Treasury officials have released a major report on how to undo many of the provisions of the seven-year-old Dodd-Frank Act in an effort to boost markets.
The U.S. Department of the Treasury released a report late last week that is being called a blueprint for all the federal agencies that oversee Wall Street firms, and it points to ways to “streamline and reform the U.S. regulatory system for the capital markets,” according to Treasury officials.
The report follows President Trump’s Executive Order 13772, issued Feb. 3, which asked Treasury officials to uncover laws and regulations “inconsistent with a set of Core Principles of financial regulation,” Treasury officials say.
“The U.S. has experienced slow economic growth for far too long. In this report, we examined the capital markets system to identify regulations that are standing in the way of economic growth and capital formation,” Treasury Secretary Steven T. Mnuchin says in an official statement. “By streamlining the regulatory system, we can make the U.S. capital markets a true source of economic growth which will harness American ingenuity and allow small businesses to grow.”
The report cites Dodd-Frank’s “several significant changes to capital markets regulation, such as mandating risk retention for securitized products, mandating clearing of certain derivatives through central counterparties (CCPs), and authorizing the FSOC to designate systemically important financial market utilities (SIFMUs).”
After seven years, Treasury officials want a reexamination of these rules “both individually and in concert, guided by free-market principles and with an eye toward maximizing economic growth consistent with taxpayer protection.”
“Certain elements of the capital markets regulatory framework are functioning well and support healthy capital markets. For some elements, more action is needed to guard against the risks of a future financial crisis. Other elements need better calibration and tailoring to help markets function more effectively for market participants. There are significant challenges with regulatory harmonization and efficiency, driven by a variety of factors including joint rulemaking responsibilities, overlapping mandates, and jurisdictional friction,” according to the report.
“In order to help maintain the strength of our capital markets, we need to constantly evaluate the financial regulatory system to consider how it should evolve to continue to support our markets and facilitate investment and growth opportunities, while promoting a level playing field for U.S. and global firms and protecting investors,” according to the report.
The significant reforms that Treasury officials want are intended “to promote growth and vibrant financial markets while maintaining strong investor protections,” which critics of Trump say will be a hard balancing act.
The proposed changes are intended to boost the number of publicly traded companies and up the liquidity that capital markets can offer to small businesses “as they grow, invest, and hire,” according to the Trump Team.
In particular, Treasury officials identify many ways to cut the burden on companies that want to go public or stay public such as:
- “Streamlining disclosure requirements to reduce costs for companies while providing investors the information they need to make investment decisions;”
- “Tailoring the disclosure and other requirements for companies going public based on their size;”
- “And re-examining the JOBS Act to identify how its tools can be improved.”
In addition, Treasury officials say that the federal financial regulatory framework and processes could be improved by:
- “Evaluating the regulatory overlaps and opportunities for harmonization of SEC and CFTC regulation;”
- “Incorporating more robust economic analysis and public input into the rulemaking process in order to make the rulemaking process more transparent;”
- And “opening up private markets to more investors through proposals to facilitate pooled investments in private or less liquid offerings, and revisit the ‘accredited investor’ definition;”
- “Limiting imposing new regulations through informal guidance, no-action letters or interpretation, instead of through notice and comment rulemaking;”
- And “reviewing the roles, responsibilities and capabilities of self-regulatory organizations (SROs) and making recommendations for improvements.”
Aside from the equity markets, Treasury officials have reviewed the derivatives market and “found the need for greater harmonization between the SEC and CFTC, more appropriate capital and margin treatment for derivatives, and resolution of cross-border frictions that fragment global markets.”
The report finds “numerous opportunities for improvements” in the implementation of regulation for “forward agreements, futures contracts, options, and swaps” that “allow financial and nonfinancial concerns to transfer, and thus better manage, a wide range of risks. Treasury recommends greater harmonization between the SEC and the CFTC, more appropriate capital and margin treatment for derivatives, allowing space for innovation and flexibility in execution processes, and improvements in market infrastructure.
“Treasury recommends that the CFTC and the SEC strive to improve cross-border regulatory cooperation with non-U.S. jurisdictions where possible to avoid market fragmentation, redundancies, undue complexity, and conflicts of law. These changes can serve to level the playing field for market participants while at the same time ensuring healthy, fair, and robust derivatives markets and preserving our domestic financial interests,” according to the report.
Some of the other recommendations in the 223-page report are:
- “Improving the oversight of financial market utilities (FMUs), such as by FSOC [Financial Stability Oversight Council] continuing to study the role FMUs play in the financial system, and regulators considering appropriate risk management for FMUs in order to avoid taxpayer-funded bailouts;”
- Repealing Section 1502, 1503, 1504 and 953(b) of the Dodd-Frank Act;
- “Investigating how to reduce costs of securities litigation for issuers with the goal of protecting all investors’ rights and interests;”
- “Increasing the amount that can be raised in a crowdfunding offering from $1 million to $5 million;”
- “Examining the impact of Basel III capital standards on secondary market activity in securitized products;”
- “And advancing U.S. interests and promoting a level playing field in the international financial regulatory structure.”
The Treasury report was released on the eve of the Columbus Day holiday weekend, and the likely opposition to the proposed changes was not able to respond by press time.
While the Trump team may have had difficulties getting a Republican majority for the repeal of Obamacare (the Affordable Care Act), he may get a more receptive response to a Dodd-Frank repeal.
Although not commenting upon the new Treasury report, U.S. Congressman Jeb Hensarling, a Republican from Texas who is chairman of the House Financial Services Committee, and author of the CHOICE Act, the counterpoint to Dodd-Frank, expressed his hopes about a Dodd-Frank repeal to FOX-News.
“I would like to see [a Dodd-Frank repeal] attached to any bill that moves across Congress. Fundamental tax reform is so critical to our economy, but so is regulatory reform. Speaker Paul Ryan has called the Financial CHOICE Act the crown jewel of our regulatory reform efforts … I look forward to any opportunity to advance both tax reform and regulatory reform,” he was quoted as saying.
The full report can be found here, and a fact sheet here.
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