The G.O.P.’s financial services reform bill is making its way through the House and Senate and poses major challenges to the Dodd-Frank regime.
The Republican-run House Financial Services Committee is putting forth the Financial CHOICE Act, the GOP’s sweeping alternative to the Dodd-Frank Act, which would take financial services reform in a direction more in line with the Trump administration’s goals.
As the bill makes its way through Congress, some of the initial aspects of the bill, dubbed CHOICE for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs, are:
- The end of “Too Big to Fail” and bank bailouts;
- The repeal of Title II of the Dodd-Frank Act and the Orderly Liquidation Authority (OLA), which would be replaced “with a new chapter of the bankruptcy code designed to accommodate the failure of a large, complex financial institution;”
- A retroactive repeal of the Financial Stability Oversight Council (FSOC)’s authority “to designate firms as systematically important financial institutions (SIFIs);
- The repeal of Title VIII of the Dodd-Frank Act, “which gives the FSOC authority to designate certain payments and clearing organizations as systemically important ‘financial market utilities’ (FMUs) with access to the Federal Reserve discount window, and retroactively repeal all previous FMU designations;”
- A prohibition against the use of the Exchange Stabilization Fund to bailout financial firms or creditors.
“The Financial CHOICE Act ends bailouts so Washington can never again pick taxpayers’ pockets and hand the money over to big banks,” says Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, in a prepared statement. Hensarling has been incubating the bill over the past two years.
Texas Congressman Jeb Hensarling
“With the Financial CHOICE Act, the era of big bank bailouts and ‘too big to fail’ will be over. There will be bankruptcy for failed banks, not bailouts. And banks that qualify for much-needed regulatory relief will be so well-capitalized that they pose no threat to taxpayers or the economy. Our plan replaces Dodd-Frank’s growth-strangling regulations on small banks and credit unions with reforms that expand access to capital so small businesses on Main Street can grow and create jobs,” Hensarling says.
Depending upon legislative schedules, the CHOICE bill may get a broader hearing via the U.S. House of Representatives during the week of June 5 before it is sent on to the U.S. Senate, where Capitol Hill pundits are expecting that it will undergo changes.
Yet controversy over the bill started long before its forthcoming debut in the Senate. After much debate, the House committee passed the bill along party lines, 34-to-26 in early May.
The bill’s supporters argue that it will “end bank bailouts, toughen penalties for wrongdoing on Wall Street, promote economic growth, and provide desperately needed regulatory relief for small community banks and credit unions.”
Opponents of the bill are echoing the concerns of Wall Street critic U.S Sen. Elizabeth Warren from Massachusetts.
“Let me be blunt,” Warren said in a statement. “This is a 589-page insult to working families. … It would unleash the same behavior on Wall Street that led to 2008 financial crisis.”
In addition, New York State Comptroller Thomas P. DiNapoli expressed his opposition to the bill via a letter to the members of Hensarling’s committee. “The authors must have hoped Americans have amnesia and have forgotten the financial crisis that caused the Great Recession when they crafted this plan, which would gut consumer protections against high-risk loans, weaken corporate accountability and sow the seeds for economic instability,” DiNapoli says in the letter.
In general, securities industry groups have refrained from comment but the Institutional Limited Partners Association, which represents 400-plus institutional investors also known as limited partners who work in the private equity industry, has gone public with its opposition to the CHOICE act.
In ILPA CEO Peter Freire’s letter to Hensarling and Maxine Waters (D-CA), ranking member of the committee, he says the association opposes the provisions of the bill that would end private equity firms from registering with the SEC.
“As a result of increased SEC oversight and, in particular, through the efforts of the SEC’s Private Fund Examination Unit, our members have seen increased transparency and disclosure of fees and expenses by fund managers, improved fund manager compliance with the terms in the contracted investment agreements and a significantly improved culture of compliance and voluntary disclosure from fund managers,” Freire says in the letter sent in late April.
“A strong SEC enforcement regime, which could not effectively operate without registration, is evidenced by the 10 significant settlements reached with major private equity fund advisers since 2014,” Freire adds. “This enforcement regime has ensured that the SEC has the power needed to ensure a level and fair playing field for all parties.”
While Freire and ILPA urged the committee to remove Sections 858 and 859 from the CHOICE bill, those provisions remain.
“Currently. the legislation still contains the provisions to which we object,” says Emily Mendell, head of marketing and communications for ILPA, in response to FTF News. “We have met with various members of Congress and the House Financial Services Committee to make our concerns known. We will continue to do so as the legislation moves through the House and, potentially onto the Senate. We know our voice has been heard.”
While more reactions to the bill are likely, one area that appears to be sidestepped is the regulation of derivatives instruments, points out analyst Kevin McPartland, the head of market structure and technology research at market research firm Greenwich Associates.
“I can say that the impacts [via the CHOICE Act] on the derivatives market would be relatively minor, as the Republican agenda is focused on more wide-reaching aspects of Dodd-Frank. Any changes to derivatives market oversight will come from the regulatory bodies, not Congress,” McPartland says.
Other industry observers such as Mary Kopczynski, CEO of 8of9, a regulatory consulting and solutions provider, are more concerned with the potential repeal of OLA.
“On balance, I could live with the Choice Act,” Kopczynski says. “I think it is a significantly less disruptive move than a resurrection of Glass-Steagall.”
What does cause concern for Kopczynski is the potential end of OLA, “which would essentially eliminate the entire Qualified Financial Contract [QFC] regime.”
The QFC section “is a highly prescriptive regulation that requires banks to identify hundreds of data points and link them to the original legal agreement,” Kopczynski says. “The banks would absolutely love to see this expense and hassle drop off their plates, but it still raises an eyebrow for me.” She says that “some of the most expensive challenges associated with Bear, Lehman, MF Global and the other spectacular bankruptcies” were directly related to people who lacked “a good handle” on what their obligations were.
The QFC regulation compels “institutions to get their legal data organized, and it incentivizes them to share the burden,” Kopczynski adds. In fact, she cites an 8of9 white paper that spotlights how QFC “would be a great use case for blockchain or distributed ledger technology. If one bank has a copy of the contract, why should the other bank have a copy? Why not have one, distributed ‘contract’ that exists where both parties have access to the single ‘ledger’ or agreement between them.”
Kopczynski also notes that a sister regulation of the European Union, the Bank Recovery and Resolution Directive (BRRD), “is forcing banks to do some of this contract clean-up” while resolution and recovery planning rules are making banks start data remediation projects. “So there is still hope even if the OLA disappears,” she says.
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