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5 things Trump needs to do to prevent another financial crisis

Executives from the financial institutions who received TARP funds, (L-R) Goldman Sachs Chairman and CEO Lloyd Blankfein, JPMorgan Chase & Co CEO and Chairman Jamie Dimon, The Bank of New York Mellon CEO Robert P. Kelly, Bank of America CEO Ken Lewis, State Street Corporation CEO and Chairman Ronald Logue, Citigroup CEO Vikram Pandit, Wells Fargo President and CEO John Stumpf testify before the House Financial Services Committee February 11, 2009 in Washington, DC.
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Executives from the financial institutions who received TARP funds, (L-R) Goldman Sachs Chairman and CEO Lloyd Blankfein, JPMorgan Chase & Co CEO and Chairman Jamie Dimon, The Bank of New York Mellon CEO Robert P. Kelly, Bank of America CEO Ken Lewis, State Street Corporation CEO and Chairman Ronald Logue, Citigroup CEO Vikram Pandit, Wells Fargo President and CEO John Stumpf testify before the House Financial Services Committee February 11, 2009 in Washington, DC.

During the recent campaign, President-elect Donald Trump discussed financial regulatory issues in broad terms. He mentioned reinstating the Glass–Steagall Act for big banks, repealing the Volcker Rule, and ditching the Department of Labor's (DOL's) fiduciary duty rule. However, since winning the election, Mr. Trump has softened his tone on such hot-button issues as immigration and the Affordable Care Act. In the weeks and months ahead, his attention will invariably turn to financial market regulation, and we would like to encourage him to continue in a similar vein of moderation.

A case for keeping regulatory reforms.

There is undoubtedly ample scope for improving the Dodd–Frank Wall Street Reform and Consumer Protection Act. Written and signed into law in the aftermath of the most severe global financial crisis in more than 70 years, the new regulations were essential in helping to stem the tide of bank losses. Given the time constraints and the strong desire to shore up confidence in the financial markets at the time, there were bound to be provisions that resulted in unintended consequences. Moreover, the reforms were debated and drafted six months before a long-awaited assessment of exactly what went wrong and how to prevent a reocurrence.

So, yes, Dodd–Frank is due for refurbishing. But let us not throw the baby out with the bathwater. It will not serve the interests of the financial system or the Trump Administration's economic program to start from scratch. Nor would it make sense to overhaul significant parts of Dodd–Frank that could mitigate the severity of another financial crisis. The same can also be said about the Consumer Protection Act and other reforms that were passed in response to the crisis.

As the asset management industry's standard bearer for professionalism and ethics, CFA Institute urges the president-elect to retain these five regulatory reforms in order to prevent another financial crisis.

  1. Fiduciary duties of personal investment advice. The DOL issued a fiduciary duty rule that increased the fiduciary obligations of investment advisers, but it also raised the hackles of brokers who give advice to small investors. It is not perfect. CFA Institute supports the DOL in principle, but we believe the simpler path to fiduciary duty is enforcement of terminology and will continue to advocate for such a universal standard. The DOL rule offers more protection to retirement savers than they have ever had before. Whatever the final form, we strongly encourage the implementation of a single fiduciary duty rule for all personalized investment advice.
  2. Higher capital requirements for banks. The financial leverage amassed by many of our largest financial institutions and investment banks prior to the financial crisis was a disaster in waiting. Banks were struggling to stay afloat as the overheated residential mortgage market unwound, and taxpayers were called in to save the day. Dodd–Frank's higher capital requirements for these large banks are a critical element in maintaining discipline, preserving investor confidence, and restoring public trust.
  3. Derivatives transparency. It has taken years of laborious negotiations to draft rules for over-the-counter (OTC) financial derrivative investments. Today's set of calibrated rules helps make the global financial markets more transparent and less risky than ever. Likewise, the SEC's new disclosure and registration rules are important steps in rebuilding the markets for asset- and mortgage-backed securities and collateralized debt obligations in the aftermath of the crisis.
  4. No proprietary trading by depository institutions. Commonly known as the Volcker Rule, this provision bans speculative trading by big banks, which reduces the potential for flash crashes that undermine insured institutions. When banks take deposits that are protected by taxpayer-funded insurance to transform themselves into giant, derivatives-trading hedge funds, the prospect for such disasters as those witnessed in 2008 and 2009 increases exponentially. Dodd–Frank mitigates the threat of such perils by "prop" trading.
  5. Credit ratings accountability. Concomitant with the problems in the OTC derivatives markets was the failure of credit rating agencies (CRAs) to provide accurate credit ratings for financial derivatives. Ultimately and irresponsibly, investment firms relied on ratings rather than conducting their own due diligence. Dodd–Frank changed the standards for CRA best practices and ensured that CRAs are held accountable for material misstatements or fraud.

Mr. Trump once said, "A little more moderation would be good. Of course, my life hasn't exactly been one of moderation." However, a little more moderation is exactly what we hope to see from the President-elect as he considers financial regulatory reform. And in these five important regulatory areas, the Dodd–Frank Act and market regulators have made so much progress that a reversal would ultimately do more harm than good. While Dodd–Frank has created certain regulatory "overreach" problems, we believe the balance is correct in the five areas mentioned. Further, we believe that turning the clock back to 2008 would ultimately betray the interests of investors, the markets, and taxpayers.


Commentary by Paul Smith, CFA, president and CEO, CFA Institute.

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