The Corrections: Battle Lines Drawn Over Dodd-Frank Act Fixes

After Congressional Republicans failed in repeated attempts to repeal the Dodd-Frank Act completely, they are taking a new tack—looking for ways to nibble around the edges with small fixes—that is finally starting to get some bi-partisan support.

Instead of using terms such as “overhaul” or “revision,” more recent attempts to reform Dodd-Frank mention “tweaks” and “corrections.” While some proposed changes truly are aimed at cleaning up fuzzy definitions and faulty language, others mask a full-on assault.

With the presidential election over, members of Congress may be more willing to cooperate on passing legislative fixes to Dodd-Frank. “The current Congress is more open to making tweaks that need to be made to make the law workable,” says Christina Crooks, senior manager of government affairs for Financial Executives International.

“Where we may see some movement is are areas that aren't considered so much as weakening, but rather facilitating what Dodd-Frank meant to accomplish, and recognizing that not all financial institutions are created equal,” says Craig Miller, a partner with the law firm Manatt, Phelps & Phillips. “There is a general sense of recognition that smaller community banks, for example, should be treated differently than larger banks.”

Last month, separate bills containing seven proposed amendments to Dodd-Frank's Title VII derivatives rules were affirmed by the House Agriculture Committee, including support from several Democrats.

Among them is H.R. 1003, which raises the legal standard for cost-benefit analysis, requiring the Commodities Futures Trading Commission, in charge of Dodd-Frank rulemaking on swaps and derivatives “must consider the potential consequences of its actions on businesses.” The push for expanded cost analysis has been the cornerstone of many efforts by business groups like the U.S. Chamber of Commerce to invalidate Dodd-Frank rulemaking. With two Democratic co-sponsors, the bill passed the committee and awaits a vote by the full House and Senate.

H.R. 1256, the Swap Jurisdiction Certainty Act that would direct the CFTC and the Securities and Exchange Commission to adopt a joint rule on how they will regulate cross-border swaps transactions as part of the new requirements created in Dodd-Frank, also won bipartisan support that moved it out of committee.

The bill has raised fears among some that large U.S. banks operating internationally could shuffle paperwork through their international locations to avoid domestic derivatives regulation.

On March 17, the advocacy groups Public Citizen and Americans for Financial Reform delivered petitions signed by more than 17,000 people calling on the CFTC to “stand firm in applying derivative standards to all the dealings of U.S. banks and their overseas subsidiaries.”

Some attribute new support for Dodd-Frank reforms to an assertive lobbying campaign by large banks that is increasingly targeting Democrats.  “Wall Street—with help from foreign banks and foreign regulators—is pushing to effectively limit the scope of U.S enforcement to derivatives traders physically based inside our borders,” the petition says. “This would be a giant loophole. For the biggest banks, evading oversight would become as simple as hitting a key or two on a computer screen.”

“I would argue that Congress writes the laws and Congress is saying this law needs to be clarified. If you consider that a weakening of the law, then the law went too far to start with.”

—Chris Ferreri,

Managing Director,

ICAP

Another piece of legislation making its way to the floor of the House is the Municipal Advisor Oversight Improvement Act of 2013, which would, according to critics, weaken Dodd-Frank protections pertaining to financial dealings with municipalities. Any advice provided by a bank, a broker, a swaps dealer, or accountant that is “related to or connected with” a municipal underwriting would be exempt from an established fiduciary requirement.

Dodd-Frank Senate Reforms

Dodd-Frank reforms are also getting new bi-partisan support in the Senate. Sen. Mark Warner (D-Va.), for example, has announced his intention to either sponsor or support a “corrections bill.” And retiring Senate Banking Committee Chair Tim Johnson (D-S.D.) has said he will support and encourage such reforms if they are bi-partisan.

The Senate is also considering legislation that would require more vigorous cost-benefit analysis.  Richard Shelby's (R-Ala.) Financial Regulatory Responsibility Act of 2013, for example, demands “rigorous, consistent economic analysis,” of every new regulation proposed by the SEC and other top regulators, as well as self-regulatory organizations. That review would need to include any affect on job creation and propose alternatives.

Similarly, Warner (D-Va.) and Jerry Moran (R-Ky.) have introduced S. 310, legislation requiring the SEC and other federal agencies to conduct a cost-benefit analysis of regulations with a $100 million impact on the economy or that materially harm a specific sector of the economy.

AMENDING DODD-FRANK

The following is bipartisan legislation to Amend Title VII of Dodd-Frank Act that has passed a vote of the House Committee on Agriculture. Descriptions were provided by the committee.

H.R. 634: Business Risk Mitigation and Price Stabilization Act of 2013

Would provide an exemption from Dodd-Frank margin requirements for swaps transactions that qualify for the end-user clearing exemption.

Congress never intended for end-users to be subject to expensive margin requirements, which would require companies to take capital away from their businesses and hinder their ability to make job-creating investments.

H.R. 677: Inter-Affiliate Swap Clarification Act

Would provide that inter-affiliate transactions, when the parties to the transaction are under common control, will not be regulated as swaps.

Regulating inter-affiliate swaps provides no additional risk-reduction, but it does substantially raise costs for corporations.

Ensures that transactions between affiliates within a single corporate group are not regulated as swaps.

Regulators are considering requiring that inter-affiliate swaps are treated the same as all other swaps—requiring margin, clearing, and price reporting.

Many companies use one affiliate to conduct swaps, and then allocate that risk to other affiliates within their corporate structure.

If these inter-affiliate transactions are subject to the same regulation as other swaps, companies could be subject to double margin, and this centralized trading model may become cost-prohibitive.

H.R. 742: the Swap Data Repository and Clearinghouse Indemnification Correction Act of 2013

Would strike the indemnification requirements related to both swap data gathered by swap data repositories (SDRs) and data collected by the Commission from clearinghouses with regard to cleared swaps.

Indemnification is not a legal concept in most foreign jurisdictions outside of the U.S. And the indemnification provisions – that were not included in the House-passed version of Dodd-Frank – threaten to make data daring arrangements with foreign regulators unworkable.

Global information sharing is critical to international regulators' ability to monitor systemic risk.

Would allow data sharing between U.S. and international regulators and swap data repositories without adding an unnecessary layer of legal bureaucracy.

H.R. 992, Swaps Regulatory Improvement Act

Amends Section 716 of the Dodd-Frank Act to limit the swap desk push-out requirement so that it does not apply to equity or commodity swaps, but it will continue to apply to structured finance swaps that are based on an asset-backed security.

Identical text was introduced in the Senate (S.474) and sponsored by Sens. Kay Hagan (D-NC), Pat Toomey (R-PA), Mark Warner (D-VA), Mike Johanns (R-NE).

H.R. 1003: CFTC Cost-Benefit Analysis

Raises the legal standard for cost-benefit analysis and ensures the CFTC must consider the potential consequences of its actions on businesses.

The Dodd-Frank Act is sweeping legislation that impacts every sector of the economy. Good policy requires careful consideration and analysis.

H.R. 1038, Public Power Risk Management Act

Would allow producers, utility companies, and other non-financial entities to continue entering into energy swaps with government-owned utilities (Aka: utility special entities) without danger of being required to register with the CFTC as a “swap dealer” solely because of their dealings with government-owned utilities.

Utility special entities should be allowed to keep using traditional swap counterparties to help manage their risk related to the generation of electricity or production of natural gas.

To hinder these utility's ability to manage risk would only increase their costs and possibly lead to higher energy rates for millions of Americans – an unacceptable result during a period of tremendous economic uncertainty.

H.R. 1256, Swap Jurisdiction Certainty Act

Would direct the Commodity Futures Trading Commission and the Securities and Exchange Commission to adopt a joint rule on how they will regulate cross-border swaps transactions as part of the new requirements created in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Any cross-border rule jointly issued by the two agencies must go through a formal rulemaking process subject to the Administrative Procedures Act. No “guidance” from either Commission will have the force of law.

Would ensure that foreign countries with broadly equivalent regulatory regimes are allowed to govern derivatives transactions within their own borders unless the CFTC and SEC determine that they are not honoring their 2009 G20 commitments to enact financial regulatory reforms surrounding the trading of derivatives.

Source: House Committee on Agriculture.

Miller, however, doesn't see any of the various bills related to cost-benefit analysis gaining much traction. “Those are perceived as attempts to stop Dodd-Frank in its tracks,” he says. “If you are required to do an extraordinary cost-benefit analysis for every piece of legislation that comes out, nothing will ever get accomplished.”

U.S. Sen. Jim Inhofe (R-Okla.) introduced an amendment to the Senate Budget Resolution for Fiscal Year 2014 that would prevent community banks from having to comply with Basel III international banking regulations. Sen. Susan Collins (R-Maine) added to the mix her longstanding demand, a leftover from last year, that imposes a 13-point test for future regulations and gives the White House expanded power to review and block them.

With such a “complex and sweeping piece of reform legislation,” it was expected that some changes would be needed, says Peter Ryan, who studies the politics of financial services industry regulation and teaches political science at the University of California, Berkeley.

Like Miller, however, he places calls for greater cost-benefit analyses in the category of stonewalling matters. “I think cost-benefit analysis can be very useful when applied properly, but at least some of the supporters of these efforts seem to see this as an effort to slow down and water down rulemaking,” he says.

Reforming the CFPB

Another effort “that is unmistakably about watering down the legislation” are proposed changes to the institutional structure of the Consumer Financial Protection Bureau, forcing it to submit a budget as part of the regular appropriations process and replacing the single director with a bipartisan board. “This is a fairly transparent attempt to turn the agency into a toothless tiger,” he says.

This month the U.S. Chamber of Commerce will ramp up its efforts to refine the financial reform legislation with its “FAR Agenda,” an acronym for “Fix, Add, Replace.”

Among the questions that initiative will ask: Are there areas where Dodd-Frank simply isn't working as intended or where regulators need additional clarity from Congress? What steps should we take to address areas that were simply left untouched by Dodd-Frank?  Should we consolidate regulators or at a minimum ensure more effective coordination among the dozens of financial regulators? Are there provisions of Dodd-Frank that simply don't work at all and need to be replaced?

According to the Chamber, specific provisions and issues it will address are the Volcker Rule, derivatives, money market mutual fund reform, corporate governance, and whistleblower regulations

The speed with which Dodd-Frank was passed has made corrective legislation a necessity, says Chris Ferreri, managing director for ICAP, an  interdealer broker for over-the-counter trading.

Ferreri dismisses critics who equate any effort to make the regulations more reasonable with weakening the law. “I would argue that Congress writes the laws and Congress is saying this law needs to be clarified,” he says. “If you consider that a weakening of the law, then the law went too far to start with.”

Jeff Connaughton, a K-Street lobbyist turned advocate for financial reform, points to one major way that Dodd-Frank was already compromised: through Democrat support of the JOBS Act. “[That legislation] made it clear that there is an appetite in Congress, even on the Democrat side, to be seen as clearing away excessive regulation,” says Connaughton, author of the book “The Payoff: Why Wall Street Always Wins,” and a former aide to then-Senator Joe Biden and Ted Kaufman, the former Democratic senator for Delaware.

 “No matter what you think of Dodd-Frank, we can't go about dismantling it before we even fully implement it,” he says. “That would turn confusion into chaos.”