The Financial CHOICE Act in the 114th Congress: Policy Issues
Released: 2016-09-14T00:00:00

Summary:
The Financial CHOICE Act (FCA; H.R. 5983), sponsored by Chairman Jeb Hensarling, was ordered to be reported by the House Committee on Financial Services on September 13, 2016. The bill is a wide-ranging proposal with 11 titles that would alter many parts of the financial regulatory system. Much of the FCA is in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act; P.L. 111-203), a broad package of regulatory reform legislation that initiated the largest change to the financial regulatory system since at least 1999. Many of the provisions of the bill would modify or repeal provisions from the Dodd-Frank Act, although others would address long-standing or more recent issues.
This report highlights major proposals included in the bill but is not a comprehensive summary. In general, the changes proposed by the FCA can be divided into two categories: (1) changes to financial policies and regulations and (2) changes to the regulatory structure and rulemaking process.
Major policy-related changes proposed by the FCA include the following:
Leverage Ratio—allowing a banking organization to choose to be subject to a higher, 10% leverage ratio in exchange for being exempt from risk-weighted capital ratios, liquidity requirements, and other regulations. Regulatory Relief—providing regulatory relief throughout the financial system to banks, consumers, and capital market participants, including by repealing the Volcker Rule, Durbin Amendment, and fiduciary rule. Too Big To Fail—repealing the designation of systemically important financial institutions and emergency assistance and replacing an option for winding down systemic institutions with a new chapter in the Bankruptcy Code that is tailored to financial firms.
The FCA also includes structural and procedural changes that affect the balance between regulator independence from and accountability to Congress and the judiciary, including
Leadership—modifying the leadership structure of agencies with a single head to be bipartisan, multimember commissions. Funding—subjecting regulators that currently set their own budgets to the traditional congressional appropriations process. Rulemaking—requiring regulators to perform more detailed cost-benefit analysis when issuing new rules and to use cost-benefit analysis to review existing rules, as well as requiring congressional approval for a major rule to come into effect. Judicial Review—requiring courts to apply a heightened judicial review standard for agency actions taken by financial regulators rather than applying varying levels of deference to the agencies' interpretations of the law. Enforcement—increasing the maximum civil penalties that could be assessed for violations of certain banking and securities laws and restraining certain agency enforcement powers. CFPB—renaming the Consumer Financial Protection Bureau as the Consumer Financial Opportunity Commission and modifying its powers, leadership, mandate, and funding.

subsections: section_title: Introduction
paragraphs: Representative Jeb Hensarling, chairman of the House Committee on Financial Services, released a discussion draft titled the Financial CHOICE Act (FCA) on June 23, 2016. On July 12, 2016, the committee held a hearing titled, "Making a Financial Choice: More Capital or More Government Control?" Much of the original draft text was introduced as H.R. 5983 on September 9, 2016. The committee held a markup on H.R 5983 on September 13, 2016, and agreed by a voice vote to an amendment in the nature of a substitute offered by Chairman Hensarling. No other amendments were offered. The committee then voted to report the bill as amended by a vote of 30 to 26. 
The FCA is a wide-ranging proposal with 11 titles that would alter many parts of the financial regulatory system. Many of the provisions can be categorized as providing regulatory relief to financial firms, investors, or borrowers. Other provisions alter the financial regulatory architecture or change the relationship between financial regulators and Congress or the judiciary. Table 1 lists the federal financial regulators and their general responsibilities. Much of the FCA is in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), a broad package of regulatory reform legislation passed following the 2007-2009 financial crisis that initiated the largest change to the financial regulatory system since at least 1999. Many of the provisions of the bill would modify provisions from the Dodd-Frank Act, although others would address long-standing or more recent issues.
This report highlights major policy proposals in the bill, but it is not a comprehensive summary of the bill. It provides context for these proposals in the form of background and policy debate. This report also includes an experts' contact list for FCA topics in the Appendix .
section_title: Regulatory Relief
paragraphs: As financial regulators have implemented the Dodd-Frank Act and other reforms, some Members of Congress argue that the pendulum has swung too far toward excessive regulation. As a result, they argue that additional regulatory burden—the cost associated with government regulation and its implementation—has stymied economic growth and restricted consumers' access to credit. Other Members, however, contend the current regulatory structure has appropriately strengthened financial stability and increased protections for consumers and investors. They are concerned that regulatory relief for financial institutions could negatively affect consumers and market stability.
In determining whether to provide regulatory relief, a central question is whether an appropriate tradeoff has been struck between the benefits and costs of regulation. In other words, can relief be provided while maintaining the stability of the financial system and ensuring consumers and investors are protected, or would relief undermine those goals? Regulatory relief is generally focused on the financial services providers—such as banks, broker-dealers, and other institutions—but what effect would relief have on consumers, investors, particular markets, and market stability more broadly? The answers to these and other policy questions will vary based on the particulars of the relief being proposed. 
subsections: section_title: Relief for Lenders5
subsections: section_title: Background
paragraphs: In response to vulnerabilities that had arisen during the financial crisis, regulatory reforms stemming from the Dodd-Frank Act, Basel III, and other rules were intended to ensure the safe functioning of lenders and to protect consumers. Some of the new regulations applied to all lenders (i.e., banks, credit unions, and nonbank lenders) regardless of the lender's charter, whereas other provisions only applied to certain types of lenders. 
Two categories of regulatory changes for lenders in the Dodd-Frank Act are (1) prudential regulation and (2) consumer protection regulation. Prudential regulation (also referred to as safety and soundness regulation) is intended to ensure that a bank or credit union remains solvent. After hundreds of banks failed during the financial crisis, the reforms implemented in the wake of the crisis were intended to make banks less likely to fail. Most nonbank lenders are not subject to safety and soundness regulation.
The goal of consumer protection is to ensure that institutions comply with applicable consumer protection and fair lending laws. The Consumer Financial Protection Bureau is a regulator created by the Dodd-Frank Act to provide an increased regulatory emphasis on consumer protection. The Dodd-Frank Act gave the CFPB new authority and transferred existing authorities to it from the banking regulators. Consumer protection applies to banks and nonbanks, but some activities and entities are statutorily exempted.
section_title: Policy Issues
paragraphs: As financial regulators have implemented the Dodd-Frank Act and other reforms through recent rulemakings, some in Congress argue that the increased regulatory burden on lenders is resulting in significant costs that restrain economic growth and consumers' access to credit. 
Others, however, view the current regulatory structure as having achieved the appropriate tradeoff between the benefits and costs of regulation and are concerned that regulatory relief for banks or other financial institutions could negatively affect the cost and availability of credit to consumers, lender solvency, and market stability.
section_title: Provisions in the FCA
paragraphs: The FCA would provide regulatory relief to lenders through more than two dozen provisions. Some of the proposals are aimed at assisting community banks and other small lenders, whereas others would apply to all institutions that perform certain regulated activities, regardless of size and whether they are banks or nonbanks. Many would modify or repeal rules stemming from the Dodd-Frank Act, whereas others target supervision or other long-standing regulatory practices. 
Regulatory relief provisions can be divided into the same categories discussed above: prudential regulation and consumer protection. Examples of relief from prudential regulation that would be provided by the FCA include the following:
Some provisions would modify or repeal prudential rules that regulators have issued. For example, the FCA would repeal Section 619 of the Dodd-Frank Act, also known as the "Volcker Rule." The Volcker Rule has two main parts—it prohibits banks from proprietary trading of risky assets and from certain relationships with risky investment funds, including acquiring or retaining "any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund." The statute carves out exemptions from the rule for trading activities that Congress viewed as legitimate for banks to participate in, such as risk-mitigating hedging and market-making related to broker-dealer activities. It also exempts certain securities, including those issued by the federal government, government agencies, states, and municipalities, from the ban on proprietary trading. Other provisions would modify the supervision of lenders for safety and soundness. For example, the FCA would require regulators to satisfy certain timelines for completing bank examinations and establish a new ombudsman to investigate bank complaints about supervisory exams. It would prohibit specific actions by the supervisor in retaliation for appealing. It would give banks the right to appeal exam results to the ombudsman or an administrative law judge, and would not allow the ombudsman or judge to defer to the supervisor's opinions. It would not permit further appeal by the supervisor, but would allow the bank to appeal this decision to appellate court. Other provisions would reduce regulatory compliance costs. For example, the FCA would require regulators to allow certain highly rated and well-capitalized lenders (that also satisfy other criteria set by the regulators) to report less regulatory information about health and performance every other quarter. 
The FCA would also provide relief from several consumer protection regulations, including the following:
Modifying mortgage-related rulemakings adopted after the housing crisis related to manufactured housing, escrows, mortgage servicing, and the Qualified Mortgage rule to ensure that borrowers had an ability to re pay . Repealing Section 1075 of the Dodd-Frank Act, also known as the Durbin Amendment. Under the Durbin Amendment, the Federal Reserve capped the interchange fee that debit card issuers with more than $10 billion in assets can charge merchants for payment processing. The Durbin Amendment requires the Federal Reserve to ensure that the fee is "reasonable and proportional to the cost incurred by the issuer with respect to the transaction." Allowing states and federally recognized Indian tribes to opt out for five years of a final CFPB rule related to payday loans, vehicle title loans, and other similar small-dollar loans so that the CFPB's rule would not apply within the state or territory during the period of the waiver. The CFPB has not issued a final rule related to payday and other small-dollar loans, but it issued a proposed rule on June 2, 2016. 
section_title: Leverage Ratio as an Alternative to Current Bank Regulation15
subsections: section_title: Background
paragraphs: With more than 500 banks failing between 2007 and 2014, strengthening prudential regulation has been a major goal of post-crisis financial reforms. Prudential regulation covers a broad set of a bank's activities, including assessing whether a bank will be able to meet its obligations during a market downturn, evaluating the quality of its assets and management team, and other factors. One of the main areas of focus is bank capital. 
Capital is the difference between the value of a bank's assets and its liabilities and is an indicator of a bank's ability to absorb losses. If a bank has $100 worth of assets and $90 of liabilities, then the bank has capital of $10. If the value of the assets decreases by $5 to $95 and the bank still has $90 in liabilities, then the $5 decline in asset value would be absorbed by the capital, which would decrease from $10 to $5.
Capital is often measured as the ratio of capital to the bank's assets. A 10% capital ratio, for example, would imply $10 of capital for every $100 of assets. Banks are required to satisfy several different capital ratios, but the ratios fall into two main categories: (1) a leverage ratio and (2) a risk-weighted asset ratio. Failure to satisfy the required ratios could lead to regulators taking corrective action against a bank, including ultimately shutting the bank down. 
Under a leverage ratio, all assets regardless of riskiness are treated the same and, as in the previous example, the ratio is calculated by dividing capital by assets. Under a risk-weighted asset ratio, each asset is assigned a risk weight to account for the fact that some assets are more likely to lose value than others. Riskier assets receive a higher risk weight, which requires banks to hold more capital—and so be better able to absorb losses—to meet the ratio requirement. 
The specifics of the capital ratios—what the minimum levels are, what qualifies as capital, what the asset risk weights are, what is included in total assets—were proposed by the Basel Committee on Bank Supervision and then implemented by the U.S. financial regulators. The Basel Committee "is the primary global standard-setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters." The most recent proposed comprehensive reform proposal is referred to as Basel III. 
The capital ratios that a bank must satisfy and how those levels are computed varies based on a bank's size and complexity. The largest banks are required to hold more capital than smaller, less complex banks. In regards to the simple leverage ratio, most banks are required to meet a 4% leverage ratio. Large banks are subject to a supplementary leverage ratio ranging from 3% to 6% depending on their size and the type of bank charter they hold. The supplementary leverage ratio is more expansive than the leverage ratio to which smaller banks are subject because it takes into account certain off-balance sheet assets and exposures.
The required risk-weighted ratios depend on bank size and capital quality (some types of capital are considered to be less effective at absorbing losses than other types, and so considered lower quality). Most banks must meet a risk-weighted ratio of 4.5% for the highest quality capital and of 6% and 8% for lower quality capital. Banks are then required to have an additional 2.5% of high quality capital on top of those levels as part of the "capital conservation buffer." The eight U.S. banks that have been designated as global systemically important banks (G-SIBs) face a capital surcharge that can range from 1% to 4.5%. Although currently set at zero and not yet fully phased in, a large bank also could be subject to a countercyclical buffer of up to 2.5% of risk-weighted assets if regulators deem it necessary. 
section_title: Policy Issues
paragraphs: Some economists argue that it is important to have both a risk-weighted ratio and a leverage ratio because the two complement each other. A basic tenet of finance is that riskier assets have a higher expected rate of return to compensate the investor for bearing more risk. Without risk weighting, banks would have an incentive to hold riskier assets because capital is costly and the same amount of capital must be held against riskier and safer assets. But risk weights may prove inaccurate. For example, banks held highly rated mortgage-backed securities (MBSs) before the crisis, in part because those assets had a higher expected rate of return than other assets with the same risk weight. MBSs then suffered unexpectedly large losses during the crisis. Thus, the leverage ratio can be thought of as a backstop to ensure that incentives posed by risk-weighted capital ratios to minimize capital and maximize risk within a risk weight do not result in a bank holding insufficient capital. 
Others argue that the risk-weighted system provides "needless complexity" and is an example of "central planning." The complexity benefits those largest banks that have the resources to absorb the added regulatory cost. They believe that the risk weights in place prior to the financial crisis were poorly calibrated and "encouraged financial firms to crowd into these" risky assets, exacerbating the downturn. Risk weighting may encourage regulators to set the weights so as "to provide a cheaper source of funding for governments and projects favored by politicians," which can lead to a distortion in credit allocation. Better, they argue, to eliminate the risk-weighted system for those banks that agree to hold more capital and satisfy a higher, simpler leverage ratio.
In addition to the issue of whether it is better to have either both a risk-weighted ratio and a leverage ratio or just a leverage ratio is the broader issue of the role of capital in bank regulation. Those who argue in favor of just having a higher leverage ratio also generally support eliminating other forms of prudential regulation, such as liquidity requirements, asset concentration guidelines, and counterparty limits. They argue that capital is essential to absorbing losses and, so long as sufficient capital is in place, banks should not be subject to excessive regulatory micromanagement. Others, however, believe that the different components of prudential regulation each play an important role in ensuring the safety and soundness of financial institutions and are essential complements to bank capital. 
section_title: Provision in the FCA
paragraphs: Under the FCA, a banking organization that has received high ratings on recent examinations could choose to be subject to a higher, 10% leverage ratio. In exchange for choosing to be subject to the 10% leverage ratio, banks would be exempt from risk-weighted capital ratios; liquidity requirements; certain merger, acquisition, and consolidation restrictions; limitations on dividends; living will mandates; and other regulations. A bank would not have to follow this new regulatory approach but would have the option. Regulators would still have authority to conduct stress tests on certain entities that opted for the new regulatory approach but would be limited in their ability to require them to alter their capital levels. 
Some of the regulations from which a bank could receive relief are regulations that apply to all banks, such as the risk-weighted ratios. Other regulations from which a bank could receive relief under the FCA would only apply to larger banks (with an asset threshold of $50 billion to $700 billion, depending on the provision). For example, banks opting in to the new leverage ratio approach would be partially exempt from the Dodd-Frank Act's Section 165 enhanced prudential regulations (discussed in " Regulating Systemically Important Financial Institutions, Limiting Their Size, and Preventing "Bailouts" ").
section_title: Securities and Derivatives Relief35
subsections: section_title: Background
paragraphs: Federal securities laws and attendant regulations are overseen and enforced by the Securities and Exchange Commission and apply to various entities involved in the securities markets as well as companies that issue securities. Statutorily, the regulations that the SEC oversees—whether specifically directed by Congress or regulatory rules adopted independently by the SEC per its authority under the securities laws—are supposed to facilitate the agency's broad missions, including to (1) ensure investor protection; and (2) facilitate capital formation—goals that at times may be in opposition to each other. 
Derivatives markets are regulated by the CFTC and SEC depending on the type of derivatives being traded. The Dodd-Frank Act created a new regulatory regime for derivatives in response to vulnerabilities highlighted during the crisis.
section_title: Policy Issues
paragraphs: When securities regulation is lenient, then it may be easier for companies to raise capital from investors, but also may leave investors less protected from fraud or misinformation. When it is stringent investors may be better protected, but it may make it more difficult to raise capital. Some observers feel securities regulation has become too onerous and is unnecessarily stifling capital formation. Others feel the current regulatory environment strikes an appropriate balance between the two objectives. 
section_title: Provisions in the FCA
paragraphs: Many of the securities-related provisions in the FCA provide regulatory relief with the aim of facilitating capital formation. Among the over three dozen securities-related provisions in the FCA are
Provisions that relax restrictions on who is eligible to invest in certain types of securities, including venture capital investors. For example, under federal securities laws, entities who qualify as accredited investors are eligible to invest in private and limited corporate offerings (private placements) that are exempt from SEC registration requirements. The concept of the accredited investor is that some investors are sophisticated enough to understand the risks of investing in privately placed securities. Individuals are currently defined as accredited investors based on income or asset thresholds. The FCA would amend the definition of an accredited investor to also include licensed securities industry professionals (including registered brokers and investment advisers) and persons whom the SEC and FINRA determines to have certain educational or job experiences that qualify them as having sufficient professional subject expertise. The FCA provision is modeled after H.R. 2187 , which previously passed the House. Provisions that relax regulatory requirements on licensed professionals in the securities industry, including private equity advisers, private funds, municipal advisors, investment fund researchers, and credit rating agencies. For example, under federal securities laws, SEC-registered investment advisers are fiduciaries , a designation that carries a legal obligation to act in their client's best interest. By contrast, brokers and dealers who receive commissions are generally not subject to the fiduciary standard, and are instead required to make investment recommendations that are suitable for the customer, a comparatively less demanding standard of client duty. The Dodd-Frank Act authorized, but did not require, the SEC to promulgate rules that establish a uniform standard of client responsibility for broker-dealers and investment advisers, which SEC officials currently describe as a work in progress. In 2016, the Department of Labor (DOL) finalized rules to amend the definition of investment advice to broaden the class of financial professionals subject to the fiduciary obligation under the Employee Retirement Income Security Act of 1974 which governs retirement and benefit plans. The rules go into effect April 10, 2017. The FCA would repeal the DOL rule and require that prior to conducting the aforementioned rulemaking, the SEC must first report to Congress on whether (1) retail investors would be harmed by the rule; and (2) alternative approaches existed to reduce confusion or harm to retail investors. The provision is modeled after provisions in H.R. 1090 , which previously passed the House. Provisions that relax regulatory requirements for firms that issue capital or securities, including emerging growth companies, risk retention requirements for non-mortgage securitizers, firms subject to disclosures on conflict minerals, and companies raising funds via crowdfunding or from angel investors. For example, Section 404(a) of the Sarbanes-Oxley Act of 2002 requires public company annual reports to include commentary on the effectiveness of the company's internal controls (methodology aimed at ensuring the integrity of financial and accounting information) and requires a company's outside auditor to attest to that managerial assessment of the internal controls. Due to the proportionally higher cost on smaller public companies of complying with Section 404(b), the Dodd-Frank Act permanently exempted non-accelerated filers—generally public companies with less than $75 million in global public float—from compliance with Section 404(b). Many in the business community still criticize Section 404(b) for being problematically costly for firms with more than $75 million in public float, however. In a study required by the Dodd-Frank Act, the SEC did not recommend expanding the current Section 404(b) exemption threshold. The FCA would expand the number of firms with Section 404(b) exemptions from less than $75 million to less than $250 million in public float. The FCA would also extend the exemption to depository institutions with less than $1 billion in assets. Provisions related to derivatives markets. One example is the regulation of cross-border swaps. The topic of cross-border swaps broadly relates to the question of to what degree did the Dodd-Frank Act authorize the CFTC to regulate swaps that may extend beyond U.S. borders? Because the swaps market is international in nature, with considerable cross-border trading, this question is material. The Dodd-Frank Act stated that swaps reforms shall not apply to activities outside the United States unless the activities have "a direct and significant connection with activities in, or effect on, commerce of the United States." One issue that has arisen is the need for U.S. and foreign regulators to recognize one another's derivatives clearinghouses, trading exchanges, and data repositories for reporting trades as "equivalent," so that one trade spanning multiple jurisdictions need only be cleared, traded, and reported one time. The FCA requires the CFTC to issue a rule within one year that establishes criteria for finding foreign jurisdictions regulations comprehensive and comparable to the U.S. regime. If the CFTC has not done so after 18 months, the FCA would consider the eight largest foreign swaps jurisdictions (which would encompass most of the world of swaps trading, particularly if countries in the European Union were treated as one swaps jurisdiction) to be comparable and comprehensive—unless the CFTC found a foreign jurisdiction to be lacking. Effectively, for trades that involved a non-U.S. person, the bill appears to substitute as a default the swaps requirements of the eight largest foreign swaps markets for U.S. requirements.
section_title: Executive Compensation43
subsections: section_title: Background
paragraphs: Generally, federal policy does not intervene to limit or regulate executive compensation levels. Instead, policy requires publicly-listed companies to disclose certain information about their executive compensation levels and practices. 
Two examples of current disclosure requirements come from the Dodd-Frank Act. It requires public companies to conduct a nonbinding shareholder vote on executive compensation at least every three years; called "say-on-pay." It also requires publicly traded companies to calculate and disclose the median annual total compensation of all employees excluding the Chief Executive Officer (CEO), the annual total compensation of the CEO, and the ratio between the two. Companies will be required to disclosure their CEO-worker pay ratios for their fiscal year beginning January 1, 2017.
One exception to the general approach on executive compensation is a Dodd-Frank Act requirement that the Fed, OCC, FDIC, FHFA, NCUA, and SEC promulgate rules aimed at prohibiting incentive-based compensation (performance-based variable employee pay) that encourage "inappropriate risks" at financial institutions with greater than $1 billion in assets. In 2016, the regulators jointly released proposed rules to implement the requirement.
section_title: Policy Issues
paragraphs: Proponents of greater disclosure believe that requiring transparency about executive compensation will help prevent outsized pay arrangements that are not in the interest of investors or in line with social values. Critics argue that current disclosure requirements impose unnecessary costs that do not impart useful information that helps maximize shareholder return. For example, critics of the pay ratio have cited the compliance challenges and costs of building systems capable of generating the worker pay data needed to arrive at worker median pay data, particularly for large multinational or multi-segmented firms with decentralized payroll systems. 
A key question in this debate is whether high executive compensation levels reflect executives' productivity or result from corporate governance shortcomings. Proponents can point to research that found that executive pay has become decoupled from corporate financial performance. Its detractors counter that taken as a whole, the body of research on the issue has failed to convincingly make the case for such a decoupling.
section_title: Provisions in the FCA
paragraphs: The FCA would amend the Dodd-Frank Act's say-on-pay provision by eliminating mandatory periodic shareholder votes on executive pay and limiting such votes to when a company has made a material change to the previous year's executive compensation. The FCA would repeal the Dodd-Frank Act requirement that companies calculate and disclose the CEO-worker pay ratio. The FCA would also repeal the Dodd-Frank Act's incentive compensation mandate.
section_title: Systemically Important ("Too Big To Fail") Financial Institutions
paragraphs: Although "too big to fail" (TBTF) has been a long-standing policy issue, it was highlighted by the near-collapse of several large financial firms in 2008, including Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, and AIG, which led to a worsening of the financial crisis. With the exception of Lehman Brothers (which failed), all of these firms received government assistance under emergency authority to avoid insolvency. Financial firms are said to be TBTF when policymakers judge that the firms' failure would cause unacceptable disruptions to the overall financial system. Financial firms can be perceived as TBTF because of their size or interconnectedness. In addition to fairness issues, economic theory suggests that market expectations that the government will not allow a firm to fail create moral hazard—if the creditors and counterparties of a TBTF firm believe that the government will protect them from losses, they have less incentive to monitor the firm's riskiness (referred to as market discipline ). If this is the case, a firm that is perceived to be TBTF could have a funding advantage, which some call an implicit subsidy, compared with other banks.
subsections: section_title: Regulating Systemically Important Financial Institutions, Limiting Their Size, and Preventing "Bailouts"51
subsections: section_title: Background
paragraphs: The Dodd-Frank Act included a number of provisions to address TBTF, using several different policy approaches. The Dodd-Frank Act's main approach was to create an enhanced regulatory regime mostly administered by the Federal Reserve to hold systemically important firms to stricter prudential standards than other financial firms. Prudential regulation is a concept from banking regulation that refers to monitoring an institution's financial safety and soundness; the concept was generally not applied federally to nonbank financial firms before the crisis, with limited exceptions. The enhanced regulatory regime can include capital standards, liquidity standards, counterparty limits, stress tests, risk-management standards, "living will" requirements, and early remediation requirements. 
The Dodd-Frank Act applied enhanced prudential regulation to three sets of financial entities—banks; nonbank financial firms; and payment, clearing, and settlement systems (called financial market utilities , or FMUs). Bank holding companies (BHCs) are automatically subject to enhanced regulation if they have $50 billion or more in assets. More than 30 BHCs, including most of the largest U.S. financial firms, meet this criterion. A BHC cannot "debank" to avoid enhanced regulation if it received funds under the Troubled Asset Relief Program (referred to as the "Hotel California" provision). A smaller subset of the largest U.S. BHCs faces, when fully phased in, additional capital, leverage, and liquidity requirements through U.S. regulations implementing Basel III, an international accord. Nonbank financial firms and FMUs are subject to enhanced regulation if they are designated as systemically important financial institutions (SIFIs) by the Financial Stability Oversight Council. To date, eight FMUs and four nonbank financial firms, three of which are insurance companies, have been designated. Subsequently, one firm (GE Capital) has had its designation removed by FSOC and one designation (MetLife) has been overturned in court. 
The Dodd-Frank Act included other approaches to coping with the TBTF problem, including provisions to limit the size of financial firms and narrow the scope of emergency authority to limit future "bailouts". It gave the Federal Reserve the authority to restrict the size and activities of a financial firm that posed "a grave threat to financial stability" and prevented a nonbank financial firm from most mergers and acquisitions that would cause its liabilities to exceed 10% of total financial-sector liabilities. These powers could be used only in limited circumstances, however, and have not been exercised to date. 
The Fed (under Section 13(3) of the Federal Reserve Act), FDIC, and Treasury (using the Exchange Stabilization Fund) used emergency authority to offer loans and guarantees to financial firms and markets during the financial crisis. Broadly speaking, the Dodd-Frank Act narrowed the scope of these authorities in an attempt to rule out "bailouts" to failing firms, but preserved the availability of emergency liquidity to healthy but illiquid firms. It also extended access to the Fed's discount window to FMUs.
section_title: Policy Issues
paragraphs: The fact that many large firms have grown in dollar terms since the enactment of the Dodd-Frank Act has led some critics to question whether the TBTF problem has been solved. Debate continues about whether the best policy approach to address excessive risk taking from moral hazard is through enhanced prudential regulation or market discipline—the fear of losses curbing excessive risk-taking. Although these two approaches need not be at odds with one another in the abstract—and policymakers have tried to pursue both simultaneously—in practice they may be. Critics of enhanced prudential regulation fear that if the government explicitly designates specific firms as systemically important, investors will assume that the firms will not be allowed to fail, which will undermine market discipline. If enhanced regulation is not tough enough—critics point to regulatory failures during the crisis as evidence that it may not be—and market discipline is undermined, designated firms might take greater risks and the financial system could be less stable. 
Proponents of enhanced regulation question how credible a pledge to let firms fail can be. They point to the excessive risk taking leading up to 2008—when the government did not have a policy of aiding failing firms—and the subsequent decision to assist large firms to avoid a further deterioration in financial conditions as an example of the failure of market discipline. Also, the fact that many large failing firms did receive government assistance in 2008 may have already undermined the viability of the market discipline approach, by undermining the credibility of any subsequent pledge to allow firms to fail (regardless of current statutory limitations). Furthermore, systemic risk is a risk to the rest of society that investors do not internalize. From a policymaker's perspective, systemic risk may still be too high in the presence of perfect market discipline, because a TBTF firm's creditors have less to lose from its failure than the financial system as a whole. Another limit to market discipline is that creditors do not have access to the same confidential information as regulators.
The concept of prudential regulation of nonbank SIFIs raises additional policy questions: 
Enhanced regulation. Can the Federal Reserve effectively adapt banking prudential regulation and supervision to nonbanks, tailoring regulation to match their business models and the risks that they pose? Designation process. Given the lack of consensus on how to measure systemic importance, is FSOC's discretion appropriate or is the existing designation process too opaque and arbitrary? Insurance and systemic risk. Given that all currently designated SIFIs are insurers, is insurance a source of systemic risk and, if so, is it already adequately addressed by prudential regulation at the state level? Size vs. activities. Is the source of systemic risk for nonbanks caused mainly by firm size or by specific market practices by firms of all size? If the latter, then SIFI regulation is unlikely to contain systemic risk.
section_title: Provisions in the FCA
paragraphs: The FCA would repeal several provisions of the Dodd-Frank Act related to TBTF. Notably, it would repeal FSOC's ability to designate nonbank financial firms or FMUs as SIFIs and subject them to enhanced regulation and early remediation. Firms and FMUs that are currently designated as SIFIs (see Table 2 ) would no longer be subject to enhanced regulation as detailed above. 
The FCA would leave in place enhanced regulation from the Dodd-Frank Act and Basel III for large BHCs. However, banks that qualify for regulatory exemptions under the 10% leverage ratio would no longer be subject to these enhanced regulations, except for stress tests under a revised framework. The FCA also would repeal the "Hotel California" provision prohibiting a BHC from debanking.
In addition, the FCA would repeal Dodd-Frank Act provisions that gave the Federal Reserve the ability to restrict the size and activities of a financial firm that posed "a grave threat to financial stability" and the limit on a nonbank financial firm exceeding 10% of total financial sector liabilities (the provision would still apply to banks). The FCA would further narrow the Fed's emergency authority and would eliminate FMU access to the discount window, the FDIC's emergency authority to guarantee bank debt and systemic risk exception to least cost resolution, and the use of the Exchange Stabilization Fund for government guarantees.
Whether these changes would increase or decrease the riskiness of large financial firms and the financial system as a whole depends on whether the effect of potentially greater market discipline or reduced prudential regulation dominates. The effect on market discipline, in turn, will depend in part on what market participants believe will happen in the event of a failure, which is addressed in the next section.
section_title: Resolving a Failing TBTF Firm and Addressing Stability56
subsections: section_title: Background
paragraphs: The financial crisis raised issues about how to allow large financial firms to fail without triggering financial instability. During the week of September 15, 2008, the broker-dealer Lehman Brothers entered the bankruptcy process without receiving financial assistance from the federal government, but policymakers intervened with financial assistance to prevent the insurer AIG from entering the bankruptcy process. Subsequently, the financial system suffered a financial panic. Some analysts believe that the rules for resolving failing non-bank financial firms contributed to financial instability during 2007-2008. 
In response to these concerns, Title II of the Dodd-Frank Act created a special resolution regime (called Orderly Liquidation Authority or OLA) for liquidating failing financial firms if federal policymakers determine that a firm's failure poses a threat to financial stability. OLA is statutorily structured as a fallback alternative to the normally applicable insolvency regimes, such as the U.S. Bankruptcy Code, and is to be triggered only under extraordinary circumstances. OLA is an administrative, rather than judicial, resolution forum modeled on how the FDIC resolves insured depository institutions. Should the failing firm's estate lack sufficient liquid assets to prevent creditor reactions from contributing to financial instability, the FDIC is empowered to contribute resources to the failing firm's estate. Any such payments would be recouped by assessments on surviving firms in the financial industry. (Note that access to OLA is not limited to designated SIFIs and has not been used to date.)
The failure of most nonbank financial institutions generally is dealt with under the Bankruptcy Code. The Bankruptcy Code consists of separate chapters designed for a variety of failing entities. However, certain entities are not statutorily permitted to be resolved through the Bankruptcy Code. The policy justifications for these exceptions vary. For example, the FDIC is statutorily authorized to resolve failing insured depositories administratively in part because the FDIC, as deposit insurer, guarantees payment to depositors even if such obligations exceed the resources of the failing firm's estate, but also due to the threat of financial instability accompanied by widespread failures of depositories. OLA allows another class of firms, financial firms with the exception of depository institutions, to be resolved administratively by the FDIC rather than judicially through the Bankruptcy Code.
section_title: Policy Issues
paragraphs: Advocates of the "Lehman Moment" explanation of the financial crisis highlight several specific characteristics of financial markets and the Bankruptcy Code at the time that may have magnified financial instability. First, some argue that the Lehman Brothers bankruptcy announcement was a negative shock to confidence because investors had assumed that Lehman was "too big to fail." Second, and more specific to the bankruptcy process, some argue that the length of a likely judicial bankruptcy proceeding compared to an administrative agency resolution process contributed to financial uncertainty. Third, some argue that the treatment of some financial contracts, such as acceleration and netting of qualifying financial contracts (QFCs) is done selectively by counterparties to the detriment of the bankruptcy estate. Fourth, some argue that the nature of financial intermediaries' continuous need to access credit (liquidity) makes a bankruptcy process impractical for large financial institutions. 
Critics of OLA argue that it "institutionalized" bailouts and that the FDIC's plan for implementing OLA has promoted "expectations that the government will come to the rescue of large financial institutions and insulate their creditors and counterparties from losses." The government, they argue, should not be given the authority to borrow money to carry out an orderly liquidation, especially given the potentially significant liquidity needs of a large financial institution in receivership. Supporters of OLA, however, note that it is unlikely that markets will be able to provide sufficient private financing during the bankruptcy of a failing firm and, therefore, "it is not credible to suggest that a financial institution bankruptcy can work without standby government financing," as is provided by Title II. 
In addition, critics of OLA worry that the FDIC would not have the capability or expertise to resolve securities firms and other complex financial institutions that have very different operations and commitments than the small banks that the FDIC typically resolves. The Chairman of the FDIC, however, has argued that in "the years since enactment of Dodd-Frank, the FDIC has made significant progress in developing the operational capabilities to carry out a resolution if needed." He highlights the FDIC's "ability to plan and the availability of a large team of professionals experienced in financial institution resolution are additional advantages the FDIC can bring to bear" in the event OLA is used. 
OLA cannot be used to bail out failing firms in the sense that it can only be used to wind a firm down, but it could potentially be used to bail out a firm's creditors by making them whole. Although Title II instructs the FDIC to generally treat similarly situated creditors similarly, critics worry that the fact that, if necessary for financial stability, the FDIC has "authority to treat similarly situated creditors differently places far too much discretion in the hands of the government to pick winners and losers" during a resolution. Uncertainty about how creditors would be treated in a failure could exacerbate a crisis and give an incentive for creditors to race to debtors and demand immediate repayment—to be the first creditor to get paid—thereby hastening insolvency or spreading the financial panic. While proponents argue that OLA can reduce financial instability by reducing uncertainty, this example demonstrates how in some ways OLA can increase uncertainty relative to the bankruptcy process. The FDIC, in addressing these concerns, has noted that it "expects that disparate treatment of creditors would occur only in very limited circumstances and has, by regulation, expressly limited its discretion to treat similarly situated creditors differently." The FDIC has attempted to reduce uncertainty by stating its position on creditor seniority prior to a resolution occurring, but it is unclear how effective that will be at reducing uncertainty given the untested nature of the OLA process. 
Proponents of OLA primarily point to two potential advantages that could contribute to financial stability: (1) OLA's administrative forum would allow the FDIC to move more quickly than generally is possible through a judicial bankruptcy proceeding, thus decreasing market uncertainty; and (2) OLA's statutory focus on maintaining financial stability, of which there is no statutory equivalent under the existing Bankruptcy Code; and (3) the ability of the FDIC to make guarantees to cover counterparty positions (which the Federal Reserve says it did not have legal authority to make in its decision not to rescue Lehman).
Critics say the first two advantages could be replicated in a judicial forum by establishing a new chapter of the Bankruptcy Code designed specifically for certain financial institutions. Critics say the third advantage, FDIC guarantees to counterparties, constitute bailouts of firm creditors and should be rejected.
section_title: Provisions in FCA
paragraphs: The FCA would repeal Title II of the Dodd-Frank Act and would add a dedicated chapter to the Bankruptcy Code to handle the failure of large complex financial firms, limited to firms with more than $50 billion in assets. As such, the resolution process would be handled through the courts rather than as an administrative action by the regulatory agencies. The FCA provisions are similar to provisions included in H.R. 2947 previously passed by the House and H.R. 4894 as reported by the Financial Services Committee. 
Under the new chapter of the Bankruptcy Code, there would be several resolution options. The firm could be liquidated (Chapter 7), reorganized (Chapter 11), or recapitalized. However, the plan must be in the best interests of the creditors and must not be a likely threat to the financial stability of the United States.
section_title: Changes to Regulatory Authority
paragraphs: Conventional wisdom regarding regulators is that the structure and design of the organization matters for policy outcomes. Financial regulators conduct rulemaking, supervision, and enforcement to implement law and supervise financial institutions. These agencies have been given certain characteristics that enhance their day-to-day independence from the President or Congress, which may make policymaking more technical and less political or partisan, for better or worse. Independence also may make regulators less accountable to elected officials and can reduce congressional influence. From a practical perspective, independence and accountability take various forms and each regulator has a unique group of characteristics that, along with tradition, determine its relative independence and accountability. The rest of this section discusses issues related to independence and accountability raised by the FCA.
subsections: section_title: Agency Structure
paragraphs: Each financial regulator has unique structural attributes. How an agency is structured is believed to influence its policy outcomes. Two of the most fundamental structural elements are an agency's leadership structure and financing. Both elements would be modified for some financial regulators by the FCA.
subsections: section_title: Leadership Structure76
subsections: section_title: Background
paragraphs:  Table 3 summarizes some of the key characteristics of leadership structure at the financial regulators. Because each agency was created at a different time and in a different policy context, each agency's leadership has different structural features.
The President nominates individuals for leadership positions at financial regulators with the advice and consent of the Senate. Currently, some financial regulatory agencies are led by a single leader and some are led by multimember boards or commissions. Multimember boards vary in size and in whether their membership has fixed, explicit ratios for party affiliations. In each case where there is a board structure, the board has a chairman, whose powers vis-à-vis other members vary by agency. 
section_title: Policy Issues
paragraphs: Vesting power in a board arguably encourages a diversity of views to be represented that may lead to more durable policy decisions. In contrast, vesting power in one individual might arguably create stronger, more unified leadership and a single point of accountability, perhaps leading to faster and more numerous decisions. The collegial structure itself is thought to increase the independence of an agency from the President. Where an agency is headed by a single individual, the appointee's views are more likely to reflect the views of the appointing President and his or her party; the leadership is unitary and no consensus is necessary.
Some of the characteristics of leadership positions that enhance independence from Congress and the President include terms that exceed the length of a presidential term and are staggered and non-renewable; requirements that nominees have issue expertise; restrictions on outside employment during or after service; and removal of agency heads only "for cause." 
section_title: Provisions in the FCA
paragraphs: The FCA would convert the financial regulators with single leaders (the OCC, FHFA, and CFPB to multimember commissions. The members of the commissions would be nominated by the President and confirmed by the Senate to staggered, five-year, nonrenewable terms. The President could choose no more than three members from the same political party. These features are similar to current leadership of the SEC and CFTC. Board members would be removable by the President for "inefficiency, neglect of duty, or malfeasance." Nominees would be required to have expertise and would be restricted from outside employment during but not after service. The FCA also would remove the heads of the OCC and the CFPB from the FDIC's board and would increase the membership of the National Credit Union Administration's board from three to five.
section_title: Appropriations79
subsections: section_title: Background
paragraphs: The annual appropriations processes and periodic reauthorization legislation provide Congress with opportunities to influence the size, scope, priorities, and activities of an agency. Currently, the two financial regulators whose funding is primarily determined through the appropriations process and who are subject to periodic reauthorizations are the CFTC and the SEC. Other financial regulators have more autonomy to determine their own budgets and assess fees to cover expenditures, typically subject to some general language regarding proportionality of budget and mission, as shown in Table 4 . 
Most financial regulators generate income from various sources, particularly fees or assessments on entities that they oversee. The two financial regulators that do not largely raise their own revenues are the CFTC and the CFPB. As noted above, the CFTC's funding comes from Treasury's general revenues and CFPB funding is transferred from the Federal Reserve's revenues.
section_title: Policy Issues
paragraphs: The appropriations and authorization processes provide Congress regular opportunities to evaluate an agency's performance. During these processes, Congress also might influence the activities of these agencies by legislating provisions that reallocate resources or place limitations on the use of appropriated funds to better reflect congressional priorities. Through line-item funding, bill text, or accompanying committee report text, Congress can encourage, discourage, require, or forbid specific activities at the agency, including rulemaking. Alternatively, Congress can adjust an agency's overall funding level if Congress is supportive or unsupportive of the agency's mission or conduct. Thus, congressional control over an agency's funding reduces its independence from (and increases its accountability to) Congress.
section_title: Provisions in the FCA
paragraphs: The FCA would bring the rest of the financial regulators—the FDIC, FHFA, NCUA, OCC, Fed, and CFPB—as well as FSOC into the appropriations process. For the Fed, spending related to monetary policy would remain outside of the appropriation process. The CFPB would no longer receive transfers from the Federal Reserve and thus would no longer have a dedicated source of revenues. Fees and assessments that agencies currently collect to fund themselves would appear as offsetting collections in the federal budget with certain exceptions, such as deposit insurance premiums.
section_title: Other Changes to Regulatory Structure82
paragraphs: In addition to the leadership and funding changes mentioned above, the FCA also would make many agency-specific structural modifications. 
FSOC. The FCA would change agency representation on FSOC. Currently, only an agency's director can vote and participate at FSOC, including for agencies with multimember heads. The FCA would require each agency's leadership to reach a consensus position using the agency's normal voting process on FSOC votes. In addition, the FCA would repeal FSOC's duties to mediate interagency disputes and make policy recommendations to member agency. It would repeal FSOC's ability to rescind CFPB rules in limited cases. The FCA would also subject FSOC to the Government Sunshine Act and open its meetings to members of the congressional committees of jurisdiction.
SEC. The FCA would reauthorize the SEC through FY2021. The amount authorized for FY2017 would equal the amount in the FY2017 appropriation passed by the House ( H.R. 5485 ) and would be $50 million less than its FY2016 appropriation. The FCA would also eliminate the SEC's Reserve Fund, which was created by the Dodd-Frank Act to allow the SEC to spend up to $100 million independently of the appropriations process.
OFR . The FCA would eliminate the OFR. Currently, the OFR serves as a permanent staff supporting FSOC in addition to the staffs of the individual agencies represented on the FSOC. The OFR has authority to gather data from and monitor financial markets and institutions. It issues an annual report and publishes occasional research papers on specific financial-stability topics. The OFR is funded by assessments on SIFIs. Although some may be concerned that the OFR creates another layer of regulatory reporting requirements, the OFR must first rely on existing regulatory sources for data prior to seeking information directly from industry. Arguably, if the FCA repealed FSOC's designation authority, it would eliminate one of the principal duties that OFR supports.
FIO . The FCA would effectively merge Treasury's Federal Insurance Office and the position of "independent insurance expert," who is a voting member of FSOC. In their place, the FCA would create the Office of Independent Insurance Advocate, a new independent bureau within Treasury, with the head appointed by the President and confirmed by the Senate. The Independent Insurance Advocate would be a voting member of FSOC and the office would take over many, but not all, of the duties of the FIO.
CFPB . The CFPB has been one of the more controversial products of the Dodd-Frank Act and would be subject to more fundamental revision under the FCA than other regulators. Since the CFPB was established, some have argued that the agency has too much independence and not enough accountability. Critics point to structural issues, such as the presence of a director rather than a board and funding that is outside the traditional congressional appropriations process. Supporters of the CFPB highlight other aspects that they argue provide sufficient transparency and accountability, including the CFPB director's biannual testimony before Congress and the cap on the CFPB's non-appropriated funding. Other structural characteristics, supporters argue, are important for ensuring that the CFPB is somewhat insulated from political pressures and can focus on the technical aspect of policymaking.
The FCA includes numerous sections that would modify the CFPB and its operations. Most notably, the FCA would replace the CFPB's director with a five-member commission (see " Leadership Structure ") and subject the CFPB to the traditional appropriations process (see " Appropriations "). In addition, the FCA would rename the CFPB as the Consumer Financial Opportunity Commission (CFOC) and would alter the CFOC's mandate to require additional focus on "strengthening participation in markets by covered persons, without Government interference or subsidies, to increase competition and enhance consumer choice." The FCA includes numerous other modifications, including repealing the CFPB's authority to deem certain acts to be unlawful because they are "abusive" and raising the CFPB's supervisory threshold for depositories from $10 billion to $50 billion in assets. 
Fed . The Federal Reserve is unique among financial regulators in that, in addition to its regulatory role, it is responsible for conducting monetary policy and operating parts of the payment system. To shield monetary policy from undue political influence, the Federal Reserve is more independent from Congress and the Administration than other financial regulators. Nevertheless, it is still subject to congressional oversight. The FCA contains 11 sections related to the Fed, including the following:
A provision that would remove statutory restrictions on Government Accountability Office (GAO) audits of monetary policy and would require an annual audit that is not subject to current statutory provisions, such as confidentiality requirements. Effectively, this provision would expand GAO's powers to allow it to evaluate the economic merits of Fed policy decisions. A provision that would require the Fed to formulate a mathematical rule (called the "Directive Policy Rule") that would instruct it how to set monetary policy so as to achieve its mandate of stable prices and maximum employment based on macroeconomic variables. The provision would also require the Fed to calculate a traditional Taylor Rule (called the "Reference Policy Rule" in the bill) and compare it to the Directive Policy rule. If the Fed did not comply, it would trigger a GAO audit and testimony by the Fed chair before the committees of jurisdiction. A provision that would change the voting membership of the Federal Open Market Committee, which sets monetary policy. The provision would dilute the voting power of the Fed governors and the New York Fed president by expanding the votes of the other regional bank presidents from four to six.
CFTC. The FCA also includes a number of provisions found in the CFTC reauthorization bill ( H.R. 2289 ), which previously passed the House. These provisions address issues including the authority of the commission over the agency staff, internal risk controls, limits on subpoenas, a requirement for a notice and comment process for agency guidance, and changes to judicial review of agency rules.
section_title: Rulemaking
paragraphs: Federal rulemaking is one of the basic tools that federal agencies use to implement public policy. In enacting legislation, Congress often grants agencies rulemaking authority, under which they are required or permitted to set standards and prescribe the details of certain federal policies and programs. Some rules an agency issues are promulgated under the agency's inherent authority, while others are in response to the specific requirements of legislation. When they issue those regulations, agencies are generally required to follow a certain set of procedures established by Congress. The most long-standing and broadly applicable federal rulemaking requirements are in the Administrative Procedure Act (APA) of 1946, which applies to all executive agencies, including independent regulatory agencies. The APA contains rulemaking requirements and procedures for agency adjudications, and it provides for judicial review of rulemaking and agency actions.
Three proposals in the FCA—requiring cost-benefit analysis (CBA), modifying the Congressional Review Act, and overturning the judicial Chevron Doctrine—would modify regulator discretion and accountability in the rulemaking process.
subsections: section_title: Cost-Benefit Analysis91
subsections: section_title: Background
paragraphs: In the rulemaking process, cost-benefit analysis is the systematic examination of estimated total costs incurred and benefits accrued if a proposed rule were to be implemented. Many regulatory agencies are required—by statute or executive order—to perform some analysis of the potential effects of the rule prior to finalizing it, but not necessarily a quantified CBA. The scope of consideration and the level of detail required of the analysis can vary between different departments and agencies, and financial regulators generally are not required to quantify and evaluate total economic costs and benefits. 
Financial regulators generally face requirements that involve a relatively narrow analysis of a specific effect of a regulation—such as the effect on small businesses or the burden of recordkeeping and reporting necessary to comply with a new regulation—or that leave the parameters of a CBA to the discretion of the issuing agency. Also, because financial regulators are generally classified as independent regulatory agencies , they are exempted from Executive Order (EO) 12866. EO 12866 establishes analytical principles for federal CBA and a review process—performed by the Office of Information and Regulatory Affairs within the Office of Management and Budget—to ensure rulemaking adheres to those principles. 
section_title: Policy Issues
paragraphs: CBA requirements help to ensure that regulators are held accountable during the development, issuance, and implementation of rules, by requiring regulators to demonstrate that their decisions are based on an informed estimation of likely consequences. However, whether financial regulators should be statutorily required to perform certain types of CBAs that are subject to judicial, presidential, or congressional review would change the balance between their independence and accountability.
One side of the debate asserts that financial regulators should not be subject to rigid legal structure when performing CBA—especially in regard to quantification of costs and benefits. One argument for this position is that attempts to quantify the effects of financial regulation are imprecise and unreliable, because they entail making causal assumptions that are contestable and uncertain and often face issues concerning data availability and accuracy. The reason for this imprecise analysis is that financial regulation aims to induce behavioral, microeconomic, and macroeconomic responses, and its effects can be harder to quantify than other types of regulation, which generally require firms to take actions with more measurable effects. Others warn that increasing rulemaking requirements could lead to "ossification" of the rulemaking process, meaning agencies find it difficult to regulate because the rulemaking process becomes difficult, costly, and time consuming. 
Others assert that financial regulators should be subject to stricter CBA requirements than is currently the case. They argue that the CBA—even in the case of financial regulation, when it might yield a wide range of estimates of cost and benefits or when technical experts might disagree over the accuracy—is necessary because it disciplines agencies in regard to what rules they implement and allows for an assessment of whether a regulation is desirable. Some also argue that the challenges of performing CBA for financial regulations are not greater than for other industries, arguing that the necessary data are available and estimations of benefits and costs—while challenging—are possible.
section_title: Provisions in the FCA
paragraphs: The FCA would require the financial regulators listed in Table 1 to perform CBA as part of the rulemaking process and lists 12 specified areas of analysis. The 12 areas relate to verifying the necessity, efficacy, benefits and costs of the rule, and include
a quantitative and qualitative assessment of all anticipated direct and indirect costs and benefits of the regulation; an identification of available alternatives and an explanation of why the proposed rule is most effective; an assessment of how the burden imposed by the regulation will be distributed among market participants; an assessment of the degree to which the key assumptions underlying the analyses are subject to uncertainty; and an explanation of predicted changes in market structure and behavior of market participants.
Other provisions would restrict the implementation of rules depending on the findings of the CBA and the agencies' adherence to the requirements of the bill. For example, agencies would be prohibited from issuing a final rule if the expected quantified costs were greater than expected quantified benefits, unless Congress granted a waiver by joint resolution. Also, the bill would entitle parties adversely affected by regulation to bring action to the U.S. Court of Appeals for the District of Columbia Circuit for judicial review. The court may vacate a rule if it finds the agency did not comply with certain requirements. 
Finally, the bill would require each financial regulator to conduct certain additional CBA after the rule is issued and implemented, a type of analysis often referred to as retrospective analysis. Within five years of implementation of a rule, the agencies would be required to issue a report that examines the rule's realized economic effects, costs, and benefits. 
section_title: Congressional Review of Federal Financial Agency Rulemaking100
subsections: section_title: Background
paragraphs: The Congressional Review Act (CRA) is an oversight tool that Congress can use to invalidate a final rule issued by a federal agency. The CRA requires agencies to report to Congress on their rulemaking activities and provides Congress with a special set of expedited parliamentary procedures, which Congress can use to consider legislation striking down agency rules it opposes. These "fast track" parliamentary procedures, which are available primarily in the Senate, limit debate and amendment on a joint resolution disapproving a rule and ensure that a simple majority can reach a final up-or-down vote on the measure.
Members of Congress have specified time periods in which to submit and act on a joint resolution of disapproval invalidating the rule. If both houses agree to such a joint resolution, it is sent to the President for his signature or veto. If a CRA joint resolution of disapproval is enacted, either by being signed by the President or by being enacted over his veto, the agency final rule in question "shall not take effect (or continue)." The act also provides that if a joint resolution of disapproval is enacted, a new rule may not be issued in "substantially the same form" as the disapproved rule unless the rule is specifically authorized by a subsequent law. The CRA prohibits judicial review of any "determination, finding, action, or omission under" the act.
Congress has considered several CRA joint resolutions of disapproval since 1996. The CRA mechanism has successfully overturned one agency final rule: a 2000 Occupational Safety and Health Administration (OSHA) rule related to workplace ergonomics standards. In addition to the OSHA disapproval resolution enacted, five disapproval resolutions were vetoed; all five vetoes took place in the current 114 th Congress.
section_title: Policy Issues
paragraphs: The CRA was enacted in 1996 in response to concerns expressed by Members of both parties about Congress's ability to control what many viewed as a rapidly growing body of administrative rules. Simply put, many Members felt that as Congress delegated more power to agencies to implement law, the traditional oversight tools Congress possessed were not adequate. The CRA mechanism was structured to permit federal agencies to continue to promulgate regulations but provide Congress with more information about that rulemaking process and give Congress an expedited way to overturn rules it opposed. Two decades after the enactment of the CRA, congressional concern about administrative rules is arguably as high as ever, but there is a growing bipartisan consensus that the CRA has not been effective as an oversight tool. As one House committee report noted of the expedited disapproval mechanism, "Despite its conceptual promise, the CRA has produced few results."
Perhaps the most widely cited reason why the CRA has overturned only one agency rule in 20 years is the de facto supermajority vote required to enact a CRA resolution of disapproval. Although all of the congressional votes related to a CRA disapproval resolution are simple majority votes, the way the mechanism is structured all but assures that a veto override—requiring that a two-thirds super majority of both houses of Congress—will be necessary to enact the disapproval resolution. This is because a President is most likely to veto a joint resolution that attempts to strike down a final rule proposed by his or her own Administration or by a like-minded independent agency.
As a result, observers have argued that the structure of the CRA disapproval process tilts the playing field away from Congress and toward the President in a way that renders the CRA largely unworkable as an oversight mechanism; unless Congress can muster the supermajorities necessary to override a presidential veto—something that has been historically rare—an agency rule will go forward.
This concern has led in recent Congresses to the introduction of several proposals that would restructure the CRA disapproval mechanism from a resolution of disapproval to a resolution of approval . Under proposals of this type, instead of rules automatically going into force unless Congress could enact a measure stopping them, some or all rules would become effective only upon the enactment of a law approving them.
Chief among proposals of this type is the Regulations from the Executive in Need of Scrutiny Act (REINS Act; H.R. 427 ). The REINS Act would keep the CRA process the same for nonmajor agency rules but would require Congress to vote to approve all so-called major rules before they could become effective. H.R. 427 passed the House on July 28, 2015. 
Supporters of these proposals argue that amending the CRA mechanism in this way would properly "flip" the balance of power in rulemaking to favor Congress—the lawmaking branch—by requiring affirmative congressional action for a rule to become effective. Opponents of such an approach have expressed concern that it could make it difficult or impossible for agencies to issue needed rules and might significantly increase congressional workload. In the case of financial regulators, the approach would reduce their independence from—and increase their accountability to—Congress.
section_title: Provisions in the FCA
paragraphs: The FCA would amend the CRA in a manner virtually identical to that proposed in H.R. 427 , the REINS Act described above. Unlike those measures, however, the FCA would apply this revised CRA approval mechanism only to rules promulgated by a "federal financial agency," a term it defines as the financial regulators listed in Table 1 .
The FCA would require the agency to meet a number of reporting requirements to Congress when issuing a rule. The FCA would require a joint resolution of approval for major financial agency rules to be enacted under "fast track" consideration before such rules could take effect. (As noted above, currently, major rules automatically take effect unless a joint resolution disapproving them is enacted. The bill defines "major rule" using the same definition as is currently contained in the CRA.) The FCA would provide that if a joint resolution of approval is not enacted by the end of 70 session days or legislative days after the financial agency proposing the rule submits its report on the rule to Congress, the major rule is not approved and will not take effect.
The FCA would, however, permit a major financial rule to take effect for one 90-calendar-day period without congressional approval if the President determined that the rule was necessary because of an imminent threat to health or safety or other emergency, for the enforcement of criminal laws, for national security, or to implement an international trade agreement.
Unlike the current CRA, the FCA would allow a court to review whether a financial agency has completed the necessary requirements for a final rule to take effect.
section_title: Judicial Review108
subsections: section_title: Background
paragraphs: The FCA contains a provision that would change how agency interpretations of the law would be reviewed. Before discussing the benefits or drawbacks of such an approach, it is important to discuss the current legal framework in which courts review agency interpretations of the law. An administrative agency may generally only exercise that authority that is provided to it by Congress. Often, however, congressional delegations of authority are imprecise and, as a result, agencies must construe ambiguous terms and make interpretive decisions to implement Congress's delegation. The Supreme Court, in Chevron U.S.A., Inc. v. Natural Resources Defense Council , Inc. , envisioned a limited role for courts in reviewing agency interpretations of law. Chevron has been a cornerstone of administrative law since being handed down more than three decades ago, having been cited and followed thousands of times by federal courts. The Chevron test requires courts to enforce the clearly expressed intent of Congress. In the absence of such clarity, generally Chevron instructs reviewing courts to defer to an agency's construction of an ambiguous statute if the agency's interpretation is reasonable. Thus, under Chevron , it is generally left to federal agencies, and not the courts, to resolve ambiguities necessary to interpret and implement authority provided to the agency by Congress. 
section_title: Policy Issues
paragraphs: The Chevron Court explained that when Congress delegates to the administrative agency the authority to interpret the statute, a judge must not substitute his or her own interpretation of the statute in question when the agency has provided a permissible construction of the statute. In reaching its decision, the Supreme Court established a two-part test, commonly referred to as the Chevron two-step, to be applied when a court is reviewing an agency's statutory interpretation. The Court announced:
When a court reviews an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.
In Chevron , the Supreme Court elucidated several reasons for favoring a restrained judicial role when reviewing an agency interpretation of an ambiguous statute. First, the Court noted that when Congress enacts an ambiguous statute, it has, in effect, delegated to the agency the authority to clarify the ambiguity. In other words, Congress made a conscious choice in selecting a specific agency to implement the statutory delegation, and the courts, the Supreme Court reasoned, should respect Congress's decision by granting the agency the ability to interpret the statute Congress has charged it with administering. Moreover, the Court noted that interpreting a statutory ambiguity is akin to making a policy decision on how to implement a statutory program. In the Court's view, agencies and legislators are best suited to balance applicable considerations and to resolve debates regarding competing, acceptable interpretations of an ambiguous delegation.
Second, according to the Court, agencies have technical expertise in the field in which they are acting and are, therefore, in a better position to make appropriate policy decisions as part of a large and complex regulatory scheme. Courts, on the other hand, generally lack such expertise. In Chevron , the Court specifically acknowledged that "judges are not experts in the field" and thus "may not substitute [their] own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency."
Finally, the Chevron Court noted that administrative agencies are politically accountable—though not directly—through the democratic process. Although courts are called to reconcile political preferences in certain circumstances, they should not do so when the power to implement the statute has been delegated to an administrative agency. In the Court's view, an Administration has the authority to implement its policy judgments through the permissible interpretation of a statute. If the agency's, and by extension the Administration's, permissible construction of a statute is undesirable, the electorate may have its voice heard through the democratic process. By contrast, when a federal court interprets a statute, the electorate cannot voice similar concerns to the unelected court.
Some have argued, however, that judicial deference under Chevron has allowed administrative agencies to exercise too much "power to expand the scope of their own authority ... to decide what and who they can regulate, and how to regulate," risking abrupt deviations from long-standing statutory interpretations. Thus, the argument has been made that a recalibration of judicial review of administrative rulemakings is necessary to ensure that laws are interpreted as intended by Congress and to effectively hold agencies accountable in how they implement federal law. By contrast, such a recalibration of the judicial review over agency decisions arguably could result in courts engaging more directly in policymaking decisions. It also might increase the number of legal challenges to agency rulemakings, which could delay the time it takes for new regulations to take legal effect, as well as increase the costs of promulgating regulations.
section_title: Provisions in the FCA
paragraphs: The FCA would upend Chevron's policy of judicial deference to administrative rulemakings as it applies to certain federal financial regulators. The provision would apply to regulations issued by the financial regulators listed in Table 1 . In lieu of deferring to the covered agencies' reasonable interpretations of silent or ambiguous statutes in accordance with Chevron , the FCA would require courts to apply a de novo review of administrative actions—that is, review wherein a court reviews an administrative agency's decision without any deference. This would require courts to independently interpret a covered agency's statutory authority, rather than deferring to that agency's reasonable interpretations of the law. (It should be noted that, while the focus of this section is on regulations, FCA would require de novo review on not just administrative rulemakings but also the broader set of "final agency actions," which are subject to varying degrees of judicial deference. ) Although the bill would not prohibit courts from taking into account the relevant agency's reasoning and technical expertise of the subject matter, courts would have much greater latitude to set aside, overrule, and modify agency interpretations if the FCA were enacted into law. 
section_title: Enforcement Powers128
subsections: section_title: Background
paragraphs: Another major administrative tool held by the federal financial agencies is their power to enforce laws within their jurisdictions. The strength and effectiveness of an administrative agency's enforcement power can be impacted by, among other things, the scope of the agency's statutory authority (e.g., the types of entities that fall within its enforcement jurisdiction; the type of enforcement powers, such as civil penalties, criminal penalties, restitution, and disgorgement, in the agency's arsenal; maximum and minimum penalties available for certain violations) and the enforcement-related resources (e.g., financial, personnel) at its disposal.
section_title: Policy Issues
paragraphs: The way in which federal financial regulators exercise their enforcement powers requires a balance between protecting consumers and investors from unlawful conduct, on the one hand, and ensuring that law-abiding financial institutions are not pushed out of certain markets and the costs of their products and services for consumers and investors are not unduly increased, on the other.
section_title: Provisions in the FCA
paragraphs: The FCA would make a number of changes that would directly or indirectly affect the enforcement authorities of the federal financial regulators. For example, the FCA would increase the maximum civil penalties that could be assessed for violations of certain laws, such as the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The bill also would constrain certain SEC and CFTC enforcement powers by, for example, repealing the SEC's current statutory authority to, under certain circumstances, permanently or temporarily prohibit individuals from serving as an officer or director of a securities issuer. Additionally, the FCA's proposals to modify the way in which various federal financial regulators are funded (see the " Appropriations " section, above) could indirectly impact the enforcement resources at the disposal of those regulators.
subsections: section_title: Appendix. Authors of this Report and Areas of Expertise