The Treasury Department recently issued a proposal outlining changes to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank regulations were put into place after the 2008 financial crisis, and they changed existing regulatory structures in an attempt to streamline and strengthen them. The law led to stronger regulatory standards and rules about a wide range of financial interactions, such as credit card transaction fees and requiring smaller investment advisers to register with the SEC.
The act established sweeping new regulatory rules but came to be seen as too heavy-handed. The House of Representatives recently passed the Financial CHOICE Act in an effort to weaken it, but passage by the Senate isn’t a given. “Many Democrats acknowledge that Dodd-Frank needs to be revisited, and Republicans certainly have enough votes to make sure that it is, but not enough votes to gut it completely,” says David Reiss, a professor at Brooklyn Law School.
Here’s what some of the changes could include.
Ending ‘Too Big to Fail’
One of the biggest components of the Financial CHOICE Act would be the reduction of oversight of large financial institutions. Regulators would no longer be able to liquidate troubled financial institutions in an “orderly way,” resulting in more bankruptcies. In addition, congressional approval of new rules from regulatory agencies would be required.
As part of this component, the Financial Stability Oversight Council would no longer have the authority to designate nonbank entities as “systemically important,” says Fred Saide, president and CEO of Foundation Insurance Services. “The definition of systemically important will be altered to reduce the impact of regulation increasing access to products and services to a wider swath of Americans,” he says. “Even stock and bond funds can be regarded as threatening the wider U.S. economy.”
Restructuring the Consumer Financial Protection Bureau
The CFPB gives financial consumers an opportunity to register complaints about financial services they may use. The CFPB has also helped consumers with those complaints, such as errors in credit scores. Under the Financial CHOICE Act, the CFPB would be renamed the Consumer Financial Opportunity Commission and it would have oversight over consumer protection and competitive markets.
Eliminating the ‘Fiduciary Rule’
The Labor Department’s so-called “fiduciary rule” calls for financial professionals who work with certain investment vehicles, such as stock brokers, or who provide advice about retirement plans to act in the best interests of their clients, not their own interests. A final guidance on this rule was issued this spring.
Reducing Regulations on Smaller Banks
In some cases, blanket regulations on all banks have hurt community banks disproportionately, says Brian Hamilton, co-founder of the financial information company Sageworks. “While pundits say the Financial CHOICE Act will be dead on arrival in the Senate, lawmakers owe it to community banks to consider at least those portions of the bill that offer smaller banks relief from the regulatory crush,” he says. While small banks also need some regulation as financial institutions, Hamilton says the misapplication of what larger banks need has created a burden on smaller institutions.