Will regulatory rollback be good for U.S. businesses?
President Donald Trump and Republican lawmakers believe so. However, companies’ recent financial filings suggest that the picture may be more complicated. For one thing, the lack of certainty about when, and how, deregulation will be effected makes corporate decision-making challenging.
Let’s take the financial services industry for example, the sector most likely to be impacted if the Dodd-Frank Act were to be pared back.
Prudential Financial Inc., in a Feb. 17 Form 10-K filed with the Securities and Exchange Commission, warned investors that it can’t “predict the timing or requirements of the regulations not yet adopted under Dodd-Frank or how such regulations will impact our business, credit or financial strength ratings, results of operations, cash flows, financial condition or competitive position. Furthermore, we cannot predict whether such regulations will make it advisable or require us to hold or raise additional capital or liquid assets, potentially affecting capital deployment activities, including buying back shares or paying dividends.”
More recently, Blackstone Group LP told investors in its annual report filed Feb. 24 that regulatory reform could have a material impact on its funds.
“A prolonged environment of regulatory uncertainty may make the identification of attractive investment opportunities and the deployment of capital more challenging,” Blackstone said in its Form 10-K. “In addition, our ability to identify business and other risks associated with new investments depends in part on our ability to anticipate and accurately assess regulatory and other changes that may have a material impact on the businesses in which we choose to invest. The failure to accurately predict the possible outcome of policy changes and regulatory reform could have a material adverse effect on the returns generated from our funds’ investments and our revenues.”
Beyond financial rule amendments, Blackstone said that other changes contemplated by the Trump administration--such as in immigration policy, health care, corporate tax and international trade--may create regulatory uncertainty for its funds’ portfolio companies and its investment strategies, and “adversely affect the profitability” of the portfolio companies.
Ultimately, regulatory changes “may impose additional costs on us and our funds’ portfolio companies, require the attention of our senior management or result in limitations on the manner in which business is conducted, or may ultimately have an adverse impact on the competitiveness of certain non-bank financial service providers vis-à-vis traditional banking organizations,” Blackstone said.
In short, uncertainty is bad for business. And deregulation—like regulation—may have unintended consequences.
Unfortunately, much still remains unclear. Trump’s Feb. 3 executive order lays out core principles for how he intends to regulate the U.S. financial system but he hasn’t spelled out with any specificity how he intends to proceed. The president’s Feb. 28 address to the joint session of Congress didn’t add any clarity and Republicans have yet to introduce legislation to address Dodd-Frank.
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