Financial CHOICE Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama on 21 July, 2010. The legislation ushered in a rulemaking process designed to ensure a broad range of issues – industry, economic, scientific and consumer – are incorporated at various stages. The goal of the process is to ensure final regulations are balanced, consistent with the intent of the initial legislation, and to avoid any potential unintended consequences.
The Financial CHOICE Act is designed to undo a number of provisions in the Dodd-Frank Act, and was passed by the House Financial Services Committee in May 2017. While it is given little chance of actually becoming law, introduction of this legislation signaled the Trump Administration’s commitment to repealing aspects of the Dodd-Frank Act.
The bill, which stands for Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs (CHOICE), would eliminate Title II of Dodd-Frank, the section that created the Orderly Liquidation provision and provides a government guided wind-down process for banks facing bankruptcy. In its place, the bill would create a new section of the bankruptcy code specifically targeted at large financial institutions.
The CHOICE Act would also eliminate Title IV of Dodd-Frank, which empowers the Financial Stability Oversight Council (FSOC) to designate financial organizations as systemically important and to impose more regulations on them. The Act would also call for the dissolution of FSOC, repeal the portion of the law responsible for the Volcker Rule, and kill the so-called “fiduciary rule”, among other provisions.
The Dodd-Frank mandate is the largest in generations, involving some 300 rulemakings mandated by the Act. To complicate matters, multiple regulators have joint jurisdiction over the same markets and products. While we support some efforts to streamline the current regulatory scheme (whether through the CHOICE Act, or similar future legislation), certain aspects of the current law should be retained.
CFA Institute Viewpoint
Amendments to the Dodd-Frank Act should still retain:
- Higher capital requirements for banks;
- Oversight of OTC derivatives;
- Volcker Rule for large, systemically important banks;
- A ban on mandates for regulators and firms to use ratings of nationally recognized statistical rating organization (NRSROs). (See credit rating agencies.)
The CHOICE Act:
CFA Institute strongly supports certain aspects of the CHOICE Act, which currently is the sole legislative outline for revising the Dodd-Frank Act. The bill amends the Dodd-Frank to:
- Repeal the "Volcker Rule" (which restricts banks from making certain speculative investments);
- With respect to winding down failing banks, eliminate the Federal Deposit Insurance Corporation's orderly liquidation authority and establish new provisions regarding financial institution bankruptcy;
- Repeal the "Durbin Amendment" (which limits the fees that may be charged to retailers for debit card processing).
Particular provisions CFA Institute hopes are enacted include:
- Enhancing the SEC’s enforcement capabilities, including increasing civil penalty authority and criminal sanctions for the most serious offences;Reconsidering the Orderly Liquidation Authority approach for TBTF banks and enact a bankruptcy-based framework for failing banks;
- Allowing creation of a venture exchange for small-cap and JOBS Act companies;
- Including in the “accredited investor” definition individuals who have knowledge of, experience in, and understanding of the financial markets and products;
- Reducing barriers for credit ratings firms to enter the market;
- Eliminating the Office of Financial Research;
- Making Financial Stability Oversight Council (FSOC) subject to greater transparency in its deliberation;
- Removing financial market utilities – central clearinghouses, et al. – from the list of systemically important financial institutions and end their access to the Fed’s Discount Window
In addition, we support additional provisions:
- We support increased monetary penalties for violations of securities laws, and particularly support increasing penalties for recidivist offenders.
- We support greater accountability and cost-benefit analyses for financial regulators, but believe the SEC needs much greater financial support to enable it to enhance enforcement of existing rules, and to improve its technological capabilities, thereby improving its regulatory efficiency. (See SEC Funding.)
- We disagree with exempting small companies from XBRL requirements; rather, we support the use of in-line XBRL to incorporate data tagging in all aspects of financial reporting, including interim financial reports and earnings releases. Exempting small companies from data tagging will worsen investors’ need to discount the pricing multiples applied to small company securities due to the lower transparency for their financial reporting when compared with the reporting of other companies.
- We support provisions to create a Venture Exchange system to list small companies that are exempt from certain reporting and governance rules.
- We support letting the shares of these companies trade exclusively on such markets to enhance liquidity.
- We do not support increasing the investment threshold for submitting shareowner proposals on companies’ proxy statements to 1% of outstanding shares and 3 years’ ownership. We suggest a revision to a minimum investment of $25,000 (versus $2,000 today) and a period of ownership of at least six months.
- We support regulatory relief for commercial banks holding a minimum of 10% equity capital, and specifically for firms not deemed systemically important. This includes loosening of Volcker Rule restrictions on such institutions when they are not engaged in proprietary trading of securities. (See Volcker Rule.)We appreciate the idea of expedited financial institution bankruptcy to eliminate future bailouts. If done correctly, transferring bad assets to “bad bank” for resolution while keeping operating units functioning with capital supplied by creditors would be a preferable solution.
- We support ending SIFI designations for financial market utilities (central clearinghouses), not because of the designation but because of the moral hazard that comes with implicit fed support for clearinghouses if they fail. (See Systemic Risk.)