GOP rewrite of financial reforms could come to House floor this month; Waters calls Hensarling's bill 'Dead on Arrival in the Senate'

The House Financial Services Committee on Thursday, May 4, approved HR 10, a sweeping rewrite of the Dodd-Frank financial reforms enacted in 2010, by a party-line vote of 34-26. Chairman Jeb Hensarling's (R-TX) 600-page Financial CHOICE Act — which stands for "Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs" — would repeal or restructure broad elements of the Dodd-Frank Act, including much of the act's post-crisis capital and prudential rules for banks; powers granted to the Financial Stability Oversight Council (FSOC); the FDIC's authority to wind down large, failing banks and non-bank financial firms; the structure and mission of the Consumer Financial Protection Bureau (CFPB); and many other provisions affecting the Federal Reserve, the SEC and other regulators.

Over the course of a three-day markup that began on Tuesday (May 2), the committee rejected 19 Democratic amendments targeting various sections of the bill, and approved only a substitute amendment from the chairman that modified the text Hensarling had introduced on April 27. The bill includes a number of revisions and additions from the version that the committee approved during the last Congress in September 2016.

Materials from the markup are posted here. Attached with this Alert please find: 1) the text of the Hensarling substitute amendment; 2) a section-by-section staff summary of the bill as introduced April 27; and 3) a document distributed among Republican members earlier this year describing changes made to the 2016 version of the CHOICE Act.

Bill's prospects. HR 10 could come to the House floor later this month, but its fate is uncertain after that. Many of the bill's provisions would be unlikely to survive a Democratic filibuster in the Senate, where Banking Committee Chairman Mike Crapo (R-ID) has so far pursued a different course for revisiting Dodd-Frank, working collaboratively with Ranking Member Sherrod Brown (D-OH) to identify changes with bipartisan support. Some elements of HR 10, such as its repeal of Dodd-Frank's orderly liquidation authority, could be included in a budget-reconciliation bill that would require only 51 votes to pass the Senate, though the narrow rules for reconciliation would probably disqualify many of the bill's other provisions. Treasury Secretary Steven Mnuchin is also compiling recommendations for changes to financial regulations and will submit them to the White House in June, as required by an executive order signed by President Trump on February 3. These could figure into a Senate bill or a House-Senate conference on financial reforms.

During opening statements on Tuesday, Chairman Hensarling said that when Dodd-Frank was passed, "Americans were promised it would lift the economy. Instead, we've had the slowest and weakest recovery of our lifetimes. We were promised Dodd-Frank would end bailouts. Instead, Dodd-Frank promises more taxpayer-funded bailouts for the Wall Street banks that unelected bureaucrats decree are too big to fail … . In hearing after hearing, this committee has heard from dozens of community bankers and credit union leaders about the very real harm Dodd-Frank is causing on Main Street." In her own statement, Ranking Member Maxine Waters (D-CA) said, "The Wrong Choice Act is a vehicle for Donald Trump's agenda to get rid of financial regulation and help out Wall Street … The bill destroys Wall Street reform, guts the [CFPB], and returns us to the financial system that allowed risky and predatory Wall Street practices and products to crash our economy. It's an invitation for another Great Recession, or worse … The bill is rotten to the core, and simply carries water for Trump and his buddies on Wall Street. The bill is also dead on arrival in the Senate, and has no chance of becoming law."

CHOICE Act provisions

FSOC, leverage ratio 'off-ramp,' stress tests and living wills. Among other provisions reshaping Title I of Dodd-Frank, the bill would repeal the FSOC's authority to designate non-bank firms as systemically important (SIFIs) — which currently places them under the supervision of the Federal Reserve with enhanced prudential requirements — and remove all of the Council's current SIFI designations. The leaders of FSOC member agencies, such as SEC and CFTC commissioners, would have to agree to FSOC actions, whereas currently only the chairmen of such agencies participate in the Council. The FSOC's Office of Financial Research, created by Dodd-Frank to analyze risks across the financial system, would be eliminated. The Fed would only be able to require banks to submit "living will" resolution plans every two years, and would have to promulgate regulations governing living wills subject to a public notice-and-comment process. The Fed would also have to issue regulations on its stress tests for larger institutions, and these would also to go through a public notice-and-comment process, with stress tests occurring every two years instead of annually. Notably, the CHOICE Act creates an "off ramp" exempting banks from Dodd-Frank's stress tests, living wills, requirements for risk-weighted capital and liquidity, and limits on mergers and issuing dividends if they maintain a 10% leverage ratio of capital to assets. Outside analysts have estimated that the largest US banks would need to raise a total of about $420 billion to achieve such a ratio.

Orderly liquidation and bankruptcy. The bill would make substantial changes to Title II of Dodd-Frank, which established a new "orderly liquidation authority" for the FDIC to safely wind down large, failing financial firms while serving as their receiver. Republicans have described OLA as perpetuating bailouts because it allows Treasury to draw upon a line of credit from Treasury to keep a bank operating while its debts and other complex transactions are resolved. The bill would repeal OLA altogether and create a new chapter of the Bankruptcy Code devoted to financial companies with more than $50 billion in assets.

CFPB. The bill would make several changes to the CFPB. The Bureau would be subject to congressional appropriations instead of being funded through a transfer of a portion of the Fed's budget. (Other agencies that are now independently funded would also come under the appropriations process, including the Fed, the FSOC, the FDIC, the Office of the Comptroller of the Currency, the Federal Housing Finance Agency and the National Credit Union Administration.) Notably, the latest version of the CHOICE Act, unlike last year's bill, would not restructure the Bureau into a bipartisan commission led by a chairman, like the SEC and CFTC. The agency would still have a single director, but the president would be able to remove that person for any reason. The bill would strip the Bureau's authority as a supervisory agency that can examine banks and other entities, leaving the Bureau as an enforcement agency only, and it would no longer be able to regulate "unfair, deceptive or abusive acts and practices" (UDAAP) among financial products.

DoL fiduciary rule, Volcker Rule, Durbin Amendment. The bill would repeal some high-profile financial regulations enacted or finalized under former President Obama. The Labor Department's 2016 rule requiring advisors to retirement plans to work under a fiduciary standard of care to their clients would be repealed, and the DOL would be required to follow the SEC's standards for regulation of broker-dealers. (The Labor Department under President Trump currently has delayed the fiduciary rule's effective date for 60 days until June 9, though that date could be extended.) The bill would also repeal the "Volcker Rule," found in Section 619 of Dodd-Frank Title VI, which prohibits banks from proprietary trading for their own accounts and maintaining relationships with hedge funds and private equity funds. The bill would also repeal Dodd-Frank's "Durbin Amendment," which required the Fed to set limits on the interchange fees that merchants pay when customers use debit cards — a provision that was controversial among some committee Republicans.

Federal Reserve reforms. The bill includes an entire section (Title X) imposing new requirements on the Federal Reserve, in line with a package of reforms the Financial Services Committee has approved under Chairman Hensarling the last two years. Among other provisions, the Government Accountability Office would be allowed to conduct an audit of the central bank's policies for setting monetary policy, and the Fed would have to follow a "rules-based" approach to setting interest rates. The Fed's ability to provide emergency loans to banks in times of crisis would be further limited. The bill would change the composition of the Federal Open Market Committee (FOMC) to add a sixth representative from the Fed's regional banks and require groups of members from existing regional banks to rotate off the FOMC in alternating even- or odd-numbered years.

Executive pay, corporate disclosures and proxy ballot. The CHOICE Act would repeal Dodd-Frank's recently finalized rules on incentive-based compensation at financial institutions, along with a controversial SEC rule requiring public companies to disclose the ratio of their CEO's pay to that of a median employee at the firm. The bill would limit Dodd-Frank's "Say on Pay" language requiring shareholder votes on a company's executive compensation, and repeal Dodd-Frank's provision requiring public companies to disclose the use of conflict minerals in their supply chain. The bill would also place new restrictions on shareholders' access to the proxy ballot, which had been eased by Dodd-Frank, requiring shareholders to hold at least 1% of a company's stock in order to seek changes on the corporate ballot (instead of holding $2,000 worth of shares).

Risk retention, credit rating agencies. The bill would repeal Dodd-Frank's SEC registration requirement for advisors to private equity funds, and exempt certain companies from Dodd-Frank's "skin in the game" risk retention rules, which require banks that securitize mortgages to retain a portion of those loans on their own portfolios. The bill also would ease a number of rules that Dodd-Frank applied to credit rating agencies, considered one of the key sources of the 2008 financial crisis. Among other changes, the bill would repeal language barring companies from choosing their own rating agency; eliminate annual SEC examinations of credit raters; and repeal a provision requiring CEOs of ratings firms to attest that the company has adopted internal controls.

Amendments

After approving Chairman Hensarling's substitute amendment, the committee voted down 19 Democratic amendments. These included several changes that would have modified the bill's removal of the CFPB's authority to regulate unfair, deceptive or abusive products; an amendment by Josh Gottheimer (D-NJ) that would strike the bill's title IX repealing the Volcker Rule; one by Stephen Lynch (D-MA) that would strike the bill's Section 841, which would repeal the Labor Department's fiduciary rule for advisors to retirement plans; one by Gwen Moore (D-WI) that would strike the bill's Title X on Federal Reserve oversight reforms; one by Jim Himes (D-CT) that would strike the bill's Sections 817 through 828, which would require the SEC to: establish a process for closing its investigations, notify individuals who are the subject of an enforcement action, and appoint an Enforcement Ombudsman; and an amendment by Carolyn Maloney (D-NY) that would strike the bill's language repealing Orderly Liquidation Authority. The committee has posted a complete list of amendments that were considered here.

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ATTACHMENTS

CHOICE Act Summary of changes

Chairman's substitute amendment

Section-by-section summary