WASHINGTON – The revised version of the Financial CHOICE Act, which carries over the municipal provisions found in the first iteration, is expected to face a hard road in Congress, despite a warm welcome from Republicans during a committee hearing on Wednesday.

The hearing before the House Financial Services Committee, which did not touch on the muni-related provisions in the draft act, was a precursor to the planned committee vote on the legislation on May 2 and an expected full House vote later in May. However, the top Democrat on the committee, Rep. Maxine Waters, D-Calif., submitted a letter during the hearing signed by each Democrat on the committee that called for an additional hearing on the act before a vote.

The CHOICE Act, championed by Financial Services Committee chair Jeb Hensarling, R-Texas, is designed to be a replacement for the Dodd-Frank Act. The previous version of the CHOICE Act passed through the Financial Services Committee last year but stalled in the full House.

U.S. Rep. Jeb Hensarling (R-Texas)
House Financial Services Committee chair Jeb Hensarling, R-Texas
House Financial Services Committee chair Jeb Hensarling's CHOICE Act is expected to face a hard road in Congress.

Individuals who have been following the act said the proposed legislation has enough support to clear the Financial Services Committee, but would have more trouble in the full House and Senate because Democrats are expected to uniformly oppose it.

One hang-up for both Democrats and Republicans in Congress is the bill’s intended repeal of the Durbin Amendment, which was added to Dodd-Frank to limit the fees credit card companies could charge retailers. The debate over repealing the amendment pits banks against retailers and is something legislators have already received significant pressure about, sources said. They added that such a provision could play into Republicans’ decisions about whether to support the bill in the House.

Those who have been following the bill all agree that if the bill does clear the House, it won't pass the Senate intact because the Senate’s cloture rule requires 60 senators to support moving forward with a vote on legislation. Democratic opposition will prevent that support from materializing, they said.

One source described the bill as being “a la carte on the Senate side,” meaning certain provisions that could garner larger support may be carved out for consideration.

“The CHOICE Act is the House GOP’s best effort at a financial regulatory reform package that we’re going to see in this Congress,” the source said. “If it passes [the House], the Senate is going to say ‘good job’ … here are our priorities, here are our limitations because of cloture, here’s our bill.”

The bill includes both muni-specific provisions as well as those that would affect the SEC and thus munis more broadly.

The legislation would require that the Securities and Exchange Commission’s Office of Municipal Securities begin reporting to the SEC’s Division of Trading and Markets instead of reporting directly to the SEC chair. It would also reallocate the fines the Municipal Securities Rulemaking Board receives from enforcement actions over violations of its rules to the Department of Treasury.

The revised CHOICE Act keeps a provision from the previous version that makes clear municipal issuers aren't required to have a municipal advisor. The provision is tied to a previous bill from Rep. Randy Hultgren, R-Ill., that responded to concerns his office had after hearing that issuers were being told they had to hire MAs under the SEC’s MA Rule.

Another portion of the draft CHOICE Act lays out considerations that agencies like the SEC must take into account when analyzing proposed rulemakings. Among other things, the SEC would have to include: an identification of the need for the regulation and the regulatory objective; an analysis of the adverse impacts regulated entities and other market participants could experience; and a quantitative and qualitative assessment of all anticipated direct and indirect costs and benefits of the regulation. The draft legislation further explains similar requirements for notices of final rulemakings.

The new act would also require the SEC to conduct a regulatory impact analysis on each of its rules within five years of their publication in the Federal Register. It would require that the SEC do a retrospective review of its existing rules within one year of the act’s enactment and then every five years thereafter. The SEC would have a year from the date the legislation is enacted to submit a report detailing a plan to subject the MSRB to the CHOICE Act’s regulatory analysis requirements.

One new addition to the act in this second version is the intended creation of an advisory committee on the SEC’s enforcement policies and practices. The SEC chair would have six months after the legislation is enacted to establish such a committee, which would be assigned to analyze the commission’s enforcement policies and procedures, and determine how closely those procedures are being followed, among other things. The SEC would also have to appoint an enforcement ombudsman within 180 days of the act’s enactment and allow the SEC to triple monetary fines in administrative and civil actions where penalties are tied to illegal profits as well as in enforcement cases dealing with repeat violators of laws and rules.

Individuals would be allowed under the rule to force the commission to end an SEC administrative action that has been brought and instead have the matter brought as a civil action.

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