Rollback of Dodd-Frank
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.
This page is dedicated to tracking legislative and regulatory developments as well as executive actions related to the rollback of the Dodd-Frank Act.
For more information, please contact David L. Ansell, David J. Harris or Robert J. Rhatigan.
Systemic Risk Designation Improvement Act of 2017 (H.R. 3312)
Sponsor: Rep. Luetkemeyer (R-MO) (69 Co-Sponsors – 53 R, 16 D)
House of Representatives passed 288-130, December 19, 2017
Senate version (S. 1893)
Sponsor: Sen. McCaskill (D-MO) (7 Co-Sponsors – 6 R, 1D)
The Bill would replace the $50 billion threshold for enhanced prudential supervision and for other enhanced regulatory requirements for bank holding companies (BHCs) with a new threshold that would only apply to BHCs that had been identified by the Federal Reserve Board as global systemically important BHCs (GSIB) for purposes of the FRB’s risk-based capital surcharge rules.
The Bill would allow the FRB to still apply enhanced prudential regulation to a non-GSIB or, by regulation, on a category of BHCs on a discretionary basis if the BHC or a category of BHCs could pose a threat to financial stability. For a category, the FSOC would have to agree by a 2/3 vote, including the chair.Potential ImpactThe Bill is consistent with the recommendation of the Treasury Department’s Report to President Trump pursuant to Executive Order 13772 that Congress amend the $50 billion threshold for enhanced prudential supervision to more appropriately tailor these standards to the risk profile of BHCs.
The Bill is consistent with the recommendation of the Treasury Department’s Report to President Trump pursuant to Executive Order 13772 that Congress amend the $50 billion threshold for enhanced prudential supervision to more appropriately tailor these standards to the risk profile of BHCs.
Testimony of Keith Noreika, Acting Comptroller of the Currency, before the Senate Committee on Banking, Housing, and Urban Affairs.
The Comptroller made a series of recommendations for regulatory reforms directed at promoting economic growth and reducing regulatory burden. He stated that the OCC’s recommendations are consistent with the Treasury Report.
Key recommendations include:
Exempt community banks from the Volcker Rule and provide larger banks with limited Volcker exposure an “off-ramp” from the Rule. For other institutions, proprietary trading would not be based on intent, but rather on bright-line objective factors, such as positions subject to the Market Risk Capital Rule. Narrow the scope of entities that are treated as covered funds.
Raise the threshold for application of enhanced prudential standards to better capture the types of companies that pose the relevant risks.
Transfer consumer law examination and supervision authority for $10 billion plus depository institutions from the CFPB to the federal banking agencies. The CFPB would continue to have primary enforcement authority over large depository institutions.
Allocate examination and enforcement authority for bank and savings and loan holding companies for companies with assets below a certain threshold that are concentrated in a depository institution subsidiary to the primary federal regulator of the institution. The FRB would continue to have the authority to issue regulations under the holding company laws.
Repeal the Dodd-Frank provision requiring the collection of certain demographic information in regard to small business lending.
Overturn the decision in Madden v. Midland Funding LLC, 785 F.3d 246 (2d Cir. 2015) to provide that the rate of interest on a loan made by a depository institution that is valid when the loan is made remains valid after transfer of the loan.
As we noted in regard to the Treasury Report, it is likely that banking reform efforts are most likely to proceed at the regulatory level. The Comptroller’s statement indicates a willingness by the OCC to take certain steps directed at addressing the principles contained in Executive Order 13772.In testimony given at the same hearing by FRB and FDIC officials, they were less forthcoming in discussing their reaction to the Treasury Report and EO 13772.
The FDIC did object to a Treasury Reports proposals that the agency be removed from the living will process and to certain proposed revisions to leverage ratio rules.
The FRB noted that it believes that small banking organizations could be exempted from the Volcker Rule and the incentive compensation provisions of the Dodd-Frank Act. The agency also supports an increase in the threshold for the application of enhanced prudential standards.
Treasury Department, Orderly Liquidation Authority and Bankruptcy Reform, Report to the President pursuant to Presidential Memorandum of April 21, 2017
The Report’s recommendations lean strongly in favor of having large financial institutions resolved in a new specialized bankruptcy proceeding. The Report cites to legislation that has passed the House of Representatives that would add a new Chapter 14 to the Bankruptcy Code, where a company would file for bankruptcy and with court approval would transfer most of its assets (including ownership of operating subsidiaries) to a newly formed bridge company but would leave behind equity holders and most unsecured creditors. The securities of the bridge company would be held in trust administered by a special trustee, the proceeds of the ultimate sale of those securities would go to the benefit of the shareholders and unsecured creditors. The bankrupt entity would be under the supervision of the bankruptcy court and claims arising from the bankruptcy would be determined by the Bankruptcy Court.
The Report makes recommendations for improvements to the OLA process, which include further restrictions on the FDIC's authority to treat similarly situated creditors differently on an ad hoc basis, transferring authority for adjudicating claims from the FDIC to a bankruptcy court, repealing the tax-exempt status of the bridge company, and strengthening several protections to reduce the potential risk to the Orderly Liquidation Fund.
Unlike the Financial CHOICE Act (available here), which would repeal OLA, the Treasury Report favors retention of OLA with the expectation that it would only be used in extraordinary circumstances. The Report’s Chapter 14 bankruptcy process is based on the provisions contained in the Financial Institution Bankruptcy Act, which passed the House of Representatives in April 2017. It remains to be seen how much effort the Treasury will put into seeking enactment of a new Chapter 14.
Treasury Department, Financial Stability Oversight Council (“FSOC”) Designations, Report to the President pursuant to Presidential Memorandum of April 21, 2017
The Report’s recommendations lean strongly in favor having FSOC address financial stability concerns through activities-based initiatives at a product or industry level with the oversight of primary regulators. FSOC would reserve an entity based approach, such as a SIFI designation, for circumstances where it finds that notwithstanding activities-based regulation a company could pose a risk to financial stability.The Report makes a series of recommendations intended to respond to criticisms of the manner in which the SIFI designation process has operated. The Report would require strong empirical evidence suggesting that a particular company is actually likely to pose a threat to U.S. financial stability. It would also require the FSOC to engage in a cost benefit analysis regarding a potential designation that would require a finding that expected benefits of a designation outweigh the costs associated with the designation.
The Treasury Secretary has broad authority in regard to the SIFI designation process since no designation can occur without the affirmative vote of the Secretary. As a practical matter, the Report signals that the Administration will use its role at FSOC to cause the Council to focus on an activities-based approach rather than an entity-based approach. To the extent that SIFI designations may be considered in the future, the Report appears to agree with many of the criticisms of the FSOC designation process raised by various financial services commenters and companies, as well as those that led a U.S. District Court to void the FSOC’s designation of MetLife and would result in a revised process that would appear to make new designations much less likely to occur.
Treasury Department, A Financial System That Creates Economic Opportunities: Asset Management and Insurance, Report to President Trump pursuant to Executive Order 13772 Treasury previously issued reports pursuant to EO 13772 covering Banks and Credit Unions and Capital Markets and intends to issue an additional report covering the following topic: Non-Bank Financial Institutions, Financial Technology and Financial Innovation
The Report analyzes the current regulation of asset management and insurance industries, applying the seven core principles for financial services regulation under EO 13772, and provides a series of recommendations.
(Recommendations that would primarily involve Congressional action are indicated with a (C) and those that would primarily involve regulatory action are indicated with an (R).)
Asset Management – Systemic Risk and Stress Testing
Rather than focus on entity-based evaluations and potential SIFI designations, regulators should focus on potential systemic risks arising from asset management products and activities and on implementing regulations that strengthen the asset management industry as a whole. FSOC should maintain primary responsibility for addressing systemic risk in the U.S. financial system. The SEC should remain the primary federal regulator of the U.S. asset management industry. (R)
The Dodd-Frank Act should be amended to eliminate stress testing requirements for investment advisers and investment companies. (C)
Asset Management – Investment Companies and Investment Advisers
Maintain the 15% limitation on illiquid assets. SEC should adopt a principles-based approach to liquidity risk management rulemaking and any associated bucketing requirement. SEC should postpone the currently scheduled December 2018 implementation of Rule 22e-4’s bucketing requirement. (R)
In regard to the SEC’s pending derivatives proposal, the agency should consider adopting a rule that would include a derivatives risk management program and an asset segregation requirement, but should reconsider what, if any, portfolio limits should be part of the rule. SEC should Reconsider the scope of assets that would be considered qualifying coverage assets for purposes of the asset segregation requirement. SEC should examine the derivatives data that will be reported by funds starting next year and publish analysis based on empirical data regarding their use of derivatives. (R)
SEC should move forward with a “plain vanilla” ETF rule that allows new registrants to access the market without the cost and delay of obtaining exemptive relief orders. The SEC should consider establishing a single process for ETF and related approvals. (R)
SEC should withdraw its proposal on business continuity and transition planning as a principles-based rule is already in place. (R)
CFTC should amend its rules so that an investment company registered with the SEC and its adviser are exempt from dual registration and regulation by the CFTC as a Commodity Pool Operator (CPO). CFTC and SEC should identify a single regulator for de facto commodity pools, with the goal that oversight of these entities will either remain with the SEC or be transferred to the CFTC and NFA. CFTC should amend its rules to exempt private funds and their advisers from registration as CPOs if the advisers are subject to regulatory oversight by the SEC. (R)
SEC should finalize its proposed rule to modernize its shareholder report disclosure requirements and permit the use of implied consent for electronic disclosures. SEC should explore other areas for which the delivery information to investors through an electronic medium using implied consent is appropriate and consistent with investor protection; however, investors should retain the choice to continue to receive paper disclosures. (R)
The Federal Reserve Board (FRB), FDIC, the Office of the Comptroller of the Currency, SEC, and CFTC should reduce the burden of the Volcker Rule on asset managers and investors. These regulators should continue to refrain from enforcing the Volcker Rule’s proprietary trading restrictions against foreign private funds that are not “covered funds” under the rule until a permanent solution to the identified challenges is implemented. The Regulators should forebear on enforcement of the restriction on funds sharing names with banking entities. (R) Congress should revise the Volcker Rule definition of “banking entity” under the Dodd-Frank Act to encompass only insured depository institutions, their holding companies, foreign banking organizations, and affiliates and subsidiaries of such entities that are at least 25% owned or otherwise controlled by such entities. (C)
Asset Management – International Engagement
U.S. should continue to play a leading role in international standard-setting bodies such as the FSB and International Organization of Securities Commissions and promote transparency and accountability in such organizations. U.S. representatives at the FSB should work to revise the FSB’s Global Systemically Important Financial Institution (G-SIFI) framework so it appropriately takes into account the differentiated ways industry participants are structured and manage risks. FSB should move away from using the term “shadow banking” to describe registered investment companies and their investment advisers. (R)
Asset Management – The Fiduciary Rule
Treasury (i) supports the Department of Labor’s (DOL) efforts to reexamine the implications of the Rule and to delay full implementation until the relevant issues addressed, (ii) believes that such assessment and resolution should include participation by the SEC and other regulators, (iii) and believes that the SEC and DOL should work together to address standards of conduct for financial professionals who provide investment advice to IRA and non-IRA accounts. (R)
Asset Management – The Annuities Market
Treasury recommends that the DOL and the SEC engage with state insurance regulators regarding the impact of standards of care on the annuities market in order to achieve consistent standards of conduct across product lines.
Insurance – Systemic Risk and Solvency
FSOC, FRB, and state regulators should focus on potential risks arising from insurance products and activities, and on implementing regulations that strengthen the insurance industry as a whole. (R)
Insurance regulation at the federal level should be conducted in coordination with the states. (R)
U.S. members of the International Association of Insurance Supervisors (IAIS) should support the IAIS’ work on an activities-based approach for assessing potential systemic risk and take steps to improve the IAIS G-SII assessment methodology to increase transparency and promote consistency with other financial sectors. (R)
The NAIC, the states, and the FRB should harmonize the group capital initiatives to mitigate duplicative and unnecessary regulation. (R)
U.S. members of the IAIS should present a consistent, unified approach to Insurance Capital Standard (ICS) development with a core goal of ensuring that the ICS initiative accommodates the U.S. business model and the existing state-based regulatory system. The IAIS should delay delivery of the ICS to allow further consultation with IAIS members and stakeholders. (R)
State insurance regulators, the NAIC, and the FRB should continue their work on addressing potential liquidity risk in the insurance sector, as the Treasury supports robust liquidity risk management programs for insurers. (R)
Insurance – Role of State and Federal Regulation
The SEC should propose a rule permitting a variable annuity summary prospectus, while continuing appropriate disclosure to investors, and should take steps to improve the efficiency and effectiveness of the regulation of insurance products under its jurisdiction. (R)
The SEC should enhance its engagement with the insurance sector, including state regulators and the NAIC, to assess how FASB and IFRS standards could affect the insurance industry. (R)
Treasury will increase transparency and stakeholder engagement in the Federal Insurance Office’s (FIO) role in regard to the insurance industry. (R)
The FRB, the NAIC, and state insurance regulators should take steps to coordinate the supervision and examination of insurers and harmonize financial reporting and record keeping requirements. FRB should reassess whether its examination of Insurance Savings & Loan Holding Companies are appropriately tailored. (R)
Clarify the “business of insurance” language in Dodd-Frank to ensure that CFPB does not engage in oversight of activities already monitored by state insurance regulators. (C)
The Department of Housing and Urban Development (HUD) should reconsider its use of disparate impact liability, including whether the rule is consistent with McCarran-Ferguson and other state law. HUD should also reconsider whether the use of the rule would have a disruptive effect on the availability of homeowners insurance or is reconcilable with actuarially sound principles. (R)
Insurance – Insurer Data Security
States should adopt the NAIC Insurance Data Security Model law. If this does not result in uniform data security regulations within five years, Congress should pass a law setting forth requirements for insurer data security. States should pass insurer data breach notification requirements. If this does not occur within five years, Congress should pass a law setting forth data breach notification requirements for insurers. (C)
FIO will establish a working group to assess cybersecurity challenges for the insurance industry and make recommendations to insurance sector participants and regulators. (R)
Insurance – Regulatory Structure
Federal agencies and regulatory entities led by the FIO should establish formal mechanisms to promote coordination and communication across the federal government with respect to insurance-related issues. FIO should lead coordination efforts among federal and state agencies to improve communication, develop insurance regulation policy, and reduce overlapping, duplicative or conflicting regulation. (R)
Insurance – International Engagement
FSB’s activities should be limited to its purpose of monitoring and enhancing global financial stability. Financial stability risk assessments and standards should be tailored to industry sectors, which should be undertaken by the appropriate standard setter with the necessary technical supervisory expertise. Revise the G-SIFI framework so that it appropriately takes into account the differentiated ways that sectors are structured and manage risks. Advocate for increased transparency and stakeholder engagement at the FSB, as well as for standards and principles consistent with the state-based U.S. insurance regulatory system. (R)
Increase transparency and stakeholder input into IAIS decision-making. At the IAIS, FIO should: (1) advocate for the U.S. state-based insurance regulatory system, U.S. consumers, the U.S. insurance sector, and growth in the broader U.S. economy, (2) coordinate the views of U.S.-based members of the IAIS, and (3) promote greater transparency and stakeholder engagement in international standard-setting forums. FIO should have a permanent, voting membership on the IAIS Executive Committee. (R)
Insurance – Economic Growth and Informed Choices
State insurance regulators and the NAIC should evaluate potential steps to encourage the development of more calibrated regulatory treatment of high-quality infrastructure investments; including specifically considering revising risk-based capital charges to reflect the stable cash flows of high-quality infrastructure investments as compared to general equity investments with more volatile returns. (R)
Insurance – Retirement Security
With respect to qualified retirement plans offering in-plan annuity options, the report recommends that the DOL and Treasury develop proposals that would address the fiduciary issues that concern employers in regard to offering in-plan annuity options. (R)
Treasury will convene an inter-agency task force to develop policies to complement reforms at the state level relating to the regulation of long-term care insurance. Its work should be coordinated with the ongoing work of state insurance regulators and the NAIC. (R)
The Report contains a comprehensive mixture of legislative and agency recommendations. As we noted in regard to the previous treasury reports on banks and credit unions and capital markets, under the current 60 vote threshold the Senate is unlikely to pass broad regulatory reform legislation that is unable to attract some degree of Democratic support which may be difficult to obtain for any actions that are viewed as controversial.
As a result, the Administration may be compelled to focus on recommendations that can be implemented through regulatory actions.
With respect to the DOL Fiduciary Rule, there has long been controversy about whether the DOL was the appropriate agency to oversee standards of conduct as they relate to advisers to an IRA. The Treasury Department recommends that the SEC participate in the oversight process. We may yet see a joint SEC/DOL rulemaking process with regard to the standard of care required of IRA advisers.
With respect to annuities, the Trump Administration clearly evidences its interest in promoting the use of annuities as a retirement savings vehicle. In 2008 the DOL adopted a safe harbor rule that was intended to provide sponsors with comfort that they would not be running afoul of ERISA’s fiduciary obligations by offering in-plan annuities if they met certain criteria. Employers have not taken advantage of this safe harbor, and so the Trump Administration is seeking ways to encourage employers to provide in-plan annuities. If effective administrative action is taken, plans may begin offering more in-plan annuity options in the future.
Treasury Department, A Financial System That Creates Economic Opportunities: Capital Markets, Report to President Trump pursuant to Executive Order 13772 Treasury previously issued a report pursuant to EO 13772 covering Banks and Credit Unions and intends to issue two additional reports covering the following topics:
Asset Management and Insurance
The Report analyzes the current regulation of capital markets, applying the seven core principles for financial services regulation under EO 13772, and provides recommendations in nine key areas.
(Recommendations that would primarily involve Congressional action are indicated with a (C) and those that would primarily involve regulatory agency action are indicated with an (R).)
Access to Capital
Repeal the Dodd-Frank Act provisions requiring non-material disclosure. (C) Alternatively, exempt smaller reporting companies and emerging growth companies (EGC) from the requirements. (R)
Streamline SEC Regulation S-K. Remove SEC disclosure requirements that duplicate financial statement disclosure required under GAAP. (R)
Allow companies to communicate with qualified institutional buyers or institutional accredited investors before initial public offering. (R)
Revise the $2,000 holding requirement for shareholder proposals, or explore different options for eligibility requirements. Revise the resubmission thresholds for repeat proposals. (R)
Revise the securities offering reform rules to permit business development companies (BDC) to utilize the same provisions available to other issuers that file Forms 10-K, 10-Q, and 8-K. (R)
Broaden eligibility for status as a smaller reporting company (SRC) and as a non-accelerated filer to include entities with up to $250 million in public float. (R) Extend the length of time a company may be considered an EGC to up to 10 years. (C)
Expand Regulation A eligibility to include Exchange Act reporting companies. Update state security regulations to exempt secondary trading of Tier 2 securities, or use the SEC’s authority to preempt state registration requirements. Increase Tier 2 offering limit to $75 million. (R)
Allow single-purpose crowdfunding vehicles advised by a registered investment adviser. Waive the limitations on purchases in crowdfunding offerings for accredited investors. Amend crowdfunding rules to have investment limits based on the greater of annual income or net worth for the 5% and 10% tests. Raise the maximum revenue requirement for the conditional exemption under Section 12(g) from $25 million to $100 million. Increase the limit on how much can be raised over a 12-month period from $1 million to $5 million. (R)
Amend the definition of the “accredited investor” to expand the eligible pool of sophisticated investors. Review rules that restrict unaccredited investors from investing in a private fund containing Rule 506 offerings. (R)
Centralize reporting of individuals and firms that have been subject to adjudicated disciplinary proceedings or criminal convictions. (R)
Equity Market Structure
Permit issuers of less-liquid stocks (e.g., based on average daily volume) to partially or fully suspend unlisted trading privileges (UTP) for their securities and select the exchanges and venues on which their securities will trade. The issuer would need to consult its underwriter and listing exchange to suspend UTP. Amend Regulation NMS to allow issuers of less-liquid stocks to choose to have their stock trade only on a smaller number of venues until liquidity in the stock reaches a minimum threshold. Internalization by broker-dealers would be retained. (R)
Allow issuers to determine the tick size for trading of their stock across all exchanges, potentially within a range of standard options and certain exceptions for retail orders. (R)Amend Rules 605 and 606 of Regulation NMS, substantially as proposed by the SEC, to require disclosure of institutional order handling practices and additional disclosure regarding retail orders, including the receipt of payments for order flow and rebates. (R)
The SEC should conduct a study of the impact of reduced maker-taker rebates and fees on liquidity and execution costs, potentially resulting in restrictions on the use of rebates and payments for order flow or a requirement to pass through such remuneration to the ultimate customer. (R)
Exempt less-liquid stocks from the restrictions on maker-taker rebates and payment for order flow to promote greater market making. (R)
Clarify that broker-dealers may satisfy their best execution obligations by relying on securities information processor (SIP) data to reduce the need to subscribe to expensive data feeds. Increase competition for market data, including by amending Regulation NMS to enable competing consolidators to provide an alternative to SIPs. (R)
Amend the Order Protection Rule to give protected quote status only to registered national securities exchanges that offer meaningful liquidity and opportunities for price improvement, and withdraw protected quote status for orders on any exchange that do not meet a minimum liquidity threshold as determined by the average daily trading volume executed on the particular exchange. New exchanges would receive the benefit of protected order status for a period of time. Guidance should be given to broker-dealers regarding the need to check low volume exchanges to evaluate best execution. (R)
The SEC should evaluate whether exchanges and alternative trading systems (ATSs) should harmonize their order types and determine if the number of order types should be limited. (R)
Amend Regulation ATS, substantially as proposed by the SEC in 2015, to increase public disclosure of certain information about ATSs that trade national market system stocks, but also limit unnecessary public disclosure of confidential information. (R)
The Treasury Market
Require certain participants in the Treasury securities market to provide more data to regulators to facilitate better understanding, monitoring, and regulation. (R)
Engage in further study of clearing and settlement arrangements in the Treasury securities market to allow regulation to evolve with such arrangements. (R)
Corporate Bond LiquidityTreasury reiterates its recommendations from the Banking Report to improve secondary market liquidity. (C)(R)
Bank Capital Requirements
Rationalize bank capital requirements for holding securitized products with the requirements to hold the same disaggregated underlying assets to avoid creating unwarranted incentives or disincentives. Address a series of specific issues that impact securitization capital requirements from both a domestic and international perspective. (R)
Consider treating high-quality securitized obligations with a proven track record to be level 2B high-quality liquid assets for purposes of the liquidity coverage ratio and the net stable funding ratio. (R)
Expand qualifying risk retention exemptions across eligible asset classes based on the unique characteristics of each securitized asset class and robust disclosures. (R)
Consider whether the mandatory five-year holding period for third-party purchasers and sponsors subject to the risk retention requirement should be decreased. (R)
Develop an exemption from risk retention for non-originating collateralized loan obligation managers who select loans that meet specified standards. (R)
Designate a single lead agency to be responsible for future action related to the risk retention rule. (C)
Reduce the number of required reporting fields for registered securitizations. Adopt a “provide or explain regime” for pre-specified data fields. Review and potentially reduce the three-day waiting period for registered issuances. SEC should indicate that it will not extend Regulation AB II disclosure requirements to unregistered Rule 144A offerings or to additional securitized asset classes. (R)
Recommendations applicable to CFTC and SEC
Review respective rulemakings under Title VII of Dodd-Frank in an effort to harmonize and eliminate redundancies and to minimize distortive effects on the markets and duplicative and inconsistent compliance burdens. (R)
Harmonize, along with U.S. banking regulators, margin requirements for uncleared swaps domestically and cooperate with non-U.S. jurisdictions that have implemented the BCBS-IOSCO framework. Among other specific recommendations, the Report recommends that the SEC re-propose and finalize its proposed margin rule for uncleared security-based swaps in a manner that is aligned with CFTC and banking regulators margin rules. (R)
Make swaps and security-based swaps rules compatible with non-U.S. jurisdictions; adopt outcomes-based substituted compliance regimes; and reconsider any U.S. personnel test for applying the transaction-level requirements of their swap rules. (R)
Balance moving more derivatives into central clearing with appropriately tailored and targeted capital requirements, including certain specific regulatory recommendations. (R)
Amend Section 2(h)(7) of the Commodity Exchange Act to allow the CFTC to modify and clarify the scope of the financial entity definition and the treatment of affiliates, and provide analogous rulemaking authority to the SEC under Section 3C(g) of the Securities Exchange Act of 1934. (C)
Recommendations applicable to CFTC
Simplify and formalize outstanding staff guidance and no-action relief in connection with the Dodd-Frank swaps regulatory framework. (R)
Maintain the swap dealer de minimis registration threshold at $8 billion and establish that any future changes to the threshold will be subject to formal rulemaking and public comment. (R)
Finalize position limits rules with a focus on detecting and deterring market manipulation and other fraudulent behavior. (R)
Consider certain changes to rules related to swap execution facilities. (R)
Complete newly launched “Roadmap” effort. (R)
Financial Market Utilities
Report expresses concern that financial market utilities — entities that support and facilitate the transfer, clearing or settlement of financial transactions such as commodity futures exchanges and central counterparties that clear swaps — present a significant risk to the U.S financial system, risk that has increased as a result of Dodd-Frank.
Improve regulatory reviews of certain rule or operational changes proposed by systemically important financial market utilities (SIFMU). (R) Additional resources should be allocated to the CFTC for its supervision of SIFMUs. (C)
Agencies should expand their efforts to plan for facilitating the recovery of central counterparties that are impaired by a range of challenges. (R)
Regulatory Structure and Process
Restore the CFTC and SEC’s full exemptive authority and remove the restrictions imposed by Dodd-Frank. (C)
Improve the CFTC and SEC’s economic analysis processes. Incorporate economic analysis in rulemaking processes. (R)
Solicit more comment and input from the public during rulemaking processes. Conduct regular, periodic reviews of agency rules. (R)
Adopt Office of Management and Budget’s Final Bulletin for Agency Good Guidance Practices to curtail excessive use of guidance to impose new requirements or to make substantive changes to rules. (R)
Update the definitions of small entities under the Regulatory Flexibility Act (RFA) to more effectively consider the impact on such entities during the RFA analysis. (R)
Conduct comprehensive reviews of the roles, responsibilities, and capabilities of self-regulatory organizations (SRO). SROs should review and update their rules, guidance, and procedures on a periodic basis. (R)
International Aspects of Capital Markets Regulation
Seek to avoid conflicting or duplicative regulation through dialogue and outcomes-based substituted compliance arrangements. (R)
Continue to advocate for and shape international regulatory standards that align with U.S. domestic regulatory objectives. (R)
The Report contains a comprehensive mixture of legislative and agency recommendations. As we noted in regard to the previous Treasury Report on Banks and Credit Unions, under the current 60 vote threshold the Senate is unlikely to pass broad regulatory reform legislation that is unable to attract some degree of Democratic support which may be difficult to obtain for any actions that are viewed as controversial.
As a result, the Administration may be compelled to focus on recommendations that can be implemented through regulatory actions.
Treasury Department, A Financial System That Creates Economic Opportunities: Banks and Credit Unions, Report to President Trump pursuant to Executive Order 13772.Treasury intends to issue three additional reports pursuant to EO 13772 that will cover the following topics:
The Report analyzes the current regulation of the banking industry applying the seven core principles for financial services regulation under EO 13772.(Recommendations that would primarily involve Congressional action are indicated with a (C) and those that would primarily involve regulatory agency action are indicated with an (R).)
Capital and Liquidity
Amend the general $50 billion threshold for enhanced prudential standards to correlate to the risk profile of bank holding companies (BHCs). (C) Limit the liquidity coverage ratio to globally significantly important banks (G-SIBs) with a lesser standard for internationally active BHCs that are not G-SIBs. (R) Alternatively, consider an “off-ramp” from prudential regulation of the type contained in the Financial CHOICE Act for banking organizations that meet a minimum leverage ratio. (C) Consider exempting community banks from Basel III risk-based capital standards. (R)
Improve capital, living will and liquidity supervisory processes. (R) Expand high quality liquid assets, including treating high-grade municipal bonds as Level 2B liquid assets. (R)
International Financial Regulatory Standards Setting Bodies
U.S. standards that place institutions at an international disadvantage should be recalibrated. (R)
FSOC should be authorized to assign a lead regulator as primary regulator where agencies have conflicting or overlapping jurisdiction. (C)
Improving the Regulatory Engagement Model
Agencies should perform and publish for comment a cost-benefit analysis in connection with rulemakings. (C) (R)
Banking organizations with $10 billion or less in assets should be exempt from all aspects of the Volcker Rule. (R) Larger organizations with limited trading assets should not be subject to the proprietary trading provisions. (R)
The 60-day presumption for proprietary trading should be repealed. (R) Flexibility should be provided in regard to permissible levels of market-making inventory and the burden of demonstrating compliances with the risk-mitigating hedging requirements should be reduced. (R)
Covered fund status should focus on the characteristics of hedge funds and private equity funds. (R) Increase the initial seeding period for customer funds. (C) Banking entities other than a bank or BHC should be permitted to share a name with the customer funds they sponsor. (C) An exemption from banking entity status should be provided for foreign funds owned or controlled by a foreign affiliate of a U.S. bank or a foreign bank with U.S. operations. (C) (R)
CFPB Structure, Authority and Activities
Return consumer law supervision of large banks to the bank regulators and supervision of nonbank entities to state regulators. (C)
CFPB Director should be removable at will by the President, or the CFPB should be restructured as a multi-member commission. (C) CFPB should be subject to the same accountability as other agencies, including through the appropriations process. (C)
Restrict the CFPB’s exercise of its enforcement authority. (C) (R)
Residential Mortgage Lending
CFPB should adjust the Qualified Mortgage (QM) rule to align with GSE-eligible loan standards and to account for compensating factors. Address concerns for self-employed persons and retirees. Increase the asset threshold for lenders to have a relaxed QM standard for portfolio loans. (R)
Private Secondary Market Activities
The residential mortgage risk retention requirement should be repealed or substantially revised. (C)(R) Additional protections should be provided to private label mortgage securities (PLS). (C) Clarify liability for secondary market investors regarding certain errors in the origination process. (R) Review how capital and liquidity rules and policies can be modified to address the negative impact they have had on the economic attractiveness of PLS. (R)
Leveraged Lending Guidance
2013 leveraged lending guidance should be re-issued for public comment, with the intention of reducing ambiguity in the definition of leveraged lending. Banks should be encouraged to use a clear but robust set of metrics in underwriting leveraged loans rather than solely relying on a 6x leverage ratio. (R)
Small Business Lending
Provide greater flexibility in regard to the use of commercial real estate financing. (R)
Repeal the Dodd Frank provision requiring the collection of certain demographic information. (C)
The Report contains a comprehensive mixture of legislative and agency recommendations. As we discussed in our analysis of the Financial CHOICE Act recently passed by the House, under the current 60 vote threshold the Senate is unlikely to pass broad regulatory reform legislation that is unable to attract some degree of Democratic support which may be difficult to obtain for any actions that are viewed as controversial.
As a result, the Administration may be compelled to focus on recommendations that can be implemented through regulatory actions.
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.
Executive Order on Core Principles for Regulating the United States Financial System
Establishes Core Principles for financial regulation, including: (i) empowering Americans to make informed choices in the marketplace, save for retirement and build wealth; (ii) preventing taxpayer-funded bailouts; (iii) fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk; and (iv) advancing American interests in international financial regulatory negotiations.
Calls for the Treasury Secretary to consult with member agencies of the Financial Stability Oversight Council and report to the President (i) on the extent to which existing regulation promotes the Core Principles, and (ii) to identify laws, regulations and other regulatory actions that inhibit regulation in a manner consistent with the Core Principles.
Congress and the administration are now embarked on a two-front effort to substantially rollback the Dodd-Frank Act and to fundamentally reconsider the structure and objectives of U.S. financial regulation.
The House of Representatives passed the Financial CHOICE Act on June 8, 2017. It remains to be seen whether the Senate will consider similar comprehensive financial services legislation.
Even in the absence of Congressional action, the administration has significant authority to change the scope and tone of regulation. The Executive Order takes advantage of the central role that the Treasury Secretary is afforded as Chair of the FSOC. This position could provide the Treasury Secretary with a platform to foster a broad based reorientation of regulations and regulatory policies, consistent with the objectives of the Core Principles.