United States: The Financial CHOICE Act Is Approved By US House Financial Services Committee

On May 4, the Financial CHOICE Act (the FCA) — which was introduced to the House of Representatives on April 26 by Rep. Jeb Hensarling (Texas-5), and co-sponsored by seven of his Republican colleagues and referred for consideration to the Committee on Financial Services, as well as the committees on Agriculture, Ways and Means, the Judiciary, Oversight and Government Reform, Transportation and Infrastructure, Rules, the Budget, and Education and the Workforce — was approved by the House Financial Services Committee. This bill, if passed, would significantly alter the Dodd-Frank Act, repealing many post-financial crisis rules and regulations. Some of the key provisions of the bill include the following:

  1. Repealing the Volcker Rule (Section 619 of the Dodd-Frank Act).
  2. Amending Section 13(3) of the Federal Reserve Act, governing emergency lending by the Federal Reserve, by:

    1. Narrowing the ability for financial institutions to obtain emergency lending by adding a requirement that the "unusual and exigent circumstances" must pose a threat to the financial stability of the United States and requiring the vote of nine or more Federal Reserve Bank (FRB) presidents, in addition to the already required five Board of Governors members, for lending to be approved.
    2. Requiring that any entity regulated by the Office of the Comptroller of the Currency (the OCC), the Securities and Exchange Commission (the SEC), commodities Futures Trading Commission (the CFTC) or the Federal Deposit Insurance Corp. (the FDIC) that proposes to receive emergency lending be certified by the OCC, the SEC, the CFTC or the FDIC, as the case may be, in writing to the Federal Reserve to be solvent. Additionally, within six months of enactment, the bill directs the Federal Reserve to adopt (1) a rule specifying the method it will use to determine the sufficiency of collateral pledged to secure lending under Section 13(3) and (2) a rule establishing a minimum interest rate on the principal amount of any loan or financial assistance extended pursuant to Section 13(3), where the applicable minimum interest rate is calculated as a 90-day average of the Federal Reserve's discount rate, plus a 90-day trailing average of the spread between a specified distressed corporate bond yield index and a specified bond yield index of debt issued by the United States. The FCA would also add a prohibition on the use of equity securities of any kind as collateral for loans with FRBs under Section 13(3).
  3. Repealing the authority of the FDIC to take certain extraordinary actions (such as indemnifying uninsured creditors of an insured depository institution) in response to serious adverse effects on economic conditions or financial stability under Section 13(c)(4)(G) of the Federal Deposit Insurance Act. In addition, repealing the authority of the FDIC to create a widely available program to guarantee obligations of solvent depository institutions, bank holding companies, thrift holding companies and their affiliates during times of severe economic stress under Section 1105 of the Dodd-Frank Act.
  4. Prohibiting use of the Exchange Stabilization Fund for the establishment of a guaranty program for any nongovernmental entity.
  5. Amending SEC enforcement and penalty authority by:

    1. Increasing the SEC's civil penalty authority, as well as criminal sanctions under the federal securities laws for the most serious offenses. Additionally, the FCA establishes a new fourth tier of penalties for recidivist offenders that allows for tripling SEC monetary fines sought in both administrative and civil actions where penalties are tied to illegal profit making.
    2. Giving respondents in SEC administrative proceedings the right to remove their enforcement action to federal court, as well as requiring the SEC to allow respondents to appear prior to the initiation of a formal enforcement action.
    3. Eliminating the system of automatic disqualifications, and makes such disqualifications subject to the discretion of the SEC.
    4. Requiring the SEC, when issuing a civil money penalty against an issuer, to include findings that (1) the alleged violations resulted in direct economic benefit to the issuer and (2) the civil penalties do not harm the issuer's shareholders.
    5. Requiring that the SEC chairman convene a new committee, with the same mission as the original Wells Committee, to holistically review the SEC's enforcement program to ensure it complies with the SEC's mission to protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation and our constitutional due process rights.
  6. Requiring that all financial regulators conduct economic analysis of all proposed and final rules to ensure the costs imposed do not outweigh the potential benefits.
  7. Revising the frequency of Dodd-Frank Act stress tests for banks to annually from semiannually, changing the Comprehensive Capital Analysis and Review (CCAR) submissions from annually to once every two years, and extending CCAR qualitative relief to all banking organizations, which would not allow the Board of Governors of the Federal Reserve to object to an institution's capital plan on the basis of qualitative deficiencies in the capital planning process.
  8. Repealing Title II of the Dodd-Frank Act and its Orderly Liquidation Authority that establishes a liquidation regime outside of bankruptcy for large, complex financial institutions whose insolvency would pose systemic risk to the financial system (for situations similar to Lehman Brothers). Additionally, the bill would repeal the authority of the Financial Stability Oversight Council to designate nonbank financial institutions as systemically important.
  9. Repealing Section 921 of the Dodd-Frank Act, which gave authority to the SEC to prohibit or restrict the use of pre-dispute arbitration clauses in agreements between customers or clients and any broker, dealer or municipal securities dealer if it found it to be in the public interest and necessary for the protection of investors.
  10. Changing the name of the Consumer Financial Protection Bureau to the Consumer Law Enforcement Agency and tasking it with the dual mission of consumer protection and competitive markets, with cost-benefit analysis of rules performed by a new Office of Economic Analysis that would be created. Other changes include restructuring the agency to be under the authority of the executive branch, with a single director removable by the president at will and making the agency subject to congressional oversight and the normal congressional appropriations process.
  11. Repealing the directive under Section 1503 of the Dodd-Frank Act that the SEC promulgate rules requiring mining companies to disclose certain safety information in their quarterly and annual reports, including significant violations, orders and citations, along with the dollar value of assessments and mining-related fatalities. Additionally, the FCA would repeal the requirement that public companies disclose (a) whether they source "conflict minerals" from the Democratic Republic of Congo and its nine neighboring countries under Section 1502 of the Dodd-Frank Act or (b) payments made to governments, including companies owned by a foreign government, made for the purpose of the commercial development of oil, natural gas or minerals under Section 1504 of the Dodd-Frank Act.

The FCA will now move to the other House committees (Agriculture, Ways and Means, the Judiciary, Oversight and Government Reform, Transportation and Infrastructure, Rules, the Budget, and Education and the Workforce). These committees can either waive jurisdiction over the bill or review and go through the process of voting on it in committee. If all committees waive jurisdiction, the next step would be bringing the bill to the floor of the House of Representatives for a vote. The House Financial Services Committee is looking to bring the bill to the floor for a vote by the end of May; however, if certain committees do not waive jurisdiction, then the process may take longer, and timing on such vote is determined by the leadership in the House once all committees have waived jurisdiction or approved the bill.

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