Dodd-Frank Reform Starts Coming Into View

Word has emerged about how House Republicans want to revise the Dodd-Frank Act and repeal various financial regulations. Compliance officers wondering how these ideas might affect them can dive in.

The key player here is Rep. Jeb Hensarling, chair of the House Financial Services Committee. Hensarling first proposed a “Financial Choice Act” last year to repeal various parts of Dodd-Frank. Like all plans from Congress during the Obama Administration, his went nowhere. Now Hensarling is back again, preparing a “Financial Choice Act 2.0.”

We don’t know the details yet, because Hensarling hasn’t revealed the text of his legislation. But an executive summary has leaked (thank you Washington), and legal bulletins are now all over the Internet dissecting details. The highlights are as follows.

  • Weaken the Consumer Financial Protection Bureau. The CFPB will still have one executive director, akin to the Federal Trade Commission. It will lose its consumer education and research functions, plus its customer complaints database. It will also lose a considerable amount of enforcement power.
  • Expand JOBS Act provisions to more companies. The Title I provision allowing pre-IPO companies to submit a confidential registration statement for early review would be expanded to all companies, not just the Emerging Growth Category.
  • Raise the threshold for compliance with Section 404(b) of Sarbanes-Oxley. SOX 404(b) requires an independent audit of internal control over financial reporting. Currently, non-accelerated filers (those with market capitalization of $75 million or less) are exempt from Section 404(b). Hensarling’s original legislation proposed raising that limit to $250 million; the 2.0 version would raise it to $500 million.
  • Bar the SEC from adopting a rule to require that companies use universal proxies in director elections. Universal proxies would list all candidates for director elections, including dissident candidates not supported by management, on one proxy voting card.
  • Abolish the Office of Financial Research. The OFR exists within the Treasury Department, and has wide-ranging discretion to collect data from financial firms to study possible sources of systemic risk.
  • Direct the SEC to reconsider its enforcement program. One idea would be to have the SEC consider possible fines from other regulatory agencies as it weighs how much to impose in monetary penalties of its own.
  • Ease Dodd-Frank stress tests. The tests would be held every two years, rather than annually.

What happens next with this legislation? Even in this era of unified Republican government, we don’t know. Hensarling is an extremist even by Republican standards; witness his (failed) efforts to kill the Export-Import Bank in 2015, which annoyed many powerful interests in Corporate America. He didn’t care.

So it’s likely that Hensarling’s bill is only an anti-regulatory wish list, to be pruned back once comparable legislation reaches the Senate. We haven’t even seen any comparable legislation introduced in the Senate, by the way. When that does happen, it will need to navigate the likes of Sen. Elizabeth Warren, D-Mass.; as well as Senate Minority Leader Chuck Schumer—who is from New York, and does take a kinder view of Wall Street than the standard Democrat.

Remember the Bigger Contours & Risks

Whatever might happen with Hensarling’s legislative dreams, compliance officers contemplating their careers or talking regulatory change with your audit committees can start with a few basic assumptions.

First, as always—the legislative branch can’t change your world all that much on any given day. Every significant thing Congress does takes enormous time and involves all sorts of compromise. The executive branch (whatever you might think of it these days) will always matter far more as it issues and repeals rules, files or drops lawsuits, gives speeches, and so forth.

Second, what Hensarling wants to do here is curb regulatory power. He’s repealing CFPB authority, abolishing research offices, questioning enforcement authority, and so forth.

That’s not the same as giving companies specific forms of regulatory exemptions. Those breaks are in there, too: Section 404(b) exemptions, expanded JOBS Act registrations, higher thresholds for filing securities offerings with the SEC, and more.

But those are specific changes to benefit specific audiences. Hensarling’s proposals to curb regulatory power are deeper, more structural reforms.

Which ones will prevail in whatever Dodd-Frank reform legislation does get passed? Right now we don’t know. But special interests can fight more effectively over specific things, not deep and broad reforms. And Democrats will oppose deep, philosophical changes to financial regulation far more than they will a “detail” like raising the 404(b) exemption somewhere between $75 million and Hensarling’s $500 million dream.

For most compliances officers, then—certainly everyone outside the financial sector—these ideas from Congress fall into the “academically interesting, can’t really hurt” category. You really need to monitor what the Trump Administration is doing. Whatever Congress is doing will be mostly pipe dream, with the potential for some specific regulatory breaks we can’t predict yet. There are worse messages to convey to your audit committee.

All Time Bombs Start Ticking Sometime

Where I do worry that Congress might go too far is in its desire to neuter every regulatory power it can find—and as a result, we might turn a collective blind eye to new sources of systemic risk.

For one tiny example, consider the Office of Financial Research. Yes, OFR can annoy financial firms as it bugs them to submit data and pushes for specific data formats. But OFR’s fundamental mission—to study financial data en masse and find new sources of systemic risk—is a wise idea.

Likewise, people have worried that the next source of systemic financial risk might originate in this country’s towering mass of student loan debt, or even auto debt. I don’t know whether those suspicions are well-founded, but the CFPB has tried to research that very question. Which will be harder to do if the CFPB has no research function.

Or maybe the next crisis will come from plain old Banks Gone Wild, like we saw in the 2000s. If Republicans weaken stress tests and liquidation authority for troubled financial firms, we won’t know that risk until we’re in it. Possibly for the second time in less than 20 years.

So compliance officers outside the financial sector might keep one eye on Dodd-Frank reform from time to time. But for those of you inside the financial world, you might be better served by a nagging voice in the back of your head.

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