In a party line vote, the House of Representatives approved the Financial CHOICE Act of 2017. If signed into law, this legislation would profoundly alter the financial services regulatory landscape put in place after the 2007–08 financial crisis.
Congressional Republicans have repeatedly pledged to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act since its enactment in 2010. In the latest effort, the House of Representatives earlier this month approved H.R. 10, the Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) Act. This 600-page bill makes multiple fundamental changes to Dodd-Frank and other financial services laws. In particular, the House-backed measure:
- Creates a regulatory off-ramp allowing banks and other financial institutions to opt out of the Dodd-Frank supervisory regime if they satisfy certain measures of institutional stability.
- Restructures the Consumer Financial Protection Bureau (CFPB) as the “Consumer Law Enforcement Agency,” with a director appointed by (and fireable by) the president. The act also subjects the agency to greater congressional oversight and the ordinary appropriations process and eliminates the CFPB’s authority to prohibit “unfair, deceptive, or abusive acts and practices” and other supervisory functions.
- Ends the power of the Financial Stability Oversight Council (FSOC) to designate firms as “systemically important,” a status that entails enhanced regulatory oversight. Any such designations previously made by the FSOC would be unmade retroactively.
- Fully repeals the Volcker Rule restricting banks from making certain kinds of speculative investments that do not benefit their customers.
- Overturns the Chevron doctrine, whereby courts grant deference to federal agencies’ reasonable interpretation of their statutory authority.
- Codifies the “valid-when-made” doctrine, providing that if a loan is nonusurious when made, it remains valid upon a subsequent sale. This provision overturns the Second Circuit’s decision in Madden v. Midland Funding that rejected valid-when-made and held that the National Bank Act does not preclude state law usury claims.
- Subjects federal banking regulators to greater congressional oversight and tighter budgetary control, with new requirements that agencies perform cost-benefit analyses before undertaking new rulemaking.
The Financial CHOICE Act also enhances penalties for certain financial and securities law violations. In particular, the legislation:
- Authorizes the Securities and Exchange Commission (SEC) to triple monetary fines sought in certain administrative and civil actions where penalties are tied to defendants’ illegal profits. The act also allows the SEC to impose sanctions equal to investor losses in certain cases involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.”
- Increases maximum criminal fines for individuals and firms that engage in insider trading and other corrupt practices, imposes enhanced penalties for financial fraud and self-dealing, and promotes greater transparency and accountability in the civil enforcement process.
Not all of Dodd-Frank is targeted by the Financial CHOICE Act. The bill is notably silent on swap dealer and investment adviser registration requirements, elimination of the “private client” exemption, conflict minerals and petroleum company disclosure rules, and the private placement “bad actor” disqualification under Rule 506 of Regulation D. Repeal of the Department of Labor’s “fiduciary rule” for retirement plan advisers is also absent from the act.
The White House has indicated its support for the Financial CHOICE Act, describing passage in the House as “a necessary and important step in moving financial reform legislation through Congress,” adding that President Donald J. Trump “looks forward to working with Congress to undo additional mandates from the Dodd-Frank law that unnecessarily raise costs and limit choices for consumers.”
If enacted, the Financial CHOICE Act would profoundly alter the complex regulatory landscape established after the 2007–08 financial crisis. Most actors in the financial services industry would feel some effect, generally in the form of lighter-touch regulation and attenuated oversight. Many banks would enjoy relaxed capital, liquidity and other regulatory requirements. Nonbank financial companies could no longer be designated as “too big to fail” and thereby subject to heightened scrutiny. And lenders and debt purchasers would face less uncertainty in the secondary debt market following codification of the valid-when-made doctrine. Critics argue the legislation would dramatically curtail investor protections and increase the risk of another financial crisis.
Despite passage in the House, the Financial CHOICE Act’s chances of reaching the president’s desk are deeply uncertain. The bill passed by a vote of 233 to 186, with zero Democrats in favor and one Republican opposed. H.R. 10 now moves to the more evenly divided Senate, where significant changes are likely. With little hope of garnering any Democratic votes, Senate leaders must walk a narrow path between the demands of its most conservative members to fully repeal Dodd-Frank and moderates who prefer a more nuanced approach. And with healthcare and tax reform already high on the congressional agenda this year, immediate consideration in the Senate is unlikely.
Nonetheless, we urge members of the financial services industry to closely monitor the progress of H.R. 10 as it moves through the legislative process. Even if pared back, the Financial CHOICE Act would still be the most significant financial services law since Dodd-Frank.
H.R. 10, the Financial CHOICE Act of 2017, 115th Congress, available at https://www.congress.gov/bill/115th-congress/house-bill/10/.