An Update on the Financial CHOICE Act
H.R. 10, the Financial CHOICE Act of 2017 (“FCA 2.0”) is a revised version of the 2016 Financial CHOICE Act (FCA 1.0) bill. The House Financial Services Committee (the “FSC”) Chairman, Jeb Hensarling (R., TX), preemptively created FCA 1.0 in case Republicans retained control of Congress and acquired the White House in the 2016 election. The bill served as a way of setting the agenda for 2017 and to define the parameters of financial regulatory reform. With the 2016 election resulting in Republican-control of the Executive and Judicial branch, the likelihood of enacting financial reform increased; thus the FSC worked to produce FCA 2.0, which will serve as a primary legislative impetus for financial regulatory reform.
In a memo titled: Summary of Bill Changes, the FSC shared FCA 2.0 provisions, including the addition of new proposals not contained in FCA 1.0. The Summary of Bill Changes was released on April 11, 2017; the same day that President Trump stated to a group of CEOs that his administration is: "really doing a major streamlining and perhaps elimination and replacing it [DFA] with something else." President Trump noted to the CEOs that some of the Dodd-Frank Act (“DFA”) rules would remain, but that his goal is to “[get] rid of many.” FCA’s 2.0 proposal for more regulatory reductions appears to indicate that the FSC is working with President Trump to streamline more aspects of DFA.
The main difference between FCA 2.0 and FCA 1.0 is the significant reduction of the Securities and Exchange Commission’s (“SEC”) and the Consumer Financial Protection Bureau’s (“CFPB”) power and authority. Below is a summary of important changes to the CFPB and SEC, added provisions, and an overview of executive orders and what may come.
Consumer Financial Protection Bureau
FCA 2.0 would revise approximately four CFPB provisions contained in FCA 1.0, including changing its name to the Consumer Financial Opportunity Agency and stripping it of its independent agency status. Proponents of FCA expressed concern with the lack of oversight of the CFPB. It appears changes to FCA 1.0 were made to enhance the bill’s provisions for accountability and oversight of the agency. For example, the CFPB’s current leadership structure is governed by a single director who can only be terminated for cause. FCA 1.0 proposed changing the agency’s unilateral governance structure to a five-member bipartisan commission structure. However, FCA 2.0, forgoes that proposal in favor of a provision which would allow the CFPB director to be terminated at-will (instead of for cause) by the U.S. president. Proponents of FCA 2.0 leverage the October 2016 D.C. circuit court ruling, which found the CFPB’s leadership structure to be unconstitutional due to the inability for other governmental bodies to review its judgments, and the unilateral power allotted to the agency’s director. In addition, proponents argue that having the CFPB’s director answer to the president, will increase balance and accountability. Opponents contend that giving the president authority to fire the director, may make the CFPB more political and will extend the president’s power.
Many Senate Democrats have expressed opposition to a five-member bipartisan commission. As such, Democrats may be more in support of FCA 2.0’s provision for the CFPB’s leadership structure. Furthermore, some Democrats may see future advantages to a provision that allows the president the authority to terminate the agency’s director. In addition, FCA 2.0 would bar the CFPB from monitoring financial markets and would appoint an Office of Economics to review the rules issued by the CFPB. DFA intended for the CFPB to crack down on companies engaged in risky business practices that harm consumers. The CFPB has returned roughly $12 billion to 29 million consumers “ripped off” by financial institutions and created a database of consumer complaints against companies. FCA Proponents argue that the CFPB by exposing and suing companies harms consumers by limiting their access to useful consumer products and services. Under FCA 2.0, the CFPB would not be allowed to publish its database of consumer complaints about companies. FCA 1.0 would have allowed the agency to keep the consumer complaint database; providing complaints were verified before publication.
Moreover, the CFPB would be subject to congressional appropriations and would lose its funding from the Federal Reserve. In turn, Congress could elect to defund all or significant parts of the agency.
Security and Exchange Commission
FCA 2.0 significantly increases the provisions to reduce the SEC’s authority. The bill proposes approximately 20 revisions to the SEC’s “rulemaking by enforcement” capabilities, including 10 provisions not contained in FCA 1.0. DFA tasked the SEC with implementing and enforcing mandatory rulemaking provisions, the ability to impose civil monetary penalties and cease and desist orders in administration law proceedings, and broader regulatory enforcement capabilities. The bill would increase the maximum penalties the agency can impose for regulatory violations, including a maximum corporate fine of $10 million per violation and the ability to triple the penalty for recidivists. Furthermore, the SEC would have to determine if a corporate penalty would harm shareholders.
Moreover, FCA 2.0 would require a study of SEC enforcement policies and practices. The study would assess how procedures protect investors while maintaining efficient markets, comply with due process, and test the adequacy of sanctions. The results of the study would be reported to congressional committees overseeing the agency. The bill also proposes replacing the SEC’s rulemaking by enforcement program with a Wells Committee approach. Under this approach, the agency would have to inform individuals and firms of possible enforcement actions and give them a chance to respond. Furthermore, the bill would allow respondents to move litigation from the SEC’s in-house court, to federal court, and require all disciplinary proceedings to be public. In addition, FCA 2.0 would reduce the SEC’s enforcement authority by revising the SEC’s whistleblower program. The SEC’s current program allows the agency to grant awards to tipsters who were involved, but not criminally charged, in the wrongdoing. FCA 2.0 would prohibit “co-conspirators” from receiving an award for successful tips.
Additional FCA Provisions
FCA 2.0 does not change the core “ideas and principles” of FCA 1.0, but it does add deemed enhancements, by including new provisions not contained in the original bill. FSC Chairman, Jeb Hensarling, stated that the objective of FCA 2.0 is to: “end and replace the DFA mistake with FCA, hold Wall Street and Washington accountable, end taxpayer-funded bank bailouts, and unleash America’s economic potential.” To accomplish this objective, the FSC included additional provisions in FCA 2.0 that would further reduce restrictions and regulations on financial institutions, including lifting the restrictions on acquiring revenue, reducing the costs associated with implementing new regulations, and decreasing the number of enforcement actions. Below are two important additions included in the U.S. House Financial Services Committee’s Summary of Bill Changes:
[Require financial agencies] (1) when promulgating a rule with $100 million or more a year in impacts of state/local governments or the private sector to prepare and file a written statement on their process and evaluation and to select the least costly, most cost-effective, or least burdensome alternative, unless otherwise explained; and (2) provide state and local government and private sector with an effective process to provide input on proposals with significant mandates (2).
[Require financial agencies] implement policies to (1) minimize duplication between federal and state authorities in bringing enforcement actions; (2) determine when joint investigations and enforcement actions are appropriate; (3) and establish a lead agency for joint investigations and enforcement actions (2).
Impact of Executive Order(s)
Changes to FCA could come in the form of executive orders and statutory changes. Though President Trump has not issued any executive orders on specific provisions contained in FCA 1.0 or FCA 2.0, he could attempt to make an executive order(s) out of some of FCA provisions. If he does, FCA may be updated to exclude said provisions. Moreover, President Trump has begun issuing executive orders to align with FCA 2.0 objectives to reduce financial regulations. For example, on January 30, 2017, President Trump signed Executive Order 13771, which is designed to eliminate 75% of regulations, by requiring federal agencies to eliminate two regulations for every new one created. The executive order gives new regulations a zero dollar budget for the cost amount they can impose on the economy, financial institutions, companies, and or employers for Fiscal 2017.
In addition, the executive order creates a budget process for new regulations in Fiscal 2018; beginning in October 2017. Moreover, Executive Order 13771 does not apply to independent agencies, e.g., the SEC; however, the White House encouraged them to comply by stating in its memorandum: Guidance Implementing Executive Order 13771, Titled “Reducing Regulation and Controlling Regulatory Costs,” that “independent regulatory agencies are encouraged to identify existing regulations that, if repealed or revised, would achieve cost savings that would fully offset the costs of significant regulatory actions while continuing to meet the agency's statutory obligations” (Q20). Regulatory policy officers and managing and executive directors at independent agencies could turn Executive Order 13771, and or others, into statutory changes.
The Way Forward
On April 26, 2017, the FSC held a hearing on FCA 2.0, so Members of the Committee could hear what witnesses (e.g., executive branch agencies, relevant industries, and groups representing interested citizens) think the bill’s strengths and weaknesses are. This was the only majority hearing for bill, however, Democrats held a separate “Minority Day Hearing” on April 28, 2017, to hear testimony from likeminded witnesses. A full committee markup (a meeting for members to offer, debate, and vote on amendments to a measure, and the next step after a hearing) of FCA 2.0 began on May 2, 2017. The FSC rejected all 19 amendments offered by Democrats, on bill provisions ranging from: the Labor Department’s fiduciary rule; to monetary policy reforms; to loosening restrictions on the CFPB. The markup concluded on May 4, 2017, when the FSC voted 34-26, along party lines, to send FCA 2.0 to the House Floor for consideration.
Though Congress has not announced tentative dates for voting on FCA 2.0, on March 30, 2017, the Chairman of the U.S. Senate Banking Committee, Sen. Mike Crapo (R., ID), stated that he hopes to pass a major piece of financial reform either in late 2017 or in early 2018. Due to the current political climate likely preventing FCA 2.0 (or another version) from passing in the Senate, Sen. Crapo said that he intends to kick-off financial reform by addressing bills that are more bipartisan, such as community bank relief and housing-finance reform. Moreover, Sen. Crapo said that he will encourage bipartisan support for the FCA, but noted that if it faces congressional challenges, Republicans are prepared to advance some of FCA’s more “favorable” provisions through a budget process that would not require much Democratic support.
FCA 2.0 is likely to pass in the House, but if it does not pass in the Senate, the FSC may revise the bill and present a more bipartisan version to Congress at a later date. The coming months or year(s) will tell how many versions of the FCA will be presented to Congress, what version (if any) will pass into law, and what other avenues Republicans may take to enact financial regulatory reform.
- Hensarling, Jeb. "Committee Hearing Scheduled for the Financial CHOICE Act." Financial Services Committee. U.S. House of Representatives, 19 Apr. 2017. Web. 25 Apr. 2017. http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401781
- Lane, Sylvan. “GOP's DFA Rewrite Would Strip Consumer Bureau of Power.” The Hill, Capitol Hill Publishing Corp., A Subsidiary of News Communications, Inc., 11 Apr. 2017, http://thehill.com/policy/finance/328387-gop-DFA-rewrite-would-strip-consumer-bureau-power-give-trump-control-of. Accessed 21 Apr. 2017.
- For more information on Chairman Jeb Hensarling’s remarks, please visit: http://financialservices.house.gov/news/documentsingle.aspx?DocumentID=401781
- United States. U.S. House of Representatives. Financial Services Committee. The Financial CHOICE Act Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs: Summary of Bill Changes. By Jeb Hensarling. N.P., 12 Apr. 2017. Web. 12 Apr. 2017. http://consumerbankers.com/sites/default/files/CHOICE_Act_04122017.pdf.
- United States. The White House. Office of Information and Regulatory Affairs. Memorandum: Implementing Executive Order 13771, Titled "Reducing Regulation and Controlling Regulatory Costs." By Dominic J. Mancini. N.P., 5 Apr. 2017. Web. 21 Apr. 2017. https://whitehouse.gov/the-press-office/2017/04/05/memorandum-implementing-executive-order-13771-titled-reducing-regulation.
- Schroeder, Pete. “Senate Banking Chair Wants Financial Rules Reform by Early 2018.” One America News Network, 30 Mar. 2017, http://oann.com/u-s-senate-banking-chair-wants-financial-rules-reform-by-early-2018/. Accessed 15 Apr. 2017.
- With the 2016 election increasing the odds of passing financial regulatory reform (due to Republicans retaining control of Congress and acquiring the White House), FCA 2.0 was created in 2017, to codify and enhance the provisions the FSC wants to use as the primary impetus for passing financial regulatory reform.
- FCA 2.0’s status is currently pending a House vote. The bill will likely pass in the House, but the probability of it passing in the Senate, is low. If FCA 2.0 does not pass in the Senate, the bill will not becoming law.
- If the Senate does not pass FCA 2.0, the FSC will likely have to create a revised version(s) of the bill (that offers more bipartisan support) in order for its passage to be viable.
- Republicans may use other avenues (e.g., passing portions of FCA 2.0 that does not require much bipartisan support; executive orders; other financial regulatory bills) to pass some provisions addressing financial regulatory reform.