House Financial Services Committee Financial Choice Act 2.0: Key Banking, Derivatives and Rulemaking Reforms

May 10, 2017

On May 4, 2017, by a vote of 34 to 26, the House Financial Services Committee ordered reported H.R. 10,[1] the Financial CHOICE Act of 2017 (CHOICE Act 2.0 or the Bill), which had been introduced previously by Chairman Representative Jeb Hensarling (R-TX) and seven other Republican members of Congress.  The Bill, which is a revised and expanded version of similar legislation introduced by Representative Hensarling in 2016,[2] seeks to overhaul the administrative state as much as it does the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

The Bill focuses on the following principal themes:

  • Under Dodd-Frank, financial regulation improperly balanced the costs of regulations against their perceived benefits;
  • Congress and the federal courts should have greater control over the regulatory process;
  • Dodd-Frank’s systemic risk provisions produced substantial regulatory overreach;
  • Heightened capital standards alone are sufficient to replace much of Dodd-Frank’s prudential regulatory structure; and
  • Dodd-Frank did not go far enough in restraining the ability of government to “bail out” and play favorites among failing financial firms.

Politically, CHOICE Act 2.0 has a challenging road ahead.  The Bill did not attract Democratic support in committee.  It was ordered reported on a party-line vote, and 19 Democratic amendments were rejected, also on party lines.  Highlighting the level of partisan rancor, one Democratic amendment that was defeated on party lines would have prevented the Bill from taking effect until the Office of Government Ethics certified that the Bill would not directly benefit the President or any of his advisors who are in a position to influence federal regulation.

This Alert summarizes the Bill’s key provisions relating to bank regulation, derivatives regulation, and rulemakings by federal financial regulators.


A.     Reforms Independent of the “Off Ramp” from Dodd-Frank

Demonstrating a desire to roll back excessive regulation generally, the Bill would eliminate many key features of the Dodd-Frank regulatory regime for all banks and nonbank financial companies.  These changes include:

  • End to Nonbank SIFI designation:  The ability of the Financial Stability Oversight Council (FSOC) to designate nonbank financial companies as “systemically significant” (Nonbank SIFIs) and the ability of the Board of Governors of the Federal Reserve System (Federal Reserve) to apply enhanced prudential standards to such institutions would be repealed.
    • As a result, Federal Reserve supervision and regulation of the two currently designated Nonbank SIFIs, American International Group, Inc. and Prudential, Inc.[3] would end, as well as the prospect of future supervision and regulation for all other nonbank financial companies.
    • The FSOC would retain, however, certain of its current authority; for example, its authority to identify risks to the financial system and report on those to Congress.
  • End to Designation of Systemically Significant Financial Market Utilities:  Similarly, the ability of the FSOC to designate financial market utilities (FMUs) as “systemically significant” would be repealed.
    • As a result, Dodd-Frank supervision and regulation of the eight currently designated FMUs would cease, and these FMUs would lose their ability to borrow from the Federal Reserve discount window.[4]
  • Repeal of FSOC “Break-Up” and Related Authority:  The so-called “Kanjorski Amendment” that gave the FSOC the authority, among other permitted actions, to break up Nonbank SIFIs and bank holding companies (BHCs) with total consolidated assets of $50 billion or more upon a finding of a “grave threat” to financial stability would be repealed.
    • The Federal Reserve would retain its authority contained in Regulation Y to require a BHC to terminate a business activity or terminate control of a nonbank subsidiary whenever it believes that the activity or control constitutes a serious risk to the financial safety, soundness, or stability of a subsidiary bank of the BHC and is inconsistent with sound banking principles or the purposes of the BHC Act.[5]
  • Repeal of the Volcker Rule:  The Volcker Rule’s restrictions on proprietary trading and private fund activities would be repealed for all banking institutions, regardless of size.
  • Repeal of the “Hotel California” Provision:  As a result, $50 billion or greater BHCs that received TARP money could “debank”–that is, close down or sell their BHC Act “banks”–without the consequence of being subject to Federal Reserve supervision and enhanced prudential standards.
  • Repeal of the Orderly Liquidation Authority:  Title II of Dodd-Frank, which established the Orderly Liquidation Authority (OLA) an alternative to the Bankruptcy Code for resolving a failing Nonbank SIFI or $50 billion or greater BHC, would be repealed.
    • As a result, resolution under the Bankruptcy Code would be the only means of resolving such companies, not an FDIC receivership.
    • The FDIC would lose its most significant source of current regulatory authority, and be relegated to its traditional role of resolving failed banks and thrifts.
    • CHOICE 2.0 Act would add a new Subchapter V to Chapter 11 of the Bankruptcy Code, discussed below, for financial companies
  • Changes to the “Living Will” Process:  The “living will” process would be transformed for $50 billion or greater BHCs.
    • The FDIC would no longer review the living wills of $50 billion or greater BHCs; only the Federal Reserve would.  The FDIC would review the living wills of insured depository institutions that were required to submit them.
    • Living wills would be required to be updated only every two years, not every year, and the relevant agency would be required to provide its feedback within six months after a submission.
  • The relevant agencies would be required to make public the framework by which they assessed BHC and insured depository institution living wills, and subject that framework to notice and comment before finalizing it.
  • Changes to the CCAR/DFAST Process:  The Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) would become a two-year process, as opposed to being conducted every year; and it would not include a “qualitative component,” regardless of the size or complexity of the BHC.
    • In addition, responding to concerns that the Federal Reserve’s stress testing process (DFAST) was based on “black box” models, CHOICE Act 2.0 would require the Federal Reserve to promulgate regulations under notice and comment setting forth its three stress testing scenarios, as well as models used to estimate certain losses under those scenarios.
  • Changes to Company Run Stress Testing Process:  For $50 billion or greater BHCs, only one annual BHC-run “stress test” would be required, as opposed to the two tests required currently.
  • Restriction on Operational Risk Capital Requirements:  The Bill would prohibit the adoption of a capital requirement for operational risk unless the requirement was based on the risks posed by a banking organization’s current activities and businesses, was appropriately risk sensitive, was based on a forward-looking assessment of potential losses, and permitted adjustments based on qualifying risk mitigants.  Large BHCs have been highly vocal in their criticism of the burdens of current operational risk requirements.
  • Repeal of Securities Holding Company Regulation by the Federal Reserve:  The Bill would repeal the current authority of the Federal Reserve to regulate a “securities holding company”–that is, a broker dealer that did not own a bank or thrift but was required to demonstrate to foreign supervisors that it was subject to consolidated supervision in the United States.
  • Repeal of “Early Remediation” Authority:  The Bill would repeal the Dodd-Frank provision authorizing the Federal Reserve to issue regulations requiring early remediation requirements for Nonbank SIFIs and $50 billion or greater BHCs.  The Federal Reserve has proposed regulations under that provision, but such regulations have not been finalized.
  • Repeal of the Durbin Amendment:  Viewed by the Bill’s sponsors as an inappropriate price control mechanism, the Durbin Amendment to Dodd-Frank, which limits the amount of debit card interchange fees that may be charged by banks with $10 billion or more in total consolidated assets, would be repealed.
  • FIRREA Reform:  The Bill would amend the civil money penalty provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 so that violations of federal statutes like those punishing wire and mail fraud would be required to be carried out either “against” a federally insured financial institution or “by a federally insured financial institution against an unaffiliated third person,” rather than merely “affect” such an institution, to give rise to liability.
  • Bank Examination Reforms:  The Bill would set mandatory time periods for the federal banking agencies to issue examination reports and create in the Federal Financial Institutions Examination Council an Office of Independent Examination Review to which material supervisory determinations in examinations could be appealed.
  • Override of Madden Decision:  The Bill would override the controversial decision of the United States Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC[6] and impose a uniform federal rule that a loan that did not violate state usury laws when made due to federal preemption would also not violate such laws when acquired by or transferred to a third party.
  • Bank Regulations to Take Into Account Business Models.  The Bill would require each federal banking agency, when taking regulatory action, to take into consideration the risk profile and business models of each type of institution or class of institutions subject to the regulatory action; determine the necessity, appropriateness, and impact of applying such regulatory action to such institutions or classes of institutions; and tailor such regulatory action in a manner that limits the regulatory compliance impact, cost, liability risk, and other burdens, as appropriate, for the risk profile and business model of the institution or class of institutions involved.

Several key points may be taken from these general reforms.  First, enactment of CHOICE 2.0 Act would return Nonbank SIFI regulation to where it was before the Financial Crisis:  if a large, interconnected company engaged in financial activities (securities, derivatives, commodities, insurance) did not control a BHC Act “bank” or a thrift, it would not be subject to supervision and regulation by the Federal Reserve or any other prudential bank regulator.

Second, although there would be a significant reduction in bank holding company regulation, the Dodd-Frank Section 165 enhanced prudential standards, amended in the manner above, would continue to apply at the $50 billion total consolidated asset threshold.  This would be the case even though there is a consensus that the $50 billion threshold was set too low, as well as strong beliefs that the Federal Reserve could have tailored its enhanced prudential standards much more effectively based on size and complexity in its regulations implementing Section 165.

Third, other than as described above, many Section 165 prudential standards and other Dodd-Frank regulations would remain:  the Basel III capital standards (including the standardized approach capital floor imposed by the Collins Amendment and certain U.S. gold-plating, such as the heightened capital charge for High Volatility Commercial Real Estate loans); the liquidity coverage ratio; and heightened risk governance requirements, among others.

In order to escape these aspects of Dodd-Frank, a BHC would be required to make use of the Bill’s so-called “Off Ramp.”

B.     Reforms for Banks and BHCs Qualifying for the “Off Ramp”

A principal aspect of the “choice” in CHOICE Act 2.0 refers to the fact that additional regulation under Dodd-Frank would disappear for BHCs and banks that are “qualifying banking organizations.”  Such banking organizations include:

  • Insured depository institutions
  • Insured credit unions[7]
  • Depository institution holding companies
  • Non-U.S. banks treated as U.S. BHCs
  • U.S. intermediate holding companies (IHCs) of non-U.S. banks established under Dodd-Frank

To qualify, the organization must have an average leverage ratio of at least 10 percent (i.e., the average of its leverage ratios for the four most recently completed calendar quarters); if the organization is a holding company, its subsidiary insured depository institutions must also meet the 10 percent test, and if the organization is an insured depository institution, any parent holding company must also meet the 10 percent test.  This is the only requirement.

How the leverage ratio is measured depends on the type of banking organization.  If the banking organization limits itself to “traditional” activities–that is, it has zero trading assets and liabilities, has no swap activities other than swaps/securities-based swaps referencing interest rates and foreign exchange, and its total notional exposure of swaps and securities-based swaps is not more than $8 billion, then the ratio is:

  • the sum of common equity Tier 1 capital, plus additional Tier 1 capital instruments issued on or before the date of enactment, plus, for certain holding companies, outstanding trust preferred securities that qualify as Tier 1 capital, divided by:
  • total assets minus any items deducted from common equity Tier 1 capital.

For other organizations, the numerator is the same, but the denominator is total leverage exposure–that is, the denominator is a supplementary leverage ratio (SLR) including off-balance sheet components.

Maintaining such a high tangible leverage ratio has substantial benefits.  These include:

  • Being exempt from “any” federal law, rule or regulation addressing capital or liquidity requirements or standards
  • Being exempt from “any” federal law, rule or regulation that permits a federal banking agency to object to a capital distribution
  • Being exempt from the consideration of Dodd-Frank “financial stability” factors in mergers, acquisitions, and the conduct of new activities
  • Being exempt from Section 165 enhanced prudential standards and their implementing regulations
  • Being exempt from laws placing limitations on mergers and acquisitions relating to capital and  liquidity standards, and concentrations of deposits and assets[8]

Because for more complex banking organizations the leverage ratio is an SLR, it not clear that such organizations would make use of the off-ramp:  the amount of tangible capital that would be required is significantly more than under current capital requirements.  This said, the off-ramp could provide small and medium-sized institutions (including certain non-U.S. bank IHCs with a retail banking focus) with an intriguing manner of significantly avoiding the current web of Dodd-Frank regulation.  Many community banks, moreover, currently do meet the 10 percent leverage threshold, and such banks would clearly benefit from enactment of the “off-ramp.”

C.     A New Bankruptcy Regime for Failing Financial Companies

As noted above, CHOICE Act 2.0 would repeal the OLA, which means that a significant bank or financial firm that failed could only be resolved–like Lehman Brothers–in a Bankruptcy Code proceeding.

Many commenters on the Financial Crisis believed that the Bankruptcy Code as in effect at the time of Lehman Brothers’ insolvency was ill-suited to the resolution of financial firm, and so CHOICE Act 2.0 would enact a new Subchapter V in Chapter 11 of the Bankruptcy Code in an attempt to fix the perceived flaws.[9]

Subchapter V would be available for “covered financial corporations,” a term defined as follows:

  • Any corporation incorporated or organized under any Federal or State law, other than a stockbroker, commodity broker, depository institution or insurance company, that is:
    • a bank holding company, or
    • a holding company that has total consolidated assets of $50 billion or greater, and for which, in its most recently completed fiscal year, had annual gross revenues or consolidated assets that were at least 85 percent financial in nature (including related to the ownership or control of insured depository institutions)

Subchapter V takes from the OLA the concept of the transfer of estate property, assignment of executory contracts, unexpired leases, and qualified financial contracts (QFCs) to a bridge company; upon an order approving such a transfer, such property would no longer be property of the estate.  The purpose of such a transfer is similar to that in the OLA–effectively to wipe out the equity and unsecured debt of the failed firm, which would be required to remain in the estate, while permitting healthy operating subsidiaries to continue their business as subsidiaries of the bridge company.

Equity in the bridge company would be owned by a trust overseen by a “special trustee” appointed by the bankruptcy court (the Federal Reserve would be permitted to consult regarding the identity of the special trustee).  Ultimately securities of the bridge company could be sold–that is, if the transferred business stabilized under the bridge company such that it could be sold to new investors or another financial firm–but the special trustee would be required to consult with the Federal Reserve and FDIC regarding such sales and disclose the result of that consultation to the bankruptcy court.  Proceeds from such sales would be held in trust for the benefit or, or otherwise transferred to, the bankruptcy estate for distribution to creditors.

Subchapter V thus seeks to preserve enterprise value of the failed firm as the OLA does.  To that end, if contains amendments to the Bankruptcy Code regarding provisions for “qualified financial contracts” (QFCs)–that is, swaps and other derivative agreements–that seek to ensure a transfer of QFCs to the bridge company, without permitting counterparties to the failed firm, or counterparties of the firm’s affiliates, to avoid such agreements due to the commencement of the case.

Although Subchapter V borrows many concepts from the OLA, it differs in one significant way.  Because CHOICE Act 2.0 seeks to end any possibility of a government bailout, there is no provision for the extension of government liquidity funding to the bridge company as in the case of the OLA.  The bridge company will therefore be required to rely on the available liquidity of the failed firm’s subsidiaries transferred to it, and any liquidity funding that it can obtain from private sources.

One logical result of the repeal of the OLA and enactment of Subchapter V, therefore, would be continued increased focus on pre-positioning of available liquidity throughout a BHC’s structure as part of the BHC “living wills” process.

D.     Reforms to the Federal Bank Regulators

                        1.        Federal Reserve

The Bill makes significant changes to the Federal Reserve’s emergency lending authority,[10] including:

  • Amending Section 13(3) of the Federal Reserve Act to require the affirmative vote of at least nine Federal Reserve Bank presidents for the Federal Reserve to grant an emergency funding request;
  • Requiring that the “unusual and exigent circumstances” in Section 13(3) that permit such emergency funding also “pose a threat the financial stability of the United States”;
  • Prohibiting the acceptance of equity securities issued by the borrower as collateral for emergency loans under Section 13(3);
  • Requiring that borrowers under Section 13(3) be financial institutions, and that, as a condition to an emergency loan, all federal banking regulators with jurisdiction over a borrower certify that the borrower was not insolvent; and
  • The Federal Reserve would be required to promulgate regulations regarding the types of acceptable collateral (including collateral haircuts) for Section 13(3) loans and the penalty rate of interest that would be applied to such loans; the Bill itself sets a minimum penalty rate.

                        2.        Consumer Financial Protection Bureau

Under the Bill, the CFPB would be radically transformed.  Among the more important reforms are the following:

  • The CFPB would be renamed the Consumer Financial Opportunity Agency;
  • It would be an executive agency whose Director would be removable at will by the President, and it would be subject to the congressional appropriations process;
  • It would be a rulemaking and enforcement agency only (it would not have supervisory or examination authority); it would be limited in enforcing enumerated federal consumer laws only, and not “unfair, deceptive or abusive acts and practices” (UDAAP);
  • It would have a “dual mandate” of enforcing laws to strengthen participation in financial markets, increase competition, and enhance consumer choice;
  • The federal banking agencies, and not it, would have authority to promulgate regulations addressing unfair or deceptive, but not abusive, acts and practices (UDAP); and
  • It would be stripped from taking regulatory action where its actions to date have been controversial, such as payday and small dollar loans, arbitration clauses, and automobile finance.

                        3.        Reforms to the Other Bank Regulators

The Bill would significantly alter the structure of the FSOC, which would be enlarged so that each member of a multi-member commission, agency or board would be a member of the FSOC.  The number of FSOC votes, however, would not be increased, so that a multi-member commission, agency or board would determine its vote by its normal voting processes, meaning that a Chair could be outvoted.  To add transparency to FSOC meetings, agency staff could attend FSOC meetings if selected by an FSOC member; meetings would also be open to attendance by members of the House Financial Services Committee and Senate Banking Committee; and they would be subject to the Government in the Sunshine Act.  The FSOC would receive a set amount of congressionally authorized funding each fiscal year, rather than its current practice of assessing Nonbank SIFIs and $50 billion or greater BHCs.  In a response to widespread criticism of its work, the FSOC’s Office of Financial Research would be abolished.  Dodd-Frank’s Federal Insurance Office would be replaced by the Office of the Independent Insurance Advocate (IIA), a bureau in the Department of the Treasury; the IIA would replace the so-called “independent member with insurance expertise” as an FSOC voting member.

As for the FDIC, the Bill would remove the Comptroller of the Currency and the Director of the CFPB from its board of directors; they would be replaced by specific Presidential appointees.  In addition, the Bill would strip the FDIC of the ability to establish a guarantee program of general applicability like the Temporary Liquidity Guarantee Facility established during the Financial Crisis and repeal the provision of current law that permits the FDIC to select a means of resolution of a failing bank that is not the least costly to government if the FDIC makes a systemic risk finding.

The effects of the changes to the federal bank regulators seem threefold.  First, the ability of the Federal Reserve and FDIC to use their discretion in the event of a new financial crisis, which was already constrained by Dodd-Frank, would be further channeled–the animating principle is to end government “bailouts” in the broadest sense of the term.  With respect to the CFPB, CHOICE Act 2.0 would transform its mission and make it less independent of the political branches of government.  The other significant Dodd-Frank administrative creation, the FSOC, would see its powers cut back, greater transparency brought to its meetings, and the ability of Chairs of regulatory agencies to influence FSOC decision-making reduced.


Largely unaffected by CHOICE Act 2.0, derivatives regulation would be subject to only two new, specific provisions.  One would require harmonization of rules promulgated by the securities-based swap regulator, the SEC, and the swaps regulator, the CFTC.  The other is a measure to exempt swaps and securities-based swaps transactions between certain affiliates from certain regulatory requirements intended to be applied to third-party transactions.

A.     Title VIII, Subtitle B, Section 871: Commission Review and Harmonization of Rules Relating to the Regulation of Over-the-Counter Swaps Markets

Similar to aspects of President Trump’s Executive Order 13777 to Executive agencies,[11] Section 871 of the Bill would instruct the SEC and CFTC to streamline their current governance framework.  In particular, the SEC and CFTC would be required to review all rules, orders, and guidance issued pursuant to Title VII of Dodd-Frank with the goal of resolving inconsistencies between such rules, orders and interpretive guidance by issuing new joint regulations, orders and guidance.

In the Title VII implementation process, harmonization between the CFTC’s rules for swaps and the SEC’s rules for security-based swaps has been recognized as an area for improvement.  For example, market participants have raised concerns that proposals from the SEC would require duplicative registration and other requirements for entities that engage in both swaps and security-based swaps activities.  In that regard, Section 871 would aim to eliminate such inconsistencies.

B.     Title VIII, Subtitle B, Section 872: Treatment of Transactions Between Affiliates

Dodd-Frank does not distinguish between internal swaps between affiliates and those with third parties, ignoring the fact that former does not create systemic risk, as such transactions do not create additional counterparty exposure outside of the corporate group and do not increase interconnectedness between third parties.[12]  Notwithstanding the lack of clarity in the statute, the CFTC has provided significant relief for inter-affiliate swaps from margin, clearing and reporting requirements.[13]  Similar to the inter-affiliate language that passed the House earlier this year as part of the CFTC Reauthorization Bill (H.R. 238),[14] Section 872 would serve to codify current CFTC relief, and add a parallel SEC provision.  The amendment would remove transactions between majority-owned affiliates from the definition of “swap” and “security-based swap” if those affiliates are on a company’s consolidated financial statements.  It would also subject those exempted swaps or security-based swaps to certain requirements:

  • if one counterparty is either a swap dealer or major swap participant if regulated by the CFTC, or a security-based swap dealer or major security-based swap participant if regulated by the SEC, it would be required to report the transaction and have a centralized risk management program; and
  • the inter-affiliate swaps cannot be structured to evade Dodd-Frank requirements.[15]


Title III of the Bill would significantly change the financial rulemaking process.  It would do so through imposing new cost-benefit analysis requirements, granting Congress oversight and veto powers over new regulations, and putting an end to federal court deference when reviewing agency action.  Moreover, Title III applies to a wide range of agencies, including all the principal bank regulatory agencies:

  • Federal Reserve
  • Consumer Law Enforcement Agency (i.e., the agency replacing the CFPB)
  • Commodity Futures Trading Commission (CFTC)
  • Federal Deposit Insurance Corporation (FDIC)
  • Federal Housing Finance Agency (FHFA)
  • Office of the Comptroller of the Currency (OCC)
  • National Credit Union Administration  (NCUA)
  • Securities and Exchange Commission (SEC, and together with the foregoing, the Agencies)

A.     Title III, Subtitle A–Cost-Benefit Requirements

Subtitle A of Title III sets forth heightened cost-benefit requirements with which Agencies must comply in rulemakings.  In addition, the Bill would require the SEC to submit to Congress a plan for subjecting the Public Company Accounting Oversight Board, the Municipal Securities Rulemaking Board, and registered national securities exchanges to these requirements.

                        1.        Expansion of Subject Agencies and Increased  Requirements

Although cost-benefit analyses are currently undertaken by certain federal financial agencies, the Bill would expand the number of Agencies that would generally be required to conduct such analyses–e.g., the Federal Reserve, the OCC, and the FDIC[16]–and impose uniform heightened standards for all Agencies.[17]

When issuing a proposed rule, an Agency would be required to complete a detailed analysis, including on the following principal subjects:

  • General Justifications:  The Agencies would be required to identify the need for the regulation, including the nature and significance of the market, regulatory or other failure necessitating Agency action.
  • Private Market and Local Solutions:  The Agencies would also be required to address and explain why the private market or state and local authorities could not adequately address the market failure or need for the regulation.
  • Method of Regulation:  If a proposed regulation would specify the behavior or manner of compliance (i.e., how to do something), rather than specify the performance objective (i.e., what an activity should result in), the Agency must provide an appropriate justification for the use of the former.
  • Adverse Effects Analysis:  The Agencies would be specifically required to analyze the adverse effects of the proposed regulation on regulated entities, market participants, economic activity, and Agency effectiveness.
  • Cost-Benefit Analysis:  The Agencies would be required to undertake a quantitative and qualitative cost-benefit analysis of all anticipated direct and indirect costs and benefits, including: (i) compliance costs; (ii) costs on economic activity, job creation, efficiency, competition, and capital formation; and (iii) regulatory administrative costs and other costs to state and local government.  An analysis would be required to include an assessment of the degree to which key assumptions used are subject to uncertainty, as well as a description of data or studies used.[18]
  • Alternatives:  The Agencies would be required to identify and assess all available alternatives to the regulation, including why modifications to existing regulations or laws were not adequate.
  • Conflicts and Overlap:  The Agencies would be required to assess any inconsistencies or duplication with other domestic or international regulations.  This provision echoes many of the principles contained in recent executive orders.
  • Market Behavior:  The Agencies would need to provide a prediction of expected changes in market structure and behavior, assuming that market actors pursue their economic interests.

The Bill would subject proposed rules to a comment period of at least 90 days from the date of publication in the Federal Register, or an Agency would be required to include in its final rulemaking an explanation of why such a comment period had not been provided.  Before issuing a final rule, an Agency would be required to conduct an analysis of the elements required in the notice of proposed rulemaking, and also include regulatory impact metrics under which the rule would be analyzed five years after promulgation.  Notably, Section 312(b) of the Bill would prevent an Agency from issuing a final rule if its quantified costs outweighed its quantified benefits, absent a joint House and Senate waiver.

                        2.        Increased Rulemaking Transparency

Section 314 of the Bill would require the Agencies to increase transparency in the rulemaking process, mandating that they make available the underlying data, methodologies and assumptions of the various analyses required under Section 312 at or prior to the commencement of the comment period.  The information provided should be “sufficient . . . so that the analytical results of the Agency are capable of being substantially reproduced.”  Although Section 314 expressly does allow agencies to deny disclosure of data and documents in order to “preserve the confidentiality of nonpublic information, including confidential trade secrets, confidential commercial or financial information, and confidential information about positions, transactions, or business practices,” this permission is not as broad as under the Freedom of Information Act (FOIA) generally.[19]

                        3.        Mandated Agency Reviews

To ensure that new Agency regulations were consistent with the statute’s objectives, Sections 315 and 316 of the Bill would require the following:

  • Five Year Analysis of Each Rule:  Each final Agency rule would be subject to a comprehensive economic impact review five years after implementation by the Agency’s chief economist; the review would be required to address the regulatory impact metrics identified in final rulemaking.  The chief economist would then issue a report on the rule to the House Financial Services Committee and the Senate Banking Committee and post it on the Agency’s public website; if a CFTC rule were involved, the report would be issued to the House and Senate Agriculture Committees as well.
  • Retrospective Review:  Each Agency would be required to undergo Agency-wide assessments to “to make the regulatory program of the Agency more effective [and] less burdensome in achieving the regulatory objectives.”  As part of the assessments, the Agencies would submit an implementation plan to the above Committees, and post it on their public websites, within one year of the Bill’s enactment and every five years thereafter.  A progress report on the plan would be required to be submitted within two years of each plan submission.

4.         Judicial Review of Compliance with Title III Requirements

Section 317 would permit any person adversely affected or aggrieved by a final rule to seek relief from the Agency action within one year of publication of a final rule.  It would empower the U.S. Court of Appeals for the District of Columbia Circuit to vacate the regulation upon a showing that the Agency failed to comply with Section 312’s requirements; an Agency could avoid vacatur if it demonstrated by clear and convincing evidence that vacatur would result in irreparable harm.  Section 317 would not, however, affect other limitations on judicial review or the ability of the federal courts to dismiss actions on appropriate legal or equitable grounds.

Because Section 312’s requirements are more specific and detailed than existing law, this provision would impose more robust constraints than currently exist on insufficiently substantiated agency decision-making.

B.     Title III, Subtitle B–Congressional Review of Federal Financial Agency Rulemaking

Title III, Subtitle B of the Bill would grant Congress new broad veto and consent powers over most final Agency rulemakings.[20]  Upon publication of a final rule in the Federal Register, Agencies would be required to submit to Congress and the Comptroller General a detailed report on the regulation, including the cost-benefit analysis.  For final rules designated as “major,” such rules would be required to obtain the joint consent of both chambers of Congress in order to become law.  For all other rules, Congress would be permitted to reject finalization via a joint resolution.

For all “major rules”–those that would likely result in (i) an annual effect on the economy of $100 million or more, (ii) a “major increase” in costs or prices for consumers, individual industries, domestic governments, or geographic regions, or (iii) have significant adverse effects on competition, employment, investment, productivity, innovation, or the ability of U.S. business to compete with foreign business[21]–Congress would be required to enact a joint resolution within 70 days of receiving the Agency report.  Absent such a joint resolution or overriding determination by the President,[22] major rules would be prevented from coming into effect.

To assist Congress in making a decision, the Comptroller General would be required to submit a report to each chamber of Congress within 15 calendar days of the Agency’s submission, assessing whether the major rule imposes any new limits or mandates on private sector activity, as well as whether the Agency complied with the administrative requirements of Subtitle B (including providing a complete version of the cost-benefit analysis).

Non-major rules would not require the affirmative vote of Congress to become effective.  Congress, however, would be afforded 60 days from publication of a final rule in the Federal Register to formally reject the rule.

If enacted, Subtitle B would alter significantly the administrative process for regulations that qualify as “major” rules and give Congress substantially more influence over Agency action, particularly when Congress and the White House are controlled by different political parties.  But even when Congress and the Administration were of the same political party, the provision could make it more difficult for major rules to become effective.

C.     Title III, Subtitle C–Restrictions on Judicial Review of Agency Actions

Section 341 of the Bill would end the application of Chevron[23] and Auer[24] deference to Agency decision-making in court actions challenging administrative action.   The Bill would instead require courts to apply de novo review on “all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by an [A]gency.”

Notably, a similar provision in the Regulatory Accountability Act of 2017[25] passed the House earlier this year.  Given the broader scope of that bill–it applied to all administrative agencies–it appears that a majority of the House believes that the deference currently given to agency interpretations of law is misplaced.

D.     Title III, Subtitle E–Subjecting Bank Regulators to Congressional Appropriations

The Bill would implement a significant change to the funding of the FDIC, OCC, and the non-monetary-policy-related functions of the Federal Reserve, as well as the FHFA and NCUA.  Whereas currently, these Agencies generally fund themselves with assessments on the banking industry, if the Bill becomes law, Congress would set, and thereby be able to limit, Agency funding; industry assessments would serve only to reimburse the federal government for its spending.  The impetus for this change is, once again, a desire to exert more congressional control over the financial regulatory process.

E.     Title III, Subtitle F – International Processes

Section 371 of the Bill would, among other things, subject each Agency’s involvement in international harmonization and rulemaking efforts to public oversight and comment.  Prior to engaging in “processes”[26] to establish standards as part of any foreign or multinational entity, Agencies would be required to issue a formal public notice at least 30 to 90 days in advance.  The notice would describe the subject matter, scope and goals of the process and be subject to public comment.

After the conclusion of such international efforts, Agencies would be required to issue a public report summarizing the discussions and efforts, including any new or revised rulemaking or policy changes that the Agency might pursue.  Section 371 thus seeks to bring greater transparency to U.S. regulators’ international co-ordination activities, such as participation in the Financial Stability Board and Basel Committee.

 *         *          *          *          *

CHOICE Act 2.0, like the statute it seeks to reform, Dodd-Frank, is an extremely ambitious piece of legislation.  It is also extremely unlikely to pass both chambers of Congress in its entirety.  This said, there is considerable desire on the part of the Administration and members of Congress to prune away those portions of Dodd-Frank that are seen as inhibiting economic growth, and so particular provisions of the Bill may ultimately be enacted as separate measures.  It is clear, moreover, from both the administrative law and federal banking law provisions of the Bill that the regulatory implementation of Dodd-Frank over the past six years has generated significant congressional opposition, opposition that is unlikely to subside in the near term.

[1]   H.R. 10, 115th Cong. (2017), available at

   [2]   H.R. 5983, 114th Cong. (2016), available at

   [3]   The FSOC is currently appealing the adverse decision of the U.S. District Court for the District of Columbia voiding its Nonbank SIFI designation of MetLife, Inc. to the U.S. Court of Appeals for the District of Columbia Circuit.

   [4]   The eight designated FMUs are:  The Clearing House Payments Company, L.L.C., as operator of the Clearing House Interbank Payments System, CLS Bank International, the Chicago Mercantile Exchange, Inc., the Depository Trust Company, the Fixed Income Clearing Corporation, ICE Clear Credit L.L.C., the National Securities Clearing Corporation, and the Options Clearing Corporation.

   [5]   12 C.F.R. § 225.4(a)(2).

   [6]   Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).

   [7]   The following discussion focuses on non-credit union banking organizations.

   [8]   If a banking organization fails to meet the tangible leverage ratio test at a particular financial quarter, the Bill provides a cure period during which capital distributions may be prohibited.  If the failure is not cured after one year, the status of a qualifying banking organization is lost, and may not be claimed until the banking organization has maintained a quarterly leverage ratio of at least 10 percent for eight consecutive calendar quarters.  Qualifying status is lost immediately if the leverage ratio falls below 6 percent at the end of any financial quarter.

   [9]   In order to have a specialized bankruptcy judge hear a case under Subchapter V, the Bill requires the Chief Justice of the United States to designate at least 10 bankruptcy judges to be available to hear such cases; bankruptcy judges may apply for consideration to the Chief Justice.  If a case is commenced, the bankruptcy judge hearing the case will be randomly assigned by the chief judge of the court of appeals for the district in which the case is pending; that judge is not required to be assigned to the district but may receive a temporary assignment.

[10]   This Alert does not discuss the Bill’s significant amendments to existing provisions governing the Federal Reserve’s conduct of monetary policy, nor its Federal Reserve audit provisions.

[11]   President Donald J. Trump, Executive Order 13777: Enforcing the Regulatory Reform Agenda, 82 Fed. Reg. 12285 (Feb. 24, 2017), available at (Designated officers of agencies shall “make recommendations to the agency head regarding their repeal, replacement, or modification [or regulation that] create[s] a serious inconsistency or otherwise interfere[s] with regulatory reform initiatives and policies.”).

[12]   For example, commercial businesses engage in inter-affiliate transactions in order to reduce costs, reduce risk, and increase efficiency.  Rather than having each affiliate face the market to execute swaps, it is a common for commercial businesses to operate a single market-facing entity within a corporate group in order to centralize hedging expertise.

[13]   See, e.g., 17 CFR § 50.52(a); CFTC No-Action Letter 13-09 (Apr. 5, 2013), available at

[14]   H.R. 238, 115th Cong. (2017), available at

[15]   Notably, Section 872 removes the requirement for swap dealers and major swap participants to exchange variation margin with respect to their inter-affiliate swaps, which was included in H.R. 238.

[16]   The final regulation under Dodd-Frank’s Volcker Rule, for example, was promulgated without any effective cost-benefit analysis, because it is a regulation under the Bank Holding Company Act, which does not require that such an analysis be conducted.

[17]   There would be limited exceptions to this general approach; for example, regulations promulgated pursuant to a statutory authority expressly prohibiting compliance with Title III, and regulations certified by an Agency to be emergency action, if the certification were published in the Federal Register.

[18]   Indeed, calls from market participants for greater transparency and justification of underlying Agency assumptions have been made consistently during recent rulemakings.  See, e.g., Comment Letter Submitted by the International Swaps and Derivatives Association in response to the Federal Reserve’s 2016 Proposed Physical Commodities Rule (Docket No. R-1547, RIN 7100 AE-58), available at (noting that the Federal Reserve’s justification for imposing heightened capital standards on banks’ physical commodities activities–as a result of perceived legal, reputational and financial risks–“provides no empirical support or analysis for these positions and does not cite any instance in which this type of liability was imposed on a banking organization or where a banking organization suffered material financial losses with respect to these activities.”); Comment Letter Submitted by the Coalition for Derivatives End-Users in response to the CFTC’s 2016 Proposed Cross-Border Rule (RIN 3038-AE54), available at (“Particularly troubling with this proposed expansion is that no exigent market events have occurred and no new risks have arisen that would necessitate the CFTC supplanting its Final Cross-Border Guidance with a different and more ‘maximalist’ regulatory approach.”).

[19]   FOIA allows government agencies to deny disclosure of, inter alia, documents related solely to the internal personnel rules and practices of an agency; documents “specifically exempted from disclosure by statute” other than FOIA if the other statute’s disclosure prohibition is absolute; documents that are “inter-agency or intra-agency memorandum or letters” that would be privileged in civil litigation; documents that are “personnel . . . and similar files the disclosure of which would constitute a clearly unwarranted invasion of personal privacy;” and documents related to specified reports prepared by, on behalf of, or for the use of agencies, such as examination, operating, or condition reports.

[20]   Subtitle B would not apply to a non-major rule if the Agency for good cause found (and incorporated the finding and a brief statement therefor in the issued rule) that notice and public procedure on the rule were impracticable, unnecessary or contrary to the public interest.

[21]   President Ronald Regan used precisely this definition in his Executive Order 12291, directing each agency to prepare impact analyses for every new “major rule” proposal.  President Regan, Executive Order 12291: Federal Regulation, Sec. 3, 46 Fed. Reg. 13193 (Feb. 17, 1981), available at

[22]   The President would be able to override Congresses’ determination and allow the rule to go into effect for a 90-day period if he or she determines that the rule is: (i) necessary because of an imminent threat to health or safety or other emergency, (ii) necessary for the enforcement of criminal laws, (iii) necessary for national security or (iv) issued pursuant to any statute implementing an international trade agreement.

[23]   Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 US 837 (1984).

[24]   Auer v. Robbins, 519 US 452 (1997).

[25]   H.R. 5, 115th Cong. (2017).

[26]   The Bill defines a “process” as “includ[ing] any official proceeding or meeting on financial regulation of a recognized international organization with authority to set financial standards on a global or regional level.”

Gibson Dunn’s lawyers  are available to assist in addressing any questions you may have regarding these developments.  Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, or any of the following:

Michael D. Bopp – Washington, D.C. (+1 202-955-8256, [email protected])
Arthur S. Long – New York (+1 212-351-2426, [email protected])
Eugene Scalia – Washington, D.C. (+1 202-955-8206, [email protected])
Carl E. Kennedy – New York (+1 212-351-3951, [email protected])
Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, [email protected])
James O. Springer – Washington, D.C. (+1 202-887-3516, [email protected])

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