The past November midterm elections brought a much stronger position in Congress to Republicans. While it may not be enough to give them the clout they need to make vast legislative changes to government regulation, it has given them hold on the purse strings.
With control of the budgeting process, and a potential new willingness by Democrats to find common ground, Republicans will be aiming to create a little more breathing room on securities and other regulation and temper the aggressive enforcement regime that has characterized the Obama administration.
During the past few years, Republicans have railed about gutting the Dodd-Frank Act, repealing the Affordable Care Act (a.k.a. Obamacare), and recasting the Consumer Financial Protection Bureau. They have also threatened budget cuts to the Securities and Exchange Commission, the Environmental Protection Agency, and several other regulatory agencies, looking to rein in what they see as overly burdensome regulation and enforcement. Now that they have taken control of the Senate and improved their majority in the House of Representatives, they may push harder than ever before to roll back reforms.
Just how much progress they can make on that agenda is still unclear, but their newly won stronghold on Congress is unlikely to translate into sweeping changes. Senate procedural rules require 60 votes to end debate and force a vote on legislation, meaning that support from Senate Democrats is still needed. Major changes to Dodd-Frank or Obamacare would certainly draw a presidential veto, and the 67 votes needed to overcome one are unlikely, given the number of seats Democrats still hold.
Setting aside their wish list, what can Republicans actually change? Quite a bit, observers say. Boding well for Republicans is that an increasing number of Democrats are also advocating financial regulation fixes. Soon-to-happen committee assignments could also benefit Republican reforms.
Sen. Richard Shelby (R-Ala.), a former Democrat, is expected to be the next chairman of the Senate Banking Committee. Not only do pundits expect him to be a buffer against hard-line Republicans in the House, he has long been a tough critic of big banks and an advocate of legislative inoculations against “too big to fail.” Changes may be afoot in the House as well if, as some suspect, Rep. Frank Lucas (R-Okla.) seeks chairmanship of the House Financial Services Committee. Lucas has a reputation for forging bipartisan consensus.
Reforming Banking Reform?
The sprawling Dodd-Frank Act, signed in 2010 to curb the abuses that led to the financial collapse of 2008, may be the first target of the next Congress. “There are going to be changes to the Dodd-Frank Act, to alleviate some of the burdens,” Michael Borden, counsel at the law firm Sidley Austin, says. A Republican and former senior counsel with the House Financial Services Committee, he says the GOP has “a real desire to show they can govern and to put points on the board.”
Republicans’ collective appetite to make changes to Dodd-Frank may be rooted in the lack of influence they had when the legislation was created. (Just three Republican Senators voted for the final bill.) Republicans efforts to shape Dodd-Frank were continually rebuffed, Borden says. It was treated by Democrats as though “it was the word of God and every word was somehow perfect or flawless.” The good news, as he sees it, is that both parties now have “pent up ideas and energy, want to get stuff done, and are now forced to cooperate.”
“It will not surprise me one bit if there are efforts to reduce funding in order to slow down final Dodd-Frank rulemaking.”
Bart Chilton, Senior Policy Advisor, DLA Piper
Some say revising the law is just part of the process and that the time is right to make fixes. “Whenever big laws pass in American history there is always a corrections bill,” Justin Schardin, associate director of the Bipartisan Policy Center’s Financial Regulatory Reform, a Washington think tank, says. “You never get things done right the first time. You do iterations, adjust, and see how it works in the real world.”
“The kinds of things that might be acted on are more narrowly targeted provisions,” Michael Barr, professor of public policy at the University of Michigan Law School, says “But these can also have a broad impact.”
Still, proponents of the original bill worry that changes could undercut the law and neutralize its ability to reform Wall Street. “It’s important to stay vigilant against attacks on the basic framework of protecting consumers,” Barr, a former assistant secretary for Financial Institutions at the Treasury Department who helped develop the Dodd-Frank Act, warns. “There is a real risk that people forget the causes and consequences of the financial crisis and a deregulatory mood takes over that poses a significant risk to the safety of the financial system.”
Power of the Purse
Opponents fear that Republicans may try to slow the pace of regulation, and stall completion of the Dodd-Frank Act, by either level-funding or cutting agency budgets.
Bart Chilton, a former commissioner at the Commodity Futures Trading Commission, now a senior policy advisor for law firm DLA Piper, is a long-time advocate for self-funding the CFTC through fines, settlements, and possibly transaction fees. The CFTC’s recent $1.7 billion in LIBOR manipulation settlements was enough to fund the agency for five years, he points out. Nevertheless, alternate funding schemes have been rebuked by Congress, and he fears things may get worse.
“Is it possible they are going to further clamp down on rules and regulations via the purse strings,” Chilton says of budgets for the CFTC and SEC. “It will not surprise me one bit if there are efforts to reduce funding in order to slow down final Dodd-Frank rulemaking.”
CFPB in the Bull’s-Eye
Predictions are nearly universal that the CFPB, a longtime source of aggravation for Republicans, will also be a top target. Critics have objected to the agency’s autonomy and sweeping scope. Its independent director, rather than a commission structure is a source of continuing criticism by Republicans, as is the fact its funding runs through the Federal Reserve, escaping meaningful Congressional oversight.
It is all-but-inevitable Congress will re-introduce legislation to subject the CFPB to the annual congressional appropriations process. The new Congress is also likely to push to replace the current independent director format with a board nominated by the president and confirmed by the Senate. A push is also underway to improve oversight by creating an independent inspector general for the agency.
“If you want to treat it like every other agency, treat it like every other agency, and they all have their own IG,” Schardin says.
Sock It to the FSOC
Republicans have continually expressed concern about the Financial Stability Oversight Council. A multi-regulator agency created by Dodd-Frank, it has authority to designate non-banks as systemically important financial institutions (SIFIs).
WHAT ABOUT DODD-FRANK?
The following, from an analysis by law firm Squire Patton Boggs, looks at major policy developments that may affect the Dodd-Frank Act in the new Congress.
Four years after the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), financial services regulators continue hard at work implementing the 398 rulemakings required by the legislation. To date, regulators have finalized approximately 50 percent of the Dodd-Frank Act rulemakings, while almost 25 percent have not yet even been proposed. Although regulators have expressed their commitment to full implementation of the Dodd-Frank Act, the agencies nevertheless continue to struggle with budget constraints and pressure from various Members of Congress (mostly Republicans, but some Democrats, too), who have voiced concerns regarding the burdens and potential unintended consequences of the Dodd-Frank Act rulemakings.
With Republicans in control of both the House and Senate, we expect continued pressure and scrutiny on regulators as they complete the Dodd-Frank Act rule-making process and begin to focus on compliance and enforcement. We also expect renewed attempts by both chambers to re-open the Dodd-Frank Act to not only make needed technical corrections, but also to address several substantive issues of controversy discussed below. With a narrowly divided Senate and a President who could veto any proposals that are perceived as paring down the Dodd-Frank Act, the potential for substantial changes to the Dodd-Frank Act remains uncertain. However, we anticipate that Republicans will push to approve legislation on various targeted financial reform issues.
Source: Patton Boggs.
Congress, through both hearings and legislation, will likely continue to pressure the agency for greater transparency and accountability, especially for SIFI designations. There could also be a push to expand FSOC by including additional members.
Schardin and his group are pushing for legislation that forces the FSOC to issue “high-level minutes” about the topics they discuss. “The market is going know at some point anyway and should have confidence they are dealing with the right issues,” he says.
What capital standards should big banks be held to? How should they be unwound if they fail? What thresholds should determine that an institution is systematically important? All are questions Republicans will raise as they consider Dodd-Frank revisions in the next Congress.
Members of both parties have voiced concerns about the $50 billion threshold established under the financial reform legislation for SIFI designations. Critics say this asset threshold, triggering enhanced compliance standards and increased capital requirements, is arbitrary and additional criteria is needed. No less than Federal Reserve Governor Daniel Tarullo and Federal Reserve Chair Janet Yellen have urged that the asset level be revisited.
“It doesn’t make sense that if you are a $49 billion bank and then you buy a couple of branches across the river then all of a sudden you are automatically systemically important,” Schardin says. “There has to be more to it than that.”
For unwinding too-big-to-fail banks when they do indeed fail, Schardin’s group is lobbying for amending the bankruptcy code to add a Chapter 14 specifically for financial institutions.
A Republican controlled Congress is also likely to advocate for changes to the Volcker Rule, a ban on proprietary trading by banks. Proponents of the rule, however, urge caution. “We had to fight really hard for the derivatives reforms in Dodd-Frank, Barr says. “There was enormous opposition from Wall Street firms, and it was very hard to get public attention on that issue because it is highly technical. But having in place strong derivatives reforms is critical to having a safer financial system.”
A Presidential veto will assuredly block any attempt to repeal the Affordable Care Act, but that doesn’t mean all potential changes are off the table.
“President Obama is never going to sign any bill that repeals the law, but there are a lot of things that need to be changed,” Kaya Bromley, an attorney, author of “The Employers Guide to Obamacare," and a business consultant who focuses her practice on healthcare. What changes do businesses want? Topping the list is the way the penalties are structured. “They are very confusing and “a moving target that is changing constantly,” she says.
Another desire is to return to the definition of a full-time employee as one who works 40 hours a week, not the 30-hour-per-week threshold on the ACA. House Speaker John Boehner said that the 40-hour definition is among his priorities. Currently, companies with at least 100 full-time workers can be fined for not offering health coverage; those with at least 50 full-time workers must provide coverage to their full-timers by 2016, or risk facing the penalties.
“We need to go back to the drawing board to figure out how to fix the ACA so it is not pitting employer against employee,” Bromley says.