Rolling back investor protection in the Trump Era

by Anita Anand and Tegan Valentine

Attempting to fulfill his election promises, President Trump has begun to reevaluate post financial crisis rules designed to protect investors. The broad-based Dodd-Frank Wall Street Reform and Consumer Protection Act will be the target of much of Trump’s reforms in this area, which if repealed would undoubtedly leave investors vulnerable.

The Dodd-Frank Act added lending restrictions aimed at: preventing the formation of risky mortgages, protecting consumers against predatory provisions and extending similar protections to common forms of consumer debt including credit cards. In addition, its bank investment provisions (the ‘Volcker Rule’) prevent banks from trading securities in their own account while also restricting their investment in hedge funds and private equity. The derivatives provisions create a framework for the regulation of over the counter swaps, restricted regulatory authority of swap agreements and incorporated anti-fraud measures.

But the President and his team cannot instantaneously unwind Dodd-Frank – it is, after all, enacted law which would require 60 votes to be repealed and Republicans in Congress would not yet provide the support needed given that only 52 votes appear to be available.

While Dodd-Frank may or may not come crashing down, it will likely not mean much for Canadian capital markets regulation either way. Our rule-making and regulatory processes are significantly different as is the composition of our market structures, which includes a handful of banks and fewer public issuers. On the other hand, one could reasonably ask: will an investor-unfriendly atmosphere in the U.S. permeate north of the border?

Rather than Dodd-Frank, first on the chopping block may be the hotly debated ‘fiduciary rule’ which was set to take effect April 2017. Unlike Dodd-Frank, the fiduciary rule is not an enacted law – it is a U.S. Department of Labor (DOL) rule which would be easier for the Trump administration to appeal. Under this rule, financial professionals are required to act in customers’ best interest when giving advice about 401(k) plan assets, retirement accounts or other qualified monies saved for retirement.

The Trump administration has argued that the DOL rule restricts freedom of choice and is overly paternalistic as it would prevent investors from taking on risk that they may prefer to bear.  This is the “rational investor” argument all over again which simply undermines the premise of securities regulation which is at heart an investor protection device.

As the DOL rule has not fully taken effect, little will change for U.S. investors if it is repealed (except perhaps reducing expectations that greater protection for investors is in the offing).  Nevertheless, many intermediaries have seized on the publicity surrounding the DOL rule as a marketing tool. For example, Merrill Lynch has begun to run advertisements touting their commitment to acting in their clients’ best interests regardless.

There is nothing akin to the DOL rule in Canada. Securities regulators in various provinces have debated and to some extent supported reforms akin to the rule. For example, the Ontario Securities Commission and the Expert Panel struck by the Province of Ontario have both supported a “best interests” duty. But their efforts have been stifled because of many factors including a strong industry lobby.

The most pronounced barrier to implementing reform is Canada’s fragmented structure of securities regulation which means that every single province can enact and enforce its own laws as it sees fit and these laws need not be uniform across the country. This has meant that the policy making process and the implementation of a fiduciary duty or best interests rule that protects investors has faltered with no one — not even the newly proposed cooperative regulator — stepping up to take charge of reform.

 

Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance and Tegan Valentine is a JD student at the University of Toronto Faculty of Law.