On May 4, 2017, the House Financial Services Committee, led by Chairman Jeb Hensarling (R-TX), passed the Financial CHOICE Act of 2017 (the CHOICE Act), or H.R. 10, in a 34-26 vote. The vote came after a hearing and three days of markups of the legislative text.

Update: On June 8, 2017, the House of Representatives passed the CHOICE Act in a 233-186 vote. The bill will now be considered by the Senate.

The CHOICE Act would make significant changes to US financial regulation, including the repeal or replacement of certain key provisions of the Dodd-Frank Act such as the Volcker Rule. The CHOICE Act would also rename and restructure the Consumer Financial Protection Bureau (CFPB).

The CHOICE Act was first released in the summer of 2016 (see Legal Updates, Potential Impact of 2016 US Presidential Election on Financial Services Regulation). Proponents of the CHOICE Act assert that it would provide for a regulatory landscape that is focused on economic growth through competition and capital markets.

Key provisions of the CHOICE Act would:

The House Financial Services Committee has released the following documents in connection with the CHOICE Act:

The CHOICE Act proposes to permit large banking organizations that maintain a leverage ratio of capital to assets of at least 10 percent to obtain an exemption from certain regulatory requirements. This 10 percent leverage ratio would be higher than the present leverage ratio requirements of:

The CHOICE Act intends for this to be an "off-ramp" from Dodd-Frank for strongly capitalized, well-managed banking organizations if these organizations maintain higher capital than required by current regulations.

Regulations that these large banking organizations can elect to be exempt from include:

In addition, under the CHOICE Act, banking agencies would be permitted to conduct stress tests but would not be permitted to limit capital distributions (see Practice Note, Summary of the Dodd-Frank Act: Regulation of Systemically Significant Financial Institutions: Other Authorities of the FRB: Stress Tests).

The CHOICE Act also proposes to repeal the Volcker Rule, or Section 619 of the Dodd-Frank Act, which prohibits US bank holding companies (BHCs) and certain insured depository institutions from engaging in "proprietary trading" and from acquiring or retaining any ownership interest in, or sponsoring, a hedge fund or a private equity fund (see Practice Note: Summary of the Dodd-Frank Act: The Volcker Rule). The CHOICE Act proposes to eliminate this prohibition in its entirety.

The CHOICE Act would also provide a complete repeal Dodd-Frank ABS risk retention rules to all classes of ABS other than RMBS. Under the risk retention rules, securitizers, including sponsors of ABS transactions, must retain five percent of the credit risk of the transaction, in an attempt to align the interests of securitizers with those of investors in the ABS (see Practice Note, ABS Risk Retention under Dodd-Frank). This nexus proved faulty in ushering in the financial crisis.

However, the LSTA and other industry groups have been pressing regulators to create exemptions from the risk retention rules for certain asset classes that have performed well historically – most notably for certain qualified CLO transactions, or QCLOs (see Practice Note, ABS Risk Retention under Dodd-Frank: LSTA Lawsuit and Other CLO Risk Retention Reform Efforts). The LSTA also recently submitted letters to Treasury and Congress seeking the elimination of the ABS risk retention requirements for CLO managers (see Legal Update, LSTA Submits Letter to Treasury Seeking Reform of Risk Retention Rules for CLO Managers).

The CHOICE Act would eliminate the risk retention rules entirely for ABS other than for securitizations of residential mortgages, for which the rules would remain effective.

The CHOICE Act proposes to repeal Title II of the Dodd-Frank Act, which establishes the FDIC's Orderly Liquidation Authority (OLA). The OLA authorizes the FDIC to facilitate the liquidation of failing financial companies in certain circumstances and was intended as a solution to taxpayer-funded bailouts. For more information on the OLA, see Practice Note, Summary of the Dodd-Frank Act: Resolution of Failing Financial Institutions: Orderly Liquidation Authority.

The CHOICE Act would also repeal the FSOC's authority to designate non-bank firms as SIFIs and its authority to designate systemically important financial market utilities (SIFMUs). It would also repeal Dodd-Frank's "Hotel California Rule," which automatically makes any BHC a SIFI if it has more than $50 billion in consolidated assets.

Instead, the CHOICE Act proposes a new Subchapter V within Chapter 11 of the Bankruptcy Code to accommodate the failure of large financial institutions, incorporating legislation from the Judiciary Committee's Financial Institution Bankruptcy Act of 2016 (H.R. 2947). This subchapter would allow for the liquidation, reorganization, or recapitalization of BHCs and SIFIs ("covered financial corporations"). It includes requirements for:

For more information on SIFIs and the "Hotel California Rule," see Practice Note, Summary of the Dodd-Frank Act: Regulation of Systemically Significant Financial Institutions.

For more information on FMUs, see Legal Update, FSOC Issues Final Rules on Designating FMUs as Systemically Important.

The CHOICE Act proposes to rename and restructure the CFPB, established under Title X of Dodd-Frank, to limit its supervision and enforcement authority and to instead function similarly to the Federal Trade Commission (FTC).

Under the CHOICE Act, the CFPB would become the Consumer Law Enforcement Agency (CLEA) with a director removable by the president at will and subject to the congressional appropriations process for additional oversight and accountability. The CLEA would also be subject to the authority of the Office of Information and Regulatory Affairs (OIRA), similar to a non-independent regulatory agency.

The CHOICE Act proposes significant changes to the functioning and rulemaking process of the agency. Some of the notable changes include:

For background on CFPB headwinds under the Trump Administration, see Legal Update, CFPB Continues to be Target for Potential Elimination.

For more information on the CFPB, see Practice Notes, Summary of the Dodd-Frank Act: Consumer Financial Protection and CFPB Supervision and Enforcement Procedures.

The CHOICE Act proposes to decrease the Fed's regulatory and supervisory powers and subject the Fed to greater congressional oversight and accountability, including:

Living wills and stress tests for major financial institutions conducted by the Fed are provided for under Section 165 of the Dodd-Frank Act, which permits the Fed to oversee the activities of SIFIs. For more information, see Summary of the Dodd-Frank Act: Regulation of Systemically Significant Financial Institutions.

The DOL issued the final fiduciary rule on April 6, 2016, and it was scheduled to become applicable on April 10, 2017 (for more information on the fiduciary rule, see Fiduciary Investment Advice Toolkit).

On April 4, 2017, the DOL issued a final rule that delays by 60 days the applicability of the fiduciary investment advice regulation that replaces the existing regulatory interpretation of fiduciary investment advice under Section 3(21)(A)(ii) of the Employee Retirement Income Security Act of 1974 (ERISA) and the related prohibited transaction exemptions (see DOL Issues Final Rule Delaying Applicability Date of Fiduciary Rule and Related Prohibited Transaction Exemptions). The fiduciary rule and related exemptions are now applicable on June 9, 2017, while compliance with the remaining conditions in these exemptions, such as the requirements to execute the best interest contract and make specific written disclosures and representations of fiduciary compliance in communications with investors, is not required until January 1, 2018.

The CHOICE Act attempts to repeal the fiduciary rule and stop the DOL from issuing the rule until the SEC issues its own rule on the standards of conduct for broker-dealers and investment advisers (SEC Rule). The CHOICE Act further requires the SEC, before issuing the SEC Rule, to provide reports to Congress on:

The CHOICE Act also indicates that any DOL fiduciary rule must substantially conform to the SEC's standards.

Given that the fiduciary rule became partially applicable on June 9, 2017, it is unlikely that the CHOICE Act will immediately impact the fiduciary rule.

However, because many of the more onerous requirements of the fiduciary rule do not become applicable until January 1, 2018, and the CHOICE Act would require the rule to be substantially similar to the SEC Rule, the CHOICE Act casts further doubt on whether the fiduciary rule as currently drafted will ever ultimately become fully applicable.

The CHOICE Act proposes to increase penalties for securities laws violations, in part through reforms to the SEC's enforcement program. Under the CHOICE Act, the SEC's civil penalty authority would be increased, and criminal sanctions under the federal securities laws for serious offenses, including insider trading would be enhanced.

In addition, the CHOICE Act would require the SEC to "holistically" review its enforcement program, incorporate economic analysis into its deliberations on enforcement matters, and augment the rights of individuals under SEC investigation to defend themselves, including a right of removal to federal court.

The CHOICE Act would also update the SEC's structure and organization by:

For information on SEC enforcement, see Practice Note, Roadmap of the SEC’s Investigation and Enforcement Process.

The CHOICE Act proposes a series of capital formation provisions that would aim to assist small- and medium-sized businesses to more easily raise capital and comply with ongoing requirements of reporting companies under the Exchange Act, including measures to:

For more information on the JOBS Act, see Practice Note, Road Map to the Jumpstart Our Business Startups (JOBS) Act of 2012.

For more information on Dodd-Frank Act requirements in this area, see Practice Notes, Summary of the Dodd-Frank Act: Executive Compensation, Summary of the Dodd-Frank Act: Corporate Governance and Summary of the Dodd-Frank Act: SEC Authority and Selected Securities Act and Exchange Act Provisions.

Appropriations and economic analysis. The CHOICE Act would:

Chevron Doctrine. The CHOICE Act would also repeal the Chevron doctrine, which provides a two-part test for judicial review of federal agency actions in which courts must defer to agency interpretations in the case of ambiguity. See Chevron USA Inc. v. Natural Resources Defense Council, Inc., 467 US 837, 104 S.Ct. 277 (August 16, 1984). The CHOICE Act would statutorily repeal Chevron to permit judicial review of agency decisions without the deference to agency interpretations.

For more information on the Chevron doctrine, see Practice Note, US Banking Law: Overview: Reporting, Examination, Enforcement and Approval Issues: Judicial Standard for Review of Bank Regulatory Agency Decisions.

Elimination of OFR. The CHOICE Act would also eliminate the Office of Financial Research (OFR), which was created under Title I of Dodd-Frank as a department within the US Treasury that supports FSOC through the collection of data and analysis on risk measurement (see Practice Note, Summary of the Dodd-Frank Act: Regulatory Structure: OFR).

The CHOICE Act would introduce an amendment to the National Bank Act, the Home Owners' Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act (FDIA) to provide that the interest rate of a loan remains valid regardless of the sale, assignment, or transfer of the loan.

This provision would override the controversial ruling in Madden v. Midland Funding, LLC, in which the Second Circuit held that the National Bank Act does not preempt state usury laws when a non-national bank entity purchases debt from a national bank (see Legal Update, Midland Funding v. Madden: Supreme Court Denies Certiorari in Debt-Purchase Usury Case). This case has caused uncertainty among secondary loan markets and Second Circuit securitizations regarding interest rates for debt purchasers that are not national banks.