We reported in SAA 2016-22 that Republicans on June 7th announced a comprehensive financial reform package to be introduced later that month. It took a bit longer, but the bill was finally introduced on September 9th.
Financial Services Committee Chairman Jeb Hensarling (R-TX) introduced the Financial CHOICE Act, H.R. 5983, which a Committee Press Release promises will “end taxpayer-funded bailouts of large financial institutions; relieve banks that elect to be strongly capitalized from growth-strangling regulation that slows the economy and harms consumers; impose tougher penalties on those who commit financial fraud; and demand greater accountability from Washington regulators.” An executive summary articulates seven core principles, which we summarize as: 1. Economic growth; 2. Financial independence; 3. Consumer protection; 4. No taxpayer bailouts and no companies too big to fail; 5. Systemic risk management; 6. Simplicity vs. complexity; and 7. Wall Street and Washington accountability. These principles translate to seven key objectives, which we summarize as: 1. Provide for strongly capitalized and well-managed financial institutions; 2. End “Too Big to Fail” and bank bailouts; 3. Empower Americans to achieve financial independence; 4. Devolve power away from Washington; 5. Demand accountability from Wall Street; 6. Facilitate capital formation; and 7. Provide regulatory relief.
Dodd-Frank, CFPB and Financial Regulators All Impacted
If enacted, the 513-page legislation would have far-ranging impact. Dodd-Frank would essentially be repealed and replaced. For example, a Committee Release from June announcing the plan to introduce the CHOICE Act promises to “fix the Dodd-Frank-Volker Rule…. Concocted in 2010, the rule was designed to prevent banks from engaging in proprietary trading. Of course, not one of the 450 institutions that failed in 2008 and 2009 failed due to proprietary trading.” CFPB, described in the Committee Release as “the most undemocratic institution in American government,” would be transformed dramatically, and would essentially mirror the structure of the SEC, complete with “an independent, Senate-confirmed Inspector General.” The SEC and all other federal financial regulators would face stricter scrutiny and accountability. All financial regulatory agencies would be made subject to the REINS Act, bi-partisan commissions and the appropriations process, so that Congress can exercise proper oversight (exception: Fed monetary policy). All financial regulators will conduct a detailed cost-benefit analysis of all proposed regulations and the Federal Reserve, both in its conduct of monetary policy and its prudential regulatory activity, would be answerable to Congress. All fines collected by the Public Company Accounting Oversight Board and Municipal Securities Rulemaking Board will be remitted to the Treasury for deficit reduction; and, finally, the Office of Financial Research (OFR) would be abolished.
Show-stoppers on SEC, CFPB and Arbitration
The proposed law would impact SEC in several ways. First, it would reauthorize the Commission for another five years “with funding, structural, and enforcement reforms.” Next, it would permit the SEC to “triple the monetary fines sought in both administrative and civil actions in certain cases where the penalties are tied to the defendant’s illegal profits.” Third, the plan would give the Commission the power to “impose sanctions equal to investor losses in cases involving ‘fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement’ where the loss or risk of loss is significant, and increase the stakes for repeat offenders.” The last SEC-related objective would be to repeal the Commission’s authority “to both prospectively and, possibly, retroactively eliminate or restrict securities arbitration.” This would be accomplished by the outright elimination of Dodd-Frank section 921. The bill would similarly repeal Dodd-Frank section 1028, which establishes CFPB’s authority to regulate arbitration.
… And on the DOL Fiduciary Rule
Recall that President Obama on June 8th vetoed the joint Congressional resolution aimed at stopping the Department of Labor (“DOL”) from implementing its long-awaited rule creating a uniform “best interest of investors” standard for individuals providing retirement account investment advice. Late on June 22nd, the House attempt at an override of H.J.Res. 88 failed by a 239-180 vote. The rule was finalized on April 6 and is set to go into effect in phases starting April 2017. Not so fast, says the proposed CHOICE Act, which in section 441 would nullify the rule, require DOL to wait until the SEC acts on a uniform fiduciary standard and require both agencies to conduct “rigorous” cost-benefit analyses.
(ed: *Wow! **Much of our analysis above is taken from our original writeup in June. ***To us this plan presumes that a future GOP-led Congress approves the reform package and sends it to a President Trump. We don’t see any chance that President Obama or a future President Hillary Clinton would sign it, or that there would be enough votes for a veto override. Most likely the bill will die when this Congress expires January 3, 2017. ****Undaunted, the Committee’s Release says that the Committee will begin debating the bill on September 13. Speaking of the Release, we note that it contains a two-minute video from Chairman Hensarling. *****The non-partisan GovTrack Website had calculated the bill’s chances of getting out of committee as 9%, and of being enacted as 3%. GovTrack says “only 15% of bills made it past committee and only about 3% were enacted in 2013–2015.” ******OK, latest news reports say the bill was passed by the Financial Services Committee on September 13 by a 30-26 vote.) (SAC Ref. No. 2016-35-04)
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