Republicans on the House Financial Services Committee, led by Chairman Jeb Hensarling (R-TX), released the text of their revised "Financial CHOICE Act" (FCA) legislation1 on April 19. The draft bill represents the House Republicans' opening position in the coming debate on financial regulatory reform, and updates the legislation reported out of the Committee in September 2016. The bill would make major, comprehensive changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA), as well as other financial regulatory laws. A committee hearing on the bill is scheduled for Wednesday, April 26, and it is likely that Republicans will try to push the bill through the Committee and onto the House floor in the coming weeks.
Not yet clear is how this effort will be coordinated—if at all—with the Trump Administration, as the Treasury Department is in the process of completing a study on financial regulatory reform, expected to be issued in early June, pursuant to an executive order signed by President Trump in February. Furthermore, while we anticipate that the House of Representatives will pass some version of the FCA in 2017, prospects in the Senate are much less clear. The Senate is more likely to pursue regulatory reform legislation that is more limited in scope than the FCA. Also, the Senate being the Senate, such action probably will not be seen until 2018.
In general, while the FCA is not a wholesale repeal of Dodd-Frank, it repeals several of its major provisions, and dramatically revises or restructures many others. The bill also includes a number of GOP priorities that are separate from Dodd-Frank. Some of the main provisions of the 593-page bill are highlighted below.
Changes to SIFI Program (Titles I, II, and VIII of DFA)
The FCA would dramatically curtail the processes established under DFA for the designation, regulation and, when necessary, receivership of systemically important financial institutions (SIFIs) and systemically important financial market utilities (SIFMUs). The FCA would:
- repeal FSOC authority to designate non-bank SIFIs (DFA § 113, FCA § 151);
- substantially repeal Federal Reserve authority over non-bank financial companies (DFA §§ 161, 162, 164, 166-168, 170, 172; FCA § 151);
- limit Federal Reserve remediation, examination, and enforcement authorities over bank holding companies with total consolidated assets of $50 billion or more (DFA §§ 166, 168, 172; FCA § 151);
- limit Federal Reserve authority to require additional operational risk capital (FCA § 152);
- repeal FSOC authority to designate SIFMUs (DFA Title VIII, FCA § 141);
- provide relief from DFA § 165 enhanced supervision and prudential rules for qualifying banking organizations with 10% average leverage ratios (FCA § 602);
- repeal FDIC receiverships of nonbank SIFIs (DFA Title II, "Orderly Liquidation Authority") and replace with new Bankruptcy Act provisions involving SEC and banking agencies in process (FCA §§ 111, 121-123) (similar Bankruptcy Code amendment introduced in Judiciary Committee); and
- further restrict Federal Reserve and Treasury bail-out authority (DFA §§ 1104-1106, FCA §§ 131-133).
Repeal Other DFA Provisions
The FCA would repeal other DFA provisions, including the:
- Volcker Rule (DFA § 619, FCA § 901);
- Durbin Amendment cap on debit card fees and other restrictions on debit card processing for merchants (DFA § 1075, FCA § 735);
- authority for SEC and CFPB to restrict arbitration clauses (DFA §§ 921, 1028; FCA §§ 738, 857); and
- restrictions on conflicts of interest in securitizations (DFA § 621, FCA § 901).
Other Major DFA Changes
The FCA would make several other substantial changes to key DFA provisions, including:
- easing regulation of mortgage lending (FCA §§ 501, 502, 506, 516, 531, 556, 571, 576);
- eliminating the CFPB's
supervision authority over banks and nonbanks and making
potentially significant changes to CFPB's enforcement
(DFA §§ 1024-1026; FCA § 727);
- eliminating the CFPB's authority to regulate payday or similar loans and rolling back its indirect auto lending guidance (DFA §§ 1022, 1024, 1027; FCA §§ 733-734);
- limiting the credit risk retention rule to residential mortgage-backed securities (FCA § 842);
- changing the program for credit rating agency regulation (FCA §§ 850-857);
- broadening Investment Company Act and Advisers Act exemptions for regulation of private funds and their managers (FCA §§ 471, 858, 859);
- stress-testing and resolution plan simplification (DFA § 165(d), (i); FCA §§ 151(b), (c));
- providing regulatory relief for community banks (FCA Title V);
- creating optional charter authority for federal savings associations (FCA § 551);
- providing regulatory relief for low-risk banks (FCA § 546);
- providing regulatory relief for strongly capitalized banks (FCA Title VI);
- providing relief from the single counterparty credit limit for qualifying banks (DFA § 165(e), FCA § 602(a)(8));
- making revisions to derivatives regulation (DFA Title VII, FCA §§ 871-872) (separate House legislation addresses swaps end-user relief and non-profit relief); and
- eliminating the CFPB's UDAAP powers and clarifying the federal banking agencies' UDAP responsibilities under the FTC Act (FCA §§ 736-737).
The FCA would address other issues not related to DFA. The FCA would:
- repeal the Department of Labor's fiduciary rule (FCA § 841);
- reverse Madden decision by codifying valid-when-made principle (FCA § 581); and
- impose requirements on international regulatory coordination (DFA § 175, FCA §§ 151, 371).
Agency Structural Changes
The FCA would make changes to the structure and operations of financial regulatory agencies:
- CFPB (FCA Title VII);
- SEC (FCA Title VIII);
- Federal Reserve (FCA Title X);
- FDIC (FCA § 351);
- Federal Housing Finance Authority (FCA § 352);
- eliminate the Office of Financial Research (DFA Title I, Subtitle B; FCA § 151); and
- merge the Federal Insurance Office (FIO) with the FSOC Independent Member (FCA Title XI).
JOBS Act 2.0 (FCA Title IV)
The FCA would make changes to federal securities laws intended to ease access to capital for businesses, including:
- amendments to streamline securities offering requirements and reporting requirements for issuers; and
- enhanced crowdfunding provisions.
Other SEC Changes
The FCA would also increase penalties the SEC can impose:
- enforcement penalties (FCA Title II).
Administrative Law Changes
The FCA would also dramatically alter the process for consideration and review of agency rulemakings through:
- more cost-benefit analysis (FCA §§ 311-321);
- Chevron judicial deference rollback (FCA § 341);
- Congressional review (FCA §§ 331-337);
- unfunded mandates reform (FCA §§ 381-388); and
- appropriations process coverage (FCA §§ 361-365).
When Chairman Hensarling put forth an earlier version of the FCA last year, the intention was to set the table for 2017 by defining the parameters of the financial regulatory reform debate in the event that Republicans retained control of Congress and captured the White House. With the election indeed producing that result, the prospects for enactment of such reform improved significantly, and the Committee has thus worked to produce an updated bill that will serve as the primary legislative vehicle for financial reform.
As with most legislative efforts during the 115th Congress, the true test of a bill's prospects will be in the Senate, where a narrower Republican majority combined with minority-friendly procedural rules give the Democrats a greater ability to obstruct or at least delay action. We expect many if not most Democratic Senators will fight attempts that they believe will weaken Dodd-Frank at both the committee level and on the Senate floor. Senate Banking Committee Chairman Mike Crapo (R-ID), well aware of these hurdles, has indicated an intention to craft legislation more slowly and deliberately, with the intention of producing a package that will have some degree of bipartisan consensus.
It therefore remains to be seen how much of the FCA might survive into a final bill, and indeed whether the effort might stall as a whole. Chairman Hensarling is aware that some compromises will be necessary for the effort to ultimately succeed, and there may come a point at which Hensarling must decide whether such compromise is a price he wants to pay for a legislative victory. In the meantime, it is clear that Hensarling intends the FCA to be his starting position in what he hopes will ultimately be bicameral negotiations.
1. "CHOICE" in the bill's title is an acronym for "Create Hope and Opportunity for Investors, Consumers, and Entrepreneurs."
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