Dodd-Frank Do-Over
The House voted today to approve the Choice Act, which repeals and replaces many parts of Dodd-Frank. The post-crisis financial legislation, which is now seven years old, deserves robust reconsideration. (Read about why here.) Changes to our financial regulatory structure are necessary for the financial system to be stable and effective, yet also dynamically responsive to consumers’, investors’, and businesses’ needs. Here are some ways the Choice Act could address problems embedded in the current financial regulatory structure.
· Dodd-Frank created a new resolution regime — the Orderly Liquidation Authority — to serve as an alternative to bankruptcy. That regime likely will serve as a way for regulators to conduct ad hoc rescues during a future crisis. The Choice Act focuses instead on revising bankruptcy to make it work better for financial companies. (I wrote more about that here and here.)
· The Choice Act does away with the Financial Stability Oversight Council’s ability to designate systemically important financial institutions and financial market utilities for special regulation. As I have written elsewhere, these designations are based on flawed, arbitrary reasoning and essentially serve as markers of companies that the government is likely to bail out in the next crisis.
· The Choice Act also does away with the Office of Financial Research, which has broad power and little accountability. (More on that here.)
· The Choice Act creates a framework for financial regulators to weigh the costs, benefits, and alternatives when they are crafting rules. It also sets up a process for post-implementation review to ensure that rules are working as intended. (Economic analysis by financial regulators is discussed here, and my colleague Jerry Ellig shows here that agencies can improve their analysis.) The Choice Act also makes it easier for Congress and judges to review agency actions to ensure that they are consistent with the law and make sense based on the evidence marshalled by the agency.
· The Choice Act enhances accountability by making federal financial regulators, including the Federal Reserve in its regulatory capacity, subject to congressional appropriations, which is standard for non-financial regulators. (More about the importance of appropriations for financial regulators here.) Likewise, revisions to the structure and functions of the Bureau of Consumer Financial Protection would address concerns about the agency’s accountability and effectiveness. (For more on why the CFPB is not optimally designed, see this article by Todd Zywicki.)
· U.S. capital markets are the best in the world, but many companies, particularly small ones, have struggled to avail themselves of the capital markets. (David Burton has written about some of these problems here.) The Choice Act adds new options for small companies seeking to raise money and eliminates regulatory provisions that raise costs for public companies without providing useful information to investors.
· The Choice Act would repeal the Volcker Rule, which prevents certain financial institutions from engaging in proprietary trading and from owning hedge funds. Regulators have struggled to implement the rule, and it may adversely affect market liquidity and stability. As my colleagues Stephen Miller and J.W. Verret have written, simple, higher capital requirements obviate the need for Volcker (and, as Stephen Miller and James Barth demonstrate, otherwise add to the stability of the financial system).
· Of particular interest this week, the Choice Act would repeal the Department of Labor’s fiduciary rule (read more about that here), which is set to take effect tomorrow. The Secretary of Labor chose to move forward with implementation despite his concerns that the rule may conflict with the principle that “Americans can be trusted to decide for themselves what is best for them.”
The Choice Act would restore responsibility for regulating the relationships between financial professionals and clients to the Securities and Exchange Commission, which has the expertise to protect investors effectively. Last week, the SEC’s new chairman, Jay Clayton, noting that the DOL rule “may have significant effects on retail investors and entities regulated by the SEC,” issued a broad request for comment on whether and how the SEC should act. As former SEC commissioner Paul Atkins wrote this week, “Not only does the potential for future SEC action necessitate coordination between the two agencies in order to avoid unnecessary costs from conflicting standards of care, but also it could fundamentally alter the purported benefits set forth in the rule’s regulatory impact analysis.”
The Choice Act would make many more changes than those included in this list, and there are yet more opportunities for reform not addressed in the legislation. (For some examples, see our recent book.) As we consider legislative and regulatory changes, it is important to remember that success is measured by how well the financial system serves Americans, not the number of rules on the books or agencies on the regulatory roster.
