WASHINGTON – Rep. Jeb Hensarling, R-Tex., plans to introduce an alternative to the Dodd-Frank Act that would, among other things, stop the Municipal Securities Rulemaking Board from receiving some of the muni rule enforcement fines collected by regulators and repeal the Volcker Rule.
The proposed legislation, to be called "The Financial CHOICE Act," is expected to be introduced later this month, according to Hensarling.
The congressman said in a speech before the Economic Club of New York on Tuesday that the legislation will be "the foundation of the Republican plan to reignite growth by replacing Dodd-Frank with real reforms that work."
He further called the Dodd-Frank Act, which passed in 2010, "a grave mistake Washington foisted upon the American people."
Hensarling's office has only released an executive summary of the legislation so far, leaving many of the specifics behind the broader summaries unknown.
The congressman's proposal is likely to meet stiff opposition from his colleagues, especially Democrats.
While much of the proposed legislation would not directly impact the muni market, the portion that would eliminate MSRB funding from enforcement action fines would remove roughly 6% of the self-regulator's funding, based on the board's financial report for last year. The money would instead go to the Treasury Department for deficit reduction.
During the MSRB's fiscal year 2015, which began on Oct. 1, 2014 and ended Sept. 30, 2015, roughly $2.65 million out of about $41.33 million in revenue came from fines for violations of board rules collected by the Securities and Exchange Commission and the Financial Industry Regulatory Authority.
The proposed bill would increase SEC and other regulatory agencies' fines for securities law violations, doubling the cap for the most serious securities law violations and tripling the fines when they are tied to illegal profits. The proposed bill would also give the SEC new authority to both impose sanctions more closely linked to investor losses and increase punishments for repeat offenders.
In his prepared remarks, Hensarling said the first section of the bill would allow banks that maintain a simple leverage ratio of at least 10% and have a composite CAMELS rating of 1 or 2, to choose to be functionally exempt from the post-Dodd-Frank supervisory regime, Basel III standards, and a number of other "regulatory burdens that pre-date Dodd-Frank."
The simple leverage ratio compares a bank's assets held with its common equity while CAMELS is a rating system for banks that assigns a number based on a bank's overall condition, with 1 being the best and 5 being the worst.
It is still unclear whether the legislation would affect banking regulators' liquidity requirements for holdings of high quality liquid assets.
HQLA requirements have been controversial in the municipal market after the original requirements from the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp. did not treat munis as HQLA. The Fed has since proposed rules that would treat some investment-grade bonds as HQLA, but the FDIC and OCC have not. Additionally, Rep. Luke Messer, R-Ind., is sponsoring legislation approved by the House that would expand the number of munis that could qualify as HQLA and give them even better treatment than the Fed.
Another section of the legislation would repeal the Volcker Rule, addressing a past area of concern for the muni market. The rule prohibits banks from trading on a proprietary basis and restricts their investments in hedge funds and private equity.
Muni groups and the MSRB warned at the time the rule was proposed that it would bifurcate the market by exempting bonds issued by states, counties, cities, and other units of general government from the rule while not exempting bonds issued by entities like water and sewer districts, school districts, and housing authorities.
They argued that there would be a diminished market for the non-exempted bonds because bank-affiliated dealers would not be able to purchase them or sell them for their inventories.
There also were concerns that the rule would lead to an unwinding of tender option bond programs, which are used to provide short-term, tax-exempt munis to money market funds. However, that portion of the Volcker Rule, which was originally supposed to be implemented in July 2015, was delayed until July 21, 2017.
Mike Nicholas, Bond Dealers of America's chief executive officer, applauded Hensarling's initiative to produce a bill that acknowledges over-regulation, even though much of that has come outside of Dodd-Frank. He said BDA looks forward to making sure any future regulations are developed in a way that recognizes the reduced risk posed by smaller institutions.
One other portion of Hensarling's rule is designed to keep citizens from feeling they have been shaken down by the government, Hensarling said. It would, for example, allow a respondent facing SEC charges before an SEC administrative judge to remove the case from the administrative court and transfer it to a federal court.
The SEC's use of administrative proceedings, including for the majority of muni-related actions, has been controversial and subject to constitutional challenges because some say the judges are not properly appointed.
