October 22, 2015
On October 8, 2015, the presidential campaign for former Secretary of State Hillary Clinton released the candidate’s prescriptions for further regulation of the U.S. financial sector. Rather than seeking to "reform the reform," the Clinton Program would go farther than Dodd-Frank, including borrowing a number of ideas from Europe.
Although in part a political document, the proposals clearly constitute serious policy as well. They demonstrate that five years of Dodd-Frank have not extinguished critical policy debates, especially on the Too Big to Fail (TBTF) issue.
Another debate that has not been extinguished concerns the appropriate calibration of regulation. The Factsheet setting forth the Clinton Program argues that raising American income levels requires strong, long-term growth, for which the additional reforms are necessary. The connection between regulation and growth has also been noted by certain critics of the Dodd-Frank Act, who have argued that refining aspects of the legislation would lead to improvements in labor force participation and household incomes.
With a Republican regulatory reform measure already drafted by Senate Banking Committee Chairman Richard Shelby (the Shelby Bill), and some of Secretary Clinton’s challengers advocating even stronger measures, the coming months have the potential to allow for a candid discussion of the connection between the extent of U.S. financial regulation and Americans’ income levels, as well as the appropriate resting place of the regulatory pendulum for the next five years.
Just as the Dodd-Frank Act sought to fill in certain gaps in existing U.S. financial regulation, the Clinton Program would not only defend Dodd-Frank as it currently exists, but it would impose new requirements, with a conscious goal of "tackl[ing] excessive risk wherever it appears." For such excessive risk, the Clinton course of treatment would rely principally on the following remedies:
In addition to regulatory enhancements, the Clinton Program would seek to take bank enforcement powers to new levels. Contending that, since the Financial Crisis, both corporations and individuals responsible for wrongdoing "too often . . . [got] off without sufficient penalty," Secretary Clinton would seek to increase sanctions for both. With respect to individuals, the Clinton Program would:
Corporations would not fare much better. Under the Clinton Program, the Department of Justice would be required to establish guidelines for the use of deferred prosecution agreements and non-prosecution agreements, and the use of those agreements would be curtailed. In instances of egregious wrongdoing, firms would be required to admit wrongdoing and the underlying facts of the matter. Secretary Clinton also stated her support for the Truth in Settlements Act introduced by Elizabeth Warren, and, conversely, her opposition to SEC waivers for recidivist bank issuers. Finally, Secretary Clinton would increase funding for the Department of Justice, SEC, and CFTC, and introduce legislation providing that SEC and CFTC funding be independent of the appropriations process, like funding for the bank regulators.
In some instances, Secretary Clinton’s enforcement proposals mimic existing practices, but when considered as a whole, it is fair to say that they would advance beyond the Obama Administration’s current practices.
Secretary Clinton did draw a line on one issue – unlike Senator Sanders and former Governor O’Malley, she would not seek to cure the TBTF issue by reinstating those provisions of the Glass-Steagall Act that the Gramm-Leach-Bliley Act repealed. Universal banks would therefore not be required to divest their securities underwriting and dealing subsidiaries, but, as described above, individual banks could be subject to government-mandated divestiture orders if they were not sufficiently well managed, and all banks would be required to "push out" many of their derivative activities to separately capitalized affiliates.
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As noted, the Clinton Program would effectively place a European-style overlay over Dodd-Frank. It is therefore quite ironic that contemporaneously with the release of the Clinton Program, there was considerable evidence of Europeans’ softening their approach to financial regulation.
Four days after the release of Secretary Clinton’s recommendations, Frédéric Oudéa, the president of the European Banking Federation and chief executive officer of Société Générale, noted the formidable competition that U.S. banks were now providing in European markets, and warned against "counterproductive steps" that certain European countries were considering, including a financial transactions tax, that would give U.S. banks more advantages. He argued that as a result of bolstered capital cushions and a European bank resolution mechanism, Europe’s banking sector had become safer, and additional regulation could result in European companies being forced to become reliant on non-European banks for debt financing, capital markets advice, and hedging solutions.
Two days after Mr. Oudéa’s article, an American former senior bank executive was reported to be the choice to lead one of the U.K.’s most important universal banks. And a few days later, regulators implementing the United Kingdom’ bank ring-fencing scheme – which requires a "push out" of investment banking operations from retail banks similar to the Lincoln Amendment derivatives "push out" that Secretary Clinton wishes to reimpose – chose less onerous alternatives on questions relating to dividend payments and the responsibility of senior management for wrongdoing.
The message from Europe, therefore, seems to be one of dissatisfaction with "tackl[ing] excessive risk wherever it appears," as Secretary Clinton would purport to do, on the grounds that doing so leads to stagnation in the financial markets and the economy as a whole. And indeed a similar message came from Asia on October 13th, when Nobuchika Mori, Commissioner of Japan’s Financial Services Agency, stated in a speech entitled "Rethinking Regulatory Reforms" that "the [G-20] leaders intend to move from the case of adding new regulation to that of implementing it, but the factories manufacturing new regulation are still operating at their full capacity." Commissioner Mori added: "[F]inancial stability is not a goal in itself. It is a means to ensure sustainable growth."
With this in mind, it seems reasonable to pose certain questions about the Clinton Program.
Given the scope of the Factsheet setting forth the Clinton Program, one can expect that there will be detailed responses to questions like these as the 2016 election approaches. It is quite clear, moreover, that the issue of financial sector regulation will be as important in this election cycle as in 2008 and 2012, with the likely effects of the outcome on bank business models rapidly becoming apparent.
 Factsheet, " Hillary Clinton: Wall Street Should Work for Main Street," October 8, 2015 (Clinton Factsheet), available at https://www.hillaryclinton.com/p/briefing/factsheets/2015/10/08/wall-street-work-for-main-street/.
 Financial Regulatory Improvement Act of 2015, available at http://www.banking.senate.gov/public/.
 Under the Shelby Bill, the total asset threshold would increase to $500 billion for banking institutions as a general matter, although the Federal Reserve and FSOC would retain the power to designate banking institutions with between $50 billion and $500 billion in total assets as systemic on a case-by-case basis.
 The $50 billion threshold derives from Senator Dodd’s failed attempt to limit Federal Reserve oversight of state member banks to the largest such institutions. It then was accepted as a replacement for the language in the House version of Dodd-Frank, which stated that enhanced prudential standards would apply to "large interconnected bank holding companies" in addition to nonbank financial companies designated by the FSOC. Every nonbank financial company that the FSOC has designated to date had more than $500 billion in total assets at the time of its designation.
 Under Section 165 of Dodd-Frank, the Federal Reserve and FDIC may order bank holding companies whose living wills have been found deficient to divest assets, if the deficiencies have not been appropriately remedied. The Kanjorksi Amendment, Section 121, permits the Federal Reserve to order systemic firms to divest assets if it determines that the firm poses a "grave threat" to financial stability and other remedies are inadequate.
 See, e.g., Joshua Zumbrun, "Hoenig Says U.S. Should Break Up Big Financial Firms," Bloomberg, February 23, 2011.
 Dodd-Frank Act, Section 120.
 See Gibson Dunn & Crutcher LLP Client Alert, DOJ’s Newest Policy Pronouncement: the Hunt for Corporate Executives (September 11, 2015), available at: http://www.gibsondunn.com/publications/Pages/Yates-Memo–DOJ-New-Posture-on-Prosecutions-of-Individuals–Consequences-for-Companies.aspx.
 77 F.3d 438 (2d Cir. 2014). See Gibson Dunn & Crutcher LLP Client Alert, United States v. Newman: Second Circuit Ruling Portends Choppier Waters for Insider Trading Charges Against Downstream Tippees (December 15, 2014), available at: http://www.gibsondunn.com/publications/pages/US-v-Newman–Second-Circuit-Ruling-Portends-Choppier-Waters–Insider-Trading-Charges-Against-Downstream-Tippees.aspx.
 Frédéric Oudéa, "Europe Needs Homegrown Bulge Bracket Banks," Financial Times (October 12, 2015). Monsieur Oudéa’s contentions about the resurgence of U.S. investment banks in Europe are supported by numerous recent articles in the financial press.
 Caroline Binham and Emma Dunkley, "Banks Win Fresh Concession on Ringfencing Rules," Financial Times (October 15, 2015).
 Blake-Evans Pritchard, "JFSA’s Mori Warns on Over-Regulation of Banks, Risk (October 13, 2015) (emphasis added).
 Ernst & Young LLP, 2015 Risk Management Survey of Major Financial Institutions (October 2015).
 Frédéric Oudéa, "Europe Needs Homegrown Bulge Bracket Banks," Financial Times (October 12, 2015).
 Andrew Ackerman & Ryan Tracy, "SEC Fights Turf War Over Asset Managers," The Wall Street Journal (January 28, 2014).
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