DC Moves Muddy Dodd-Frank Reform

Compliance officers keeping one eye on Dodd-Frank Act reform might want to turn both eyes to Washington for a moment. We have a flurry of activity this week that could influence that effort in any number of ways.

Most notably, the chairman of the House Financial Services Committee, Jeb Hensarling, announced Tuesday that he will not seek re-election next year. Hensarling is a Texas Republican and a diehard Tea Party conservative. He has been chairman of the Financial Services Committee since 2013, and he was going to lose his chairmanship at the end of next year anyway; GOP rules limit members to serve as committee chairs for only three consecutive terms.

Hensarling has led a crusade against Dodd-Frank since 2013—and “crusade” really is the correct word here: a cause pursued with religious fervor, yet seldom encountering success.

During the Obama Administration, substantive reform of Dodd-Frank was never going to happen, much like Obamacare repeal. This year, Hensarling did manage to get the House to approve his proposed legislation, the Financial Choice 2.0 Act. That bill was a hodgepodge of right-wing ideas, from weakening the Consumer Financial Protection Bureau, to weakening the Financial Stability Oversight Council, to imposing much tougher cost-benefit analysis requirements on the Securities and Exchange Commission.

Most notable for compliance officers, the Financial Choice 2.0 bill would exempt many more companies from Section 404(b) of the Sarbanes-Oxley Act, which requires an annual audit of internal control over financial reporting.

Most telling for compliance officers, however, is that Hensarling’s bill would also exempt those companies from filing financial statements with the SEC using the XBRL data reporting technology—a rule that has now been in place for all companies since 2012. XBRL improves equity analysts’ ability to follow publicly traded companies, which in turn helps to provide the market with more liquidity. Even the SEC loves XBRL, and has been expanding the technology’s use even in 2017.

In other words, XBRL repeal is an antiquated idea, and a clause to repeal it has been kicking around in Hensarling’s wish list for years like an old fruitcake in the closet. It’s symptomatic of Hensarling’s approach to Dodd-Frank reform: find every complaint about financial regulation that exists, and cram it into a reform bill that stands no serious chance of passage.

Anyway, he’s retiring. The question now is whether Hensarling, freed from thoughts about re-election, will coordinate with Republican colleagues on the Senate Banking Committee for Dodd-Frank reform that might actually pass both chambers. Or he could stand his Tea Party ground and leave real legislative work to the next Financial Services Committee chairman—except it’s possible that the next chairman, in 2019, is a Democrat.

Speaking of the Senate…

One obstacle to Dodd-Frank reform had been differing priorities between House and Senate. While Hensarling pursued his Financial Choice 2.0 vision to weaken various regulatory agencies, the Senate Banking Committee had barely considered Dodd-Frank reform at all—and when it did, usually committee members were talking about regulatory repeals for community or regional banks..

Well, so much for that. Word from Capitol Hill is that talks between the committee chairman, Mike Crapo, and ranking Democrat Sherrod Brown have broken down. So that means Senate Republicans will try to ram through their vision of legislation on party-line votes.

Because, you know, that strategy worked so well with Obamacare repeal.

This is a shame, since regulatory relief for small banks was one of the few ideas that did make sense, and had fairly wide appeal. (Every member of Congress has a few community banks in the district back home, after all.) But Brown was clear yesterday: “After working in good faith, it’s clear we will not be able to reach a compromise,” he said in a statement.

Could banking lobbyists pick up a few votes from Democrats in states that Trump carried last year, to pull together just enough votes for a majority? Possibly. At the same time, however, Crapo and ultimately Senate Majority Leader Mitch McConnell will need to keep all other Republicans together, too. See Obamacare strategy, above; flat on its face.

Bottom line: if Dodd-Frank reform happens at all this year or next, it will likely happen the Republican way, and Republicans do things the hard way. Their hold on power is a mile wide, and an inch deep.

Other Stuff This Week…

First, the Senate Banking Committee will hold a vote today on the nominations of two SEC commissioners, Hester Peirce, Republican; and Robert Jackson, Republican. Assuming they both win approval (likely), that brings us one step closer to a full, five-member commission again. Their nominations will still need a vote by the full Senate, whenever that might happen.

For comparison purposes, the last time we had a fully manned SEC, nobody had even heard of “Stranger Things” on Netflix.

Second, Hensarling and his henchmen will hold a hearing on Friday titled, “Legislative Proposals to Improve Small Businesses’ and Communities’ Access to Capital.” The hearing will examine three bills before the committee. The bills mostly tinker with the Investment Companies Act of 1940, so broker dealers and financial advisers to small companies may want to follow along, but corporate ethics and compliance officers have more pressing concerns.

Third, House Republicans delayed unveiling their tax reform legislation from today until tomorrow, amid concerns that they haven’t figured out how to pay for it without raising taxes on 401(k) contributions and cutting deductions for state and local taxes.

That’s an ominous sign that portends more trouble ahead. My prediction: if Democrats pull off an upset victory in the Alabama Senate race in December, that will send another shudder through Republican ranks that they’re not in step with public opinion on taxes. Let alone the pragmatic point that one less Republican senator means one less path forward for Republicans on, well, anything.

My other prediction: if Democrats win the governor’s race in Virginia next week, that’s going to be a shot in the arm to Democrats across the country. Including Alabama.