TREASURY RECOMMENDATIONS V. FINANCIAL CHOICE ACT COMPARISON CHART

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1 TREASURY RECOMMENDATIONS V. FINANCIAL CHOICE ACT COMPARISON CHART Topics Treasury Recommendations Financial CHOICE Act (CHOICE Act) Volcker Rule Exempt banking entities with $10 billion or less in assets Exempt banking entities with more than $10 billion in assets from the proprietary trading prohibition unless they are subject to the market risk capital rules (i.e., trading assets and liabilities are at least $1 billion or 10% of total assets) Ensure agencies guidance and enforcement of the Volcker Rule is consistent and coordinated Eliminate from the proprietary trading definition the rebuttable presumption that financial positions held for fewer than 60 days constitute proprietary trading Consider elimination of the purpose test from the proprietary trading definition Provide banks with additional flexibility to adjust their determinations of the reasonable amount of marketmaking inventory under the market-making exemption Evaluate the benefits of potential modifications to the reasonably expected near term demand (RENTD) framework under the market-making exemption, including the ability of banking entities to opt out of the RENTD requirement if they adopt enhanced trader mandates or fully hedge all significant risks End requirement for banks to maintain ongoing calibration of a hedge over time under the riskmitigating hedging exemption Eliminate requirements to maintain documentation of specific assets and risks being hedged Apply enhanced compliance program requirements only to banking entities with at least $10 billion in trading assets and liabilities on a consolidated basis rather than the current $50 billion in total consolidated assets threshold Give banks greater ability to tailor compliance programs to their particular activities and associated risks Repeal 1 Attorney Advertising: For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Ave., New York, NY 10019, ; 1 S. Dearborn, Chicago, IL 60603, ; and 1501 K St., NW, Washington, DC 20005, Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.

2 Eliminate any required metrics for reporting that are not necessary for effective supervision Adopt a simple definition of covered funds focusing on the characteristics of hedge funds and private equity funds with appropriate additional exemptions Restore the exemptions in Section 23A of the Federal Reserve Act (restrictions on transactions with affiliates) so that they apply to banking entities transactions with their covered funds Extend the seeding period exemption for investments in covered funds from 1 year to 3 years Allow banking entities (other than depository institutions and their holding companies) and sponsored covered funds to share a name, provided that the separate identity of the funds are disclosed to investors Exempt from the definition of banking entity foreign funds owned/controlled by a foreign affiliate of a U.S. bank or a foreign bank with U.S. operations Consider an off-ramp from the Volcker Rule for highlycapitalized banking entities, if they remain subject to trader mandates and ongoing supervision and examination to reduce risks to the safety net Consumer Financial Protection Bureau (CFPB) Either make the CFPB Director removable at will by the President or restructure the CFPB as an independent multi-member commission or board Limit its enforcement actions, such as requiring the bureau to give companies adequate notice before an action, particularly if it represents a new position on an existing law Shift funding to the annual appropriations process and subject the CFPB to Office of Management and Budget (OMB) apportionment Prohibit from using its civil penalty fund for reasons other than remediation Restructure the agency as an Executive Branch agency with a single director removable by the President at will Eliminate its supervision authority and many of its rulemaking powers, leaving it to act solely as an enforcement agency Change the name to Consumer Law Enforcement Agency (CLEA), and task it with the dual mission of consumer protection and competitive markets, with cost-benefit analyses of rules performed by a newly-formed Office of Economic Analysis 2

3 Financial Stability Oversight Council ( FSOC ) Office of Financial Research Topics Treasury Recommendations Financial CHOICE Act (CHOICE Act) Adopt regulations that more clearly contour the CFPB s unfair, deceptive or abusive acts and practices (UDAAP) standard Required to make more frequent use of no-action letters Enforcement actions to be brought in federal district court rather than use administrative proceedings Implement changes to streamline and soften the CFPB s Civil Investigative Demand (CID) process Promulgate regulation committing it to regularly review its rules Limit CFPB complaint database usage to federal and state agencies Remove its supervision authority, but allow retention of other powers Restructure the agency as an Executive Branch agency with a single director removable by the President at will Make the agency subject to Congressional oversight and the normal Congressional appropriations process Establish an independent, Senate-confirmed Inspector General Require obtaining permission before collecting personally identifiable information of consumers Repeal authority to ban bank products or services it deems abusive and its authority to prohibit arbitration Expand the FSOC to play a larger role in coordinating regulators that overlap on policy FSOC authority to designate primary regulator and amplify information sharing Turn the entity into a functional part of the Treasury, with a single director appointed and removable at will by the Treasury secretary Repeal indirect auto lending guidance Retroactively repeal the authority of the FSOC to designate firms as systemically important financial institutions (SIFIs) Repeal Title II of Dodd-Frank and its Orderly Liquidation Authority and replace it with a new chapter of the Bankruptcy Code designed to accommodate the failure of a large, complex financial institution Repeal Title VIII of the Dodd-Frank Act, which gives the FSOC the authority to designate certain payments and clearing organizations as systematically important financial market utilities ( FMUs ) with access to the Federal Reserve discount window, and retroactively repeal all previous FMU designations Abolish the office Stress Test Raise the asset threshold (from $10 billion to $50 billion) and eliminate the possibility that banks fail for qualitative or subjective reasons Similar changes, but also exempt banks with higher level of capital specifically a leverage 3

4 The Federal Reserve to subject more of its stress-test process to notice and public comment process Supports CHOICE Act s 10% leverage ratio proposal ratio of at least 10% from heightened regulations, including stress tests Living Wills Capital/Liquidity Raise the current $50 billion in total consolidated assets threshold for compliance with the living will requirements to match the revised threshold for EPS Require living wills to be submitted once every two years, rather than annually, and require notice of material events that occur between living will submissions Require regulators to develop clear guidance for living will submissions and the framework used to assess deficiencies in such submissions (including remediation procedures), subject to public notice and comment Remove the Federal Deposit Insurance Corporation (FDIC) from the living wills process, leaving only the Federal Reserve involved Require the Federal Reserve to complete its review of living will submissions and provide feedback to financial institutions within six months Supports an off-ramp exemption for Dodd-Frank Act stress test (DFAST), Comprehensive Capital Analysis and Review (CCAR) and certain other prudential standards for any bank that elects to maintain a sufficiently high level of capital Make the operational risk capital requirements more transparent Implement administrative changes to CCAR, including modeling standards and pushing it to a two-year cycle Delay Net Stable Funding Ratio and Trading Book review Simplify capital regime through a shift away from the advanced approach Review and harmonize the application of Current Expected Credit Losses (CECL) Nearly identical to the Treasury recommendations Provide an off-ramp from the post-dodd- Frank supervisory regime and Basel III capital and liquidity standards for banking organizations that choose to maintain high levels of capital Permit banking agencies to conduct stress tests (but not limit capital distributions) of a banking organization that has made a qualifying capital election Require that the different sets of conditions under which stress tests are evaluated made public and subject to notice and comment period Exempt banking organizations that have made a qualifying capital election from any federal law, rule, or regulation that provide limitations on 4

5 Banks Topics Treasury Recommendations Financial CHOICE Act (CHOICE Act) Change CCAR sequence and integrate RBC with CCAR stress testing regimes Significant changes to the Supplementary Leverage Ratio Expand treatment of High-Quality Liquid Assets (HQLA) mergers, consolidations, or acquisitions of assets or control (to the extent the limitations relate to capital or liquidity standards or concentrations of deposits or assets) Revisit the Global Systemically Important Bank (G-SIB) Exempt banking organizations that have made a risk-based surcharge, the mandatory minimum debt ratio qualifying capital election from any federal law, in Total Loss-Absorbing Capacity (TLAC) and the rule, or regulation that permits a banking agent Enhanced Supplementary Leverage Ratio to consider risk to the stability of the U.S. No longer allow qualitative CCAR element to be the sole banking or financial system, when reviewing an basis for the Fed rejecting capital plans application to consummate a transaction or Subject stress-testing and capital review to notice and commence an activity public comment process End countercyclical capital buffer Community Banks/Credit Unions Raise DFAST threshold from $10 billion to $50 billion Eliminate DFAST mid-year cycle and reduce number of supervisory scenarios Raise the enhanced prudential standards (EPS) $50 billion threshold under Section 165 of Dodd-Frank to be better tailored to the complexity and risk profile of bank holding companies (BHCs) Raise the threshold for CCAR to match the revised EPS threshold Liquidity Coverage Ratio to apply only to internationally active banks Single-Counterparty Credit Limit to apply only to banks that are subject to the revised threshold for EPS Regulators to simplify the overall capital regime for community banks (less than $10 billion in assets) Exempt community banks from the risk-based capital (RBC) regime implementing the Basel III standards Simplify and clarify the definition of high volatility commercial real estate (HVCRE) loans Raise the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement requirements threshold from $1 billion to $2 billion Make Comprehensive Capital Analysis and Review (CCAR) a biennial process Regulatory agencies to appropriately tailor regulations to fit an institution s business model and risk profile Reduce reporting burdens for highly-rated and well-managed institutions Regulators to increase transparency and reestablish due process by making final examination reports available for a depository institution s review on a timely basis, and affording the institution a right to appeal 5

6 NCUA to revise the RBC requirements to only apply to credit unions with more than $10 billion in assets or those satisfying a 10% simple leverage (net worth) test Raise threshold for stress tests and RBC requirements for federally-insured credit unions from $10 billion to $50 billion Streamline de novo bank application process material supervisory determination to an independent arbiter Mortgage Lending Leveraged Lending Align the Qualified Mortgage (QM) definition with Government-Sponsored Entities eligibility requirement and phase-out the QM patch Increase small creditor QM exemption from $2 billion in assets to a threshold between $5 billion and $10 billion Revise points and fees caps for QM loans Clarify and modify TILA-RESPA Integrated Disclosure Streamline and soften Loan Originator Compensation rule Amend Reg AB II as it applies to registered securitizations to reduce the number of required reporting fields Delay 2018 implementation of Home Mortgage Disclosure Act requirements Clarify limited assignee liability for secondary market investors Review and improve the risk-weighting and stress-testing framework for securitized products Place moratorium on additional mortgage servicing rules Repeal or revise the residential risk retention rule Enhance private label mortgage-backed securities (PLS) investor protection Evaluate the impact of liquidity rules on the PLS market Re-issue the 2013 leveraged lending guidance for public comment Allow banks to incorporated their own robust metric rather than relying solely on the 6x leverage ratio Clarifies that a retailer of manufactured home is not a mortgage originator for purposes of the Truth in Lending Act, with certain exceptions (H.R. 650) Changes the way points and fees are calculated for purposes of complying with the Ability-to- Repay/Qualified Mortgage rule by excluding fees paid for affiliated title charges and escrow charges for insurance and taxes (H.R. 685) Create a legal safe harbor for mortgage loans that are originated by a company and then held in portfolio on the company s balance sheet (H.R. 1210) Creates a legal safe harbor from escrow requirements for community financial institutions holding loans in portfolio for three years, and exempts small firms that meet certain requirements (H.R. 1529) Exempt all non-residential mortgage asset classes from Dodd-Frank s risk retention requirements for ABS (Dodd-Frank Section 941) N/A 6

7 Small Business Lending Consider alternatives to assessing concentration risk to allow banks engaged in commercial real estate lending to maximize access to credit Consider altering the Supplementary Leverage Ratio for lines of credit to small and medium-sized businesses Repeal Section 1071 of the Dodd-Frank Act pertaining to small business lending data collection N/A General Regulatory Foreign Banks Streamline regulatory reporting requirements Recommends all agencies to undertake cost-benefit analyses and include them in the final rule s administrative record Improving regulatory efficiency and effectiveness by critically evaluating mandates and regulatory fragmentation, overlap and duplication across regulatory agencies Reducing regulatory burden by decreasing unnecessary complexity Tailoring the regulatory approach based on size and complexity of regulated firms and requiring greater regulatory cooperation and coordination among financial regulators Aligning regulations to support market liquidity, investment and lending in the U.S. economy See recommendations for the Volcker Rule Apply the EPS and living will requirements to foreign banking organizations (FBOs) based on their U.S. risk profile rather than their global consolidated assets, using the same revised threshold as is used for the application of the EPS to U.S. bank holding companies; see additional recommendations for Living Wills Continue the Federal Reserve s Intermediate Holding Company (IHC) regime to promote consolidated prudential supervision over an FBO s U.S. banking and non-banking activities Make all financial regulatory agencies subject to the REINS Act, bi-partisan commissions, and subject them to the appropriations process so that Congress can exercise proper oversight (with the exception of the Fed monetary policy) Impose across-the-board requirements that all financial regulators conduct a detailed costbenefit analysis of all proposed regulations Reauthorize the SEC for a period of five years with funding, structural and enforcement reforms Institute significant due process reforms for every American who feels they have been the victim of a government shakedown N/A 7

8 Raise the threshold for IHCs to comply with U.S. CCAR from the current $50 billion level to match the revised threshold for the application of EPS, subject to the Federal Reserve s ability to impose these requirements on smaller IHCs based on risk Require the Federal Reserve to review the recalibration of the internal TLAC requirement for IHCs of foreign G- SIBs and in doing so, consider the foreign parent s ability to provide capital and liquidity resources to the U.S. IHC, provided arrangements are made with the home country supervisors for deploying unallocated TLAC from the parent, among other factors Recalibrate other IHC regulatory standards (e.g., living wills, liquidity), taking into account the degree to which home country regulations are comparable to regulations for similar U.S. BHCs and where comparable, allow FBOs to meet certain U.S. requirements through compliance with home country regimes If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work or Michael E. Borden Partner mborden@sidley.com Connie M. Friesen Partner cfriesen@sidley.com George W. Madison Partner gmadison@sidley.com Seulbee Lee Associate seulbee.lee@sidley.com Michael D. Lewis Associate michael.lewis@sidley.com To receive Sidley Updates, please subscribe at 8