5 regulatory reforms President Trump must retain to prevent another financial crisis

During his election campaign, Donald Trump discussed financial regulatory issues in broad terms. He talked about reinstating the Glass–Steagall Act for big banks, repealing the Volcker Rule, and ditching the Department of Labor's (DOL's) fiduciary duty rule. And on Friday, President Trump took a step closer to making his campaign promises a reality when he signed an executive order aimed at scaling back or dismantling the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly known as the Dodd-Frank Act) and halting the implementation of the DOL’s fiduciary rule, pending further review.

While there is undoubtedly scope for improving the Dodd-Frank Wall Street Reform and Consumer Protection Act, 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.

At CFA Institute, we believe that, in order to prevent another financial crisis, President Trump and Congress must retain the following five regulatory reforms:

1. Fiduciary duties of personal investment advisors. The U.S. Department of Labor (DOL) issued a fiduciary duty rule that increased the obligations of investment advisors, and, while it is not perfect, it 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 the 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. Today's set of calibrated rules for over-the-counter (OTC) financial derivative instruments 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 these risks.
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.