Rolling back Dodd-Frank, piece by piece

On the campaign trail, President Trump promised to “do a big number” on the postcrisis Wall Street reforms. So far, he’s signed a bill easing Dodd-Frank-Act-mandated supervision of small and midsize banks.

Now the Securities and Exchange Commission (SEC) is proposing a measure to roll back the controversial Volcker Rule, and the U.S. House of Representatives is debating further legislation to scale back the financial reporting and disclosure requirements under the Dodd-Frank Act. Here are the latest developments.

Regulatory relief for banks

In 2010, Congress enacted a major Wall Street reform law known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law aims to promote the financial stability of U.S. markets by improving accountability and transparency in the financial system, ending bailouts of entities that are “too big to fail” and protecting consumers from abusive financial services practices. Under the Dodd-Frank Act, Systemically Important Financial Institutions (SIFIs) are subject to tougher capital and liquidity requirements, more stringent Federal Reserve supervision, regular stress testing and “living will” resolution planning.

President Trump and many lawmakers felt the Dodd-Frank reforms were overly restrictive. So, the President recently signed a bipartisan bill — known as the Economic Growth, Regulatory Relief, and Consumer Protection Act — which rolls back systemic risk oversight on all but the largest banks.

The new law raises the asset threshold under which a bank is classified as a SIFI to $250 billion from $50 billion. Among other changes, it also frees banks with total consolidated assets of less than $10 billion from the Dodd-Frank Act’s Volcker Rule. The controversial rule primarily restricts banks’ proprietary trading and ownership in hedge funds and private equity funds. The bill passed the Senate in March on a 67-31 vote and the House in May on a vote of 258-159.

SEC targets Volcker Rule

In June, the SEC proposed additional changes to the Volcker Rule, following similar moves by the Federal Reserve and other banking regulators. The SEC’s proposal would establish new requirements based on a bank’s trading activities, with the goal of reducing the burdens of Volcker compliance on small and midsize entities. It also would retool the exemptions for the rule’s proprietary trading restrictions.

The SEC voted 3-2 to issue the proposal, with two Democrats dissenting. SEC Commissioner Kara Stein, a dissenter, said the proposal would allow banks to more easily classify trades as a hedge and warned that new exemptions would “increase proprietary trading, moral hazards and conflicts of interest.”

Rollback efforts continue

The SEC proposal comes as Congress debates further legislation to ease Dodd-Frank-mandated financial reporting and disclosure requirements, including scaling back the SEC’s quarterly reporting rules. The bills are the latest in a flurry of financial deregulatory measures the House Financial Services Committee has advanced in recent months.

One bill would allow publicly traded companies to disclose quarterly financial information “in a simplified manner, such as through a press release or by a shortened form,” instead of on a Form 10-Q. Proponents of the measure said it would cut down on an expensive and redundant filing, and argued that investors have already digested a company’s quarterly financial results through 8-K notices and financial press releases before the formal 10-Q is released. Critics worry that the bill will weaken the quality of the information companies provide to shareholders.

A House Financial Services subcommittee is also debating various draft bills that would:

  • Exempt more issuers from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002,
  • Exempt so-called “emerging growth companies” (EGCs) and other companies with less than $250 million in revenue from filing financial reports in the eXtensible Business Reporting Language (XBRL),
  • Amend the Securities Exchange Act of 1934 to allow for the registration of exchanges for venture capital, and
  • Require the SEC to study the research coverage of small companies before they go public.

Another draft bill would allow large public companies to qualify as EGCs under the JOBS Act by removing a key restriction on public float. EGCs are given a host of accounting and disclosure benefits, including an exemption from Sarbanes-Oxley Section 404(b), which requires a public company’s outside auditor to attest to management’s assessment of the company’s internal control over financial reporting (ICFR).

Under current law, several events trigger the loss of EGC status, including the conclusion of the fiscal year in which a company hits the fifth anniversary of its initial public offering or reaches $1 billion in revenue. A company can also lose its EGC status if it issues more than $1 billion in nonconvertible debt over a three-year period, or if its public float rises above $700 million, and it becomes what the SEC classifies as a “large accelerated filer.”

A company’s public float represents the value of shares traded by the public and not held by controlling investors, officers and directors. The House bill would order the SEC to set a new public float limit for EGCs, which “may not be less than the value of public float required to qualify as a large accelerated filer.”

However, critics of shrinking the scope of Section 404(b) requirements believe the changes could weaken the resolve at many companies to combat accounting fraud.

Stay tuned

At this point, it’s unclear which of these drafts will advance to a formal House vote and whether any will make it to a Senate vote. In 2017, House Financial Services Committee Chair Jeb Hensarling put forth a far more sweeping package of Dodd-Frank rollbacks than the bill President Trump recently signed. It passed the House on a party-line vote. But the Senate refused to take up the measure, which would have almost certainly run into a Democratic filibuster. Any further Dodd-Frank legislation faces an uphill battle, and its fate might hinge on the results of the November 2018 elections.