Financial Oversight Under Trump; Bessent Outlines Regulatory Shift; SEC Punts on Audit Rules
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There was plenty going on in financial regulation, as the Biden regulators wrapped things up and made some last-minute moves that will likely soon be undone. That included a late Friday decision by the SEC to appeal a federal judge’s ruling that vacated a major Gensler-era rule aimed at trading firms. Earlier in the week, Martin Gruenberg gave his final remarks, though there was no mention of the toxic workplace scandal that tarred his FDIC chairmanship.
Meanwhile, the new slate of agency heads is beginning to take shape. Donald Trump’s Treasury secretary pick went before the Senate Finance Committee. He talked a lot about tax cuts, but offered a few interesting thoughts on bank oversight — and oligarchs. The president-elect also announced a surprising choice to lead the FHFA, the overseer that will play a key role in the push to release Fannie Mae and Freddie Mac from government conservatorship.
On a more in-the-weeds topic, we took a look at the little-noticed fight to adopt two new standards for auditors before Democrats lose the SEC majority. The commission ultimately punted. And looking ahead to the change of power in Washington, we spoke with advocates and legal experts about what’s in store for Trump 2.0.
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Friday Q and A: Washington is preparing for yet another transition of power next week, and all signs point to the second Trump administration moving quickly to implement its agenda. Yet few things happen fast in the financial regulatory world, as Capitol Account readers know all too well.
To sort through the morass, we asked a few astute observers from our corner of the policy universe about their expectations for the first year of Trump’s second presidency. They include trade association leaders outlining their agendas and top banking lawyers and lobbyists offering up their predictions about where things in banking, fintech and securities oversight are headed. Here’s their collective wisdom.
Bryan Corbett is president of the Managed Funds Association, the hedge fund trade group that has been very busy during the Biden administration. Gary Gensler’s SEC aimed numerous rules at the industry. MFA successfully turned to the courts to overturn two of them – one that set broad disclosure requirements for private funds and another that imposed new regulations on firms that trade large amounts of government bonds. A third case against the agency involving short-selling is still pending, but Corbett says that alternative investment firms will likely be in a very different posture with the Trump regulators.
Reducing red tape: “We think there are things the new administration can begin to do while Paul Atkins’ nomination is pending. Immediately on Day One we are going to ask the acting chair of the SEC to delay implementation of Form PF and the short-sale reporting rule. Let’s stop now some of these rules that, frankly, we think are undermining our markets and creating a lot of regulatory burden without any corresponding benefit.”
Bigger picture: “[The SEC] can begin to take a broader step back and look at all of the rules that have been passed, not only under Gensler but over the last decade. You’ve seen public companies drop from 8,000 to 4,600. At the same time, you’ve seen the growth of private markets, which clearly have a significant role in funding businesses and providing capital. Under the last administration, you saw the SEC try to stop that progress. Instead, we think the new administration should take a more open approach – to facilitate more companies going public, facilitate the growth of private capital.”
Alternative investments in retirement accounts: “The accessibility of alternative products to a broader class of investors is going to be an important topic. As the industry continues to grow and expand, it’s natural to look at who has access to these investments and what are the rules for who gets in. That’s certainly a debate and policy discussion that is coming, and we will be an active participant in it.”
Chris Iacovella, president of the American Securities Association, is pressing for some big changes at the SEC, both in its internal workings and to its broader policy focus. The group represents mid-size brokerage firms.
Overhaul: “The new chairman needs to end delegated authority to unelected bureaucrats, taking away their ability to make policy decisions. The initiation of any sweep must be approved by the full commission – after full disclosure of the legality and the concerns driving it. The agency must be modernized and reorganized to better service market participants and foster collaborative interaction with regulated entities. Lastly, the weaponization of the enforcement process needs to end. One way to restore trust in that division is to not hire a prosecutor to lead the division and to reevaluate the responsibilities and reporting lines between D.C. headquarters and the branch offices.”
CAT: “Halting the Consolidated Audit Trail’s illegal surveillance of American investors tops the list of policy issues that need to be immediately addressed. It is egregious that this Orwellian registry continues to consolidate all of the personal and financial information of American investors in Washington while cybercriminals and nation-state sponsored hackers in Russia and China try to infiltrate our government institutions, the latest being the U.S. Treasury.”
Frank Kelly, founder of the policy consulting firm Fulcrum Macro Advisors, predicts a big upswing in M&A. He also thinks the Justice Department “will absolutely” revise the guidance it issued last year that sets a higher bar for bank mergers:
“There is, I believe, significant pent-up merger demand everywhere. The big banks feel like they are being left behind by private equity. Banks are just lenders at this point. You have to think that the Capital One-Discover deal went from a `no’ to a pretty strong `yes’ – and maybe that is the starter gun. The asset management side is also going to be interesting. There is a greater desire to merge some of these institutions and streamline them.”
Still, Kelly warns that the Trump administration isn’t necessarily pro-Wall Street:
“There is this populist view, and smaller banks I think will have more influence with Trump. They’ve got a bigger seat at the table. The larger banks are going to be careful about this. And more mid-size bank mergers are likely to happen.”
Ed Hill, a veteran financial services lobbyist at Forbes Tate Partners, sees plenty of rule adjustments coming in the banking space. And with crypto a priority, he says that the flap over “debanking” raised in recent months by digital asset executives will likely result in a high-profile congressional probe. Hill is also a host of “Macrocast,” a podcast that looks at economic issues shaping the markets.
Digital assets: “There are very high expectations in three areas around crypto: passing stablecoin legislation, establishing market structure rules for tokens as either a security or a commodity and ensuring crypto has access to banking services. Promoting access is something that will fall under the bank regulators, but certainly will get attention on Capitol Hill in terms of investigations.”…(Friday)
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Smooth Sailing: Scott Bessent had a pretty easy time at his nomination hearing where he argued strenuously for extending Trump’s tax cuts, defended tariffs and committed to taking a tough approach to China. The billionaire hedge fund manager was well-prepared and calm under the pressure, parrying the Democratic attempts to highlight his support for policies that favor the one percent. Though his confirmation was never in doubt, Bessent should now be on a glide path to the Treasury – a point that a number of senators emphasized on Thursday.
While much of the session revolved around Trump’s economic plans, the secretary candidate weighed in on several important regulatory matters. He emphasized that “of course” the Fed is independent from the president – at least when it comes to “monetary policy decisions.” Bessent also maintained that the banking system is “well capitalized and perhaps over-capitalized.” And he argued that a broad reassessment of oversight requirements may be needed to maintain the “depth and breadth” of the U.S. financial system.
“I believe that we have likely seen the top five banks become likely too big a share of banking assets,” Bessent said. “We have seen, because of undue regulation, the shadow banking system get larger and larger – to the detriment of community banks, small banks and the small regional banks.” He concluded: “I think we have to take a look at both the regulatory and supervisory conditions.”
Bessent pointed out that he has a background as a bank analyst and has also taught classes on the history of financial crises. “The pendulum tends to swing… to go into overshoot,” he said. “From `99 to 2008, that was an overshoot. And since then, the regulation, our banking system has been constrained.”
On the broader economy, Bessent stressed that passing tax legislation is “the single most important” issue right now. “If we do not fix these tax cuts, if we do not renew and extend them, we will be facing an economic calamity,” he said. Most of the fallout, he warned, would hit “working people.”
Democrats, not surprisingly, were a bit incredulous. “Is there any billionaire rich enough who you wouldn’t support a tax cut for?” asked Elizabeth Warren. “I think it’s unwise to single out,” Bessent started to reply before the senator cut him off. “Rich people?” she wondered. “I could give you a glib answer, but I won’t,” he responded.
Still, Bessent, who made his name as a protege of the liberal investor George Soros and has given large amounts of money to both Democrats and Republicans, did his best to make nice with some of his more skeptical inquisitors and indicated that he would strive to work across partisan lines. The nominee told Warren that he appreciated what the two have in common – a love of the Red Sox and Cape Cod, as well as an interest in addressing the housing shortage. And to charm Sheldon Whitehouse, Bessent noted that he had already read an Economist article on “the next housing disaster” that the senator had recommended.
“I will point out to my children [sitting] behind me, doing your homework is important,” Bessent said. Whitehouse agreed. “Thank you for doing that,” he said. “I think you’re the first person in a nominations hearing who’s actually done the reading that has been proposed.”
Even as he took pains to be polite, Bessent couldn’t resist pushing back on some lines of attack. When Bernie Sanders pressed him on whether Trump’s embrace of Silicon Valley billionaires like Elon Musk portends the rise of an oligopoly that could threaten democracy (a claim Joe Biden made last night in his Oval Office farewell speech), Bessent objected. “President Biden gave the Presidential Medal of Freedom to two people who I think would qualify for his oligarchs,” he said, an apparent reference to Soros and Carlyle Group co-founder David Rubenstein…(Thursday)
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SEC Balks: A push by the PCAOB to get two controversial audit standards enacted in the waning days of the Biden administration was quietly put on hold by the SEC this week, a big win for accounting firms. But the decision allows the fight to be rekindled in two months, and the industry is concerned that the victory could slip away, even with Republicans taking over the agency.
The largely-behind-the-scenes clash has been gaining steam since the end of November when the PCAOB adopted the rules, which are designed to give investors a better idea of audit quality and require accounting firms to make extensive disclosures about their operations and performance. The post-election vote – blasted by dissenting board member Christina Ho as “midnight rulemaking" fraught with “political expediency” – sent the measures to the SEC for final sign-off. That’s where things suddenly got heated, and complicated.
The audit board’s gambit set in motion a complex regulatory process that includes a short public comment period. It also requires the SEC to act on a tight deadline – 45 days after the rules are published in the Federal Register. The timing for the decision on these two standards was especially dicey because it fell right around the inauguration. (Meanwhile, the public feedback was due right around the Christmas and New Year’s holidays, which also drew ire.)
On Tuesday, however, the SEC punted, posting a notice on its website that extended the comment window for another 21 days. It also kicked forward its review period another 45 days for both standards, setting it up deadlines in mid-March. That will ensure that a final up-or-down decision will occur after Gensler departs and the commission is controlled by Republicans.
Sources say that Gensler, who is stepping down on Jan. 20, was advised by the SEC’s general counsel’s office that the commission would likely be sued if it backed the PCAOB. The agency could very well lose in court, the lawyers predicted, because it received an unusually large number of comments and hasn’t had much time to consider them. The bulk of the feedback was negative and aired substantive concerns about the cost-benefit analysis – a frequent target in lawsuits.
Critics are happy with the reprieve, but they note that the pause doesn’t necessarily mean that the standards will be withdrawn or reworked. Regulatory lawyers have raised several quirks embedded in the SEC process that could perhaps allow the rules to go into effect.
“We’re entering the fourth quarter. It's not the end of the game,” says Tom Quaadman, a senior vice president at the chamber. “The policy itself is questionable, and it's important for the new administration to take this up.”
Most concerning to the accounting industry is that under the law if the SEC does nothing by the March deadlines, the standards are automatically approved – a sort of reverse pocket veto. On the flip side, if the commissioners do decide to formally act, they likely need to hold a public meeting and vote. That, however, could run into a snag if Atkins, Trump’s choice for chairman, hasn’t yet been confirmed…(Wednesday)
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