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Reality check: Dismantling Dodd-Frank far from a done deal

A street sign for Wall Street outside the New York Stock Exchange in Manhattan.

Andrew Kelly/Reuters

U.S. President Donald Trump's plan to dismantle crisis-era financial laws faces hurdles in Congress and from the regulatory process – obstacles that could take months if not years to overcome.

Although Mr. Trump vowed to do a "big number" on the Dodd-Frank financial-regulation bill, his administration cannot kill the law unilaterally.

"The President can't change the law by fiat," said Rohit Chopra, senior fellow at the Consumer Federation of America. "The White House wants to move into less regulation of Wall Street; that will require action by the Congress."

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Congress must write a law to repeal Dodd-Frank and that legislation must win 60 votes in the Senate, where Republicans control only 52 of the seats. One proposal by congressional Republicans giving banks a choice between holding more capital or complying with Dodd-Frank would face similar problems in the Senate.

Another major difficulty lies in how rules are established.

Dodd-Frank has been implemented through a deliberative process, with regulators sometimes spending years analyzing and crafting rules before issuing them. For example, one rule that banks want relaxed – the Volcker rule banning proprietary trading – took five agencies five years to implement.

"You can't just say you don't like it and change it," said Dennis Kelleher, chief executive with consumer advocate Better Markets Inc. "They have to have a robust basis, and data and analysis that is defensible and withstands aggressive scrutiny."

Take a look at the fiduciary rule that Mr. Trump and his chief economic adviser, Gary Cohn, want to quash.

The rule, which was expected to come into effect in April, would impose stricter standards on brokers to act in their clients' best interests when giving retirement advice. Although the industry has fought to stop the rule, courts have ruled in its favour.

Courts have also temporarily suspended Mr. Trump's executive order banning immigration from seven Muslim-majority countries, just days after the ban went into effect.

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"As he is finding out, the President is not above the law. He has to follow the law and his nominees have to follow the law and the agencies have to follow the law," Mr. Kelleher said.

But there are ways to gut Dodd-Frank without an outright repeal.

With the most ardent supporters of Dodd-Frank gone or on their way out, Mr. Trump's choices to lead the financial regulators will set the pace of policy making and the tone of enforcement.

So far, the President's nominees are known for their ties to Wall Street. A Wall Street lawyer, Jay Clayton, has been chosen to head the Securities and Exchange Commission. Mr. Cohn, a former Goldman Sachs president, is pulling the strings on regulatory reform. A former Goldman Sachs executive and hedge-fund manager, Steven Mnuchin, was sworn in on Monday to serve as Mr. Trump's Treasury Secretary.

"Appointments matter quite a bit," Mr. Chopra said.

Mr. Trump's executive order on financial oversight is vague and does not name Dodd-Frank. Rather, it outlines a set of core principles, such as enabling U.S. companies to be competitive and directs the Treasury Secretary to consult the Financial Stability Oversight Council (FSOC) on which rules adhere to the administration's standards and which ones need to be changed.

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It is that language that gives Mr. Mnuchin latitude to redo rules that financial players find burdensome.

The FSOC is a 10-member council that includes the leaders of every U.S. financial regulator, such as the Federal Reserve and SEC. It was set up to monitor risks to the financial system in the wake of Wall Street's meltdown, but has come under fire from Republicans for giving certain financial institutions a "systemically important financial institution" designation and subjecting them to more rigorous oversight and higher capital levels.

"Agencies can go to FSOC and say 'stop doing stuff' and maybe this gets at the problem of over-regulation," said Douglas Landy, a partner at Milbank, Tweed, Hadley & McCloy in New York, who advises major financial institutions.

For example, bank regulators could use their seat on the FSOC to say that U.S. banks under the current capital regime are less competitive than their counterparts in the EU, where banks don't have to hold as much capital.

Then, Mr. Mnuchin could direct regulators to come up with a solution, such as lowering capital requirements. On Mr. Mnuchin's first day on the job as Treasury Secretary, he heard positive comments from Federal Reserve chair Janet Yellen. The central bank chief told lawmakers that she agreed with the Trump administration's core principles on financial oversight.

"It's a very interesting comprehensive way of achieving the same idea of dismantling Dodd-Frank without going through the problem of getting 60 votes in the Senate," Mr. Landy said.

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About the Author
Economics Reporter

Rachelle Younglai is The Globe and Mail's economics reporter. More

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