It is traditional at this time of year to make predictions about what the coming year may bring, and we thought it appropriate to consider possible DoddFrank Act (“DoddFrank” or the “Act”) reforms that may be enacted by the new Republican Congress. However, we need to disclaim at the outset any pretense of accuracy in that, not only has the President threatened veto of legislation that he believes weakens the Act, but also, already, last Wednesday, the new House was unable to send on to the Senate, using fast track procedures requiring a two thirds vote, what many would consider modest DoddFrank reforms. Thus, what follows may be considered more a “wish list,” not necessarily ours, but rather reflecting public policy concerns that have been expressed about the Act since its enactment in 2010.
First, DoddFrank provides that all bank holding companies with assets of $50 billion or more shall be subject to enhanced prudential standards issued by the Federal Reserve Board as such banks are all systemically important. There now seems to be consensus that this threshold is too low and should be raised significantly.
Second, we believe that Congress may consider reform of the Financial Stability Oversight Council (the “FSOC”) charged with designating nonbank financial firms as “systemically important” (“SI”) thereby subjecting them to banklike enhanced prudential standards issued by the Federal Reserve Board. The FSOC has operated with what some consider a lack of transparency and absence of stated standards in making such designations. Reformers may well try to bar the FSOC from further SI designations until Congress reviews those already made and to require FSOC to announce the metrics it is using.
Third, DoddFrank requires large banking organizations to submit to the Federal Reserve Board and the FDIC resolution plans or “living wills,” i.e., plans for dissolution of the firms in case of failure. There are no guidelines as to what constitutes an acceptable plan, and, exercising their discretion, the agencies have publicly rejected as inadequate many plans filed by many major banking organizations. Reformers will likely require the agencies to adopt, through formal Administrative Procedures Act (“APA”) rulemaking proceedings, standards for what is acceptable in these plans.
Fourth, similarly, DoddFrank requires many banking organizations to undergo stress testing, but the process is opaque and discretionary. Reformers will want the Federal Reserve to disclose and seek APA rulemaking public comment on the assumptions and models it uses to conduct these stress tests.
Fifth, the DoddFrank Act requires each banking agency to establish an Office of Minority and Women Inclusion to assess the diversity policies and practices of regulated entities, all of which, of course, are already subject to antidiscrimination laws. Reformers may seek repeal of this requirement as superfluous.
Sixth, the Volcker Rule cries out for revision as its definitions, particularly of covered funds, are overbroad and have caused numerous unintended consequences, catching up and prohibiting wideranging bank activity ranging from energy tax credit investments to tender option bonds. Reformers likely will push for narrowing of Volcker Rule definitions. Also, authority for administering the rule is shared by five agencies, making agreement at times unachievable. Reformers may well push for administration by a single agency.
Seventh, the Act federalizes corporate law by requiring “say on pay” votes by shareholders, clawbacks of executive compensation in the event of accounting restatement even if the executive had no involvement in the restated matter, and proxy access (i.e. entitling certain shareholders to nominate directors in company proxy materials). In addition, the Act imposes unusual new burdensome disclosure requirements intended to affect company behavior, such as disclosures regarding use of socalled “conflict minerals” and disclosures of pay ratios comparing CEO compensation and median employee compensation. Reformers are expected to advocate repeal of clawback and proxy access requirements as well as these burdensome disclosure requirements.
Finally, the new Consumer Financial Protection Bureau (the ”CFPB”) should serve as a rich source of considerable reform attention. Renewed attention will be devoted to converting it into an agency with a bipartisan commission structure, instead of being governed by a single director. Also, efforts will be renewed to bring the CFPB into the normal Congressional appropriations process, eliminating current automatic funding as a percentage of Federal Reserve Board expenses. New efforts will be undertaken to remove the director of the CFPB from membership on the FSOC and the board of the FDIC. Consistent with the effort to strengthen the rule of law at FSOC and the banking agencies by requiring greater transparency and APA notice and comment rulemaking procedures, reformers are likely to urge that the CFPB follow rulemaking procedures before adopting any policy or legal interpretation that may serve as the basis of an enforcement action, including, but not limited to, particularly actions based on the Act’s “abusive” practice prohibition. Also, we would expect efforts to require the CFPB to pay settlements and penalties into the general treasury rather than the current required practice that such funds be paid into a special fund for victims and consumer education programs.
None of these reforms would frustrate the Act’s stated purposes of promoting the financial stability of the U. S., ending “too big to fail,” protecting taxpayers by ending bailouts, and protecting consumers from abusive financial practices. Nonetheless, it is not clear at all that bipartisan support will be had for all or even any of them.