Legislation holds clues to what will replace Dodd-Frank

The days appear to be numbered for the Dodd-Frank Act, the sprawling legislation designed to address holes in regulation that led to the financial crisis. But what will replace it?

President-elect Trump has pledged his team will be working to replace Dodd-Frank with new policies to encourage economic growth and job creation. An existing bill provides a blueprint for what financial regulation under President Trump might look like.

In September, the House Financial Services Committee passed the Financial Choice Act, the purpose of which is to replace the Dodd-Frank act. At that time the bill was not expected to be enacted into law. While Trump has not endorsed the bill, it is possible he will use it as a guide as he works to make good on his campaign promises.

The Dodd-Frank act was remarkable in its breadth, and the Financial Choice Act is not timid in its rollback. The landscape will again change significantly if the Financial Choice Act were to become law.

The Financial Choice Act would rein in the Consumer Financial Protection Bureau, placing it under the supervision of a five-member commission and subjecting its budget to the congressional appropriation process. The Financial Choice Act would largely repeal the CFPB's authority to regulate "abusive" practices.

A central tenet of the Dodd-Frank act aimed at ending the "too-big-to-fail" syndrome, is the ability to provide enhanced supervision and regulation of institutions found to be "systematically important." The Financial Choice Act would end that regulation and designation. As a partial replacement, the Financial Choice Act provides for a new chapter of the bankruptcy code for insolvent financial institutions.

To promote more financially sound banking institutions, the Financial Choice Act encourages banks to have stronger capital bases to absorb losses, and provides for what is sometimes described as an "off ramp" from regulation. The off ramp provides that banks with favorable examination histories could choose to maintain a 10 percent leverage ratio as sufficient capital.

One of the more controversial aspects of the Dodd-Frank act is the so called "Volcker rule." Among other things, the Volcker rule was meant to prohibit banks from engaging in risky trading strategies for their own account so that taxpayers and the Federal Deposit Insurance Program would not have to foot the bill for unsuccessful strategies. Section 901 of the Financial Choice Act repeals the Volcker rule and reinstates previous provisions of law.

Interchange fees are charges that retailers pay banks when a customer makes a purchase using a debit card. The Durbin amendment provision of the Dodd-Frank act capped interchange fees that debit card issuers could charge merchants.

The idea was the provision would lower prices for consumers by cutting retailers' costs. Some believe the law had the opposite effect, leaving consumers with higher fees and the loss of benefits such as free checking. The Financial Choice Act repeals the Durbin amendment with a provision labeled "Prohibition of Government Price Controls for Payment Card Transactions."

Historically, stockbrokers have been subject to a standard that investment recommendations must be suitable for a customer. Other investment professionals, such as investment advisers, have been subject to a stricter fiduciary standard — to act in their client's best interests. The Dodd-Frank act authorized the SEC to unify the two standards.

While the SEC never proposed a rule to do so, the Department of Labor imposed a fiduciary obligation for retirement accounts that has not yet taken effect. The Financial Choice Act would repeal the Department of Labor rules and impose limits on any further SEC rule-making for a uniform standard.

It would be wrong, however, to think that the Financial Choice Act is nothing but a large concession to Wall Street institutions. The Financial Choice Act significantly increases penalties for wrongdoing, including doubling the statutory cap for securities law violations and allowing the SEC to triple monetary fines in cases where penalties are tied to illegal profits.

So will President-elect Trump's dismantling of the Dodd-Frank act resemble the blueprint set forth in the Financial Choice Act? Certainly not in its totality, even if we knew where he stood on the details. The Financial Choice Act has yet to be seriously debated in Congress, and is likely to become the target of special-interest deal making to attain passage, just like the Dodd-Frank act, even if Trump does "drain the swamp."

And the dismantling of Dodd-Frank likely will not be quick either, with a multiyear legislative process followed by years of rule-making. But with all the uncertainty about the Trump presidency, the Financial Choice Act may provide the best window we have on his views about financial regulation.