United States: U.S. House Of Representatives Passes The Financial CHOICE Act Of 2017

On June 8, 2017, the Financial CHOICE Act of 2017 (the "CHOICE Act") was passed on a party line vote by the U.S. House of Representatives, with nearly all Republicans voting in support and nearly all Democrats voting against passage.1 The CHOICE Act was previously approved by the House Financial Services Committee ("Committee") on May 4, 2017 after two hearings were held on the bill.2

The CHOICE Act now moves to the U.S. Senate where it faces an uphill battle. Senate passage would require a 60 vote majority and Republicans control only 52 seats. There is no indication that any of the 46 Democrats, or 2 independents that caucus with the Democrats, will support the measure as passed by the House. As a result, it is likely that fundamental changes to the CHOICE Act would be required in order for it, or portions of it, to pass the Senate, be reconciled with the House bill and become law.

It is also anticipated that the Trump Administration will begin to weigh in on financial regulatory reform before a final bill is enacted. On February 3, 2017, the President issued Executive Order 13772 stating "Core Principles for Regulating the United States Financial System."3 The Executive Order requires, among other things, the Secretary of the Treasury to issue a report identifying areas in the financial regulatory framework that should be amended. The Secretary of the Treasury has yet to publish the report, but it is expected soon and this report may help to shape the contours of any final bill.

In its current form, the CHOICE Act would make significant changes to the U.S. financial regulatory system mostly through repealing and restructuring much of the post-financial crisis framework established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Although the prospects for the CHOICE Act in its current form are uncertain, U.S. financial institutions, and foreign financial institutions with operations in the United States will want to keep abreast of the legislative process involving the CHOICE Act, as legislation, if any, that emerges is likely to impact their business.

Below is a general summary of some of the principal components of the CHOICE Act.4

  • Repeal of Orderly Liquidation Authority. Section 111 of the CHOICE Act would repeal Title II of the Dodd-Frank Act which provides for the orderly resolution of systemically important financial institutions ("SIFIs"). After the financial crisis, an international consensus developed concerning the orderly resolution of SIFIs as an essential means to prevent future crises. The drafters of the CHOICE Act view the orderly liquidation authority ("OLA") as institutionalizing bailouts. The CHOICE Act would replace the OLA with a resolution process administered under the Bankruptcy Code and take away the ability of the FDIC to provide liquidity in the resolution process. It would also eliminate the role of the Federal Deposit Insurance Corporation ("FDIC") in resolution planning review.
  • The Leverage Ratio "Off-Ramp". Title VI of the CHOICE Act would enable "qualifying banking organizations" or "QBOs" to opt out of federal laws and regulations that set capital and liquidity requirements and would prohibit federal banking agencies5 from considering a QBO's effect on systemic risk or financial stability when reviewing certain applications. QBOs would also not be required to comply with most of the enhanced prudential standards established by Section 165 of the Dodd-Frank Act, including the risk committee, resolution planning, and stress testing requirements, among others. To qualify as a QBO, a banking organization would need to have an average leverage ratio of at least 10 percent. The term "average leverage ratio" is defined to mean the average of the banking organization's quarterly leverage ratios for each of the most recently completed four calendar quarters.

The leverage ratio for determining whether a banking organization qualifies as a QBO would be calculated as Tier 1 capital divided by total assets (as reported on the banking organization's call report) plus off-balance sheet exposures, i.e., the supplemental leverage ratio for complex banking organizations.

"Traditional banking organizations" would use the traditional leverage ratio, that is, Tier 1 capital divided by total assets as reported on the traditional banking organization's regulatory filings.6

Banks that do not satisfy the conditions to be considered a "traditional banking organization" may find that maintaining a 10 percent supplemental leverage ratio is not an attractive alternative to complying with the regulations from which QBOs are exempt. As a result, if enacted in its current form, the "off-ramp" option may be of limited value.

  • Repeal of the Volcker Rule. Section 901 of the CHOICE Act would repeal the Volcker Rule (i.e., Section 13 of the Bank Holding Company Act) in its entirety. The Volcker Rule was enacted as part of the Dodd-Frank Act and, subject to a series of exemptions and exclusions, generally prohibits banking entities from engaging in proprietary trading and from investing in, or sponsoring, hedge funds and private equity funds.
  • Repeal of the DOL Fiduciary Rule. Section 841 of the CHOICE Act would repeal the Department of Labor's ("DOL") fiduciary rule which, when fully implemented, will require advisors to retirement plans to act as
  • fiduciaries. The DOL would be prohibited from adopting any similar rule until after the U.S. Securities and Exchange Commission ("SEC") adopts a fiduciary standard for broker-dealers. In that event, the DOL would be required to adopt a rule substantially similar to the SEC rule.
  • Changes to the Financial Stability Oversight Council. The Dodd-Frank Act established the Financial Stability Oversight Council ("FSOC"), an interagency council with responsibility to oversee systemic risk. FSOC has the authority to designate non-bank institutions as systemically important. The designation has the effect of subjecting such institutions to increased oversight and regulation. The CHOICE Act would repeal FSOC's authority to designate non-bank financial institutions and financial market utilities as systemically important. The CHOICE Act would also abolish the Office of Financial Research, which was established to support the work of FSOC by analyzing risks, performing essential research, and collecting and standardizing financial data across the U.S. financial system.
  • Changes to the Rulemaking Process. Section 312 of the CHOICE Act would require any proposed rulemakings from the federal banking agencies (among others) to include at least the following analyses: (i) identification of the need for regulation and the regulatory objective; (ii) an explanation of why the private market or local government cannot address the problem; (iii) an analysis of adverse impacts; and (iv) a quantitative and qualitative cost benefit analysis; among other things. It also prohibits the enactment of a final rule where the quantified costs are deemed greater than the quantified benefits. This may inhibit the rulemaking process for agencies subject to this requirement, which may have difficulty quantifying the benefits of rules designed to protect against such things as systemic risk. The CHOICE Act would also require Congressional approval before rules that have an annual impact on the economy of $100 million or more take effect.
  • Review of Agency Actions. Section 341 of the CHOICE Act would eliminate the Chevron doctrine with respect to judicial review of actions by the federal banking agencies (among others). The Chevron doctrine requires courts to provide significant deference to the determinations of federal agencies. The CHOICE Act would replace this deference with de novo review, meaning the agencies subject to this provision would not receive deference from federal courts with respect to their interpretations of federal law.
  • Changes to the Consumer Financial Protection Bureau. Title VII of the CHOICE Act would restructure the Consumer Financial Protection Bureau ("CFPB") by moving it outside the Federal Reserve System, enabling its director to be removed at-will by the President, and renaming it as the Consumer Law Enforcement Agency. The CHOICE Act would also make fundamental changes to the authority of the renamed agency, including: stripping the agency's power to bring actions relating to unfair, deceptive, or abusive acts or practices ("UDAAP"); eliminating its enforcement authority over insured depository institutions; eliminating its rulemaking authority with respect to UDAAP, employee benefit compensation plans or persons regulated by the SEC or the Commodity Futures Trading Commission ("CFTC"), and small dollar loans; and preventing the agency from restricting arbitration agreements in connection with the offering or providing of consumer financial products.
  • Funding for Banking Agencies. The CHOICE Act would subject certain agencies, which are currently funded outside the regular Congressional appropriations process, to be subject to such process. The agencies affected include: the new Consumer Law Enforcement Agency; the FDIC; the Office of the Comptroller of the Currency ("OCC"); the Federal Housing Finance Agency; the National Credit Union
  • Administration; FSOC; and the non-monetary policy functions of the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
  • Requirements for International Processes. Section 371 of the CHOICE Act would impose administrative burdens on federal financial regulatory agencies7 with respect to their participation in international organizations. Such agencies would be required to issue notices, solicit public comment, and consult with the U.S. Senate's and House's committees of jurisdiction with respect to their participation in the standard-setting process of certain recognized international organizations (including, among others, the Basel Committee on Banking Supervision, the Financial Stability Board, and the International Association of Insurance Supervisors).
  • Minimization of Duplicative Enforcement Efforts. Section 391 of the CHOICE Act would require the federal banking agencies (among others) to implement policies and procedures that would minimize duplication of efforts with other federal and state authorities when bringing an administrative or judicial action. Under the United States' dual-banking system, most banks answer to at least two regulatory agencies. This provision may help streamline enforcement actions where multiple agencies are involved.
  • Tailoring of Regulation. Section 546 of the CHOICE Act would require the federal banking agencies (among others) to tailor future regulatory actions based on the risk profile and business model of each type of institution or class of institutions subject to the regulatory action. This section would also require the federal banking agencies (among others) to review all regulatory actions taken in the past seven years and to revise such regulatory actions to conform to the requirements of the CHOICE Act. A regulatory action is defined to mean "any proposed, interim, or final rule or regulation, guidance, or published interpretation." This may help ease the regulatory burden for smaller institutions.

As the CHOICE Act progresses through Congress, any legislation ultimately enacted into law will likely diverge significantly from the current bill. Nevertheless, we expect the CHOICE Act to play a part in framing the debate going forward.


1 The actual vote was 233-186; all 233 votes in favor came from Republicans and the votes against passage included 185 Democratic votes and 1 Republican vote. See http://clerk.house.gov/evs/2017/roll299.xml. The latest version of the Financial CHOICE Act of 2017, as amended, is available here: https://www.congress.gov/115/bills/hr10/BILLS-115hr10rh.pdf. A section-by-section summary of the legislation, prepared by the Republican majority on the Committee, is available here: https://financialservices.house.gov/uploadedfiles/050217_fc_memo.pdf. A comprehensive summary of the legislation, prepared by the Republican majority on the Committee, is available here: https://financialservices.house.gov/uploadedfiles/2017-04-24_financial_choice_act_of_2017_comprehensive_summary_final.pdf.

2 For our client alert summarizing the hearing held by the Committee on April 26, 2017, please see: https://media2.mofo.com/documents/170427-financial-choice-act-of-2017.pdf.

3 For the full text of Executive Order 13772, please see: https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states. President Trump also signed two presidential memoranda dealing with financial regulations on April 21, 2017: one directs the Secretary of the Treasury to assess the Financial Stability Oversight Council's process of designating banks and financial firms as "too big to fail"; the other directs the Secretary of the Treasury to review and report back on whether the federal government's orderly liquidation authority is useful to the U.S. economy and in line with the Administration's regulatory policy. Copies of the presidential memoranda are accessible here: https://www.whitehouse.gov/briefing-room/presidential-actions/presidential-memoranda.

4 Please note that this Client Alert does not endeavor to summarize all of the important components of the CHOICE Act.

5 The term "federal banking agencies" refers to the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the FDIC.

6 A "traditional banking organization" is defined in this section as a banking organization that: (A) has zero trading assets and zero trading liabilities; (B) does not engage in swaps or security-based swaps, other than swaps or security-based swaps referencing interest rates or foreign exchange swaps; and (C) has total notional exposure of swaps and security-based swaps of not more than $8 billion.

7 The term "federal financial regulatory agencies" refers to the Federal Reserve Board, the FDIC, the OCC, the U.S. Department of the Treasury, the SEC, and the CFTC.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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Marc-Alain Galeazzi
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