and became very active in the “Occupy Wall Street” movement has a great Twitter thread full of specific examples of the CFPB’s work.

An interesting side note on the CFPB: Senator Elizabeth Warren is a household name now, but it was not too long ago that most of us hadn’t heard of her.  It was actually through the creation of the CFPB that many of us first learned about her, because the agency was Elizabeth Warren’s baby.  She came up with the idea and pushed for its creation.  As we watched her in tv interviews or saw clips or her online, arguing so enthusiastically for the creation of this agency & explaining why it was needed, she became known to many of us as a fierce fighter for the “regular guy.”

But, But . . . How??

It took Democrats more than a year to get Dodd-Frank passed in Congress, so how can Trump just undo it with a stroke of the pen?  I wrote a post at the beginning of the week that explains how executive orders work and what Trump is allowed to do with them, called  Order Up.  That post provides a good background for understanding what’s happening now with the changes Trump is planning to make to Dodd-Frank.  But the main idea here is that Trump isn’t actually repealing the Dodd-Frank law.  The law will still stand, but Trump plans to undo much of the regulation and guidance put out by the numerous government agencies that are responsible for implementing the law.  This law is so big, and the industry it’s attempting to regulate is so vast, that many of the details were not specified in the law itself but were left up to the individual agencies to put into place after the law was passed.  Trump can use this executive order to instruct the relevant agencies to undo or replace these rules and guidance actions (though the rules making process is very slow and technical, so many of these changes won’t be seen for some time).  The Washington Post explains:

[The law] is basically constructed of thousands of pages of regulations promulgated since its enactment, it is susceptible to effective dismantling by modifying or rescinding regulations and guidance actions issued by a multitude of agencies, including but not limited to the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Treasury Department and the Federal Reserve Board. The 850-page law required some 400 rules, some of which have yet to be completed.

Republicans do plan to ultimately repeal to entire law through legislation if they can muster up the votes, but in the meantime, Trump can take much of the bite out of Dodd-Frank by simply changing the way the relevant regulatory agencies implement the law.

Bottom line, with these two orders, Trump gets to keep his donors and his Party happy for the moment, while soothing any supporters who don’t happen to be millionaires by explaining to them that they too are winners here because they get the chance to choose cheeseburgers & french fries instead of spinach.