Saturday, December 01, 2012

Election Results Signal Strong Possibility of Dodd-Frank Corrections Legislation, Not Repeal

The re-election of President Barack Obama and the retention of the Democratic majority in the U.S. Senate means that there will be no repeal of 2010’s landmark Dodd-Frank Wall Street Reform and Consumer Protection Act. However, a bipartisan Dodd-Frank Act corrections bill is very likely to pass in the 113th Congress that will convene in January, 2013 according to remarks by Senator Mark Warner (D-VA) at the Bipartisan Policy Center. Senator Warner, a key member of the Banking Committee and author of a number of Dodd-Frank provisions, said that while Dodd-Frank broadly got things directionally right, there are many sections of Dodd-Frank that he would like to change.

Historically, with any major piece of federal legislation, Congress never gets it entirely right the first time and a corrections bill is needed a few years later. In addition, President Obama’s commitment to reforming the federal regulatory process, evidenced by the issuance of two significant Executive Orders during his first term, in addition to bipartisan Congressional efforts in this area, argue for the passage of significant legislation affecting the rulemaking process at independent agencies such as the SEC and CFTC.

Senator Warner had predicted that, regardless of the outcome of the November election, the Dodd-Frank Act would not be repealed. The repeal of Dodd-Frank would be extremely disruptive to the market, he warned, and would chill financial stability in the U.S. and globally. Instead, the Banking Committee will revisit Dodd-Frank in a rational way, he stated. While Dodd-Frank only got the 60 votes needed to clear the Senate hurdle, he noted, many parts of the legislation received a much broader bipartisan consensus. For example, he observed that Titles I and II setting up the Financial Stability Oversight Council (FSOC) and an Orderly Resolution Authority were embraced by 85 Senators.

He added that there are lots of places in Dodd-Frank where Congress got it wrong. But as imperfect as Dodd-Frank may be, he continued, the U.S acted in a comprehensive way and, as a result, financial markets are safer and banking institutions are stronger. Specifically, when Congress revisits Dodd-Frank, he noted, more work must be done on transparency, derivatives, and the Volcker Rule. He called for a more principles-based Volcker Rule that is not as rules-based. He also said that many of the problems arising around swaps are due to regulatory overlap. The reality is that regulators protect their turf, he observed.

Congress and the regulators must also recognize the diversity of U.S. financial institutions and not impose the same level of stringent regulations and capital standards on mid-size and smaller financial institutions that are applied to large global financial institutions. Another concern is that the FSOC is an imperfect creation with no independent entity or person in charge. The FSOC has not become the arbiter of conflicting regulations that he envisioned it would be. Perhaps because the Office of Financial Research created by Dodd-Frank has not functioned as a quasi-independent backstop to get data to the FSOC as he had hoped it would.

Indeed, a number of Dodd-Frank pieces of correction legislation have passed the House in the 112th Congress with overwhelming bipartisan support. These pieces of legislation often had the support of the relevant oversight agency, such as the SEC, CFTC or CFPB. But the legislation was not taken up by the Senate. These items are almost certain to be included in any Dodd-Frank corrections bill considered by the 113th Congress. For example, the House passed by voice vote bipartisan legislation, H.R. 2827, clarifying that Section 975 of Dodd-Frank requiring municipal advisors to register with the SEC does not include banks, investment advisers and members of municipal governing bodies.

Also, by a vote of 357-36, the House passed legislation (H.R. 2779) exempting inter-affiliate swaps from derivatives regulation under Dodd-Frank. Without H.R. 2779, companies would face the prospect of having to post double margins on swap trades. The House also passed by a vote of 370-24 the Business Risk Mitigation and Price Stabilization Act, H.R. 2682, to clarify the derivatives end-user exemption as part of Dodd-Frank. The House also passed by an overwhelming bipartisan margin the Small Business Credit Availability Act, H.R. 3336, amending the Commodity Exchange Act to clarify the insured depository institutions will not be swap dealers under Dodd-Frank to the extent they enter into swaps with customers to manage risk in connection with the extension of credit.

The House unanimously approved H.R. 4014 by voice vote legislation that would protect confidential bank examination information provided to the Consumer Financial Protection Bureau. In this instance, Senator Tim Johnson (D-SD), Chair of the Banking Committee and Senator Richard Shelby (R-AL), the Committee’s Ranking Member, introduced it as a companion bill.