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What Will New Financial Choice Act Look Like?

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Release of a Feb. 6 memo detailing changes to House Financial Services Committee Chairman Jeb Hensarling’s Financial Choice Act got the rumor mill churning that a reintroduction of the bill to derail the Dodd-Frank Act was imminent.

It likely still is. But the memo, which, as it states, “provides changes to be made to the introduced version of the Financial Choice Act in the 115th Congress,” isn’t likely the final version of what amendments will be made during the bill’s markup.

Indeed, industry officials and political watchers doubt the Choice Act — if passed by the House — will survive the Senate, where 60 votes are required for passage.

“It’s hard to see how the supporters can get this through the Senate,” says Andy Friedman of The Washington Update. “These are not fiscal issues that can be addressed through reconciliation.”

(Reconciliation would mean no filibuster was allowed, so the measure could pass with a simple majority.)

So what does the memo say? Besides changes to end too-big-to-fail and bank bailouts as well as “eviscerating” the Consumer Financial Protection Bureau, the memo also “appears to eliminate nonbank” systemically important financial institutions, or SIFIs, said Mercer Bullard, law professor at the University of Mississippi Law School, founder of Fund Democracy and a former attorney at the Securities and Exchange Commission. The memo also seeks to reform the Federal Reserve and details “capital markets improvements” that include changes impacting the SEC and the rules it issues.

The memo states that it would impose term limits on members of the SEC’s Investor Advisory Committee, require the SEC to establish a “Wells Committee 2.0” to reevaluate the agency’s enforcement program, as well as prohibit a “co-conspirator” from receiving an SEC whistleblower award.

“Those aren’t the whistleblowers I worked with,” said Stephen Cohen, former associate director in the SEC’s Division of Enforcement, who recently joined Sidley Austin LLP as partner in the Securities & Derivatives Enforcement and Regulatory practice, in a recent ThinkAdvisor interview.

“I don’t believe this is a fundamental change, although the Commission already carefully considered this issue and made explicit provisions about this in existing rules,” Cohen added. “First, whistleblowers who are criminally convicted already are disqualified from receiving an award by statute. And, the existing SEC’s rules already prohibit awards to whistleblowers where sanctions are predicated on liability based substantially on conduct that the whistleblower directed, planned or initiated. So, whistleblowers already cannot benefit by blowing the whistle on themselves. What is left is the possibility that wrongdoers can come forward and claim an award by telling the government about other related misconduct (not their own) that the government did not already know about. This is good for law enforcement.”

Capital formation initiatives under the Jumpstart Our Business Startups (JOBS) Act like expanding the act’s Title VI provisions to increase the SEC “Reg A+” $50 million threshold to $75 million/year plus adding an inflation trigger, are also mentioned. The memo also suggests eliminating the annual verification of accredited investor status “added by the SEC without congressional consent when implementing the JOBS Act.”

Rep. Ann Wagner’s Retail Investor Protection Act, which passed the House last year and requires the SEC to move first before the Department of Labor can implement its own fiduciary rule is also mentioned (and is Section 441 of the Choice Act).

The change would require the Labor Department, in promulgating any fiduciary rule, to adhere to a “substantially similar standard after the SEC has promulgated its uniform fiduciary standard” under Section 913 of Dodd-Frank.

The Choice Act would also amend the Investment Company Act Section 36(b) to require a “private right of action brought against an investment company for breach of fiduciary duty be stated with particularity and meet the burden of clear and convincing evidence.”

Bullard notes that it looks as though the 36(b) amendment “is simply a way to make it more difficult to bring a claim, an odd result given that there has never been a judgment against a fund manager under that provision.”

The 36(b) amendment, he adds, “is a response to plaintiffs’ recent success in settlements of 401(k) fee litigation.”

One last thing: The memo “appears to eliminate the SEC stress test requirement, so funds and advisors would be in the clear,” Bullard adds. 

— Check out Harold Evensky: How Trump Could Weaken the Fiduciary Standard on ThinkAdvisor.