On September 13^th, the House Financial Services Committee approved the Financial CHOICE Act of 2016 to repeal and replace key parts of the 2010 Dodd-Frank law by a largely partisan vote of 30 to 26.  Democrats declined to offer any amendments, and Chairman Jeb Hensarling (R-TX) ordered a vote on the bill, H.R. 5983, not long after that became clear.

According to Hensarling, “the Financial CHOICE Act will end taxpayer-funded bailouts of large financial institutions; relieve banks that elect to be strongly capitalized from growth-strangling regulation that slows the economy and harms consumers; impose tougher penalties on those who commit financial fraud; and demand greater accountability from Washington regulators.”

At more than 2,300 pages, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) represented the most sweeping overhaul of the U.S. banking law in our nation’s history.  Indeed, the legislation revisited every major financial services law passed by Congress since enactment of the National Bank Act in 1864.  In just 14 months, the 111^th Congress revamped 140 years of banking law, essentially rewriting a decade’s worth of banking law each month. 

Given both the size and pace of the undertaking, it should come as no surprise that the final product was by no means perfect.  That was clear to many even before Dodd-Frank was enacted, but has become increasingly evident in the wake of an unprecedented 24,000 pages of federal regulation required to implement Dodd-Frank.

Unfortunately for consumers, the enactment of Dodd-Frank has resulted in less choice and higher costs.  It has also resulted in increased compliance costs for small- and medium-size banks that can least afford it.  While Dodd-Frank and its accompanying regulations may have been a boon for lawyers and accountants, the American Bankers Association (“ABA”) contends that 1,708 small banks have closed their doors since Dodd-Frank was enacted – nearly one fourth of the community banks in the United States.  

A culmination of several years of legislative activity, including numerous hearings, the Financial CHOICE Act attempts to address the negative consequences of Dodd-Frank to both consumers and financial institutions as follows:

• Title I provides for election to be a strongly capitalized, well-managed financial institution by allowing for an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for financial institutions that choose to maintain high levels of capital equivalent to a simple 10 percent tangible assets-to-equity ratio.  It would also exempt such banking organizations from final rules implemented under section 165 of Dodd-Frank. 

• Title II attempts to end “Too Big To Fail” and bank bailouts by repealing the authority of the Financial Stability Oversight Council (“FSOC”) to designate non-bank financial companies as systematically important financial institutions (“SIFIs”), and retroactively repeals its previous designations of non-bank financial companies.  It also repeals the FSOC’s authority to designate particular financial activities for heightened prudential standards, which includes the power to mandate that an activity be conducted in a certain way or be prohibited altogether.  Lastly, Title II creates a new chapter of the Bankruptcy Code designed to accommodate the failure of a large, complex financial institution (House-passed H.R. 2947, the Financial Institution Bankruptcy Act of 2016).

• Title III replaces the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) with a five-member “Consumer Financial Opportunity Commission” subject to the normal congressional appropriations process.  It also repeals the CFPB’s authority to ban bank products and services it deems “abusive” and takes away its authority to prohibit arbitration. Finally, Title III proposes to address CFPB enforcement actions, which the Bureau has increasingly used as an alternative to rulemaking, and requires the Bureau to obtain permission before collecting personal information from consumers.  Notably, section 335 of the Financial CHOICE Act also repeals the so-called “Durbin Amendment” which regulates the fees that financial institutions can impose on debit card transactions.

• Title IV reauthorizes the Securities and Exchange Commission (“SEC” or the “Agency”) for a period of five years and attempts to rationalize the Agency’s unwieldy bureaucratic structure.  It also requires the SEC and Commodity Futures Trading Commission (“CFTC”) to harmonize, where applicable, rulemakings, guidance, and other interpretive orders required by Title VII of Dodd-Frank to simplify compliance burdens and improve oversight.  Lastly, it incorporates legislation drafted by the House Committee on Agriculture to reform the CFTC, which received broad new powers over the derivatives markets in Dodd-Frank (H.R. 2289, the Commodity End-User Relief Act).

• Title V attempts to improve insurance coordination through an independent advocate, while repealing the Federal Insurance Office.

• Title VI requires that every financial regulation pass a cost-benefit analysis so that stakeholders know how the rule will impact economic growth before it takes effect.  It also subjects all financial regulatory agencies to the Regulations from the Executive in Need of Scrutiny Act of 2015 (“REINS Act”) and provides for congressional review of federal financial agency rulemaking.  It also repeals the Chevron doctrine requiring judicial deference to agency interpretations by altering the standard of judicial review in the Administrative Procedure Act as it relates to financial regulatory agencies.

• Title VII addresses Federal Reserve oversight, reform, and modernization by demanding greater accountability and transparency from the Federal Reserve, both in its conduct of monetary policy and its prudential regulatory activity (House-passed H.R. 3189, the Fed Oversight Reform and Modernization Act).

• Title VIII imposes enhanced penalties for financial fraud and self-dealing and promotes greater transparency and accountability in the civil enforcement process.  It allows the SEC to triple the monetary fines sought in both administrative and civil actions in certain cases where the penalties are tied to the defendant’s illegal profits.  It also increases the maximum criminal fines for individuals and firms that engage in insider trading and other corrupt practices.

• Title IX repeals the Volcker Rule and other provisions that limit capital formation.

• Title X includes a number of provisions intended to help encourage small businesses, foster innovation, and accelerate access to capital.  It incorporates more than two dozen Committee- or House-passed capital formation bills, including the Retail Investor Protection Act (H.R. 1090), the Small Business Capital Formation Enhancement Act (H.R. 4168), the Helping Angels Lead Our Startups Act (H.R. 4498), the Fix Crowdfunding Act (H.R. 4855), and the Fair Access to Investment Research Act (H.R. 5019).

• Lastly, Title XI provides regulatory relief for “Main Street” by incorporating more than two dozen regulatory relief bills for community financial institutions, including the Financial Institutions Examination Fairness and Reform Act (H.R. 1941), the Taking Account of Institutions with Low Operational Risk Act (H.R. 2896), the Portfolio Lending and Mortgage Access Act (H.R. 1210), and the Financial Institution Customer Protection Act (H.R. 766), among others.

With introduction of the Financial CHOICE Act, Chairman Hensarling has proven himself to be a serious and thoughtful lawmaker.  While there is general industry support for the legislation, the ABA has expressed some concern regarding provisions in Title I that would allow banks to escape certain regulations should they agree to meet higher capital requirements.  In addition, the retail industry continues to oppose repeal of the Durbin Amendment regulating the fees financial institutions can impose on debit card transaction.  

While Committee passage of the Financial CHOICE Act is likely the high water mark for the bill this year, it will undoubtedly serve as important blueprint for financial regulatory reform in the next Congress.  Moreover, it is quite possible that some of the bipartisan provisions that have previously passed the House of Representatives could find themselves incorporated within a year-end omnibus appropriations bill, similar to what occurred during the lame duck session of the last Congress.