The Trump Agenda

Torys Quarterly: Adapting to Change

The 2016 U.S. election resulted in Donald Trump winning the White House, with economic growth a significant aspect of his campaign platform.

However, this has been overshadowed in the first few months of the new administration by replacing Obamacare, instituting a travel ban, and the administration’s alleged ties to Russia.

Nevertheless, President Trump’s economic and trade policy proposals made during the campaign and the initial manifestations of the President’s economic agenda portend a significant departure from the agenda pursued by the previous administration. These changes could have far-reaching and profound consequences for businesses and financial firms in the United States and its trading partners, including Canada.

1. Dodd-Frank

President Trump has issued an executive order directing the U.S. Treasury to review the Dodd-Frank Act. Although the President has publicly denounced Dodd-Frank and promised to cut large portions of it, changes will likely come in the form of targeted roll-backs instead of substantial repeal. Dodd-Frank, which passed in 2010, consists of hundreds of provisions overseen by different regulatory agencies, some of which have yet to be implemented. It established, among other things, the Consumer Financial Protection Bureau, the Volcker Rule (prohibiting banks from engaging in proprietary trading and limiting their investments in and other relationships with hedge funds and private equity funds), stricter rules regarding bank capitalization, and stricter standards for issuing mortgages. Although Republicans currently hold majorities in both houses of Congress, they do not have the 60 votes needed to overcome a filibuster—indefinitely delaying a vote—by Democrats in the Senate in order to pass a broad repeal. As a result, the roll-back of Dodd-Frank is expected to take the form of a series of incremental reforms.

Resource Extraction

In February 2017, a joint resolution of the U.S. Congress repealed the SEC’s publish-what-you-pay rules, which were set to take effect in 2018 to force oil, gas and mining companies to reveal payments to U.S. federal and foreign governments tied to resource development. For this particular vote, Republican lawmakers used the Congressional Review Act to avoid the procedural requirement for 60 Senate votes. It is unlikely that the SEC will seek to adopt a new rule to address this Dodd-Frank requirement.

Without the 60 votes needed to overcome a filibuster, the roll-back of Dodd-Frank is expected to take the form of a series of incremental reforms.

Conflict Minerals

The SEC has also announced that it is reconsidering the implementation of the conflicts mineral rule, which requires manufacturing companies to trace and report on their use of minerals from the Democratic Republic of the Congo and surrounding regions in Africa. Critics of the rule question its effectiveness in terms of harm reduction and raise concerns about the compliance cost burden on companies. Although the rule remains in effect and disclosures for the 2016 conflict minerals reporting period are due May 31, 2017, it remains to be seen whether U.S. listed issuers (including Canadian cross-listed issuers) will receive any relief in the future.

Financial CHOICE Act

A Dodd-Frank alternative bill, the Financial CHOICE Act, was introduced by Financial Services Chairman Jeb Hensarling in 2016 and is expected to be reintroduced in the coming months. This legislation provides clues to likely items that Republicans may target for reform. One likely item is the Volcker Rule noted above, which some have criticized for hindering the competitiveness of U.S. banks and hurting market liquidity.

As contemplated, the Financial CHOICE Act is expected to address a number of aspects of Dodd-Frank and other securities law reform initiatives, including a revaluation of the SEC enforcement program, repealing non-material specialized disclosures, facilitating the formation of venture exchanges and eliminating or reducing regulatory burdens on smaller public and private companies raising capital.

On executive compensation, the SEC had previously adopted or proposed rules to implement provisions of Dodd-Frank including disclosure rules around pay ratios, performance pay and hedging as well as rules governing incentive-based compensation at certain financial institutions, compensation clawback policies and say-on-pay. Some of these rules may get a second look under the new administration. For example, Michael Piwowar, an SEC commissioner and acting head of the SEC, has re-opened public comment on the pay-ratio rule, which requires domestic U.S. companies to compare and disclose compensation for executives with compensation for other employees. Reopening public comment for this rule does not relieve companies from the requirement to comply this year, but it could be a first step to ultimately changing the rule.

2. Appointments to Federal Agencies

Perhaps the new administration’s biggest impact on financial regulation may come from new appointments to federal agencies. President Trump has appointed a new Treasury Secretary, a key position to help the administration’s plans to overhaul the tax code, renegotiate trade deals and remake financial regulations. President Trump has also nominated a new Chairman of the SEC, selecting Jay Clayton to replace Mary Jo White. Ms. White came into office with a background as the United States attorney in Manhattan. In contrast, Mr. Clayton’s career has focused primarily on capital market and mergers and acquisitions, advising Goldman Sachs and other Wall Street firms. The choice of Mr. Clayton may signal that the SEC is shifting its priorities from enforcement to improving capital formation.

President Trump’s recent failure to repeal and replace Obamacare may be a telling sign that broad regulatory reform will be quite challenging.

In the past, Mr. Clayton has been critical of the Foreign Corrupt Practices Act (FCPA) and how aggressively prosecutors and the SEC have applied the law. In his role as Chair of the New York City Bar Association, Mr. Clayton issued a report which argued that broad application of the FCPA hinders American companies in the global marketplace when other countries do not police their companies closely. Although the report may not be a complete reflection of Mr. Clayton’s views, his appointment could result in de-emphasizing investigations in this area.

3. NAFTA

President Trump has repeatedly announced his intention to renegotiate U.S. trade deals, and has singled out the North American Free Trade Agreement (NAFTA) in particular. Changing the terms of NAFTA would profoundly impact trade between the United States and its neighbors. Canada is the largest merchandise export market for the United States, and since NAFTA went into effect in 1994, total merchandise trade between Canada and the United States has more than doubled.

At the confirmation hearing for President Trump’s main trade negotiator, both Republican and Democrat lawmakers stated a number of grievances against Canada including openness of Canada’s markets and intellectual property issues.

Although President Trump attacked NAFTA as a disaster during the presidential campaign, he recently seemed to have softened that stance in a meeting with Canadian Prime Minister Justin Trudeau, telling reporters that he only intends to tweak NAFTA with Canada and that he considers the agreement’s impact on U.S.-Canada trade relations to be much less problematic than its impact on U.S.-Mexico trade relations.

Conclusion

The new President’s public remarks and the current initiatives of his administration and Republican lawmakers indicate potential changes on many fronts of the regulatory landscape impacting the financial system and the economy in general. While most of the specifics of Trump’s initiatives on financial regulation remain to be seen, the new administration is generally expected to emphasize reducing regulatory burdens and promoting capital formation and economic growth. However, President Trump’s recent failure to repeal and replace Obamacare may be a telling sign that broad regulatory reform will be quite challenging.

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