By Michael N. Pedroni, Founder and CEO
The incoming Trump Administration has promised sweeping regulatory reforms to boost America’s competitiveness and capital markets. As a former White House and Treasury official, I have assisted several Administration changes and supported the first 100 days of both Obama and Trump presidencies. What I learned is that the foundation of successful financial policies is setting concrete objectives right at the outset and acting quickly to achieve them. Here is my recommended playbook for the new Trump Administration.
On Day One
Rebuild Trust Between the SEC and Private Sector
The last four years have been riddled with tension and litigation that crippled the SEC’s effectiveness. It is important the Commission quickly gains new leadership that engages and works to rebuild trust with all stakeholders. Paul Atkins, nominee for Chair of the US Securities and Exchange Commission, is highly qualified with a clear path to confirmation: The sooner he can take office, the sooner the reset can begin. The Administration should press the Senate to act quickly.
The SEC has also been mired in legal disputes. With Chair Gensler stepping down and the Supreme Court’s overturning of Chevron deference, it is time for the SEC to direct an honest appraisal of current litigation. Dropping unproductive battles will set the SEC on a path to success in the next four years.
Get Cryptocurrency Out of Its Regulatory No-Man’s Land
The current patchwork of enforcement approaches and turf battles between the SEC, CFTC and others has led to confusion and uncertainty. The Trump Administration should announce its intent to define a clear and sensible regulatory framework that will serve America well.
There can be honest disagreement about the resilience of various cryptocurrencies, but there is no question that the underlying distributed ledger technology (DLT) will continue to lower transaction costs and improve security across a wide range of financial activities. The Administration should take every step possible to quickly encourage frameworks that safeguard against fraud and encourage growth and innovation.
Clarify the Future of Bank Capital Requirements
We have gone too far in hamstringing banks with regulation that inhibits their ability to perform their core function of providing liquidity to finance the American economy.
The banking sector on the whole does not need higher capital requirements. The new Administration should immediately signal its intent to relax the Supplementary Leverage Ratio, which has discouraged banks from operating in low-risk, high-volume markets, including the market for US Treasuries.
With the large volume of outstanding government debt, the US needs more market makers, and banks should not be disincentivized.
We also need to do better on targeted supervision. The failure of Silicon Valley Bank was not due to inadequate capital, it was the result of its board being asleep at the switch on risk oversight and governance, and lax supervision by public authorities.
And then there’s the so-called Basel Endgame. If, as expected, the Trump Administration does not want the Federal Reserve to proceed with its proposal for new capital requirements on large US banks, it should quickly and definitively say so.
Accelerate Key Confirmations
America’s capital markets are the envy of the world because our general framework of rules and regulations invites confidence. Market participants are eager to serve as contributors, not adversaries, in the regulatory dialogue that is to come. To do so, they need strong leaders to engage with.
In addition to seeking quick confirmation for Paul Atkins to Chair the SEC, the Administration should fast-track confirmation of Scott Bessent as Treasury Secretary. And it should should swiftly move to fill leadership vacancies at the Commodities and Futures Trading Commission, Federal Deposit Insurance Corporation, Consumer Financial Protection Bureau, and Office of the Comptroller of the Currency. Other vacancies on the Securities and Exchange Commission should also be speedily addressed.
In the First 100 Days
Be Smart on Sanctions
What is most important here are crystal-clear rules. Investors shouldn’t be forced to interpret what is in the best interest of the United States. If the government leads, investors will follow.
It is also important for the new Administration to recognize that financial firms are already drinking out of the regulatory fire hose in responding to rules recently issued by the previous one.
The US Treasury Department’s new outbound investment screening framework went into effect on January 2 and puts investors in the uncomfortable position of assessing which Chinese companies are bad actors. It should be the US government’s job to make this assessment, with the vast intel resources it has at its disposal.
I encourage the new Administration to create more clarity by identifying which Chinese companies need to be avoided, rather than asking US investors to make that decision.
Navigating gray zones created by regulatory uncertainty is in no one’s interest. The Administration will achieve readier, fuller compliance with strictures that take a clear, common-sense approach on a reasonable timeline.
Encourage Artificial Intelligence in Financial Services
Financial firms have rapidly integrated AI into their operations, discovering new efficiencies and opportunities to innovate. There is so much more potential. The Administration’s new AI czar should announce a dedicated policy workstream with the private sector to understand how AI could further transform and expand America’s behemoth financial markets.
Nearly every significant company in America is assessing how to integrate AI into its business, and government needs to be closely attuned to these developments. When I served in the White House, I used the Roosevelt Room to convene key business leaders to discuss and share key trends in the economy and markets – the new AI czar could take this same approach to gather ideas.
Work with Congress on Cryptocurrency Legislation
Distributed ledger technology (DLT), which is the underpinning of cryptocurrencies but also has broader utility, should be encouraged by introducing a technology-neutral regulatory framework.
The Administration should take every step possible to quickly encourage legislation that protects consumers, safeguards against fraud, and encourages growth and innovation.
The new legislation should offer legal classification of different types of digital assets, specify the appropriate regulatory authority, and provide guidelines on minimum disclosure requirements. It also should call for common-sense know-your-customer requirements to guard against criminality and fraud, clarify tax treatment, establish fair custody rules and clear processes for dispute resolution.
Very importantly, it should avoid picking winners and losers. Let the markets, not Congress, decide where there is demand for a specific asset type.
Reassess the Financial Stability Oversight Council’s Rules on Designation
The FSOC is at risk of becoming a political tetherball, with Democratic administrations pressing to expand the Committee’s powers and reach while Republican administrations push to establish a much narrower set of powers. The FSOC should primarily be a sober forum for financial regulatory agencies to confer, discuss, and identify stability risks. The first Trump Administration adopted a sensible approach to FSOC’s designation authority, and this new Administration should return to that framework.
Within Year One
Modernize Fund Regulations
Mutual funds and exchange-traded funds are stalwart investment vehicles for ordinary Americans to save for education, home buying, and retirement. Yet the SEC has spent the last four years trying to implement swing pricing and liquidity fees, which would have crippled large parts of the market.
This should be set aside permanently, and instead we should think about modernizing the regulatory framework governing how mutual funds operate to better reflect today’s capital markets and investor use of technology.
Enhance Access to Private Markets
Retail investor demand for investment in private credit, infrastructure, and other types of alternative investment funds is rising dramatically, but institutional and accredited investors have a major edge because of retail investor restrictions. In the past, this made sense because the public markets were so large, and private markets were more opaque.
But as private markets claim an increasingly large share of the capital markets pie and are becoming more transparent, it is time for the SEC to take a fresh look at rules governing access.
Balancing investor protection with investor access is important, but right now the pendulum has swung too far, meaning everyday investors are missing out on opportunities for portfolio diversification and long-term savings growth.
So, too, can the SEC’s Accredited Investor definition be updated to recognize a wider range of measurements for determining investor sophistication and risk appetite.
Let the Marketplace Decide the Future of Sustainable Finance
Starting a fight against sustainable investment would be unnecessary and distract from other Administration priorities. Let investors make the call: If they want sustainable products, they should be able to buy them, and asset managers should not be restricted in offering them.
Assert Global Leadership on Financial Policy
A Fortress America approach to capital markets regulation won’t serve the US or its investors well. Financial and tech businesses are global, and fragmentation would simply add complexity and increase costs.
The Administration should lead regular and open dialogue with other regulators in other influential financial markets around the world and specifically begin a special effort with the European Union to find opportunities for convergence and coordination.
Defining Success
I have devoted my career to helping financial markets work better. The most successful US administrations are the ones that accomplish two goals at the same time – doing what is best for American savers and citizens while leading the world toward compatible market friendly policies. I wish the new Administration every opportunity in doing just this.
Learn more at www.highlandglobaladvisors.com.
Contact Michael at mpedroni@highlandglobaladvisors.com or 202-570-4401