Nearly seven years after its enactment, the Dodd-Frank Act still hasn’t been fully completed through agency rulemaking.

For longtime critics, that probably isn’t very surprising. The law’s complexity and sweeping scope, they warn, is symptomatic of its knee-jerk origins following the Financial Crisis that began in 2008.

Supporters of the law see things differently. The breadth of the legislation was necessary given the systemic array of problems it needed to address. A rule-by-rule approach would have been slow, ineffective, and politically treacherous.

There are various approaches for how to deal with the Dodd-Frank Act now that most (although not all) of its rules have had time to succeed or fail. Should a repeal be wholesale? Is a piece-by-piece approach more likely to be successful and maybe even attract bipartisan support?

With a Republican majority in both chambers of Congress and a President committed to deregulation, these dilemmas of style and substance will likely become more common. Even as the Financial CHOICE Act, a sweeping do-over of the law, is on the fast track to a vote, other ideas on what to either send to the chopping block or salvage are emerging.

Former Federal Reserve Board Chairman Paul Volcker’s banking prescription inspired a Dodd-Frank Act prohibition on proprietary trading by federally insured banks. He is also a founder of the Volcker Alliance, launched in 2013 to “address the challenge of effective execution of public policies.”

On April 19, Volcker delivered a speech before the Bretton Woods Committee’s annual meeting, held at the International Monetary Fund Headquarters in Washington D.C.

Private sector leaders, policy professionals, and government officials in attendance heard Volcker deliver a vigorous defense of the current regulatory regime.

While substantial progress has been made on financial reform, after a few years of relative stability, “the presumed unshakeable commitment to sustaining reform appears to be waning,” he said, warning that “relaxation of key reforms and the temptation to retreat inward into idiosyncratic domestic approaches needs to be resisted.”

“Fragmented approaches toward what are inherently international markets and financial institutions would have costs in terms of fair competition, global market efficiency, and the ability to reach a concerted approach in the event of a serious future crisis,” he added.

Volcker conceded that a review of some of the provisions of Dodd-Frank might be appropriate. Citing data on bank profits and loan growth, however, he noted that “claims [it] and other regulatory approaches have somehow gravely damaged the effective functioning of American financial markets, the commercial banking system, and prospects for economic growth, simply do not comport with the mass of the evidence before us.”

The Volcker Alliance has prepared a list of priorities it wants policymakers to consider before embarking on any mission of regulatory reform.

Among them is preserving the Dodd-Frank Act’s Orderly Liquidation Authority. Volcker described it as a powerful weapon in the fight against taxpayer-funded bailouts of “too big to fail” financial institutions. Contrary to what many critics say, under OLA “there is no taxpayer bailout,” he said. Its absence, however, “might inexorably lead some future government to rescue big failing financial institutions, just as happened in 2008.”

The rule that bears his name should also be preserved. The concept underpinning the Volcker Rule—prohibiting banks from making certain kinds of speculative investments that do not directly benefit their customers—was simple, he says. It “became grist for the lobbying mills,” however, and in the process, regulators “each with different priorities and financial industry relationships, haggled endlessly over the precise interpretation and enforcement of the legislative intent.”

“Congress and the President are reviewing and considering changes to financial laws and regulations that currently harm small banks, ordinary investors, entrepreneurs, and low income and middle class consumers. But to really have an impact, we must tackle the worst offenders first.”
John Berlau, Senior Fellow, CEI

What emerged was a complex and lengthy rule. Nevertheless, he said, it has had a meaningful impact in curtailing risky activity and reducing conflicts of interests.

In his speech, Volcker encouraged Congress and the Trump Administration “to launch a serious study of how to deal with the shortcomings of a system that has outlived its rationale and usefulness.”

The free-market approach

In what might be glibly described as the flip side to the Volcker Alliance’s blueprint for regulatory reform, a report released by the Competitive Enterprise Institute in late April identified “urgent financial reform priorities.”

The CEI is a non-profit public policy organization “dedicated to advancing the principles of limited government, free enterprise, and individual liberty.”


The following is from an executive summary of the Financial CHOICE Act.
Key Principles:
Taxpayer bailouts of financial institutions must end and no company can remain too big to fail;
Both Wall Street and Washington must be held accountable;
Simplicity must replace complexity, because complexity can be gamed by the well-connected and abused by the Washington powerful;
Economic growth must be revitalized through competitive, transparent, and innovative capital markets;
Every American, regardless of their circumstances, must have the opportunity to achieve financial independence;
Consumers must be vigorously protected from fraud and deception as well as the loss of economic liberty; and
Systemic risk must be managed in a market with profit and loss.   
End “too big to fail” and bank bailouts
Repeal Title II of the Dodd-Frank Act, and its Orderly Liquidation Authority, and replace it with a new chapter of the Bankruptcy code designed to accommodate the failure of a large, complex financial institution.
Retroactively repeal the authority of the Financial Stability Oversight Council to designate firms as systematically important financial institutions (SIFIs).
Repeal Title VIII of the Dodd-Frank Act, which gives the FSOC authority to designate certain payments and clearing organizations as systemically important “financial market utilities” (FMUs) with access to the Federal Reserve discount window, and retroactively repeal all previous FMU designations.
Prohibit the use of the Exchange Stabilization Fund to bailout financial firms or creditors.
Demand Wall Street Accountability through enhanced penalties for fraud and deception
Impose enhanced penalties for financial fraud and self-dealing and promote greater transparency and accountability in the civil enforcement process.
Allow 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. Give the SEC new authority to impose sanctions equal to investor losses in cases involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement” where the loss or risk of loss is significant, and increase the stakes for repeat offenders.
Increase the maximum criminal fines for individuals and firms that engage in insider trading and other corrupt practices.
Remit all fines collected by the Public Company Accounting Oversight Board and Municipal Securities Rulemaking Board to the Treasury for deficit reduction.
Demand accountability from financial regulators and devolve power away from Washington
Make all financial regulatory agencies subject to the REINS Act, and place them on the appropriations process so that Congress can exercise proper oversight.
Impose an across-the-board requirement that all financial regulators conduct a detailed economic analysis of all proposed and final regulations to ensure the costs imposed are outweighed by the benefits.
Reauthorize the SEC with funding, structural, due process and enforcement reforms.
Increase transparency of financial regulations’ costs to state and local governments and private sector entities.
Require public notice and comment for any international standard-setting negotiation.
Institute significant due-process reforms for every American who feels that he or she has been the victim of a government shakedown.
Repeal the so-called Chevron doctrine.
Demand greater accountability and transparency from the Federal Reserve, both in its conduct of monetary policy and its prudential regulatory activity, by including the House-passed Fed Oversight Reform and Modernization (FORM) Act.
Abolish the Office of Financial Research.
Prohibit the financial regulators and the Department of Justice from using settlement agreements to require donations to non-victims.
Increase transparency and accountability in the Federal Reserve’s conduct of the supervisory stress tests while streamlining duplicative and overly burdensome components.
Institute criminal penalties for leaks of sensitive, market-moving information related to the Federal Reserve’s stress test and living will processes.
Provide for election to be a strongly capitalized, well-managed financial institution
Provide an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banking organizations that choose to maintain high levels of capital. Any banking organization that makes a qualifying capital election but fails to maintain the specified non-risk weighted leverage ratio will lose its regulatory relief.
Exempt banking organizations that have made a qualifying capital election from any federal law, rule, or regulation that provide limitations on mergers, consolidations, or acquisitions of assets or control, to the extent the limitations relate to capital or liquidity standards or concentrations of deposits or assets.
Exempt banking organizations that have made a qualifying capital election from any federal law, rule, or regulation that permits a banking agency to consider risk “to the stability of the United States banking or financial system,”added to various federal banking laws by Section 604 of the Dodd-Frank Act, when reviewing an application to consummate a transaction or commence an activity.
Unleash opportunities for small businesses, innovators, and job creators by facilitating capital formation
Repeal sections and titles of the Dodd-Frank Act, including the Volcker Rule, that limit or inhibit capital formation.
Repeal the SEC’s authority to eliminate or restrict securities arbitration.
Repeal the Dodd-Frank Act’s non-material specialized disclosures.
Incorporate almost two dozen Committee or House-passed capital formation bills.
Change the name of the CFPB to the “Consumer Law Enforcement Agency,” and task it with the dual mission of consumer protection and competitive markets, with cost-benefit analyses of rules performed by a newly-formed Office of Economic Analysis.
Restructure the agency as an Executive Branch agency with a single director removable by the President at will, and make the agency subject to Congressional oversight and the normal Congressional appropriations process.
Eliminate the CFPB’s supervisory function and hold it responsible for enforcing the enumerated consumer protection laws.
Remove the agency’s opaque and ill-defined “unfair, deceptive, or abusive acts and practices” (UDAAP) authority.
Establish an independent, Senate-confirmed Inspector General.
Eliminate the CFPB’s sweeping market-monitoring function and require the Agency obtain permission before collecting consumers’ personally identifiable information.
Repeal the Department of Labor’s (DOL’s) fiduciary rule.
Modernize the corporate governance system to better promote value creation for public companies and their shareholders.
Source: House Financial Services Committee

“Congress and the President are reviewing and considering changes to financial laws and regulations that currently harm small banks, ordinary investors, entrepreneurs, and low income and middle class consumers,” said John Berlau, CEI senior fellow and author of the report. “But to really have an impact, we must tackle the worst offenders first. These include policies that prevent entrepreneurs from raising capital for their own small businesses and reduce opportunities and choices for middle class investors, like people interested in helping start-up companies.”

“The explosion of financial regulation has translated to billions of dollars in lost access to capital, credit, and opportunity for small businesses and consumers,” Berlau added. Hiring just two additional employees for post-Dodd-Frank compliance is all it takes “to make some community banks unprofitable.”

Atop the CEI’s list of recommendations is eliminating Dodd-Frank Act’s Durbin Amendment, which imposes price controls on interchange fees charged by credit card companies to merchants, “leading to higher bank fees and loss of free checking for many consumers.”

The report also urges reforming “the unconstitutional” Consumer Financial Protection Bureau by making the director removable by the President and subjecting the bureau to congressional appropriations.  “The CFPB has been a stumbling block for the average person getting credit and having affordable financial services,” Berlau says.

The report also urges the elimination of “New Deal-era securities laws that hurt entrepreneurs, small businesses, and middle-class investors by shutting them out of wealth-building opportunities associated with investment-based crowdfunding.”

“What’s been implemented of the JOBS Act has been very successful,” Berlau says of post-Dodd-Frank legislation to streamline capital formation. “What hasn’t been successful are the changes that were watered down or not really implemented as intended.”

For example, crowdfunding provisions in Title III of the JOBS Act grant exemptions—in increments up to $2,000—for investment-based crowdfunding campaigns raising up to $1 million. They were not implemented by the Securities and Exchange Commission until more than four years after the law was enacted.

Repealing Dodd-Frank’s conflict minerals disclosure mandates, “which caused foreign companies to simply avoid doing business in the Congo and adjoining countries,” is also on the CEI’s to-do list.

Beyond Dodd-Frank, the CEI wants the elimination of some mandates imposed by the 2002 Sarbanes-Oxley Act, notably Section 404 requirements. They impose “huge auditing costs on companies and make it prohibitive for companies to grow and attract investors.”

The frontal assault

The CEI’s report praises the Financial CHOICE Act, a bill authored by House Financial Services Committee Chairman Jeb Hensarling (R-Texas). It is a nearly 600-page bill that seeks to repeal and replace large swaths of the Dodd-Frank Act.

Berlau doesn’t see the broad nature of the legislation as any less effective than a more targeted and prioritized approach. “I see the CHOICE act as a comprehensive menu,” he says. “Once you have that menu, then you can start ordering things from it.”

A few of the many changes up for Congressional consideration in the legislation include:

Abolishing the Federal Reserve’s authority to supervise and set regulations for non-bank financial institutions.

Renaming the Consumer Financial Protection Bureau as the Consumer Law Enforcement Agency, with a deputy director appointed by the president and removable at will;

Directing the SEC to publish a manual establishing its enforcement policies and procedures.

Allowing banks and credit unions to qualify for regulatory relief if they maintain sufficient capital levels so as to not require a taxpayer bailout.

A committee markup of the bill is scheduled for May 4.

“One way to understand the act and the need for the comprehensive reform that the CHOICE Act provides, is to recognize that the Dodd-Frank Act was completely unnecessary,” said Peter Wallison, senior fellow at the American Enterprise Institute. “It was based on a false diagnosis of the 2008 financial crisis by an administration and a Congress that didn’t even try to understand why the crisis occurred. They simply assumed—or wanted to believe—that the crisis was caused by insufficient regulation of the financial system and greed on Wall Street.”

The Volcker Rule, “which has driven many bank-related financial firms out of the business of making markets in debt securities” has resulted in a serious lack of liquidity in the debt markets and should be eliminated, he said.

Michael Barr, professor of law at the University of Michigan Law School, offered a viewpoint far more in line with Democrats. “Instead of offering hope and opportunity to American families, the legislation being considered by this committee would needlessly expose taxpayers, workers, businesses, and the American economy to fresh risks of financial abuse and financial collapse,” he said. “That’s not a risk we can or should take.”

Critics may argue that the Financial Stability Oversight Council—the government organization tasked with designating which companies pose a systemic risk to the U.S. financial services system—should be more beholden to its member regulatory agencies. However, Barr said that the opposite is true, praising the multi-agency approach to SIFI designations. “The system of checks and balances requires that FSOC members leave their agency’s ‘turf’ at the door, and focus on system-wide risks and responses. If anything, the FSOC’s powers should be strengthened, so that fragmentation in the financial regulatory system does not expose the U.S. to enormous risk, as it did in the past.”

He also asked: “Why would anyone want to poke out the eyes of financial regulators by eliminating the Office of Financial Research, an agency with no regulatory turf, but with the sole mission of informing regulators, markets and the public about evolving financial risks?”

In summary, the CHOICE Act “crushes investor hope, mocks investor opportunity, and undermines the transparency, honesty, and trust essential for capital formation,” Barr said.

“The CHOICE Act is an excellent example of the Congress asserting itself at last to clarify that regulatory agencies are derivative bodies accountable to the Congress, that they cannot be sovereign fiefdoms—not even the Dictatorship of the CFPB, and not even the money-printing activities of the Federal Reserve,” testified Alex Pollock, distinguished senior fellow at the R Street Institute, a public policy research organization that promotes “free markets and limited, effective government.”

As an alternative to the sweeping Financial Choice Act, U.S. Rep. Brad Sherman (D-Calif.) is among those who lobbied Hensarling to consider splitting up the legislation. “This bill includes a dozen individual bills that a majority of Republicans and Democrats voted for,” he said. Sticking to an all or nothing approach would prove fears that the intent is only to unfairly and inaccurately bash Democrats for “voting against every change in Dodd-Frank.”

There were also far less generous views of Hensarling’s legislative agenda during the two days of testimony. “I have never seen so many bad ideas jammed into one bill,” said Rep. Stephen Lynch (D-Mass.).