No matter what happens in November, legal challenges and leadership changes at Washington’s regulatory agencies may have an impact on Dodd-Frank rulemaking after the election.
While President Barack Obama and his administration are implementing the largest overhaul of financial regulations since the Great Depression, Governor Mitt Romney has said he wants to repeal and replace Dodd-Frank if he is elected.
Two years after the law was signed, regulators are less than halfway finished writing all the Dodd-Frank rules. Full repeal is unlikely, but critics could use other tactics through the regulatory process and the courts to stop or slow implementation.
There will be some turnover at the leadership of the main regulatory agencies that oversee the financial sector, no matter who is president. This could have the most impact on designations of which nonbanks are systemically important financial institutions, heightened prudential standards, the Volcker rule and derivatives regulations.
The regulators in the accompanying chart are also members of the Financial Stability Oversight Council, which is charged with monitoring systemic risks, addressing gaps in regulation, and selecting nonbank systemically important financial institutions, or SIFIs. Changes to the panel, particularly with regard to the Treasury secretary who has veto power over the nonbank SIFI selection, could affect which companies are selected.
If Romney wins, expect more — and perhaps successful — lobbying by companies to avoid the SIFI designation and its requirements for more capital and stringent reporting. Even if some companies are selected before the makeup of the FSOC changes, SIFI designations must be reviewed by the council annually.
It’s unclear which party will have a majority in the U.S. Senate, but Democrats are almost sure to hold enough seats to block any efforts to substantially undercut Dodd-Frank. Republicans would need to win 60 seats, and keep them voting as a bloc, to beat back Democratic filibusters.
Senate Banking Committee Chairman Tim Johnson of South Dakota likely will remain the top Democrat on the panel. Ranking Republican Richard C. Shelby of Alabama would take the gavel from Johnson if Republicans win the Senate, opening new lines of inquiry into Dodd-Frank’s implementation and impact.
However, if Democrats hold the Senate, the ranking member spot on the Appropriations Committee would open up because of Republican term limit rules, and Shelby could choose to forgo the ranking slot on Banking in favor of Appropriations. Republican Senator Mike Crapo of Idaho would be next in line for the Banking post if that happens.
Crapo has sponsored legislation to amend Dodd-Frank provisions related to the Consumer Financial Protection Bureau and derivatives regulations.
If Republicans maintain a majority in the U.S. House of Representatives, as is likely, efforts to scale back or repeal parts of Dodd-Frank would continue to gain traction. The leadership of the House Financial Services Committee will change because chairman Spencer Bachus, the Republican from Alabama, is leaving his post because of term limits. Jeb Hensarling of Texas is the most likely successor because of seniority.
The ranking member post, now held by retiring Democrat Barney Frank from Massachusetts, is likely to be filled by Maxine Waters of California, the next in line in seniority, even though she was recently cleared of allegations that she helped get a government bailout for a bank in which her husband owned stock. She appears to be gearing up for the post by launching a series of bipartisan roundtables to discuss financial regulation issues with industry and consumer groups.
Legal and Funding Challenges
The financial services industry has successfully challenged two Dodd-Frank rules in court, striking down Securities and Exchange Commission proxy access rules and the position limits rule issued by the Commodity Futures Trading Commission. Future challenges are likely. This is one of the most effective ways industry has halted Dodd-Frank rules.
The appropriations process and sequestration also could have an adverse effect on the CFTC and SEC. Dodd-Frank provisions that have budgetary implications — such as the orderly liquidation authority — could be altered using budget reconciliation rules. House Republicans proposed that approach this year. A narrow Republican majority in the Senate could pursue that course next year as well.
The SEC, which has already missed deadlines for adopting regulations related to investors, executive compensation and credit rating companies, has asked for more funding so that it can implement Dodd-Frank. It may lose more than $100 million under cuts mandated by sequestration, according to the Office of Management and Budget.
The CFTC would also be subject to sequestration, which could slash about $17 million from its annual appropriation. That agency has also asked for more funding to write and enforce new derivatives regulations.
The orderly liquidation fund set up by the FDIC to pay for the costs of winding down failing financial institutions could lose more than $100 million under sequestration. These costs, while fronted by the government, must be repaid by the financial services industry. The financial research fund, which pays for the costs of the Office of Financial Research and Financial Stability Oversight Council, could lose $12 million.
The outcome of the elections may determine the scope of sequestration and future appropriations. A new Congress would have the authority to increase or decrease funding for agencies and programs, affecting the outcome of Dodd-Frank implementation.
Cady North is a senior finance policy analyst with Bloomberg Government focusing on the implementation of the Dodd-Frank law and other financial services regulations. She joined Bloomberg from Financial Executives International, where she was senior manager of government affairs. She has done state and federal public policy work for the Texas Office of State Federal Relations, Texas Department of Transportation and Capital Consultants. She holds a B.A. in government from the University of Texas at Austin.