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Paul Weiss Discusses Review of Dodd-Frank Provisions

On April 21, 2017, President Trump signed two presidential memoranda calling for review of portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). These presidential memoranda follow the executive order signed on February 3 (see our client alert here) setting forth “Core Principles” intended to guide the regulation of the U.S. financial system.

Orderly Liquidation Authority

The first presidential memorandum (available here) directs the Secretary of the Treasury to review the Dodd-Frank Orderly Liquidation Authority, which provides a mechanism for the seizure, break up and winding down of a failing non-bank financial institution, under the supervision of the FDIC, where the failure of the institution would otherwise threaten financial stability in the United States. The presidential memorandum notes that the existence of the Orderly Liquidation Authority may encourage excessive risk taking by creditors, counterparties and shareholders of financial companies, because section 210(n) of the Dodd-Frank Act also created an Orderly Liquidation Fund that is authorized to use taxpayer funds to carry out liquidations.

Among other things, the Secretary’s review is required to consider:

The memorandum further directs the Secretary to refrain from making any determination regarding a financial company under section 203(b) of the Dodd-Frank Act pending the completion of the review of the Orderly Liquidation Authority unless the Secretary determines, in consultation with the President, that the criteria enumerated in section 203(b) require otherwise.

Financial Stability Oversight Council

The second presidential memorandum (available here) directs the Secretary of the Treasury to review the Financial Stability Oversight Council (“FSOC”), which is authorized under the Dodd-Frank Act to designate large, systemically important non-bank financial institutions for enhanced regulation. The Secretary of the Treasury is directed to report on the FSOC designation and determination processes, considering, among other things:

Notably, several of these factors are implicated in MetLife’s successful 2016 challenge in the D.C. District Court to its designation as a systemically important non-bank financial institution (see our client alert here). MetLife has requested that the case, currently on appeal, be held in abeyance pending the Secretary of the Treasury’s report.

The memorandum further directs the Secretary to (i) evaluate and report to the President on whether the FSOC designation process is consistent with the Core Principles, and (ii) not to vote for any non-emergency proposed designations or determinations pending the completion of this review and submission of the Secretary’s recommendations. As the Dodd-Frank Act designates the Secretary of the Treasury as the Chairperson of the FSOC and requires the affirmative vote by the Chairperson for any designation or determination, this effectively prevents any designations or determinations during this review period.

While President Trump had already directed the Secretary of the Treasury to review the regulation of the U.S. financial system in light of the Core Principles, these recent presidential memoranda indicate a particular concern with two controversial provisions of the Dodd-Frank Act. When signing the memoranda, President Trump stated his belief that the Dodd-Frank Act has in many cases done the opposite of what it was supposed to do, namely it has enshrined “too big to fail” and encouraged risky behavior.

This post comes to us from Paul, Weiss, Rifkind, Wharton & Garrison LLP. It is based on the firm’s memorandum, “President Directs Review of Dodd-Frank Provisions,” dated April 27, 2017, and available here.

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