The GOP takeover in the House of Representatives last fall prompted many to question the future of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"), and whether an attempt would be made to repeal the financial regulatory overhaul.
Up until last week, Representative Michelle Bachman (R-MN) was the only member of Congress to have introduced legislation (H.R. 87) repealing the entire Dodd-Frank Act. Her bill, however, has been largely ignored by House leadership. Nonetheless, this past Friday, Senator DeMint (R-SC) announced the introduction of similar legislation (S. 712) which has more than twice the number of cosponsors (18 in total), including that of the Senate Republican leadership, than Bachman's legislation has garnered. While DeMint's bill seems to have healthy support, the chances of it passing are highly unlikely.
The more likely scenario will be the approach House Republicans took at the beginning of 112th Congress; cut the budget of those agencies in charge of writing the new rules under the Dodd-Frank Act and hold multiple investigative hearings on controversial provisions of the law. This systematic approach allows them to slow the implementation process, while buying time to review specific provisions they claim are overly burdensome and costly for companies to comply with. For example, Title VII of the Dodd-Frank Act, regulating the over-the-counter ("OTC") swaps markets, is one provision Congress has focused on.
The Dodd-Frank Act requires the SEC to write over 100 rules, and the CFTC is to write over 50 rules by July 15, 2011; many of them jointly with the SEC. CFTC Chairman Gary Gensler has recently stated that many of the rules will miss this deadline due to budgetary constraints. This, he said, is due to the House Republicans' plan to reduce the CFTC's budget of $168.8 million by $56.8 million. The GOP spending bill also reduces the SEC's $1.12 billion budget by $25 million. Both CFTC Chairman Gensler and SEC Chairwoman Mary Schapiro have repeatedly testified that the cuts in their budgets will impede each agencies' ability to properly write and implement the rules required under the Dodd-Frank Act.
The Sarbanes-Oxley Act of 2002 required a total of 16 rulemakings and six studies that were proposed and implemented over a two-and-a half year time period. The Dodd-Frank Act requires a total of 240 rulemakings and nearly 70 studies, with most of the final rules to be promulgated within 360 days of the enactment of the law, followed by a swift implementation period. Needless to say, a bipartisan view exists that the regulators could use more time with the rulemaking process, particularly since the Dodd-Frank Act created several new entities and oversight of new markets. More precisely, drafting new rules for the never-regulated swaps market is a daunting task, given the highly technical and complex nature of the market, as well as the very short amount of time to be completed.
The CFTC and SEC must undertake rulemakings in a multitude of areas, including corporate governance, capital and margin requirements, end-user exceptions, whistleblowers, clearing, data recordkeeping and recording requirements and position limits. The CFTC has been proposing rules at a lightening pace and has issued approximately fifty rules thus far, creating a great deal of criticism during recent oversight hearings of Dodd-Frank. Republicans have expressed deep concern that both the CFTC and SEC are issuing rules at such a fast pace, making these rules overly prescriptive. According to some lawmakers, the joint rules are not harmonized and are not being proposed in a systematic way due to the fact that each agency is more concerned about meeting the deadline, rather than "getting it right." For example, the CFTC has proposed several rules that require the definition of a swap, yet this definition remains undefined to date. Republicans and the industry have been highly critical, saying this creates confusion and uncertainty within the industry which can affect the markets. To further the confusion and uncertainty, the CFTC and SEC have reopened the comment periods for some of the proposed rules, which may be viewed as the agencies trying to "get it right."
Another recent criticism was brought to Congress' attention by Republican CFTC Commissioner Jill E. Sommers. Sommers has been critical of the Commission's process of not performing a cost benefit analysis when proposing a rule. Section 15(a) of the Commodity Exchange Act requires the CFTC to only consider the cost benefit analysis, while it is not required to provide a quantitative analysis when proposing a rule. Sommers has been objecting to this for about a month and a half, and in the current political and economic environment, it is receiving a lot of traction. She has urged the agency to follow the President's recent Executive Order on "Improving Regulation and Regulatory Review," which requires agencies to justify the costs of any regulation. As an independent agency, the CFTC is not bound by the Executive Order, but the Commissioner has been publicly pressing the agency to undertake this type of analysis.
House Financial Services Committee Chairman Spencer Bachus of Alabama has publicly stated that he will work on repealing or amending pieces of the Dodd-Frank Act. Similarly, Republican Representative Scott Garrett of New Jersey, who chairs the Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, has stated that the Republicans do not intend to repeal the Dodd-Frank law due to concerns that it will create uncertainty and confusion in the markets.
With no visible support from the House Republican Leaders, it seems unlikely that Dodd-Frank will be repealed. However, even though Senator DeMint has the support of Minority Leader Mitch McConnell of Kentucky and Senate Banking ranking member, Richard Shelby of Alabama, it will likely be opposed by the Senate's Democratic majority, as well as by President Obama. We are likely to see a technical corrections bill and several more oversight hearings on the Dodd-Frank Act aimed at picking apart controversial provisions of the law. Meanwhile, the agencies will continue to ask for additional funds to help them "get it right."