After Donald Trump’s surprise victory in November, many observers were left wondering what a his presidency would mean for the financial regulatory environment, given his repeated campaign promises to significantly roll-back many recent financial regulations.
Will President Trump and his administration lean back on his business and Wall Street ties to enact financial deregulation policies focused on boosting banking profits at the expense of excessive risk taking? Or will President Trump take a more measured approach to financial deregulation with an end-goal of job creation through reduction of compliance burdens and return to pro-business, credit-friendly environs?
With election night in our collective rear view mirror and the inauguration less than three weeks away, an examination of the president-elect’s transition advisers, early cabinet and agency nominees, and industry reaction provides insight to how financial deregulation will unfold in the early stages of a Trump presidency. None is more telling than the lead up to the president-elect’s announcement of Jay Clayton as his nominee for chairman of the U.S. Securities and Exchange Commission (SEC).
We can start by looking at billionaire investor Carl Icahn, one of Trump’s primary advisers on this nomination. Icahn, who was an early supporter and key advisor to Trump during the campaign, became an early member of his transition team and was recently named special advisor to the president on regulatory reform, with an emphasis on regulations that are in the purview of the SEC.
Icahn played a central role in evaluating candidates for the SEC chairmanship, meeting with most of the candidates on behalf of the president-elect. As a well-known activist investor, Icahn has skin in the game in terms of the SEC’s direction under the next administration. Activist investors and their clashes with corporate boards are heavily monitored and controlled by the SEC, with business groups urging the agency to require activist investors to more quickly disclose their stakes following acquisition.
Icahn has also been less critical of recent targets of deregulation focus, having been generally positive about the Dodd-Frank Act, and in particular, the Volcker rule’s ban on proprietary trading, which is one of the financial reform law’s signature initiatives. Icahn has acknowledged that the Volcker rule has reduced the role of banks in securities markets, which opponents criticize as reducing the number of buyers and sellers in a crisis market.
Icahn, while debating BlackRock CEO Laurence Fink at a conference in 2015, said that regulations weren’t to blame for this market weakness. Rather, he said the vast role that large asset managers like BlackRock play in the markets by introducing high-risk investment funds are to blame, as they would inevitably have difficulty meeting investor redemptions in a crisis—much like how the most recent financial crisis unfolded.
We can expect Icahn to be a powerful voice in shaping the direction of the SEC in this area of what will likely be adjustments to Dodd-Frank, rather than an outright appeal. This is a preference expressed by several the largest bank executives. Icahn’s well-known advocacy of better corporate governance standards for boards of directors and executive management will also likely be pushed by the Trump administration.
This brings us to Trump’s nomination of veteran Wall Street lawyer Jay Clayton, a partner at prominent New York law firm Sullivan & Cromwell, as the next chairman of the SEC. Many had expected the president-elect to nominate former U.S. Attorney Debra Wong Yang, whose background is more closely aligned to that of outgoing SEC Chairwoman Mary Jo White, a former federal prosecutor.
Clayton is more of a conventional choice than was expected under an Icahn-advised president-elect, but he is consistent with Republican ideals in terms of dealmaking with Wall Street rather than vilifying it. He is more consistent with pre-crisis nominees of the administrations of Bill Clinton and George W. Bush.
Clayton has a wealth of large Wall Street banking deals under his belt, including assisting Barclays in acquiring significant Lehman Brothers assets in bankruptcy and facilitating the sale of Bears Stearns to JPMorgan Chase in the early days of the financial crisis. He has extensive experience in raising capital, having counseled Goldman Sachs on Warren Buffett’s $5 billion investment in the bank during the financial crisis, and advised several significant initial public offerings.
In his role at the SEC, Clayton will likely focus his deregulatory efforts to loosen the fundraising rules and compliance requirements, particular for small to middle market companies, which is in line with Trump’s mantra of job creation through capital investment. Given Clayton’s close ties to private-equity firms and several prominent Wall Street executives, private-equity firm oversight and executive compensation limitations will likely be rolled back.
If confirmed, Clayton will take over the SEC at a time when congressional Republicans are pressuring the agency to loosen fundraising rules for smaller public companies, lighten its oversight of private-equity firms, and repeal executive-compensation rules opposed by corporations.
Much of president-elect Trump’s deregulation policy is yet to unfold. Beyond targeting Dodd-Frank for a repeal or rewrite, the Sarbanes-Oxley Act of 2004—enacted after the Enron and WorldCom accounting scandals—may be in the crosshairs of the Trump administration and Republican-controlled Congress.
Nominations such as that of Clayton certainly indicate that deregulation will be aggressive in the hopes of making it easier for the commercial banking and private-equity sectors to do business.
Adam Ingles is a director and head of regulatory risk solutions at MBAF, a global accounting and advisory firm. He has advised financial institutions on regulatory compliance and enforcement actions for more than 15 years.
Frank Gonzalez is the managing principal of MBAF’s Miami office and the principal-in-charge of the firm’s audit department, where he leads the financial institutions and SEC practices. He advises businesses on audit and compliance issues.
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