United States: U.S. House Of Representatives Passes The Financial CHOICE Act Of 2017

On June 8, 2017, the Financial CHOICE Act of 2017 (the "CHOICE Act") was passed on a party line vote by the U.S. House of Representatives, with nearly all Republicans voting in support and nearly all Democrats voting against passage.1 The CHOICE Act was previously approved by the House Financial Services Committee ("Committee") on May 4, 2017 after two hearings were held on the bill.2

The CHOICE Act now moves to the U.S. Senate where it faces an uphill battle. Senate passage would require a 60 vote majority and Republicans control only 52 seats. There is no indication that any of the 46 Democrats, or 2 independents that caucus with the Democrats, will support the measure as passed by the House. As a result, it is likely that fundamental changes to the CHOICE Act would be required in order for it, or portions of it, to pass the Senate, be reconciled with the House bill and become law.

It is also anticipated that the Trump Administration will begin to weigh in on financial regulatory reform before a final bill is enacted. On February 3, 2017, the President issued Executive Order 13772 stating "Core Principles for Regulating the United States Financial System."3 The Executive Order requires, among other things, the Secretary of the Treasury to issue a report identifying areas in the financial regulatory framework that should be amended. The Secretary of the Treasury has yet to publish the report, but it is expected soon and this report may help to shape the contours of any final bill.

In its current form, the CHOICE Act would make significant changes to the U.S. financial regulatory system mostly through repealing and restructuring much of the post-financial crisis framework established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Although the prospects for the CHOICE Act in its current form are uncertain, U.S. financial institutions, and foreign financial institutions with operations in the United States will want to keep abreast of the legislative process involving the CHOICE Act, as legislation, if any, that emerges is likely to impact their business.

Below is a general summary of some of the principal components of the CHOICE Act.4

  • Repeal of Orderly Liquidation Authority. Section 111 of the CHOICE Act would repeal Title II of the Dodd-Frank Act which provides for the orderly resolution of systemically important financial institutions ("SIFIs"). After the financial crisis, an international consensus developed concerning the orderly resolution of SIFIs as an essential means to prevent future crises. The drafters of the CHOICE Act view the orderly liquidation authority ("OLA") as institutionalizing bailouts. The CHOICE Act would replace the OLA with a resolution process administered under the Bankruptcy Code and take away the ability of the FDIC to provide liquidity in the resolution process. It would also eliminate the role of the Federal Deposit Insurance Corporation ("FDIC") in resolution planning review.
  • The Leverage Ratio "Off-Ramp". Title VI of the CHOICE Act would enable "qualifying banking organizations" or "QBOs" to opt out of federal laws and regulations that set capital and liquidity requirements and would prohibit federal banking agencies5 from considering a QBO's effect on systemic risk or financial stability when reviewing certain applications. QBOs would also not be required to comply with most of the enhanced prudential standards established by Section 165 of the Dodd-Frank Act, including the risk committee, resolution planning, and stress testing requirements, among others. To qualify as a QBO, a banking organization would need to have an average leverage ratio of at least 10 percent. The term "average leverage ratio" is defined to mean the average of the banking organization's quarterly leverage ratios for each of the most recently completed four calendar quarters.

The leverage ratio for determining whether a banking organization qualifies as a QBO would be calculated as Tier 1 capital divided by total assets (as reported on the banking organization's call report) plus off-balance sheet exposures, i.e., the supplemental leverage ratio for complex banking organizations.

"Traditional banking organizations" would use the traditional leverage ratio, that is, Tier 1 capital divided by total assets as reported on the traditional banking organization's regulatory filings.6

Banks that do not satisfy the conditions to be considered a "traditional banking organization" may find that maintaining a 10 percent supplemental leverage ratio is not an attractive alternative to complying with the regulations from which QBOs are exempt. As a result, if enacted in its current form, the "off-ramp" option may be of limited value.

  • Repeal of the Volcker Rule. Section 901 of the CHOICE Act would repeal the Volcker Rule (i.e., Section 13 of the Bank Holding Company Act) in its entirety. The Volcker Rule was enacted as part of the Dodd-Frank Act and, subject to a series of exemptions and exclusions, generally prohibits banking entities from engaging in proprietary trading and from investing in, or sponsoring, hedge funds and private equity funds.
  • Repeal of the DOL Fiduciary Rule. Section 841 of the CHOICE Act would repeal the Department of Labor's ("DOL") fiduciary rule which, when fully implemented, will require advisors to retirement plans to act as
  • fiduciaries. The DOL would be prohibited from adopting any similar rule until after the U.S. Securities and Exchange Commission ("SEC") adopts a fiduciary standard for broker-dealers. In that event, the DOL would be required to adopt a rule substantially similar to the SEC rule.
  • Changes to the Financial Stability Oversight Council. The Dodd-Frank Act established the Financial Stability Oversight Council ("FSOC"), an interagency council with responsibility to oversee systemic risk. FSOC has the authority to designate non-bank institutions as systemically important. The designation has the effect of subjecting such institutions to increased oversight and regulation. The CHOICE Act would repeal FSOC's authority to designate non-bank financial institutions and financial market utilities as systemically important. The CHOICE Act would also abolish the Office of Financial Research, which was established to support the work of FSOC by analyzing risks, performing essential research, and collecting and standardizing financial data across the U.S. financial system.
  • Changes to the Rulemaking Process. Section 312 of the CHOICE Act would require any proposed rulemakings from the federal banking agencies (among others) to include at least the following analyses: (i) identification of the need for regulation and the regulatory objective; (ii) an explanation of why the private market or local government cannot address the problem; (iii) an analysis of adverse impacts; and (iv) a quantitative and qualitative cost benefit analysis; among other things. It also prohibits the enactment of a final rule where the quantified costs are deemed greater than the quantified benefits. This may inhibit the rulemaking process for agencies subject to this requirement, which may have difficulty quantifying the benefits of rules designed to protect against such things as systemic risk. The CHOICE Act would also require Congressional approval before rules that have an annual impact on the economy of $100 million or more take effect.
  • Review of Agency Actions. Section 341 of the CHOICE Act would eliminate the Chevron doctrine with respect to judicial review of actions by the federal banking agencies (among others). The Chevron doctrine requires courts to provide significant deference to the determinations of federal agencies. The CHOICE Act would replace this deference with de novo review, meaning the agencies subject to this provision would not receive deference from federal courts with respect to their interpretations of federal law.
  • Changes to the Consumer Financial Protection Bureau. Title VII of the CHOICE Act would restructure the Consumer Financial Protection Bureau ("CFPB") by moving it outside the Federal Reserve System, enabling its director to be removed at-will by the President, and renaming it as the Consumer Law Enforcement Agency. The CHOICE Act would also make fundamental changes to the authority of the renamed agency, including: stripping the agency's power to bring actions relating to unfair, deceptive, or abusive acts or practices ("UDAAP"); eliminating its enforcement authority over insured depository institutions; eliminating its rulemaking authority with respect to UDAAP, employee benefit compensation plans or persons regulated by the SEC or the Commodity Futures Trading Commission ("CFTC"), and small dollar loans; and preventing the agency from restricting arbitration agreements in connection with the offering or providing of consumer financial products.
  • Funding for Banking Agencies. The CHOICE Act would subject certain agencies, which are currently funded outside the regular Congressional appropriations process, to be subject to such process. The agencies affected include: the new Consumer Law Enforcement Agency; the FDIC; the Office of the Comptroller of the Currency ("OCC"); the Federal Housing Finance Agency; the National Credit Union
  • Administration; FSOC; and the non-monetary policy functions of the Board of Governors of the Federal Reserve System ("Federal Reserve Board").
  • Requirements for International Processes. Section 371 of the CHOICE Act would impose administrative burdens on federal financial regulatory agencies7 with respect to their participation in international organizations. Such agencies would be required to issue notices, solicit public comment, and consult with the U.S. Senate's and House's committees of jurisdiction with respect to their participation in the standard-setting process of certain recognized international organizations (including, among others, the Basel Committee on Banking Supervision, the Financial Stability Board, and the International Association of Insurance Supervisors).
  • Minimization of Duplicative Enforcement Efforts. Section 391 of the CHOICE Act would require the federal banking agencies (among others) to implement policies and procedures that would minimize duplication of efforts with other federal and state authorities when bringing an administrative or judicial action. Under the United States' dual-banking system, most banks answer to at least two regulatory agencies. This provision may help streamline enforcement actions where multiple agencies are involved.
  • Tailoring of Regulation. Section 546 of the CHOICE Act would require the federal banking agencies (among others) to tailor future regulatory actions based on the risk profile and business model of each type of institution or class of institutions subject to the regulatory action. This section would also require the federal banking agencies (among others) to review all regulatory actions taken in the past seven years and to revise such regulatory actions to conform to the requirements of the CHOICE Act. A regulatory action is defined to mean "any proposed, interim, or final rule or regulation, guidance, or published interpretation." This may help ease the regulatory burden for smaller institutions.

As the CHOICE Act progresses through Congress, any legislation ultimately enacted into law will likely diverge significantly from the current bill. Nevertheless, we expect the CHOICE Act to play a part in framing the debate going forward.

Footnotes

1 The actual vote was 233-186; all 233 votes in favor came from Republicans and the votes against passage included 185 Democratic votes and 1 Republican vote. See http://clerk.house.gov/evs/2017/roll299.xml. The latest version of the Financial CHOICE Act of 2017, as amended, is available here: https://www.congress.gov/115/bills/hr10/BILLS-115hr10rh.pdf. A section-by-section summary of the legislation, prepared by the Republican majority on the Committee, is available here: https://financialservices.house.gov/uploadedfiles/050217_fc_memo.pdf. A comprehensive summary of the legislation, prepared by the Republican majority on the Committee, is available here: https://financialservices.house.gov/uploadedfiles/2017-04-24_financial_choice_act_of_2017_comprehensive_summary_final.pdf.

2 For our client alert summarizing the hearing held by the Committee on April 26, 2017, please see: https://media2.mofo.com/documents/170427-financial-choice-act-of-2017.pdf.

3 For the full text of Executive Order 13772, please see: https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states. President Trump also signed two presidential memoranda dealing with financial regulations on April 21, 2017: one directs the Secretary of the Treasury to assess the Financial Stability Oversight Council's process of designating banks and financial firms as "too big to fail"; the other directs the Secretary of the Treasury to review and report back on whether the federal government's orderly liquidation authority is useful to the U.S. economy and in line with the Administration's regulatory policy. Copies of the presidential memoranda are accessible here: https://www.whitehouse.gov/briefing-room/presidential-actions/presidential-memoranda.

4 Please note that this Client Alert does not endeavor to summarize all of the important components of the CHOICE Act.

5 The term "federal banking agencies" refers to the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the FDIC.

6 A "traditional banking organization" is defined in this section as a banking organization that: (A) has zero trading assets and zero trading liabilities; (B) does not engage in swaps or security-based swaps, other than swaps or security-based swaps referencing interest rates or foreign exchange swaps; and (C) has total notional exposure of swaps and security-based swaps of not more than $8 billion.

7 The term "federal financial regulatory agencies" refers to the Federal Reserve Board, the FDIC, the OCC, the U.S. Department of the Treasury, the SEC, and the CFTC.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Marc-Alain Galeazzi
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.