Department of the Treasury
Congress and the Trump Administration may be embarking on making far-reaching changes that will recalibrate the manner in which financial services are regulated in the United States, including amending the Dodd-Frank Act and its implementing rules. We expect to see vigorous debate regarding the appropriate approach to financial services regulation, leading to rewrites of the structures and goals of federal banking and securities agencies and other government agencies.
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Presidential Memorandum for the Secretary of the Treasury (Secretary) regarding the Financial Stability Oversight Council (FSOC)
The Secretary is directed to review the process under which the FSOC designates entities either as systemically important financial institutions (SIFIs) or as financial market utilities (FMUs). The review, among other things, is to consider whether the process: (i) is sufficiently transparent, (ii) provides adequate due process, (iii) gives market participants the expectation the Government will shield SIFIs and FMUs from bankruptcy, and (iv) should include evaluations of a nonbank financial company’s likelihood of material financial distress, and quantifiable projections of the damage that a nonbank financial company could cause to the U.S. economy if it is not designated as a SIFI.
The review is to include recommendations, if appropriate, for improvements in the FSOC’s process or for legislative changes.
The review is also to consider whether the SIFI and FMU designation processes are consistent with the February 3, 2017 Executive Order on Regulating the Financial System.
The review is to be completed within 180 days of the date of the Memorandum. During the review period, the Secretary is directed not to vote for any proposed non-emergency SIFI or FMU determinations, which would have the effect of preventing non-emergency proposed determinations.
The Trump Administration questions the efficacy of SIFI designations and the process by which it happens. This is the first step toward the reconstruction or elimination of SIFI designations in favor of actions that may have a greater long-term impact on systemic safety.
At the same time, the FSOC’s SIFI designation process has been a subject of ongoing controversy, which, in part, led the FSOC to modify its procedures in 2015.
In April 2016 a U.S. District Court for the District of Columbia invalidated the FSOC’s decision to designate MetLife as a SIFI, finding that the FSOC had failed to follow its own rules in making the designation. See Dechert OnPoint, MetLife Opinion Turns the Tables on FSOC: Back to the Drawing Board. The court’s ruling is currently on appeal before the U.S. Court of Appeals for the D.C. Circuit. The appeal is in abeyance pending the Secretary's report.
Presidential Memorandum for the Secretary of the Treasury (Secretary) regarding Orderly Liquidation Authority (OLA)
The Secretary is directed to review the OLA, which was enacted as Title II of the Dodd-Frank Act, and which permits the Secretary to designate nonfinancial companies for resolution by the FDIC under rules similar to those that apply to failed banks rather than under otherwise applicable law such as the Bankruptcy Code.
The review, among other things, is to consider: (i) whether the availability of OLA could lead to excessive risk taking on the part of creditors, counterparties and shareholders, or otherwise leads market participants to believe that a financial company is “too big to fail”, (ii) whether invoking OLA could result in a cost to the general fund of the Treasury, (iii) whether a new chapter of the Bankruptcy Code to resolve claims against a failed financial company would be a superior method of resolution of financial companies than OLA, and (iv) consider whether the framework for using OLA is consistent with the February 3, 2017 Executive Order on Regulating the Financial System.
The review is to include any recommendations for improvement, including legislative changes.
The review is to be completed within 180 days of the date of the Memorandum. During the review period the Secretary is directed to refrain from placing any nonbank financial company in an OLA receivership unless the Secretary, in consultation with the President, determines the applicable criteria require otherwise.
The OLA alternative to regular resolution regimes, such as the Bankruptcy Code, has been a controversial aspect of the Dodd-Frank Act.
The discussion draft of the Financial CHOICE Act of 2017 would repeal the OLA and would establish new Bankruptcy Code provisions for large bank holding companies and nonbank financial companies. The Financial Institution Bankruptcy Act would also establish special Bankruptcy Code provisions for large bank holding companies and nonbanking financial companies but would not repeal the OLA.
A report by the Secretary favoring a special Bankruptcy Code regime for failed nonbank financial companies could give greater impetus to bills seeking to establish such a regime.