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Financial Regulatory Reform: Here Comes the CHOICE Act

April 24, 2017 - Last week, Congressman Jeb Hensarling (D, TX), Chairman of the House Committee on Financial Services, introduced the CHOICE Act, a sweeping bill that would repeal much of the equally sweeping 2010 Dodd-Frank Act. Importantly for the loan and CLO markets, among the provisions that would be repealed would be the risk retention rules for CLO managers (and everyone other asset class other than residential mortgages) and the Volcker Rule restrictions on banks that prevent them from owning the debt securities of CLOs that hold anything other than loans.  Hearings on the CHOICE Act are scheduled for this Wednesday and the Committee expects to markup the legislation in the coming weeks.  While the CHOICE Act is almost certain to pass through both the Financial Services Committee and the full House on partisan votes, its prospects in the Senate, according to most Washington observers, are dim.  Instead, the Senate appears to be taking a much less ambitious and more targeted approach.  As we recently noted, Senators Mike Crapo and Sherrod Brown, the Chairman and Ranking Member, respectively, of the Senate Banking Committee, requested proposals that would foster economic growth and are likely to use some of the responses as a starting ground for more moderated financial regulatory reform.  Ultimately, to the extent there is any financial regulatory reform during this session of Congress, it will probably result in a compromise between the aggressive position espoused in the House and the more focused approach reflected in the Senate.  Arnold & Porter Kaye Scholer published a handy summary of the draft legislation, available here.

Last week, Congressman Jeb Hensarling (R, TX), Chairman of the House Committee on Financial Services, introduced the CHOICE Act, a sweeping bill that would repeal much of the equally sweeping 2010 Dodd-Frank Act. Importantly for the loan and CLO markets, among the provisions that would be repealed would be the risk retention rules for CLO managers (and every other asset class other than residential mortgages) and the Volcker Rule restrictions on banks that limit their ability to engage in most proprietary trading and prevent them from owning the debt securities of CLOs that hold anything other than loans.  Acrimonious hearings took place on Wednesday, April 26th which were marked by a virtually total partisan divide.  Nevertheless, according to Bloomberg, the Committee expects to markup the legislation on May 2nd, when the CHOICE Act is almost certain to pass (albeit on an entirely partisan vote).  The CHOICE Act is also likely to pass through the full House but its prospects in the Senate, according to most Washington observers, are dim.  Instead, the Senate appears to be taking a much less ambitious and more targeted approach.  Senate Banking Committee Chairman Mike Crapo and Ranking Member Sherrod Brown requested proposals that would foster economic growth and are likely to use some of the responses as a starting ground for more moderated financial regulatory reform.  (The LSTA responded with a proposal to improve the risk retention rule.) 

Ultimately, to the extent there is any financial regulatory reform during this session of Congress, it will probably result in a compromise between the aggressive position espoused in the House and the more focused approach reflected in the Senate.  Simpson Thacher published a comprehensive summary of the draft legislation. The Committee Memorandum relating to the CHOICE ACT is available here and the written testimony of the witnesses is available here.

*Article updated on April 26 to cover the CHOICE Act hearing*

 

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