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The Financial Wrong Choice Act

July 27, 2017 Blog

Last month, the Republican controlled House of Representatives passed the “Financial Choice Act,” which, if passed in the Senate, and then signed into law, would gut reforms to the financial system created by the 2010 Dodd-Frank Act.

Democrats immediately dubbed it the “Wrong Choice Act” because it would eviscerate Dodd-Frank, which imposed regulations on Wall Street to prevent another financial crisis like the one that occurred in 2008.

Republicans in Congress appear poised to repeal Dodd-Frank; the message from the right is that such reform would cut onerous financial regulations in order to help create jobs and foster economic growth.

In the end, the Financial Choice Act could bring the financial regulatory system to the same place it was prior to the 2008 financial crisis, Rep. Maxine Waters, D-Calif., said.

“[President] Donald Trump and Republicans want to open the door to another economic catastrophe like the Great Recession and return us to a financial system where reckless and predatory practices harm our families and communities. We cannot allow that to happen,” said Waters, the ranking member on the House Financial Services Committee, according to an article from Law360.

Wall Street’s reckless practices led to the Lehman Brothers bankruptcy, the collapse of Bear Stearns, and the bailout of virtually every other major Wall Street firm.

The Wrong Choice Act would erode protections that have helped to prevent another financial calamity.

“If the Senate takes up and adopts the Choice Act, it would weaken and transform the Consumer Financial Protection Bureau (CFPB); eliminate the Federal Deposit Insurance Corp.’s ability to unwind a giant financial institution; and allow banks to abide by a 10 percent leverage ratio rather than follow Dodd-Frank-mandated capital rules,” according to Law360. “The Choice Act would also ease the regulatory weight placed on community banks and credit unions and take a hatchet to the Volcker Rule, Dodd-Frank’s ban on proprietary trading, and the U.S. Department of Labor’s fiduciary rule on financial advisers, among a host of other changes.”

The two parties could not be more clear when it comes to this financial reform.

“Republicans criticize the Dodd-Frank regulations as the primary driver for anemic economic growth in the U.S. and for enshrining too-big-to-fail, which they say paves the way for future taxpayer bailouts of the country’s biggest banks,” according to Law360. “For Democrats, restructuring the CFPB to be a law enforcement agency akin to the Federal Trade Commission, as included in the Choice Act, while removing the CFPB’s ability to supervise banks, debt collectors and other consumer finance firms, would leave consumers vulnerable.”

One of the key provisions of the proposed legislation would be the repeal of the Fiduciary Duty Rule, which the Department of Labor recently said should go forward.  That rule would require Wall Street brokers to put their customers’ interests first and ahead of their own, an unremarkable, common sense position. Large brokerage firms are imploring the Trump administration to do away with the rule.

Michael Piwowar, a commissioner at the Securities and Exchange Commission, signaled he will also likely to try and kill the Fiduciary Duty Rule.

“The rule, promulgated under the Obama administration in April 2016, requires financial professionals who advise retirement account holders to act in the best interests of their clients when recommending investment products, a higher standard than the current approach of promoting products that are merely suitable to an investor,” according to another article from Law360.

“But Piwowar argued in his letter on Tuesday that this extension of fiduciary status reflects an ‘excessively dour’ view at DOL that disclosures are insufficient to protect investors from potential conflicts of interest and may even be harmful,” according to the article. “According to Piwowar, such a view runs contrary to standard economic theory holding that ‘sunshine is the best disinfectant’ and is inconsistent with the SEC’s experience.”

Why can’t Wall Street and Congress learn from the near-death experience of the 2008 financial crisis?  Instead, it looks like major reforms created to prevent another crisis are under siege. Wall Street profits and campaign contributions seem to trump the interests of investors and taxpayers. Sad.

Zamansky LLC are investment and stock fraud attorneys representing investors in federal and state litigation and arbitration against financial institutions.