The U.S. Treasury Department (“Treasury”) released a second report pursuant to President Donald J. Trump’s Executive Order establishing core principles for improving the financial system (see coverage of first report). The new report details plans to reduce burdens of capital markets regulation (see also Fact Sheet on report).
The report recommends supporting and promoting access to capital markets, reducing regulatory costs, making changes to market structure and modifying derivatives regulation to facilitate risk transfer.
In a “Table of Recommendations” (beginning on page 205), Treasury lists proposed recommendations. Some highlights include:
- Public Companies and IPOs (e.g., decrease the cost of being a public company by eliminating the conflict minerals rule);
- Challenges for Smaller Public Companies (e.g., increase the level at which a company may be considered “small”);
- Expanding Access to Capital Through Innovation (e.g., allow accredited investors to invest freely in crowdfunded offerings);
- Maintaining the Efficacy of Private Markets (e.g., expand the definition of accredited investor);
- Market Structure and Liquidity, Equities (e.g., allow smaller companies to limit the exchanges on which they trade to facilitate the development of centralized liquidity);
- Market Structure and Liquidity, Treasuries (e.g., provide greater support for the repo market);
- Market Structure and Liquidity, Corporate Bonds (e.g., improve liquidity);
- Securitization and Capital (e.g., simplify capital regulation of banks);
- Securitization and Liquidity (e.g., treat certain securitizations as liquid assets);
- Securitization and Risk Retention (e.g., provide exemptions from the risk retention requirements);
- Securitization and Disclosures (e.g., reduce the number of required reporting fields for registered deals);
- Derivatives and Harmonization Between the CFTC and SEC (e.g., the SEC should adopt its security-based swap rules);
- Derivatives and Margin Requirements for Uncleared Swaps (e.g., there should be exemptions from initial margin requirements between bank affiliates of a bank “consistent with the margin requirements of the CFTC and the corresponding non-US requirements”);
- Derivatives and CFTC Use of No-Action Letters (e.g., rules should be fixed so it is not necessary to rely on no-action letters);
- Derivatives and Cross-Border Issues (e.g., the U.S. regulators should work with global regulators on issues such as privacy);
- Derivatives and Capital Treatment in Support of Central Clearing (e.g., required capital should be reduced on centrally cleared transactions);
- Derivatives and Swap Dealer De Minimis Threshold (e.g., there should be no reduction in the de minimis threshhold for dealer registration);
- Derivatives and Definition of Financial Entity (e.g., modify the definition, presumably with the goal of reducing the central clearing requirement);
- Derivatives and Position Limits (e.g., adopt rules but provide hedging exemptions);
- Derivatives and SEF Execution Methods and MAT Process (e.g., permit a broader range of trading mechanisms);
- Derivatives and Swap Data Reporting (e.g., improve standardization of reporting requirements);
- Financial Market Utilities (e.g., consider providing “Fed access” to certain clearing corporations);
- Regulatory Structure and Processes, Restoration of Exemptive Authority (e.g., restore the SEC’s and CFTC’s plenary exemptive authority under the statutes that they monitor);
- Regulatory Structure and Processes, Improving Regulatory Policy Decision Making (e.g., adopt clear rules);
- Regulatory Structure and Processes, Self-Regulatory Organizations (e.g., better define the roles of the SROs in rulemaking); and
- Internal Aspects of Capital Market Regulation (e.g., U.S. regulators should seek to reach “outcomes based non discriminatory substituted compliance arrangements” with foreign regulators to mitigate “the effects of regulatory redundancy and conflict”).
Lofchie Comment: The prior Administration viewed financial markets as creators of risk that had to be controlled; this Administration appears to view financial markets as creators of growth that would benefit from decreased controls. This is simply a tremendous difference in perspective and tone.
There will and should be a fair amount of discussion over these many and specific recommendations. One broad recommendation, however, stands out: restoring to both the SEC and the CFTC complete exemptive authority as to the requirements of the statutes that they enforce. Depriving the regulators of this authority in the wake of the Congressional enthusiasm for Dodd-Frank had limited the regulators ability to fix Congressional mistakes and over-reaches in drafting. The prior Administration had simply become so locked into defending Dodd-Frank against any criticism that it had become impossible for the regulators to consider, or even discuss, what aspects of it might be working or not. The new Administration does not bear the burden of justification.