Dodd-Frank Reform: The Beat Goes On

The Dodd-Frank Act may be turning five years old soon. Fights about Dodd-Frank, on the other hand, feel like they’ve been going on forever.

The month of May was no exception, as Congress returned from a spring recess and immediately held a flurry of hearings on all things Dodd-Frank. Republicans in both the House and Senate moved forward legislation to remedy the perceived “damage” Dodd-Frank has caused, with various fixes and corrections.

The latest effort is the Financial Regulatory Improvement Act of 2015, released to the public on May 12 by Senate Banking Committee Chairman Richard Shelby (R-Ala.). Included in the 216-page bill are numerous Dodd-Frank Act changes and related initiatives. Among them:

Creating an examination ombudsman for the Federal Financial Institutions Examination Council that would investigate complaints from financial institutions and review the examination procedures among regulatory agencies.

Exempting banks with $10 billion or less in assets from the Volcker Rule and adjusting that threshold in line with Gross Domestic Product growth.

Subjecting the Consumer Financial Protection Bureau to the Federal Advisory Committee Act’s demands for transparency and open meetings.

Requiring financial agencies to perform a comprehensive review of regulations to identify outdated or otherwise unnecessary regulatory requirements imposed on financial institutions.

Requiring regulators to consider Dodd-Frank regulations as part of their Economic Growth and Regulatory Paperwork Reduction Act review.

Establishing a process to designate bank holding companies as systemically important by replacing the existing threshold of $50 billion in total consolidated assets with criteria that also includes interconnectedness, substitutability, cross-border activity, and complexity.

Allowing access to Financial Stability Oversight Council meetings and information for members of regulatory agencies, not just the heads of those agencies.

“Rolling back Dodd-Frank would be a serious error. Changes that roll back Dodd-Frank rules or create major new exemptions to them would in most cases have a negative impact on financial stability or consumer protection.”
Marcus Stanley, Policy Director, Americans for Financial Reform

So why is this bill different, and could it survive a polarized, slow-to-act Congress? For starters, Shelby’s leadership position on the Banking Committee is sure to help. He also crafted the bill as a “greatest hits” package of changes, including variations of past bills filed by Democrats and Republicans alike. A requirement that the Federal Reserve governors vote on all enforcement actions against banks that result in fines of $1 million or more was predated by a bill co-sponsored by none other than Sen. Elizabeth Warren (D- Mass.), hardly an ally of Republicans opposed to Dodd-Frank.

Aaron Klein, director of the Bipartisan Policy Center’s Financial Regulatory Reform Initiative, is among the vocal supporters of Shelby’s legislative package. He calls it “an important step” that will offer “common-sense regulatory relief to financial institutions.” And don’t count Klein among the anti-regulatory set either. His group, as the name suggests, is a consortium of both Democrats and Republicans that has come out in favor of just as many Dodd-Frank regulations as it has opposed.

Klein says he is especially pleased to see efforts to improve the transparency and accountability of the FSOC. He would, however, like to see more added to the legislative package, including action by Congress to establish independent inspectors general for the Fed and CFPB, to increase their accountability. “Including these provisions in would improve the effectiveness and efficiency of financial regulation, preserving what has worked well in Dodd-Frank and building on the landmark financial reform law in areas it has not worked as well,” he says.

Meanwhile, critics took aim at the Dodd-Frank Act, and proponents had their say yet again in testimony before the House Financial Services Committee on May 13. “Dodd-Frank is designed, in significant part, to enhance the regulatory reach of bank regulators,” said Paul Mahoney, dean and professor of law at the University of Virginia School of Law. “Inevitably, that will mean increasing the size, market share, and political clout of the largest banks. Congress can do better than this and should aim to do so in the future.” He stressed the importance of allowing greater flexibility to the FSOC’s process of SIFI designations.

Contrary to other cost estimates detailing the law’s economic burden, Marcus Stanley, policy director for Americans for Financial Reform, asserted that Dodd-Frank will actually produce $2.9 trillion in economic benefits over the next decade “in financial stability benefits.”

“Rolling back Dodd-Frank would be a serious error,” he added. “Changes that roll back Dodd-Frank rules or create major new exemptions to them would in most cases have a negative impact on financial stability or consumer protection.”

That same day, the House Financial Services Committee held a separate hearing to consider several regulation-changing bills. Among the legislation under consideration are proposals to create venture exchanges for small-cap companies and to allow smaller issuers to enjoy the expedited shelf-registration benefits large issuers currently enjoy.

REVAMPING FSOC

The following, from a discussion draft of The Financial Regulatory Improvement Act of 2015, details proposed structural changes for the Financial Stability Oversight Council.
Revisions to FSOC’s Authority
Establishes a process to designate bank holding companies (BHCs) as systemically important by replacing the existing framework in which all BHCs with more than $50 billion in total consolidated assets are automatically deemed systemically important with a framework that requires the Federal Reserve Board of Governors and FSOC to evaluate BHCs with more than $50 billion and less than $500 billion in total consolidated assets, as indexed for GDP growth, for systemic designation based on certain criteria that will initially include size, interconnectedness, substitutability, cross-border activity, and complexity.
As part of the designation process, FSOC is required to provide a BHC [or non-bank institution] with:

Notices and detailed explanations of why FSOC is considering it for designation during various stages in the designation process;

Opportunities to meet with FSOC or its representatives, have a hearing, and submit materials to FSOC (including a remedial plan);

An analysis of any remedial plan submitted, an opportunity to meet with representatives of FSOC to discuss the analysis, and an opportunity to revise the plan; and

A detailed explanation if FSOC decides to designate.
This section also sets forth a reevaluation process for a designated BHC pursuant to which such BHC will have an opportunity to, at least once every five years or at the recommendation of the Federal Reserve Board, (1) submit materials to FSOC (including a remedial plan), (2) meet with representatives of FSOC, and (3) have a hearing before FSOC members. FSOC then has to vote on whether to renew such BHC’s designation, and if so, provide the BHC with meaningful information about why it should continue to be designated, why any remedial plan submitted is unsatisfactory, and what the BHC can do to no longer be designated. If FSOC does not vote to renew the designation, the previous designation will be rescinded.
Non-bank Determinations
This section amends the current reevaluation process for a designated non-bank financial company pursuant to which such company will have an opportunity to submit materials (including a remedial plan) and to meet with representatives of FSOC during FSOC’s annual reevaluation of such company’s designation. Afterwards, FSOC has to vote on whether to rescind such company’s designation and if FSOC does not vote to rescind, provide the company with meaningful information about why it should continue to be designated, why any remedial plan submitted is unsatisfactory, and what the company can do to no longer be designated.
At least once every five years, the company is entitled to a hearing with FSOC members to contest its designation.
Source: Senate Banking Committee.

Testimony also focused on the Securities and Exchange Commission, how it updates its regulatory regime, and how Congress can get the SEC to respond faster to regulatory mandates. The discussion draft of one bill (as yet untitled) directs the SEC to review its regulations, determine whether they are necessary, and decide whether they should be amended or rescinded.

That call is nothing new. The SEC itself took a stab at it in 2011, but the effort went nowhere. Proponents think a new push could garner bipartisan support, especially because President Obama’s Executive Order 13579 in 2011 demanded that regulatory agencies should “consider how best to promote a retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.”

Legislation is needed “because past efforts have been ineffectual,” said Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “The JOBS Act and discussions about a JOBS Act 2.0 were needed because of the failure of the SEC to modernize its regulations,” he added. “Had a regulatory review process, such as envisioned by the draft bill or the President’s executive order, been in place, Congress would not have had to step in.”

Quaadman suggested that the retrospective review first prioritize those rules that are economically significant under the Small Business Regulatory Enforcement Fairness Act. This would allow the SEC to focus on regulations that cost the economy more than $100 million.

Quaadman also wants decisions subjected to a public comment process. This will “prevent what has submarined other retrospective reviews, namely that they get shuffled into a staff process and quietly ignored,” he said. The reviews should extend to entities with SEC-delegated powers, such as the Financial Industry Regulatory Authority and Public Company Accounting Oversight Board.

Any other “standard setting” release, interpretation, no-action position, or exemption issued by the SEC or its staff must also fall under the scope of the review process, said Ronald Kruszewski, CEO of Stifel Financial, testifying on behalf of the Securities Industry and Financial Markets Association.

While he agreed with the objective, Mercer Bullard, a professor at the University of Mississippi School of Law, wasn’t sold on the idea that another law is needed. While adjectives like “outmoded,” “ineffective,” “insufficient,” or “excessively burdensome” are “perfectly appropriate as general standards of review … their use as statutory standards will conflict with the different standards that apply to the original adoption of a rule,” he said. “They will create legal uncertainty due the lack of judicial precedent regarding their meaning.”

The SEC’s current approach to rulemaking is “dysfunctional,” said David Schweikert (R-Ariz.), citing delays in JOBS Act implementation. “There is something horribly wrong at the SEC. Should we become dramatically more prescriptive to them because of their inability to do their job?”

Hearings over, the committee took no votes on legislation last week. The fight continues to another day.