Financial Services Committee Chairman Hensarling has issued a memo alerting committee leadership of changes to an earlier version of the Act to repeal and replace Dodd-Frank. We cover here the arbitration-related changes.
Candidate Trump was very clear that acting on repealing and replacing Dodd-Frank was on his First Hundred Days list. Although some suggestions to reconsider were raised after the election, any doubts about the President’s intentions were put to rest February 3rd when he issued an Executive Order on “Core Principles for Regulating the United States Financial System” (see SAA 2017-06). On February 6th, Chairman Jeb Hensarling (R-TX), wrote to Committee leadership highlighting what’s new or changed from the CHOICE Act, which was a proposed bill to replace Dodd-Frank that the last Congress did not act on. As we surmised, the prior bill will serve as a template for the new legislation.
The Unenacted 2016 CHOICE Act…
Last September, Financial Services Committee Chairman Jeb Hensarling (R-TX) introduced the Financial CHOICE Act, H.R. 5983. If enacted, the 513-page legislation would have had far-ranging impact, and Dodd-Frank would have been essentially repealed and replaced. While the bill was not enacted in 2016 because of the certainty of a presidential veto, there were clear implications for securities and consumer arbitration. CFPB, described in a Committee Release from June announcing the plan to introduce the CHOICE Act as “the most undemocratic institution in American government,” would have been 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 have faced stricter scrutiny and accountability.
Show-stoppers on SEC, CFPB and Arbitration
The proposed law would have impacted SEC in several ways. First, it would have reauthorized the Commission for another five years “with funding, structural, and enforcement reforms.” Next, it would have permitted 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 have given 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 have been to repeal the Commission’s authority “to both prospectively and, possibly, retroactively eliminate or restrict securities arbitration.” This would have been accomplished by the outright elimination of Dodd-Frank section 921. The Bill would have similarly repealed Dodd-Frank section 1028, which establishes CFPB’s authority to regulate arbitration. Finally, the proposed CHOICE Act, in section 441 would have nullified the DOL’s fiduciary rule and required the Department to wait until the SEC acts on a uniform fiduciary standard and require both agencies to conduct “rigorous” cost-benefit analyses.
Changes in the Planned New CHOICE Act
Chairman Hensarling’ memo highlights what’s changed from the 2016 Bill. Here’s what’s of interest to us: First, CFPB would now be transformed into an executive agency with a Director terminable at will by the President. This would essentially codify PHH Corporation v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir. Oct. 11, 2016), now pending a rehearing en banc motion at the D.C. Circuit. The agency would become a “civil law enforcement agency,” but with many of its enforcement powers eliminated or pared down. Also, the memo states: “Strengthen the existing Dodd-Frank language that the CFPB’s jurisdiction does not include entities regulated by the SEC or CFTC.” The memo says nothing specifically about arbitration, which to us signals that the new CHOICE act will retain the planned elimination of the SEC’s and CFPB’s authority to regulate or eliminate predispute arbitration agreements. Last, the section on the DOL fiduciary rule will be getting tweaked. The memo states that the new CHOICE Act will “require that DOL must, in promulgating any fiduciary rule, adhere to a substantially similar standard after the SEC has promulgated its uniform standard…”
(ed: *Wow! Big changes are a comin’ if the Bill is enacted. **The Republicans need to figure out a course on the CFPB’s structure – executive agency or independent board/commission? On January 21st the “Consumer Financial Protection Board Act of 2017” – S.105 – was introduced by Senators Deb Fischer (R-NE), John Barrasso (R-WY), and Ron Johnson (R-WI). If enacted, the Bill would result in a five-person Board of Directors, each appointed by the President and serving for five-year staggered terms. Of key importance: members could be removed only for cause. Like the SEC, only three members could be from the same political party. ***Given the DOL fiduciary rule’s tenuous standing (see SAA 2017-07), we wonder if pressure will build on the SEC to finally act? Short answer: “Yes.”) (SAC Ref. No. 2017-07-12)
Like what you see here?
Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.