Bates Research - 05-31-17

Prospects for Financial Services Reform: Where Things Stand

Only a month ago, Bates reported on House Speaker Paul Ryan’s desire to push for swift legislative action on the Financial CHOICE bill, (now known as H.R.10). It was clear then that the extreme partisanship surrounding House Financial Services Committee Chair Jeb Hensarling’s reform efforts would make passage of comprehensive legislative changes to the Dodd-Frank Act a challenge. The bill itself was reported out of the House Committee on a party-line vote 34-26, with all nineteen amendments proposed by Democrats summarily rejected.

Moment of Truth Nears in the House

Despite favorable statements made by the Treasury Secretary and supporting statements made by various industry groups, it took a major concession by Congressman Hensarling last week to improve the chance of passage by the House. The Chair agreed to remove the repeal of the "Durbin Amendment" from the bill, stating: “I will not let this one provision hinder passage of an important priority bill that will end bank bailouts and help renew healthy economic growth for all Americans.” (The Durbin Amendment requires the Federal Reserve Board to adopt regulations to cap bank interchange fees and prohibits the issuance of debit cards that restrict the processing of certain electronic debit transactions). Speaker Ryan has now scheduled H.R.10 for debate on the House floor the week of June 5.

Majority Leader Says Legislation is Dead in the Senate

With these latest changes, passage of the CHOICE Act in the House of Representatives seems likely. This outcome stands in contrast to the unlikely prospect of any comprehensive financial services reform bill emerging from, or passing in, the Senate. Under rules requiring 60 votes, Senate Majority Leader Mitch McConnell said he was pessimistic about any chance of passing a bill. In a recent interview, he placed the blame squarely on Democrats, stating: “so far, my impression is the Democrats on the banking committee believe that Dodd-Frank is something akin to the Ten Commandments.”

These sentiments were seconded by Senate Banking Committee Chair Mike Crapo, who nonetheless said that the Senate might work on non-controversial statutory changes. “There are pieces [of Dodd-Frank] like community banks and credit union issues where we have broad bipartisan agreement" he said. Senator Crapo was possibly signaling that the larger, more controversial Dodd-Frank issues, such as an overhaul of the Consumer Financial Protection Bureau, were unlikely to be incorporated into a bill.

As a result, Senator McConnell effectively punted the issue to the Trump administration, stating: “unless the situation in Congress changes,” they will be “stuck with whatever the administration thinks it can do on its own to modify the impact of Dodd-Frank.” President Trump has been urging the Majority Leader to revise Senate rules to reduce the number of votes needed to a simple majority in order to pass legislation. Senator McConnell has rejected that option.

It’s All On Trump

In February, President Trump issued an Executive Order setting forth “Core Principles” for regulating the financial system. That Order directed the Secretary of the Treasury to undertake a report within 120 days “on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements … promote the Core Principles.” In April, President Trump signed two additional Executive Orders directing the Treasury Secretary to make an assessment and report on two Dodd-Frank creations: the Financial Stability Oversight Council and the Orderly Liquidation Authority (see here and here).

Given that no formal comprehensive financial services legislation will emerge from the Senate, only the Treasury Secretary, through the report and recommendations he issues in August, can produce the kind of change that the President called for during the campaign.

What are the Odds?

Former SEC Chair Mary Jo White predicted that there won’t be any dramatic regulatory change under the Trump administration. Speaking at Bloomberg Law’s Business Summit last week, White said “it’s both uncertain where the administration is actually going to land on policy, and then there’s uncertainty as to whether they can bring that about.  Whatever change happens is going to come several years down the road by virtue of how the regulators carry out their jobs with a different kind of philosophy.” She added that, “There is some room to roll back or consolidate certain regulations to loosen the burden on corporations and financial firms,” and “regulators might act differently under the new philosophy, … even if there aren’t legislative and regulatory changes.”

That prediction is already playing out. Quickly rolling back the DOL’s fiduciary rule, for example, is proving harder than the administration thought. Last week, DOL Secretary Acosta announced in a Wall Street Journal Op-ed that he would not further delay the June 9 initial implementation. While the DOL announced that it will be seeking feedback about the new rule, and thus, preserving the possibility of revisions to or repeal of the rule before the full implementation date of January 2018, as of now, he could find "no principled legal basis to change the June 9 date...".

Stephen Cutler, Vice Chairman of JPMorgan Chase and former head of the SEC’s Enforcement Division, echoed the notion that change will take time. At the Business Summit, he said, “I think we’re a long way away from accomplishing a significant change in the regulatory agenda even if one were to have that agenda, and it’s not clear to me that it’s as broad-sweeping as a lot of people thought it would be or as a lot of people maybe hoped it would be just several months ago.”

The inability of the Republican-controlled legislative and executive branches to effectuate significant change in financial services law and policy is perhaps a symptom of the larger political polarization of the country. It may come to pass that the judiciary will have the last word on the continued viability of many of the Dodd-Frank mandates. Bates will continue coverage of these developments. 

 

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