Financial Services Report

Our Take
While the 2016 Presidential election has felt like it has been going on for an entirety, hopefully it will all be over soon (though perhaps not soon enough).   Since the beginning, we have been arguing that the 2016 race will be seen as the “Facebook election” meaning that for the first time the majority of individuals are screaming into the echo chamber that is social media.  However, we want to tweak that analysis by adding that this election may also be seen as the first time that the broader public should no longer trust media polling.

If true, this will not be the first time that a news organization was possibly spun by a polling firm, or even its own polling.  But in this era of clickbait journalism, it is not surprising that it is in the media’s self-interest to have a race that is tightening.  Otherwise, what’s the interest in watching the first debate.  But in the end, the numbers don’t lie, unless this time they do.

Looking Ahead

Near Term

• An estimated 100 million people are expected to tune into the first Presidential debate tonight.  According to the Wall Street Journal, up to a third of those viewers say that this debate will have a major influence on their vote.  It is safe to say that none of the people who feel that way sit on the New York Times editorial board.
• The House Financial Services Committee has an insanely busy week ahead.  Wells Fargo CEO John Stumpf will be there on Thursday.  Fed Chair Yell is there on Wednesday and there are two subcommittee hearings, both ostensibly on international agreements – one on Insurance and on the Financial Stability Board.  If you come across a HFSC staffer this week, give them a hug.
• In the Senate, Leadership on both sides of the aisle continues to play a game of chicken on funding the government.  Current funds run out on Friday, and there will be a cloture vote on Tuesday to gauge the support for the proposal that Leader McConnell offered last week.   In addition to finding the time to vote on the funding bill the Senate is expected to take up an override vote of the President’s veto of the JASTA Bill. 

Further Out

• Hopefully crickets in Congress come next week as members will have fled town subsequent to passing a short term continuing resolution to keep the government open until December 9^th.
• On November 8^th, the Nation will go to the polls to cast ballots for the President and numerous down ballot races.  The result of which could mean significant changes in the Nation’s Capital. 

The Past Week

Legislative Branch
House
House Floor, Senate Finance Committee Approves Startup Measure
On Thursday, the House floor and a Senate committee approved a bill that would allow new employees at startup companies to defer paying taxes on their stock options. First, the Senate Finance Committee unanimously approved their version of the bill (S. 3152) before the House passed their version (H.R. 5719) 287-124. The White House has opposed the lower chamber's iteration of the bill due to the Congressional Budget Office's determination that it would add $1 billion to the federal deficit over a 10 year period.
 
Lew Gives Annual Report on FSOC to House Financial Services Committee; 
On Thursday, House Financial Services Committee held a hearing featuring the Financial Stability Oversight Council’s (FSOC) annual report to Congress from Treasury Secretary Jack Lew. FSOCs annual report highlighted cybersecurity and asset management risk protection as areas for future action, among other concerns on financial stability. However, the hearing quickly strayed from issues inherently related to FSOC as committee members took the opportunity to question the Treasury Secretary on Administration policy regarding a recent cash payment to Iran, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, and a pending Treasury rule on executive compensation.
 
McHenry Introduces His Regulatory Sandbox Bill  – Abstains from Defining Fintech or it’s Regulator
On Thursday, Rep. Patrick McHerny (R-NC), introduced H.R. 6118, his legislation to create a FinTech or financial innovation “sandbox.”  The legislation appears to look similar to the sandbox concept that other nations, including the UK and Hong Kong have taken, by mandating that the federal agencies regulating financial services companies carve out an internal “Financial Services Innovation Office” for testing out new products and service.  Under the framework envisioned by McHenry, companies looking for regulatory certainty with new products would have to prove three main things: 1) their product or service serves a public interest; 2) it improves access to the industry; and 3) the product doesn’t pose a risk to both the financial system and consumers. Then the federal agencies would have 60 days to identify three, at minimum, areas for improvement or changes.   While some of these regulators currently have a no action letter policy, McHerny’s bill would go a step further by providing more regulatory certainty by formalizing the process, sharing data and most importantly, not having a revocable letter.
 
Capital Markets Subcommittee Continues Examination of Corporate Governance
On Wednesday, September 21^st, the House Financial Services Committee's Subcommittee on Capital Markets and Government Sponsored Enterprises held a hearing entitled “Corporate Governance: Fostering a System that Promotes Capital Formation and Maximizes Shareholder Value.”  During the hearing, the subcommittee examined a number of issues including proxy access, proxy advisory firms and the SEC’s “No Action Letter” policies. 
 
HFSC Subcommittee Examines SRO Regulators Agendas
On Thursday, the Capital Markets Subcommittee held a hearing entitled, “Examining the Agenda of Regulators, SROs, and Standards-Setters for Accounting, Auditing, and Municipal Securities.”   Witnesses included: Mr. Wesley R. Bricker, Interim Chief Accountant, Office of the Chief Accountant, U. S. Securities and Exchange Commission; Mr. James R. Doty, Chairman, Public Company Accounting Oversight Board; Mr. Russell G. Golden, Chairman, Financial Accounting Standards Board; Ms. Jessica Kane, Director, Office of Municipal Securities, at the SEC;  Ms. Lynnette Kelly, Executive Director, Municipal Securities Rulemaking Board; and Mr. Robert L. D. Colby, Chief Legal Officer, Financial Industry Regulatory Authority (FINRA).  Among the items discussed during the hearing including how these bodies pursue enforcement proceedings and FASB’s accounting standards.
 
Senate
Wells Fargo Almost Creates Bipartisan Commity on Senate Banking Panel
On Tuesday, the Senate Banking Committee held a highly publicized hearing on the recent fine of Wells Fargo – the world’s third-largest bank by assets – over a massive scandal involving the creation of millions of unauthorized checking and credit card accounts by Wells Fargo employees.  The employees engaged in the fraudulent activity to capitalize on sales incentives that the bank used to promote so-called “cross-selling,” or encouraging existing customers to open more than one account with the bank. Wells Fargo’s CEO, John Stumpf, apologized for the bank’s actions and assured lawmakers that effected consumers would be given appropriate recompense. The hearing’s second panel featured the primary regulators that investigated the bank – the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), and the Los Angeles City’s Attorney’s Office – who collectively fined Wells Fargo $185 million over the scandal.
 
The Wells Fargo CEO was heavily criticized by both parties, in a rare display of partisan unity on the panel, as noted by Senator Tester.   However, the attacks were not quite fully unanimous.  As the more liberal members of the Committee called on Stumpf to resign and criticized him over his refusal to guarantee the claw back of executive pay and for the bank’s failure to recognize the problem sooner. While at the same time the Republicans split their outrage against the Bank and the CFPB, arguing that the later failed to disclose and prevent the scandal.  
 
While Sen. Elizabeth Warren (D-MA) recommended that the Justice Department investigate the bank for criminal wrongdoing.   Democrats on the panel used the session with regulators, where the Republican members were mostly absent from, to highlight the contributions of the CFPB, and among other things the Bureau’s pending rule barring arbitration clauses in financial contracts – a practice that Wells Fargo had utilized.  Chairman Shelby closed the hearing by saying that the conversation could be the “beginning of a lot of things” and that there is “fear there are similar things going on in other banks.”
 
After Hearing, Fallout from Walls Fargo Scandal Continues
After Wells Fargo CEO John Stumpf appeared before the Senate Banking Committee on Tuesday, the fallout in the wake of its unauthorized accounts scandal has continued to grow.   
 
On Thursday senators wrote a letter to the Department of Labor to investigate whether Wells Fargo violated overtime pay requirements.    Also on Thursday, a separate letter from a group of senators urged the Federal Reserve Bank of San Francisco to deny the reappointment of Stumpf as the representative for its district on the Fed's Federal Advisory Council. On Friday, Stumpf elected to resign from the advisory panel.   Also on Friday, six Senators, led by Judiciary Committee ranking-member Patrick Leahy, sent a letter to Stempf calling on him to denounce the use of mandatory arbitration, as well as to answer questions about the bank’s use of the practice.   Attacks on the bank and on Stumpf personally are likely to continue when the House Financial Services Committee holds its own hearing later this week.
 
Senate Finance Committee Advances Bipartisan Miners, Retirement Bills 
On Wednesday, in a Senate Finance Committee markup, senators approved a bill (S. 1714) that would address potential shortages in the Multiemployer Health Benefit Plan that serves coal miners, and unanimously approved a measure (chairman's mark) that would promote access to retirement plans for employees at small businesses. The retirement measure, known as the Retirement Enhancement and Savings Act of 2016, received approving remarks from members of both parties, and the only amendment was one offered and withdrawn by Ranking Member Sen. Ron Wyden (D-OR) that would allow for payments to student loans to be matched by employers in 401k contributions.
 
Select Highlights from the Administration
Federal Reserve
Fed Holds Rates Steady Ahead of November Election
On Wednesday, the Federal Open Markets Committee (FOMC) decided to leave short-term interest rates unchanged, but dissent within the committee suggests that a raise in interest rates this yearn remains possible. With three dissents, Fed Chair Janet Yellen navigated the divide within the committee on when – and whether – the Fed should raise rates this year. Yellen conceded that the "case for an increase in the federal funds rate has strengthened," but nonetheless, the Fed has chosen to stand pat. The decision means that Fed rates will remain steady until the U.S. elections in November, barring a shock decision from the Fed. 
 
Consumer Financial Protection Bureau
CFPB Sues Title Lenders on Failure to Disclose Loan APR
On Wednesday, the Consumer Financial Protection Bureau (CFPB) sued five title lenders operating in Arizona for failing to disclose the annual percentage rate (APR) in online advertisements for title loans. In their complaint, the CFPB alleges that the companies advertised a periodic rate for their loans without listing the corresponding APR. The lawsuit seeks both civil monetary penalties and administrative orders requiring the companies to adjust their practices. 
 
Office of the Comptroller of the Currency
In Innovation Project, OCC Reaches Out to Nonbanks 
On Thursday, deputy comptroller of the Western District Kay Kowitt suggested that one of the primary objectives of the OCC's emphasis on innovation was to reach out to nonbanks. “We think there are opportunities in expanding our outreach to nonbanks,” Kowitt said at a conference in Washington sponsored by the Electronics Transactions Association. "We are inherently risk-averse. We need to consider both the risks and the opportunities.” Kowitt said her team would be making recommendations to Comptroller of the Currency Tom Curry before the end of the year, but declined to offer details on the report.
 
Financial Stability Oversight Council
FSOC Releases Readout of Meeting on Asset Management
On Thursday, following Treasury Secretary Jack Lew's testimony to the House Financial Services Committee on the Financial Stability Oversight Council, the body released a readout of its meeting on asset management products, among other agenda items.