On April 21, 2017, the White House issued an Executive Order and two Presidential Memoranda to the U.S. Secretary of the Treasury as part of the Trump Administration’s continuing efforts on deregulation:
The Presidential Executive Order on Identifying and Reducing Tax Regulatory Burdens orders the Secretary of the Treasury, in consultation with the Office of Management and Budget, to review significant tax regulations (whether or not they meet certain thresholds to be deemed “significant” under a 1993 Executive Order on regulatory reform) and submit an interim report by June 20, 2017, that identifies tax regulations that:
- Impose an undue financial burden on the U.S. taxpayer
- Add undue complexity to the Federal tax laws; or
- Exceed the Internal Revenue Service’s statutory authority
By September 18, 2017, the Treasury Security must submit another report that recommends specific actions to mitigate the identified burden imposed by the regulations listed in the interim report. The Treasury Secretary must take action to delay or suspend the effective date of those regulations or take action to modify or rescind the regulations. Within ten days of having taken any such actions, the Secretary must publish a summary of such actions in the Federal Register, the official U.S. publication for regulatory and other governmental actions.
If not all recommended actions have been finalized within six months of the submission of the recommended actions report to the President, the Treasury Secretary must publish a report summarizing actions taken to date.
The two Presidential Memoranda pertain to the 2010 Dodd-Frank regulatory reform legislation.
The first deals with the Orderly Liquidation Authority (OLA) provisions of Dodd-Frank, which in certain instances allow the Federal Deposit Insurance Corporation (FDIC) to undertake the receivership and liquidation of a large nonbank financial company (such as a bank holding company), rather than under the U.S. Bankruptcy Code. The President states in this memo that “OLA, however, may encourage excessive risk-taking by creditors, counterparties and shareholders of financial companies” due to a provision that creates what is termed in the Memorandum as a “Government backstop” that “may reduce market discipline and increase excessive risk taking” because it allows taxpayer money to be borrowed to carry out the receivership and liquidation, to be paid back by an assessment on large financial companies.
As a result, the President has ordered the Treasury Secretary to conduct a review of the OLA and within 180 days, submit a report (with any recommendations for improvement) that reviews (i) the potential adverse effects of failing financial companies on U.S. financial stability, (ii) whether using the OLA would be consistent with the President’s recent “Core Principles” Executive Order on regulating the U.S. financial system; (iii) whether using the OLA would result in a cost to the Treasury; (iv) whether the availability of the OLA could lead market participants and others to believe a financial company was “too big to fail;” and (v) whether a new chapter in the U.S. Bankruptcy Code would be a better solution.
The second Presidential Memorandum deals with the interagency Financial Stability Oversight Council (FSOC), which among its mandates oversees the stability of the U.S. financial system and designates systemically significant nonbank financial companies, financial market utilities and financial activities to be subject to additional supervision and oversight by the Federal Reserve Board.
In the Memorandum, the President stated that it was important that this designation process be transparent, promote market discipline and reduce systemic risk because these “determinations and designations have serious implications for affected entities, the industries in which they operate and the economy at large.”
The President orders the Treasury Secretary to undertake a thorough review of the FSOC determination and designation process and within 180 days, provide a report on the review and how the determination and designation process could be improved. The review must cover a number of areas, including whether the current process is sufficiently transparent and provides entities with adequate due process, and the opportunity to have the determination or designation re-evaluated in a timely manner; whether the process adequately considers the costs of any determination or designation on the designated entity; and whether the process gives market participants an expectation that the federal government will shield supervised or designated entities from bankruptcy.
As with the other Presidential Memorandum, the Secretary is required to evaluate and report to the President on whether the determination and designation activities of the FSOC are consistent with the recent “Core Principles” Executive Order.
The current designations of systemically significant nonbank financial companies are AIG, Prudential and MetLife (MetLife’s designation currently is being litigated). The currently designated systemically significant financial market utilities include The Clearing House Payments Company L.L.C. on the basis of its role as operator of the Clearing House Interbank Payments System, The Depository Trust Company, and the Chicago Mercantile Exchange. A complete list of the designated financial market utilities and nonbank financial companies, and more information on the current determination and designation process can be found here.
Our previous blog posts on the Trump Administration’s actions on deregulation can be accessed here, here and here.