The House Passes the Financial CHOICE Act

On June 8, 2017, the House of Representatives passed the Financial CHOICE Act  (“Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs”). The act regulates banking institutions’ qualifying capital through numerous exemptions and policies. Further, the act repeals the Financial Stability Oversight Council’s authority while overhauling multiple parts of the Dodd-Frank Act. The act proposes to make achieving financial independence more feasible for Americans as well as increase financial opportunities for small businesses. It regulates the power of Wall Street and Washington, striving to hold both more accountable for their actions. At the same time, the act gives more power to smaller, community-based financial institutions.

Executive Summary

The act’s executive summary, comprised of seven characteristics, is below.

  1. Economic growth must be revitalized through competitive, transparent, and innovative capital market
  2. Every American, regardless of their circumstances, must have the opportunity to achieve financial independence
  3. Consumers must be vigorously protected from fraud and deception as well as the loss of economic liberty
  4. Taxpayer bailouts of financial institutions must end and no company can remain too big to fail
  5. Systemic risk must be managed in a market with profit and loss
  6. Simplicity must replace complexity, because complexity can be gamed by the well-connected and abused by the Washington powerful
  7. Both Wall Street and Washington must be held accountable

This bill is not expected to pass in the Senate, who has the tools to implement their own financial reform; however, nothing has been passed yet.

Four Crucial Changes

This act involves four primary focuses: the Dodd-Frank Bill, reallocating the power of financial institutions, giving more to small business and less to large powerhouses, and granting Americans more financial independence.

The Dodd-Frank Bill

The Dodd-Frank Bill is officially titled The Dodd-Frank Wall Street Reform and Protection Act. It was passed by the Obama Administration in 2010 to address the 2008 financial crisis and was designed to transform the financial regulatory system at that time. Donald Trump wanted to repeal the Dodd-Frank because he did not like the regulations that it imposed on business growth. It has been amended throughout the years and was most recently affected by the Financial Choice Act. The act proposes three major reforms to the current Dodd-Frank Bill.

  1. Repeal Title II of Dodd-Frank and replace it with a new chapter of the Bankruptcy code designed to accommodate the failure of a large, complex financial institution.
  2. Repeal Title VIII of the Dodd-Frank Act, which gives the FSOC authority to designate certain payments and clearing organizations as systemically important “financial market utilities” (FMUs) with access to the Federal Reserve discount window, and retroactively repeal all previous FMU designations.
  3. Repeal Dodd-Frank’s so-called “Hotel California” provision.

Title II aimed to make changes to the bankruptcy process that large companies underwent upon failure. During the financial crisis of 2008, this process did not adequately support large companies. Title VIII was passed to address high financial risk and give companies more financial security and stability through the use of financial market utilities, which, according to the Federal Reserve, are “ multilateral systems that provide the infrastructure for transferring, clearing, and settling payments, securities, and other financial transactions among financial institutions or between financial institutions and the system.”The basic meaning behind Hotel California is a place where you check in but don’t check out. In the context of the Dodd-Frank bill, this meant that companies regarded as “systematically important financial institutions” could not back out of that designation. This is where the “too big to fail” label comes about; these types of companies are much more closely scrutinized than their counterparts. Take a look at a specific instance involving General Electric in this New York Times article. Today, the financial industry is still trying to find a balance between imposing adequate regulations while keeping companies satisfied.

Reallocating the Power of Financial Institutions

Four sections of the act aim to monitor and regulate the power of financial institutions. The provisions of the first, “SECTION ONE: Provide for election to be a strongly capitalized, well managed financial institution,” are below:

  1. Provide an “off-ramp” from the post-Dodd-Frank supervisory regime and Basel III capital and liquidity standards for banking organizations that choose to maintain high levels of capital. Any banking organization that makes a qualifying capital election but fails to maintain the specified non-risk weighted leverage ratio will lose its regulatory relief.
  2. Permit banking agencies to conduct stress tests (but not limit capital distributions) of a banking organization that has made a qualifying capital election. Require that the different sets of conditions under which stress tests are evaluated be made public and subject to notice and comment period.
  3. Exempt banking organizations that have made a qualifying capital election from any federal law, rule, or regulation that provide limitations on mergers, consolidations, or acquisitions of assets or control, to the extent the limitations relate to capital or liquidity standards or concentrations of deposits or assets.
  4. Exempt banking organizations that have made a qualifying capital election from any federal law, rule, or regulation that permits a banking agency to consider risk “to the stability of the United States banking or financial system,” added to various federal banking laws by Section 604 of the Dodd-Frank Act, when reviewing an application to consummate a transaction or commence an activity.

This act primarily addresses banking institutions’ qualifying capital through exemptions and policies. The first proposed change also involves leverage ratio. In short, this aims to ensure the financial stability and perseverance (the ability of a company to withstand economic shocks and/or other financial adversity) of wealthy organizations. Similarly, the second proposed change allows banks to conduct stress tests, which gauge a company’s ability to respond to financial stress. With the new regulations to ensure more company wide stability, the last two changes give these larger companies more freedom when conducting financial operations.

The second section is titled: “End “Too Big to Fail” and Bank Bailouts.” Its contents are below.

  1. Retroactively repeal the authority of the Financial Stability Oversight Council (FSOC) to designate firms as systematically important financial institutions (SIFIs).
  2. Repeal Title II of Dodd-Frank and replace it with a new chapter of the Bankruptcy code designed to accommodate the failure of a large, complex financial institution.
  3. Repeal Title VIII of the Dodd-Frank Act, which gives the FSOC authority to designate certain payments and clearing organizations as systemically important “financial market utilities” (FMUs) with access to the Federal Reserve discount window, and retroactively repeal all previous FMU designations.
  4. Restrict the Fed’s discount window lending to Bagehot’s dictum.
  5. Prohibit use of the Exchange Stabilization Fund to bailout financial firms or creditors.
  6. Repeal Dodd-Frank’s so-called “Hotel California” provision.

The bulk of these provisions involve changes to the Dodd-Frank Bill, discussed in detail above. Parts four and five restrict banks in two ways. The first involves restricting a bank’s discount window, “the facilities that central banks, acting as lender of last resort, use to provide liquidity to commercial banks.” The second involves the exchange stabilization fund (ESF), which, according to Investopedia, is “money available to the U.S. Treasury Department primarily used for participating in the foreign-exchange market in an attempt to maintain currency stability.” The provision no longer allows firms to use the ESF as bailout.

Sections four and five center on holding Wall Street and Washington accountable, and involve several policy changes. Section four involves The Regulations From the Executive in Need of Scrutiny (REINS) act, which aims to “increase accountability for and transparency in the federal regulatory process by requiring Congress to approve all new major regulations.” To further increase accountability, the Choice Act proposes to reauthorize the SEC for five years as well as provide Americans with adequate due process in the event of “government shakedown.”

  1. Make all financial regulatory agencies subject to the REINS Act, bi-partisan commissions, and place them on the appropriations process so that Congress can exercise proper oversight. (Exception: Fed monetary policy.)
  2. Impose an across-the-board requirement that all financial regulators conduct a detailed cost-benefit analysis of all proposed regulations.
  3. Reauthorize the Securities and Exchange Commission (SEC) for a period of five years with funding, structural, and enforcement reforms.
  4. Institute significant due-process reforms for every American who feels that they have been the victim of a government shakedown.

Section five centers on holding Wall Street more accountable for fraud and deception. These suggest improvements to the process of penalizing individuals for acts of fraud and deception as well as tightening the SEC’s authority on these matters, to mitigate future offences. Some of the provisions are below.

  1. Impose enhanced penalties for financial fraud and self-dealing and promote greater transparency and accountability in the civil enforcement process.
  2. Allow the SEC to triple the monetary fines sought in both administrative and civil actions in certain cases where the penalties are tied to the defendant’s illegal profits. Give the SEC new authority to impose sanctions equal to investor losses in cases involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement” where the loss or risk of loss is significant, and increase the stakes for repeat offenders.

Granting Americans More Financial Independence and Small Companies a Chance to Thrive

Section three, “Empower Americans to achieve financial independence by fundamentally reforming the CFPB and protecting investors,” details how the Choice Act seeks to grant Americans financial independence. These policies are built to rebrand certain aspects of the financial industry. The act suggests changes in the processes of electing personnel, name changes, and in the Commission’s authority. These changes present large companies in a more optimistic and fair light by creating a balance between themselves and consumers. Some of the proposals are below.

  1. Change the name of the CFPB to the “Consumer Financial Opportunity Commission (CFOC),” and task it with the dual mission of consumer protection and competitive markets, with a cost-benefit analysis of rules performed by an Office of Economic Analysis.
  2. Replace the current single director with a bipartisan, five-member commission which is subject to congressional oversight and appropriations.
  3. Establish an independent, Senate-confirmed Inspector General.
  4. Require the Commission obtain permission before collecting personally identifiable information on consumers.
  5. Repeal authority to ban bank products or services it deems “abusive” and its authority to prohibit arbitration.

Sections six (“Unleash opportunities for small businesses, innovators, and job creators by facilitating capital formation”) and seven (“Provide regulatory relief for Main Street and community financial institutions”) strive to grant small businesses and community institutions with more freedom by increasing their ability to raise capital and dampening financial regulations, respectively. Section six repeals several parts of the Dodd-Frank bill, including the Volcker rule. This section also suggests that Congress pass numerous H.R. bills, including but not limited to:

  • R. 1090 – “Retail Investor Protection Act”
  • R. 4168 – “Small Business Capital Formation Enhancement Act”
  • R. 4498 – “Helping Angels Lead Our Startups Act”
  • R. 5019 – “Fair Access to Investment Research Act”

These bills would facilitate small businesses’ ability to raise capital, creating a better balance between small businesses and large corporations, allowing both not necessarily equal success, but equal opportunity for success.

Section seven exclusively involves regulatory relief bills, some of which are below.

  • R. 1941 – “Financial Institutions Examination Fairness and Reform Act”
  • R. 2896 – “Taking Account of Institutions with Low Operational Risk Act”
  • R. 1210 – “Portfolio Lending and Mortgage Access Act”
  • R. 766 – “Financial Institution Customer Protection Act”

These bills similarly emphasize community financial institutions rather than global institutions, and also serve to mitigate the effects of tightened regulations after the 2008 financial crisis.

To view the executive summary of the act which includes the sections discussed in this article in full, click here.


Eric Mellmer
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