House Financial Services Committee Approves Revised 'Financial CHOICE Act'

Republicans on the House Financial Services Committee, led by Chairman Jeb Hensarling (R-TX), approved their "Financial CHOICE Act" (FCA)¹ legislation on a party-line 34-26 vote on May 4, clearing the way for consideration on the House floor in the coming weeks. The Committee held this vote following a marathon three-day markup session that saw Committee Republicans defeat numerous Democratic amendments and other delaying tactics. The markup session was a clearly partisan affair that is indicative of the bill's uncertain future in the closely divided Senate.

The bill, numbered H.R. 10, would make major, comprehensive changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA),² as well as other financial regulatory laws. The bill has been praised in general terms by the Trump Administration, but it remains to be seen how similar the bill will be to the Treasury Department's recommendations on financial regulatory reform, expected to be issued in early June, pursuant to an executive order signed by President Trump in February.

The FCA is likely to see action in the coming weeks on the House floor, where procedural rules make it likely that Republicans will be able to pass the bill notwithstanding Democratic objections. The Senate, however, is another story, with even Chairman Hensarling noting that there is a "different dynamic" in the Senate that complicates the FCA's chances.

In general, while the FCA is not a wholesale repeal of the DFA, it repeals several of its major provisions and dramatically revises or restructures many others. The bill also includes a number of GOP priorities that are separate from the DFA, such as repeal of the Obama Labor Department's fiduciary rule. Some of the main provisions of the 591-page bill are discussed below.

Changes to SIFI Program (Titles I, II, and VIII of DFA)

The FCA would dramatically curtail the processes established under the DFA for the designation, regulation, and, when necessary, receivership of systemically important financial institutions (SIFIs) and systemically important financial market utilities (SIFMUs). Since the passage of the DFA, House Republicans have taken the position that the DFA failed to end implicit and explicit federal guarantees, and thus taxpayer funding, for financial institutions experiencing financial distress or failure. House Republicans have argued that Titles I, II, and VIII of the DFA institutionalize taxpayer-funded bailouts, thus encouraging financial institutions to engage in risky behaviors that create moral hazard and unnecessarily put taxpayers at a risk of loss. The FCA alters the existing regulatory regime in several important ways, as summarized below.

Repeal of Orderly Liquidation Authority. Sections 111 through 123 of the FCA would repeal Title II of the DFA, "Orderly Liquidation Authority" (12 U.S.C. §§ 5381 et seq.), in its entirety and replace those resolution processes (generally managed by the Federal Deposit Insurance Corporation (FDIC)) with a new subchapter of the Bankruptcy Code specifically designed for the failure of large, complex financial institutions. In the new process, regulators could appear and be heard at proceedings, but the process would be administered by a bankruptcy court.

Limits on Emergency Lending Authority. Section 1008 of the FCA would add new limits on the Federal Reserve's authority to lend on an emergency basis through programs of broad-based eligibility under Section 13(3) of the Federal Reserve Act beyond those imposed by Section 1101 of the DFA (12 U.S.C. § 343). Under the FCA, among other process-related changes, such programs would require a determination that the circumstances, in addition to being unusual and exigent, pose a threat to the financial stability of the United States. The Federal Reserve also would be required to adopt rules tightening collateral standards and penalty rates. These changes are discussed in additional detail in the section below on "Agency Structural Changes."

Limits on Use of Emergency Stabilization Fund. Section 133 of the FCA would prohibit use of Treasury's Emergency Stabilization Fund to aid financial institutions or their creditors, thus building upon the prohibition currently in place for money market funds (31 U.S.C. § 5302). Sections 131 and 132 of the FCA also would repeal entirely the FDIC's current authority under Sections 1104 through 1106 of the DFA to create widely available programs to guarantee obligations of financial institutions during periods of severe economic distress (12 U.S.C. § 5611–5613).

Repeal of FSOC SIFI and SIFMU Designation Authority. Sections 141 and 151 of the FCA would repeal FSOC's authority to designate non-bank financial institutions or financial market utilities as SIFIs or SIFMUs and would rescind previous designations of such entities, thereby substantially restricting the Federal Reserve's authority over these entities (DFA §§ 161, 162, 164, 166–168, 170, 172, Title VIII (12 U.S.C. §§ 5361, 5362, 5364, 5366–5368, 5370, 5372, 5461 et seq.)).

Repeal of FSOC "Mitigatory" Action and Other Authorities. Section 151 of the FCA also would repeal FSOC's authority under Section 121 of the DFA to direct the Federal Reserve to require large bank holding companies and designated nonbanks to take certain "mitigatory" actions, such as acquiring or divesting of specific entities or to cease offering a specific product or service (12 U.S.C. § 5331). Section 151 also would repeal FSOC's authority under Section 115 of the DFA to issue recommendations to the primary federal financial regulators regarding heightened standards and safeguards for bank holding companies (12 U.S.C. § 5325).

Additional Limits on Federal Reserve Authority. Section 151 of the FCA also would limit Federal Reserve remediation, examination, and enforcement authority over designated nonbank and bank holding companies with greater than $50 billion in assets and would simplify stress-testing and resolution-planning processes (DFA §§ 165(d) & (i), 166, 168 & 172 (12 U.S.C. §§ 1818(t), 1820(b)(3), 5365(d) & (i), 5366, 5368)).

Limits on Operational Risk Capital. Although the current draft of the FCA would not repeal the DFA's risk-based capital requirements, it would limit the authority of the federal financial regulators to establish additional operational risk capital requirements.

Title I of the FCA is an effort to further commit the federal government to a "no more bailouts" policy. According to the drafters, the FCA will allow financial institutions to fail safely without taxpayer involvement.

Targeted Regulatory Relief for Specific Classes of Financial Institutions

The FCA would provide regulatory relief to several classes of financial institutions based on their capitalization, size, risk level, or charter type.

Strongly Capitalized Institutions and Well-Capitalized Banks. Title VI of the FCA would implement Representative Hensarling's proposed "regulatory off-ramp" for strongly capitalized institutions by permitting banks and depository institution holding companies, as well as foreign banking organizations treated as bank holding companies under the International Banking Act and the intermediate holding companies of such organizations, with an average "quarterly leverage ratio" of at least 10 percent³ to elect "qualifying banking organization" status. This status would entitle them to exemption from the following requirements and restrictions under Section 602 of the FCA:

• Capital or liquidity requirements or standards, including those embedded in limitations on acquisitions.⁴
• Federal banking agency objections to capital distributions.
• Consideration by federal banking agencies of financial stability-related factors under various statutory approval provisions.
• Approval requirements for interstate acquisitions and certain financial activities.
• Section 163 of the DFA (12 U.S.C. § 5363) restrictions on certain bank acquisitions.
• Section 165 of the DFA (12 U.S.C. § 5365) enhanced supervision and prudential rules.⁵

Section 566 of the FCA would provide regulatory-reporting relief for well-capitalized banks by requiring the federal banking agencies to permit these banks to provide abbreviated call report disclosures for two quarters of each year.

Community Financial Institutions and Their Business Customers. Title V of the FCA would provide regulatory relief to community financial institutions and their business customers. Benefitting financial institutions, Section 526 of the FCA would direct the Federal Reserve to raise the consolidated asset threshold under its Small Bank Holding Company Policy Statement from $1 billion to $5 billion, and Section 536 of the FCA would require federal financial regulatory agencies to provide examined institutions with a final examination report within 60 days of an examination's exit interview or provision of additional examination-related information by the institution. Bank holding companies with $50 billion or more in total consolidated assets would be required to conduct a company-run stress test under Section 165 of the DFA only once a year under Section 151 of the FCA, rather than twice a year (as currently required). In addition, indirectly relieving regulatory burdens on business customers, Section 511 of the FCA would require federal banking agencies to have a material reason not based solely on reputation risk for requesting or ordering a bank to terminate a customer's account, and Section 561 of the FCA would relieve banks of the requirement to collect fair lending-related information from businesses regarding their ownership.

Low-Risk Institutions. Low-risk institutions could benefit from Section 546 of the FCA's requirement that the federal banking agencies consider several new factors, primarily focused on variations in institutions' risk profile and business models, when taking regulatory actions after the FCA's enactment. The agencies also would be required to review regulations adopted since mid-2010 under these factors and report their findings to the House Financial Services Committee and Senate Banking Committee.

Federal Savings Associations. Section 551 of the FCA would create optional charter authority for federal savings associations that would permit them to elect to have the rights and duties of national banks. Key details regarding eligibility and treatment of federal savings associations that elect this treatment, including the applicability of the qualified thrift lender test, would be left to the Comptroller of the Currency. This provision tracks H.R. 1660, the Federal Savings Association Charter Flexibility Act of 2015, which was introduced by Representatives Keith Rothfus (R-PA) and Jim Himes (D-CT) in March 2015 and was supported by the Office of the Comptroller of the Currency (OCC) at the time.

Repeal of Certain DFA Provisions

The FCA repeals several other highly controversial provisions of the DFA, including the Volcker Rule, the Durbin Amendment, the authority of the Consumer Financial Protection Bureau (CFPB) and the Securities and Exchange Commission (SEC) to prohibit mandatory pre-dispute arbitration clauses in customer contracts, and the already-sunset moratorium on the provision of deposit insurance by the FDIC to industrial loan companies and other Bank Holding Company Act-exempt institutions owned or controlled by a commercial firm.

Repeal of the Volcker Rule. Section 901 of the FCA would repeal the "Volcker Rule" that was enacted as Section 619 of the DFA (12 U.S.C. § 1851), as well as related provisions in Section 620 of the DFA that required a banking agency study of banking entities' investment activities. Section 901 thus would remove the statutory authority for the interagency rules that implement the Volcker Rule.⁶ The Volcker Rule, subject to certain exceptions, currently prohibits proprietary short-term trading by banks and their affiliates in most types of securities, as well as "sponsorship" by banks and their affiliates of or investment as principal in, "covered funds." Covered funds subject to the Rule's prohibition are private investment funds that rely on either Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (the 1940 Act) for exemption⁷ from registration as "investment companies" (15 U.S.C. § 80a-3(c)(1), (c)(7)), certain private commodities pools that rely on Commodities Futures Trading Commission (CFTC) Rule 4.7 exemptions from commodity pool operator requirements, as well as some private offshore funds. The interagency rules that implement the Volcker Rule also impose extensive compliance, recordkeeping, and reporting program requirements for documentation of compliance with the Volcker Rule. These Volcker Rule and related compliance program provisions are extremely complex in practice and pose an expensive burden not only on large trading banks, but also on mid-sized and smaller banks and banks that manage client investment portfolios or that securitize assets or invest in loan securitizations.

Repeal of Moratorium on ILC Charters. Section 901 of the FCA would also repeal Section 603 of the DFA (12 U.S.C. § 1815 note), which imposed a moratorium on the approval by the FDIC of any application for deposit insurance or change-in-control notice submitted after November 23, 2009 for any industrial bank, credit card bank, or trust bank that was directly or indirectly controlled by a commercial firm (collectively, ILCs).⁸ Although this moratorium expired in 2013, the repeal of Section 603 of the DFA would evidence congressional support for the chartering of commercially owned banking entities. Prior to the enactment of the DFA, the FDIC twice imposed short-term moratoria on deposit insurance applications and change-in-control notices submitted regarding proposed or existing ILCs, and the federal banking agencies have been challenged for several years by the supervisory and policy questions posed by the entry of commercial firms into the business of banking through an ILC charter. The FDIC has recently expressed tacit support for the de novo formation of ILCs, but the FDIC's approach to ILC charters remains somewhat uncertain. It is unclear if the FDIC will issue guidance or take a more definitive stance on ILC charters when the term of outgoing FDIC Chairman Martin Gruenberg expires in November 2017.

Repeal of the Durbin Amendment. Section 735 of the FCA would repeal the "Durbin Amendment" (DFA § 1075 (12 U.S.C. § 1693o-2)), which restricts the permitted charges to merchants for debit card transactions, with an exception for small issuers, and prohibits exclusive network processing requirements for debit cards (the so-called duality requirement). The Durbin Amendment amended the Electronic Fund Transfer Act and was implemented by Federal Reserve Regulation II.⁹ Regulation II caps debit card interchange fees at 21 cents per transaction plus 0.05 percent of the value of the transaction, plus a 1-cent fraud-prevention adjustment per transaction. The theory behind the Durbin Amendment was that fee reductions would be passed on by merchants to consumers through lower prices. Economic studies have indicated, however, that merchants are retaining the fee savings for themselves and that banks are charging debit card holders more for basic services to make up for the lost revenues. Repeal of the Durbin Amendment reportedly has been controversial within the Republican caucus because it pits the interests of two Republican support bases—retailers and banks—against one another.

Repeal of Prohibition on Mandatory Pre-Dispute Arbitration Clauses. Pursuant to the Federal Arbitration Act (9 U.S.C. §§ 1 et seq.), securities firms and banks have long included mandatory arbitration clauses in standard forms of customer agreements. The Federal Arbitration Act was drafted at the request of the federal judicial branch to reduce the case load burden on the court system. The inclusion of these mandatory pre-dispute arbitration clauses in customer securities brokerage contracts has been upheld repeatedly by the US Supreme Court. Sections 921 (15 U.S.C. §§ 78o(o), 80b-5(f)) and 1028 (12 U.S.C. § 5518) of the DFA provided authority to the SEC and the CFPB to adopt rules restricting the use of these arbitration clauses, but Sections 738 and 857 would repeal this authority for the CFPB and the SEC, respectively. The CFPB conducted a study in 2015 and issued a proposed rule in 2016¹⁰ to require a carve-out from arbitration clauses to allow customers to participate in class action lawsuits and require reporting to the CFPB on arbitration, but due to delays and the recent change in administrations, the proposed rule is on hold. The SEC has not used its DFA authority to propose limits on customer arbitration clauses, although FINRA has long imposed disclosure provisions and restrictions on the use of the clauses in certain contexts.

Changes to the CFPB

In addition to the structural changes discussed elsewhere in this Advisory, the CFPB—which would be renamed the "Consumer Law Enforcement Agency" (CLEA)—would see its powers significantly scaled back or eliminated in key areas. These proposed changes respond to a number of criticisms that have been leveled at the CFPB by the financial services industry and the business community more generally. Although certain important core powers, such as rulemaking authority for various federal consumer protection statutes, would remain with the CFPB, the FCA, if enacted in its current form, would likely render the bureau a much smaller, and potentially less influential, body.

Loss of Supervision Authority. Perhaps the most significant restriction on the CFPB sought by the FCA is the proposed elimination of its supervision authority over financial institutions. With this change, not only would the CFPB lose its ability to supervise and examine bank and nonbank companies, including the segments of the mortgage, student loan, and payday loan industries over which it currently has examination and supervision authority, but Section 727 of the FCA would also appear to strip the CFPB of its enforcement authority over all insured depository institutions, regardless of size. While this outcome is not mentioned in the Committee Staff's summary of the FCA, the revised Sections 1026 (12 U.S.C. § 5516) and 1061 (12 U.S.C. § 5581) of the DFA would give exclusive enforcement authority for federal consumer financial protection laws to the appropriate prudential federal bank regulator for such institutions. Thus, except for its rulemaking and data-collection powers, the CFPB would become a much less significant presence for large banks, savings associations, and credit unions.

Loss of UDAAP Authority. Another significant proposed loss of authority for the CFPB is of its power to take action against unfair, deceptive, and abusive acts and practices (UDAAPs), a broad enforcement weapon that has been one of the CFPB's primary—and often criticized—tools. Section 736 of the FCA would repeal the DFA's prohibition on UDAAPs and the CFPB's accompanying UDAAP enforcement powers (12 U.S.C. §§ 5531, 5536). Simultaneously, Section 737 would direct the prudential bank regulators to promulgate regulations under Section 5 of the Federal Trade Commission Act (15 U.S.C. § 45), which similarly prohibits unfair and deceptive acts and practices (UDAPs). While the Federal Reserve, FDIC, and OCC have for many years applied Section 5's UDAP prohibition to banks using the agencies' general enforcement authority under Section 8 of the Federal Deposit Insurance Act (12 U.S.C. § 1818), Section 5 had not been the subject of a formal rulemaking setting forth comprehensive compliance expectations for depository institutions.¹¹

Controversial Actions Restrained. The FCA also takes aim at a number of CFPB initiatives that have prompted particularly vocal criticism by revoking the CFPB authority underlying them. Two affected areas are the CFPB's authority to regulate small-dollar credit, such as payday lending, which would be revoked by Section 733 of the FCA, and its authority to limit mandatory pre-dispute arbitration agreements in connection with financial products and services, as discussed above. Each of these areas is the subject of controversial CFPB rulemakings that have not yet been finalized. The FCA also would void the CFPB's guidance on fair lending compliance in connection with indirect auto lending, which had been both controversial and costly for the industry, and creates a process that the CFPB must follow for the issuance of any future guidance on the topic.

Reduced Access to Information. Other areas of the CFPB's activities would similarly be subject to new restrictions. The CFPB's consumer complaint database, which is publicly searchable and has been the subject of considerable industry criticism, would no longer be available to the public (FCA § 725). The CFPB also would be required to obtain consent from consumers before collecting their non-public personal information (FCA § 731). Furthermore, the FCA expands the DFA's existing limitations on the CFPB's authority to take actions related to employee benefit plans, employee compensation plans, and persons already regulated by the SEC or the CFTC (FCA § 731).

Certain Remaining Powers Restrained. Even the powers that the CFPB would retain would be circumscribed in many instances. Private-party respondents in CFPB-initiated administrative proceedings would effectively be able to move such proceedings into district court, as Section 715 of the FCA would allow private parties to compel termination of a CFPB administrative proceeding, which the CFPB could then re-commence as a civil action. Section 716, responding to frequent complaints that CFPB civil investigative demands (CIDs) were unreasonable in both scope and timing and were subject to an arbitrary appeals process, would introduce a CID meet-and-confer requirement and would allow for judicial appeal of CIDs, replacing the current process in which appeals are heard and decided by the CFPB itself in the first instance. Finally, while the FCA would introduce a formal advisory opinion process for requesting agency guidance on specific fact patterns, the FCA would also eliminate any judicial deference for the CFPB's interpretation that is currently required under Section 1022 of the DFA (12 U.S.C. § 5512(b)(4)(B)).

Mortgages

A number of changes are made to reduce regulation of mortgage-origination and related activities, with several sections of the Act providing targeted relief to specific market segments.

Manufactured Housing. Sections 501 and 502 of the FCA would exclude most retailers of manufactured housing (and their employees) from the definition of "mortgage originator" in the Truth in Lending Act (TILA) and would increase the thresholds for determining whether loans for manufactured housing are "high-cost mortgages" for purposes of TILA (15 U.S.C. §§ 1601 et seq.). This latter change would likely increase the number of manufactured housing loans that could be sold into the secondary market, as many would-be purchasers of such loans avoid purchasing "high-cost mortgages" because of the heightened compliance and liability risks that they carry.

Treatment of Certain Origination-Related Services Provided by Affiliates. Section 506 of the FCA would modify Section 103 of TILA (15 U.S.C. § 1602) to exclude from the definition of "points and fees" (when determining whether a loan is a "high-cost mortgage") amounts paid to an affiliate of the creditor for title examination, title insurance, or a similar service. Currently, such fees are excluded only if paid to an unaffiliated third party.

Safe Harbor from Ability-to-Repay Litigation for Portfolio Loans. Section 516 of the FCA protects depository institutions from lawsuits alleging violation of the ability-to-repay provisions of TILA to the extent the institution has kept the loan in question on its books since the loan's origination and any prepayment penalties otherwise comply with TILA. Mortgage originators involved with such loans are given similar protection.

Escrow Relief. Section 531 exempts "smaller" creditors (those with $10 billion or fewer in assets) from TILA's escrow requirement for a particular loan to the extent the creditor holds the loan on its books for at least three years following origination. The same section also amends the Real Estate Settlement Procedures Act (RESPA) to require the CFPB to promulgate rules to reduce the escrow burden imposed by RESPA on servicers of fewer than 20,000 mortgage loans.

HMDA. Section 571 of the FCA orders the GAO to study and report on the extent to which the information collected pursuant to the Home Mortgage Disclosure Act (HMDA) puts consumers at risk of identity theft or other similar inappropriate disclosure of sensitive information. Further, Section 576 of the FCA, would exempt lower-volume mortgage originators (fewer than 100 closed-end and fewer than 200 open-end mortgage loans over a two-year period) that are depository institutions from the reporting and recordkeeping requirements imposed under HMDA.

Changes Relevant to Securitizations, Marketplace Lending, and Commercial Lending

The provisions the current version of the FCA with the most direct potential effects on securitizations, marketplace lending, and commercial lending are summarized as follows.

Limiting Risk Retention to Asset-Backed Securities Collateralized by Residential Mortgages. Section 842(a) of the FCA would eliminate the risk-retention requirement under Section 941 of the DFA for all asset-backed securities (ABS) other than those "comprised wholly of residential mortgages."¹² This change would provide significant additional flexibility to market participants in structuring other types of ABS—including, in particular, collateralized loan obligation (CLO) transactions. As the FCA does not amend the original rulemaking directives with respect to risk retention in the DFA, the question remains open as to whether the FCA is intended to change the level of retention required for residential mortgage‑backed securities (RMBS) or the exclusion from risk retention, as previously adopted by the various regulatory agencies, pursuant to such directives, with respect to certain high-quality "qualified residential mortgages."

The use of the phrase "comprised wholly of residential mortgages" in Section 842(a), if adopted in its current form, would be expected to provide helpful clarity that entities holding multiple asset classes—including, in particular, asset-backed commercial paper conduits—would not be subject to the risk retention requirements. However, the specific extent to which the inclusion of non‑mortgage assets (or ancillary collateral, such as an interest-rate hedge or external credit support) would result in a transaction falling outside of the risk retention requirement is not yet clear.

Relief from the Single Counterparty Credit Limit. Section 165(e) of the DFA (12 U.S.C. § 5365(e)) requires the application of counterparty credit limits (equal to 25 percent of capital stock and surplus) to banking organizations with $50 billion or more in total consolidated assets and to non-bank financial companies supervised by the Federal Reserve.¹³ These limits were intended to address a concern that regulators and institutions needed to limit a broader range of exposures than those captured under traditional lending limits. In addition to extensions of credit, the counterparty limits would reflect repurchase and reverse repurchase agreements, guarantees, letters of credit, securities issued by the counterparty, and derivatives. Section 602 of the FCA would exempt qualifying strongly capitalized banks from this provision and thus would simplify tracking requirements at the affected institutions and reduce the chance that organizations routinely providing multiple services of this kind to repeat customers would find themselves precluded from providing these services to their regular clients.

Valid When Made. By codifying the "valid-when-made" principle for bank‑originated loans, Section 581 of the FCA would directly address some of the uncertainty in secondary loan markets that has arisen from the Second Circuit's controversial 2015 decision in Madden v. Midland Funding, LLC.¹⁴ Specifically, Section 581 would provide that a loan made by a national bank, an FDIC-insured state bank or savings association or a federal credit union that is "valid when made as to its maximum rate of interest" would "remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary."

Note that Section 581 only addresses the availability of state-law usury defenses against a secondary‑market non‑bank loan purchaser and would not invalidate rulings on other issues, such as challenges to the status of a banking institution as the "true lender" or claims under other federal or state consumer protection laws.

Conflicts of Interest. With some exceptions for hedging, market-making and the satisfaction of undertakings to provide liquidity, Section 27B of the Securities Act of 1933 (the 1933 Act), which was added by Section 621 of the DFA (15 U.S.C. § 77z-2a), prohibits "[a]n underwriter, placement agent, initial purchaser, or sponsor, or any affiliate or subsidiary of any such entity, of an asset-backed security" from engaging in transactions during the year after the sale of asset-backed securities that would result in a material conflict of interest with an investor in that transaction. The SEC's proposed Rule 127B would have implemented this requirement,¹⁵ The themes of which are also partially reflected in Section __.15 of the interagency rules implementing the Volcker Rule, which provides a definition of "material conflict of interest" and several ways of resolving potential conflicts. Section 901 of the FCA's elimination of Section 27B and of the Volcker Rule would allow the structuring and operation of securitizations without consideration of whether there might be a way in which the acts of an entity subject to the provision could potentially be viewed as materially adverse to the interests of an investor.

Repeal of the Volcker Rule. As discussed above, Section 901(a) of the FCA would repeal the Volcker Rule that was enacted as Section 619 of the DFA (12 U.S.C. § 1851), including the statutory authority for the interagency rules that implement the Volcker Rule. As a result, both the provisions of that section relating to proprietary trading and those relating to covered funds would be repealed.

The elimination of these provisions would reduce regulatory complexity for lending transactions in a number of ways. For example, determining available exemptions from registration under the 1940 Act would become simpler for fund sponsors; the strict affiliate transaction rules under so-called "Super 23A" (12 U.S.C. § 1851(f)(1), which applies 12 U.S.C. § 371c to transactions with Volcker Rule "covered funds") would no longer apply; there would be greater freedom to vary the types of assets held by issuers of ABS; and providing written legal advice about ABS transactions would become less complicated. Eliminating the special treatment of covered funds would also reduce the regulatory distance between the US and the EU in that regard.

Reducing the Regulation of Banks with Qualifying Banking Organizations. As discussed above, Section 602 of the FCA would reduce various regulatory burdens on institutions that elect "qualifying banking organization status." An indirect benefit of the provision relevant to lending would be the elimination of the requirement that an institution comply with risk-based capital and liquidity rules, among others, if it maintained a leverage ratio of 10 percent or more. Institutions eligible for this treatment would not have to engage in the process of evaluating the effect of the risk-based capital or liquidity rules on the securitizations they organize or in which they invest. Depending on the circumstances, the inapplicability of risk-based capital rules could, by virtue of their reliance on nominal values, increase the amount of capital required for an investment in ABS (e.g., in the most highly rated tranche, which is subject to a smaller capital requirement under the risk-based rules) or decrease it (e.g., in the most subordinate tranches). The effective elimination of the regulatory liquidity requirements would allow institutions to make their own economic determinations regarding the liquidity facilities that they provide for asset-based commercial paper (ABCP) conduits and the related notion of "structured transaction outflow amount," both of which concepts are used in computing outflow amounts under the liquidity coverage rule currently in effect. Because liquidity facilities provided to ABCP conduits are not unconditionally cancellable, they may also impose burdens under the potential future requirements of the net stable funding ratio. Institutions that benefit from qualifying banking organization status would be able to ignore those potential burdens.

Institutions that sponsor or invest in ABS and engage in other complicated transactions may nevertheless feel compelled, at least under the current version of Title VI of the FCA, to maintain in the background the organizational structure and computational capability necessary to comply with risk-based capital and liquidity requirements. Otherwise, it may be quite difficult to comply with the general background regulatory requirements if they become ineligible for qualifying banking organization status or if they engage in transactions in jurisdictions outside the US that may apply such regulatory standards.

The potential availability of qualifying banking organization status to some institutions and not others may also change the overall structure of the ABS markets in two ways. First, in addition to there being institutions that operate using the standardized approach and others using advanced approaches, there may in the future be a group of institutions relying on qualifying banking organization status. Second, given qualifying banking organizations' distinctive regulatory characteristics under the FCA, sponsors and structurers of ABS may conceivably develop specialized products for different types of buyers.

Imposition of New Requirements on the Basel Process. Section 371 of the FCA would subject the participation of the Federal Reserve Board, FDIC, Department of the Treasury, OCC, SEC, and CFTC in international processes of regulatory standard-setting to uniform requirements regarding notice of and requests for comment on topics to be covered during any intended participation, reports on the discussions held at meetings attended, and notice to Congress and subsequent consultation before participating in standard-setting. Because these rules have had a significant effect on US financial regulation even before the recent financial crisis, modifying the manner in which the rules are discussed and agreed upon could substantially affect capital and liquidity requirements and rules governing securitizations and derivatives, among other things.

Nevertheless, the express involvement of Congress in the process would perhaps have a larger effect than the other portions of the proposal, since the decision-making processes of the international bodies affected already move slowly and often make use of a public consultation procedure in which numerous groups participate. It is not infrequently the case, as well, that the US agencies adopt special US versions of the internationally agreed rules, and the adoption of these rules in the US is already subject to the usual administrative procedural requirements, some of which are the subject of proposals contained elsewhere in the FCA and discussed below.

Changes of Interest to Private Fund Managers

The FCA contains several provisions of particular interest to managers of private investment funds. Some of these provisions would roll back changes put in place by the DFA; others would create useful new amendments to the 1933 Act and 1940 Act for private funds.

Section 466 of the FCA would simplify and streamline certain provisions of the SEC's Regulation D private placement exemption for private investment funds. Section 860 of the FCA would broaden out the permitted categories of "accredited investor" to include licensed securities professionals and persons qualified under FINRA rules.

Section 471 of the FCA would amend Section 3(c)(1) of the 1940 Act to create a new exemption from registration under that Act for privately offered qualifying venture capital funds with up to 500 beneficial owners and no more than $50 million in capital commitments. This would allow these venture funds to have more than 100 beneficial owners and accept investors who are not "qualified purchasers" and yet avoid registration under the 1940 Act.

Section 858 of the FCA would curtail Investment Advisers Act registration and reporting requirements for private equity fund managers that were enacted as part of Title IV of the DFA (15 U.S.C. § 80b-3). The SEC would have rulemaking authority to define the private equity funds whose managers are exempt and would amend the provisions on recordkeeping by private equity fund advisers.

Section 859 of the FCA would eliminate required systemic risk reporting by investment advisers and remove references to FSOC in the SEC's authority to require recordkeeping and reporting by private fund managers.

As discussed above, Section 901 of the FCA would repeal the Volcker Rule that was enacted as Section 619 of the DFA (12 U.S.C. § 1851) and, effectively, also would repeal the interagency rules that implement the Volcker Rule.¹⁶ The repeal of the Volcker Rule would directly affect the opportunities available to banks and their affiliates and the potential investors eligible to invest in private investment funds operated by any fund manager.

Other Major DFA Changes

Derivatives. The DFA created a comprehensive statutory scheme for the regulation of derivatives, subjecting swaps to regulation by the CFTC and security-based swaps to regulation by the SEC. The FCA would leave the new regulatory structure in place, with one significant change. Specifically, the FCA would exempt certain swaps between affiliated entities from CFTC and/or SEC regulation, subject to certain trade-reporting and risk-management standards.¹⁷ More significant reform in this area may come from pending CFTC reauthorization legislation (H.R. 238, the Commodity End-User Relief Act). Title III of that bill would provide exemptions from mandatory swap clearing requirements for finance companies and smaller bank holding companies, as well as producers, processors, merchants, and commercial users of agricultural and hard commodities. However, the FCA and H.R. 238 are proceeding on separate tracks through the congressional process, and it remains to be seen whether and how any significant changes to derivatives regulation would be reflected in final legislation.

Nationally Recognized Statistical Ratings Organizations. Sections 850 through 856 of the FCA would also revise the SEC's regulatory oversight program for nationally recognized statistical ratings organizations (NRSROs). Most notably, these provisions would permit the SEC to issue exemptions from registration-related requirements in order to ease potential barriers to entry for new NRSROs, foster competition, or advance other purposes in the public interest. Section 853 of the FCA would eliminate requirements for NRSROs and their chief executive officers to attest to internal controls, conflict-of-interest management, and credit evaluation quality.

Other Repeals and Modifications

The FCA would address other issues not related to the DFA, as summarized below.

Repeal the Department of Labor's Fiduciary Rule. Section 841 of the FCA would repeal the Department of Labor's (DOL) highly controversial "fiduciary rule" in its entirety and prohibit DOL from reissuing a new "fiduciary rule" until the SEC issues a final rule "relating to the standards of conduct" for broker-dealers as authorized by Section 913(g)(1) of the DFA (15 U.S.C. § 78o(k)), as it would be modified by Section 841(d) of the FCA. After the SEC issues such a rule (if it chose to do so after reporting on its proposal to Congress) on the conduct of broker-dealers, any new fiduciary rule promulgated by DOL would have to be "substantially identical" to the SEC's rule with respect to (i) what conduct constitutes fiduciary investment advice and (ii) the standard of care applicable to broker-dealers and investment advisers, under Section 913(g)(1) of the DFA. While the repeal of the fiduciary rule would be welcomed by most financial institutions, the adoption of new, uniform standards by the SEC is not necessarily all good news. If the FCA passes in its current form and the SEC were to move forward with harmonizing the fiduciary standards for broker-dealers and investment advisers, there is a risk that the SEC may set standards that are higher than those presently imposed on broker-dealers and investment advisers and potentially could result in the adoption, for all accounts—not just IRA/retirement plan accounts—of some of the onerous requirements in DOL's fiduciary rule.

Oversight of International Coordination on Policies and Processes. As discussed above with respect to the Basel process, Section 371 of the FCA would require the federal financial regulators to provide advance notice to Congress, the Treasury Department, and the public of the planned participation by any of the agencies in international standard-setting processes or other incidences of international policy coordination. Financial regulators also would be required to notify the House Financial Services Committee and Senate Banking Committee of any agreements that may result from such international coordination, and to consult with the Committees on the agreements and their anticipated economic effects. Section 175 of the DFA (12 U.S.C. § 5373) encouraged international policy coordination by requiring regular consultation by the FSOC, the Federal Reserve, and the Treasury Department with foreign governments and other international organizations regarding international systemic risk and prudential supervision of large and interconnected financial institutions. Congressional Republicans have been critical of such coordination, much of which has occurred without the input of Congress and outside of traditional administrative processes.

Agency Structural Changes

Much of the attention the FCA has received has focused on its comprehensive restructuring of the CFPB. However, the FCA also would make significant structural changes to other federal financial agencies.

CFPB

As noted, Section 711 of the FCA would amend Section 1011 of the DFA (12 U.S.C. § 5491) to change the name of the CFPB to the CLEA and to provide that the CLEA Deputy Director would be appointed by the President. It also eliminates the restriction that the CLEA Director can only be removed by the President "for cause." Other significant structural changes, generally intended to limit the CLEA's authority and autonomy, include:

• Providing that the Office of Information and Regulatory Affairs (the US Government's central authority for the review of Executive Branch Regulations) has the same duties and authorities regarding the CLEA as it does for any other non-independent regulatory agency (FCA § 712; DFA § 1022(e) (12. U.S.C. § 5512(e))).
• Creating an independent Inspector General for the CLEA and requiring the Inspector General to testify twice a year before the House Financial Services and Senate Banking Committees (FCA § 714; DFA § 1011 (12 U.S.C. § 5491(i))).
• Amending the Consumer Financial Protection Act to expand the CLEA's purpose to include strengthening consumer participation in financial markets, increasing competition, and enhancing consumer choices and creating an Office of Economic Analysis within the CLEA to review and assess regulations and administrative enforcement and civil actions (FCA § 717; DFA §§ 1021(a) (12 U.S.C. § 5511(a)), 1013(h) (12 U.S.C. §5493(h))).
• Directing the CLEA to create segregated accounts for specific civil penalties to compensate victims of the violations for which the penalties were created, with any account balances remaining after two years to be paid to the Treasury (FCA § 722; DFA § 1017(b) (12 U.S.C. § 5497(b))).
• Making discretionary, rather than mandatory, the creation of certain units within the CLEA, including a research unit, a Community Affairs unit, and an Office of Fair Lending and Equal Opportunity (FCA § 725; DFA §§ 1013, 1029(e), 1035 (12 U.S.C. §§ 5493, 5519(e), 5535)), and eliminating the mandatory Consumer Advisory Board, but permitting the CLEA Director to establish advisory boards pursuant to the Federal Advisory Committee Act (FCA § 726; DFA § 1014 (12 U.S.C. § 5494)).
• Putting CLEA employees on the federal General Schedule pay scale (FCA § 723; DFA § 1013(a)(2) (12 U.S.C. § 5493(a)(2))).

SEC

The FCA takes a number of actions with respect to the SEC's organizational framework. Generally, these deal with improving operational efficiency and reducing "regulatory burden." They include:

• Directing the SEC to finish implementing recommendations contained in a consultant's report to the SEC required by Section 967 of the DFA and issued on March 10, 2011 (FCA § 806).¹⁸ The report recommended reprioritizing regulatory activities; reshaping organizational structure; investing in infrastructure (including technology); and enhancing the SEC's role as an overseer of, and co-regulation with, self-regulatory organizations. At the same time, Section 803 of the FCA would eliminate the SEC Reserve Fund, a fund created by the DFA to support SEC operations and used primarily to pay for information technology enhancements (15 U.S.C. § 78d(i)).
• Placing both the Office of Credit Ratings (FCA § 807; 15 U.S.C. § 78o-7(p)(1)) and the Office of Municipal Securities (FCA § 808; DFA § 979 (15 U.S.C. § 78o-4a)) within the SEC's Division of Trading and Markets.
• Providing for independence of the SEC Ombudsman by having the Ombudsman appointed by the SEC Commissioners and reporting to the SEC (FCA § 809; 15 U.S.C. § 78d(g)(8)).
• Requiring the SEC's Investor Advisory Committee to consult with the Small Business Capital Formation Advisory Committee in submitting findings and recommendations to the SEC; requiring the Investor Advisory Committee to include a member of the Small Business Capital Formation Advisory Committee as a non-voting member, and setting term lengths for members of the Investor Advisory Committee (FCA § 810; 15 U.S.C. § 78pp).
• Prohibiting the SEC Investor Advocate from taking a position on pending legislation, other than legislative changes proposed by the Investor Advocate regarding retail investors; requiring that the Investor Advocate consult with the Advocate for Small Business Capital Formation in proposing such recommendations, and directing the Investor Advocate to advise the Advocate for Small Business Capital Formation on issues related to small business investors (FCA § 811; 15 U.S.C. § 78d(g)(4)).
• Subjecting SEC statements and guidance that implement, interpret, or prescribe law or policy to the notice and comment procedures of the Administrative Procedures Act (FCA § 814).
• Directing the SEC to appoint an Enforcement Ombudsman who reports to the SEC and acts as a liaison between the SEC and any person who is the subject of an SEC investigation or an administrative or judicial action brought by the SEC (FCA § 818; 15 U.S.C. § 78d).
• Directing the SEC to establish an advisory committee to analyze and make recommendations regarding the SEC's enforcement policies and practices (FCA § 820).

Federal Reserve

The FCA includes a number of provisions regarding the Federal Reserve, including the Federal Open Market Committee (FOMC), that appear to be intended to limit flexibility and increase oversight of the Federal Reserve. Among other things, this includes:

• Requiring the Federal Reserve to adopt a "directive policy rule" for open market operations and directing the GAO to monitor compliance with the rule and report instances of non-compliance to the House Financial Services and Senate Banking Committees. The FCA also authorizes the Committee Chairs to request the Federal Reserve Chair to testify about compliance failures (FCA § 1001).
• Changing the composition of the FOMC by adding a sixth representative from one of the regional Federal Reserve Banks and designating which Reserve Banks will be represented on the FOMC in even years and which ones will be represented in odd years (FCA § 1004; 12 U.S.C. § 263(a)).
• Requiring the Federal Reserve Chair to testify quarterly before the House Financial Services and Senate Banking Committees on the conduct of monetary policy and economic developments and future prospects for the economy (FCA § 1005; 12 U.S.C. §225b).
• Requiring written testimony from the Federal Reserve Vice Chairman for Regulation on the status of pending and anticipated rulemakings (FCA § 1006; 12 U.S.C. 247(b)).

• Raising the standards for the Federal Reserve to exercise its emergency lending authority (FCA § 1008; 12 U.S.C. §243(3)):

• the "unusual and exigent circumstances" identified as the basis for exercising emergency lending authority must also "pose a threat to the financial stability of the United States";

• exercising the emergency lending authority would require the affirmative vote of at least nine presidents of the regional Federal Reserve Banks and five members of the Federal Reserve Board;

• the Federal Reserve must issue rules regarding economic terms of emergency authority loans; and

• federal banking regulators must certify that an institution is solvent before it is eligible to borrow under the emergency lending authority.
• The Federal Reserve and the regional Federal Reserve Banks would be subject to annual GAO audit, with the audit results reported to Congress.

Other Agencies and Offices

The FCA also would impact the structures of other federal financial agencies and offices. For example:

• FDIC: The FDIC's Board of Directors would consist of five members appointed by the President with the advice and consent of the Senate. One of the Directors would have to have state bank supervisory experience (FCA § 351; 12 U.S.C. § 1812).
• Federal Housing Finance Agency (FHFA): Section 352 of the FCA provides the President with the authority to terminate the Director of the FHFA before the end of the Director's appointed term, with or without cause (12 U.S.C. § 4512).
• Federal Financial Institutions Examination Council (FFIEC): Section 536(a) of the FCA would create an Office of Independent Examination Review within the FFIEC to investigate complaints about examinations. It would also give financial institutions the right to obtain an independent review of a material supervisory determination contained in a final report of examination.
• National Credit Union Administration (NCUA): Section 586 of the FCA would require the NCUA to report annually on how it allocates expenses between its prudential and insurance-related activities and how it allocates payments of these expenses between operating fees assessed by the NCUA and the NCUA Share Insurance Fund (12 U.S.C. § 1783).
• Office of Financial Research (OFR): Section 151 of the FCA would abolish the OFR, an office within the Department of the Treasury that performs research and provides financial data to FSOC, its member organizations, and the general public (12 U.S.C. §§ 5341–5346)).
• Federal Insurance Office/Office of the Independent Insurance Advocate (OIIA): Section 1101 of the FCA would abolish the Federal Insurance Office (FIO) and create the OIIA. The OIIA would act as an independent advocate on behalf of US policyholders on prudential aspects of insurance matters and would coordinate and consult on various insurance-related matters at the federal and state levels, including the Terrorism Reinsurance Program and issues that could contribute to crises in the insurance industry or the US financial system. The OIIA would be a voting member of FSOC. Since the OIIA assumes many of the same functions as the FIO, the provision is more properly viewed as a merging of FIO with the FSOC Independent Member rather than a simple abolition of the FIO (DFA § 502(a) (31 U.S.C §313)).

JOBS Act 2.0 (Title IV of the FCA)

Offerings. In order to accelerate growth of capital, foster business development, and increase hiring, the FCA would streamline various aspects of the laws and regulations applicable to securities offerings.

The FCA includes a number of provisions that would broaden existing exemptions or limit existing prohibitions to facilitate certain securities offerings. Section 406 of the FCA would direct the SEC to exempt offerings of up to $20 million in securities from additional disclosure requirements for sales effected in connection with compensatory benefit plans. Section 431 of the FCA would broaden the safe harbor under Section 4(a)(7) of the 1933 Act (15 U.S.C. § 77d(a)(7)) from requirements to register securities for private resales of securities to accredited investors.

The FCA also would add an exemption from the requirement to register offerings of securities for "Micro-Offerings" of securities to fewer than 35 purchasers who all have "substantive pre-existing relationships" with an officer, director, or ten-percent shareholder of the issuer (FCA § 461); revise the crowdfunding provisions of the 1933 Act by creating broader exemptions from securities and broker-dealer registration requirements (FCA § 476); and increase the aggregate amount of securities that may be offered and sold pursuant to the exemption provided by Section 3(b) of the 1933 Act (15 U.S.C. § 77c(b)) from $50 million to $75 million within a twelve month period, as adjusted for inflation every two years (FCA § 498). Further, Section 452 of the FCA would direct the SEC to revise its Regulation D to clarify that presentations or communications at events sponsored by institutions of higher education, nonprofit organizations, angel investor groups, venture forums, venture capital associations, trade associations, or other groups determined by the SEC would not run afoul of the rule's prohibition against general solicitation or advertising.

Section 456 of the FCA would authorize a new category of national securities exchange, known as a "venture exchange," for the listing and trading of securities issued by early-stage growth companies. Venture exchanges would be allowed more latitude in their operations than traditional securities exchanges (for example, they could determine their own price quoting and trading increments and would not be subject to Regulation NMS).

Disclosure. The FCA also would spur the amendment of certain SEC forms and filing requirements, including by:

• directing the SEC to revise Form S-3 for the registration of securities offerings in order to permit its use by companies with any class of common equity securities listed and registered on a national securities exchange (FCA § 426);
• directing the SEC to revise its Regulation D to abbreviate its filing requirements for private placements (FCA § 466); and
• creating an exemption from SEC broker-dealer registration requirements for merger and acquisition brokers (FCA § 401).

Other SEC Changes

Although the FCA would provide regulatory relief from certain elements of the securities laws, it would dramatically increase penalties for violators. In this vein, Title II of the Act calls for raising the maximum amounts of civil monetary penalties in SEC enforcement actions for violations of any of the securities laws. In cases involving fraud, deceit, manipulation, or deliberate or reckless disregard of regulatory requirements, and where there is also substantial loss, or the risk of substantial losses by other persons, the FCA would authorize a penalty up to the greater of (a) $300,00 for a natural person or $1,450,000 for any other person, (b) three times the amount of the gross pecuniary gain by the transgressor, or (c) the amount of losses incurred by victims. The amount of the penalty would be tripled for persons or entities who, within the five years preceding the violation, had been criminally convicted of securities fraud or become subject to a judgment or order imposing monetary, equitable, or administrative relief in an SEC action alleging fraud. The maximum penalty for insider trading would be raised from the greater of $1,000,000, or three times the amount of the profit gained or loss avoided, to the greater of $2,500,000, or three times the amount of the profit gained or loss avoided. In cases involving violations of injunctions or orders, each day of non-compliance would be deemed a separate violation. Finally, the amounts of civil monetary penalties that could be imposed by the Public Company Accounting Oversight Board would generally be doubled, except that for entities the maximum authorized civil penalty would be raised from $15 million to $22 million.

Administrative Law Changes

The FCA would also significantly alter the process for consideration and review of agency rulemakings. Consistent with the Republicans' stated goal to reduce the centralization of power in the federal government, Title III of the FCA is about "Demanding accountability from financial regulators and devolving power away from Washington." To effectuate this goal, the FCA places strict limitations on agency authority to make independent decisions, both at the front end and the back end of the rulemaking process. By imposing rigid cost-benefit justification requirements on agency rulemakings and institutionalizing congressional overrides of final rules, these provisions, if enacted in their current form, could dramatically undermine the ability of agencies to use their experience and expertise to make regulatory judgments.

Mandatory Cost-Benefit Analysis. Currently, agencies are required to analyze the costs and benefits of proposed rules and to provide that analysis in their notices of proposed rulemaking as well as notices of final rules. Section 312 of the FCA would intensify these requirements by imposing very specific mandates for cost-benefit analyses. Specifically, each federal financial regulatory agency would have to include in any notice of proposed rulemaking all of the following:

• an identification of the need for the regulation and its purpose;
• an explanation of why the private market or local authorities cannot adequately address the issue;
• an analysis of the regulation's adverse impacts;
• a quantitative and qualitative assessment of all costs and benefits of the regulation;
• if quantified benefits do not outweigh quantitative costs, a justification for the regulation;
• an identification and assessment of all available alternatives to the regulation, and of why a pilot program is not appropriate;
• if the regulation specifies the behavior or manner of compliance, an explanation of why the agency did not instead specify performance objectives;
• an assessment of how the burden imposed by the regulation will be distributed among market participants;
• an assessment of the extent to which the regulation is inconsistent, incompatible, or duplicative with the existing regulations of the agency or those of other authorities;
• a description of any studies, surveys, or other data relied upon in preparing the analysis;
• an assessment of the degree to which the key assumptions underlying the analysis are subject to uncertainty; and
• an explanation of changes in market structure and infrastructure and in behavior by market participants as a result of the regulation, assuming that they will pursue their economic interests.

Notices of final rules would have to include a further analysis of all of these factors, and no final rule could be published if the agency's analysis found that the quantified costs exceeded the quantified benefits of the regulation. Thus, although the agency would have to consider qualitative as well as quantitative costs and benefits, ultimately, a qualitative benefit could not justify a regulation without proven quantitative benefits in excess of quantitative costs.

Congress would have the power to waive this publication restriction on a case-by-case basis, but only by passage of a joint resolution within a specific, relatively short period. Given Congress' recent history with respect to rapid cooperative action, this waiver authority seems unlikely to have any practical prospect of implementation.

Section 315 of the FCA would further require the financial agencies to undertake re-assessments of their rules on a regular basis:

• within five years of publishing a final regulation, the chief economist of the promulgating agency would have to produce a report on the economic impact (costs and benefits) of the regulation; and
• starting one year after enactment of the FCA and every five years thereafter, each agency would have to produce a plan for streamlining, repealing, or otherwise modifying its existing regulations.

Chevron Judicial Deference Rollback. Under the Supreme Court's decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the courts will defer to agency decisions within the scope of the agency's specific expertise. The rationale behind the Chevron principle is that agencies are in a better position to analyze complex issues, particularly those that involve technical factual matters, but also in some cases questions of administrative law. Under Section 341 of the FCA, rather than applying such deference, courts reviewing federal financial regulatory agency actions would decide de novo all relevant questions of law, including the interpretation of the agency's own rules. Thus, although in general an agency is granted great deference in explaining the meaning and intent of its own regulations, the FCA would compel courts to reach their own independent conclusions regarding the purpose and meaning of those rules.

Congressional Review. Further undermining agency independence and authority, provisions in Sections 331 through 337 of the FCA would require the federal financial agencies to report to Congress on all proposed rules and would prohibit the adoption of any regulation having an estimated annual economic impact of $100 million or more absent congressional approval. Congress also could disapprove, by joint resolution, any proposed rule of lesser economic impact.

Unfunded Mandates Reform. Sections 381 through 388 of the FCA would enhance procedures to help prevent unfunded mandates by requiring additional notice to potentially affected regions, states, and localities of proposed regulations requiring the compliance of those jurisdictions, thereby increasing the likelihood of comment on the proposed rules by the affected jurisdictions. It also would require federal financial regulatory agencies to develop processes whereby such affected jurisdictions could provide input and recommendations on any such proposed rules. And in promulgating rules, the federal agencies would have to identify their options for different regulatory alternatives, and to select the least costly alternative for any rules that impose federal mandates on such non-federal jurisdictions.

Appropriations Process Coverage. In a move to bring certain independent federal financial agencies under more congressional control, the FCA, under Sections 361 through 365, would bring the OCC, the FDIC, FHFA, the NCUA, and the Federal Reserve (with respect to non-monetary policy functions) into the regular congressional appropriations process.

Outlook

The partisanship of the Financial Services Committee's markup session was not unexpected, and it should not complicate Chairman Hensarling's desire to move the bill through the House promptly. House Leadership has essentially already blessed the effort by assigning the bill the coveted "H.R. 10" bill number. Accordingly, passage of the FCA by the full House of Representatives in the near term is likely.

As with most legislative efforts during the 115th Congress, however, a better barometer is the Senate, where a narrower Republican majority combined with minority-friendly procedural rules give the Democrats a greater ability to obstruct or at least delay action. As was on display at the House markup, we expect most if not all Democratic Senators will fight attempts that they believe will weaken the DFA at both the committee level and on the Senate floor. Senate Banking Committee Chairman Mike Crapo (R-ID), therefore, intends to craft legislation more slowly and deliberately, with the intention of producing a package that will have some degree of bipartisan consensus.

It therefore remains to be seen how much of the FCA might survive into a final bill, and indeed whether the effort might stall as a whole. Chairman Hensarling is aware that some compromises will be necessary for the effort to ultimately succeed, and there may come a point at which Hensarling must decide whether such compromise is a price he wants to pay for a legislative victory. In the meantime, it is clear that Hensarling intends the FCA to be his starting position in what he hopes will ultimately be bicameral negotiations.