After four years of U.S. regulators zealously expanding the agenda for asset managers and the wider financial markets, many in the industry are eagerly waiting for agencies to start rollling back regulations.
The administration has already issued a flurry of executive orders, taken a ‘personnel is policy’ approach to key agency appointments, and a halted all new regulatory actions for the next few months.
Despite this, sources say that the landscape will not be quite as deregulatory as many people might have anticipated. Regulators may ultimately only simplify existing rules and red tape, rather than dismantle them altogether. Although deregulation often brings short-term gains, balancing this with long-term stability remains crucial and sources say policy makers will likely respect that despite growing political pressure.
“The last two years, especially with the amount of SEC regulations that were either proposed, debated upon, or put into effect, caused a lot of frustration in the industry,” said Steven Strange, head of product, asset management, at ION.
Last year, the SEC proposed about 40 regulations, creating a burden for asset managers, especially smaller ones that lack the resources to do multiple reviews of the rules. Figuring out what is being proposed, what it means for firms and their clients, and then providing useful responses is time consuming and generates large legal bills.
“If you don’t have those resources to speak up, or if it does go into effect, then preparing for it by speaking to software vendors, data providers, or hiring additional reporting staff was causing a lot of pain. Having a clearer direction of what the priority regulations that we need to comply with would be useful, everybody would be interested in that,” said Strange.
Although leadership roles at U.S. financial regulators have yet to be confirmed by Congress, there are some indications of what can be expected in the coming years. For example, Hester Peirce, Republican SEC Commissioner and newly appointed leader of the crypto task force, has told Institutional Investor that the SEC under the new administration will be more focused on right-sizing existing rules rather than coming in and changing everything overnight.
“So a lot of the stuff that the new SEC is going to be working on will have to do with rules that are on the books, but just trying to implement them as widely as possible,” she said in a wide ranging interview published in January. “There are lots of rules that are going to stay in place, and I hope that what we do is think carefully about how to implement them as best as they can be. Certainly a new SEC doesn’t come in and just rip things up without looking at what makes sense for the system.”
Some banks and asset managers concede that rules should be rationalized rather than eliminated. Sources say the industry wants a stable system without deference to regulatory interpretation or a default to litigation in most situations.
“There is nothing that a regulator does today that doesn’t get immediate litigation, and some successful challenges,” said Todd Baker, an adjunct lecturer at Columbia Law School. “It’s not a good time to be in the regulation business, particularly if you’re interpreting a broad statute that you are arguing applies to something that it hasn’t applied to before, because that thing didn’t exist when it is was written.”
“This is serious problem for administrative law and administrative regulatory agencies of all types.”
Eliminate Duplication and Overlap
The U.S. banking system, for example, has regulators that overlap in several areas. The prudential banking regulators — the Federal Reserve, Federal Deposit Insurance Corp., and Office of the Comptroller of the Currency (OCC), for example — have several rules covering the same issues and there have been calls to merge the three entities for some time. The Trump administration has even loudly called for a merger or elimination of the FDIC altogether. It’s not yet clear if there would be any impact on its flagship bank deposit insurance as a result.
As the last few weeks have shown, the administration’s next steps are hard to predict. If the industry and senior regulators expect pragmatic changes, they may be disappointed. There has been chatter that the turbulence in the tech sector and the buoyancy shown in bank results could work in tandem with a preferable regulatory regime to create ideal conditions for financial services companies to blossom — perhaps even replacing tech as the darling of the S&P and claiming the top berth as the largest segment (currently held by tech, mostly due to the magnificent 7).
But deregulation can go dangerously wrong, putting strain on the system. It has done several times in the past.
Speaking in 2018 at an event in Manhattan, not long before he died, the late former Fed chair Paul Volcker warned of the importance of strong regulation to the banking system.
“I’ve seen it all before, over and over again, it has been more complicated than this in the market before… But will we ever drain the swamp and talk about the advisory business, about lobbying, hundreds of millions of dollars are spent on lobbying. I think things got more complicated because of technology; it is harder to deal with,” he said.
Some of the complaints that were apparent seventy years ago are apparent today, he continued. And one that stands out, “why do we have five regulatory agencies overseeing the banking system? I heard great complaints about it, seventy years ago, competition and laxity, unwillingness to press banks and other financial institutions.”
But Volcker warned against going too far in either direction.
“You can’t compress it into rules hundreds of pages long and try to cover every possible detail of what could go wrong,” he said. “A lot of other things will happen too, and if you don’t have a strong regulatory system, you’re in trouble.”
