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Financial Services Report

May 22, 2018

Our Take

There is a question on the top of mind in Washington, well, ok, two.  But beyond the viral determination if you’re Yanny or Laurel, everyone wants to know what is going to happen in November.  Will it be wave?  Or  a trickle?  Will the Dems take control of the House? The Senate? And if so, what does it mean in terms of a governing philosophy and agenda.   So, with the large caveat that we are still a long, long way from the election, and many things could change between now and then, we wanted to share our latest thinking on the topic. 
 
Between last week’s primaries and the primary in Ohio the week before, it seems possible that the Midwest could serve as the dam to stem the Democratic tide in November.   This is based partly on turnout and partly on results.   If true, then it seems likely that any Democratic gains will come from coastal states.  There are still enough seats in play in those states that the House could flip, but any Democratic majority would be narrow at best.   


On the other hand, if the conventional wisdom that Democrats need moderates to win in seats that Democrats don’t traditional win in is misguided in a year where Democratic and Independent turnout will be driven not by the party but by the Commander in Chief, whose ability to generate Democratic anger is unparalleled.  Then you could have a Democratic wave but it raises the question of the governing model if the left’s equivalence of the tea party is demanding free college, Medicare for all, etc.    
 
In terms of the Senate, it is possible that a Dem wave could bring a Senate majority, but the more likelihood is that the upper chamber remains in Republican control.  At least through 2020 when the map is much more favorable to Democrats.
 
Of course, this could all change 40 times between now and November.   Because, just like predicting the weather, this is really hard.

Looking Ahead

Near Term

  • The House is poised to pass, unamended, S. 2155, the “Economic Growth, Regulatory Relief, and Consumer Protection Act” on Tuesday.  This will send the regulatory relief bill to the President’s desk.
  • The House Financial Services Committee will hold a mark-up on a series of bills, including the “true lender” legislation that many in the fintech world have been watching closely.
  • The Senate is expected to debate and then vote to confirm Jelena McWilliams to be FDIC Chair.
  • The Senate Banking Committee also has two hearings scheduled, to discuss the conservatorship of housing finance agencies and cybersecurity, respectively.

Further Out

  • The House and Senate depart for the Memorial Day recess.
  • The Senate FSGG Appropriations bill is set to be marked up the week of June 18th.
  • SEC Chairman Clayton is expected to testify before the Senate FSGG Subcommittee on June 5th.

The Past Week

Legislative Branch
House
Farm Bill Fails Floor Vote After Freedom Caucus Revolt
The farm bill was the main action for the House last week, but it came to an end with a surprising failed vote on Friday. The nutrition and agriculture package (H.R. 2) became embroiled in the immigration debate as the House Freedom Caucus decided to oppose the farm bill unless a vote was held on a conservative immigration measure first. Seeing the bill as the last major opportunity to flex their muscle before this fall’s midterms, the three-dozen member caucus led the charge against the bill — with all Democrats also voting against due to its inclusion of work requirements for the Supplemental Nutrition Assistance Program (SNAP) — ultimately resulting in its failure Friday on a 198-213 vote. The failure comes as a major embarrassment for House Republican leadership, and likely makes it more realistic that the House will actually take up immigration before the end of the summer. 
 
Ways and Means Committee Holds First Hearing in Series on Tax Reform
On Wednesday, the House Ways and Means Committee held their first hearing in a planned series on the impact of tax reform, with this session having the relatively generic title “Growing Our Economy and Creating Jobs.” The session featured witnesses from businesses and interest groups, and took a wide approach to the different areas that tax reform is expected to influence, including capital expenditures, repatriation, and infrastructure. The series moves to the subcommittee level next week, as the Ways and Means Trade Policy Subcommittee is scheduled to examine the effect of tax reform on small businesses.  
 
Ed and Workforce Subcommittee Discusses Retirement Proposals
On Wednesday, the House Education and the Workforce Subcommittee on Health, Employment, Labor, and Pensions’ hearing this morning that examined proposals that would update and modernize the Employee Retirement Income Security Act (ERISA). In the Committee’s questioning of the panel — which consisted of four witnesses from retirement policy and stakeholder groups — lawmakers on both sides of the aisle offered broad bipartisan support for modernizing ERISA. In terms of overarching policy goals, Democrats on the Subcommittee in particular stressed the need to bolster the Social Security program and promote policies that auto-enroll individuals without retirement accounts into IRAs.
 
SEC Top Cop Defends Decline in Enforcement Actions
On Wednesday, the House Financial Services Capital Markets Subcommittee held a hearing for oversight of the SEC’s Division of Enforcement, featuring testimony from Co-Directors Stephanie Avakian and Steven Peikin. The two officials defended the drop in enforcement actions between 2016 and 2017 — down from 868 to 754 — saying that the agency was protecting a wider range of retail investors and that some effects can only be measured qualitatively. The approach has gained the approval of Subcommittee Chair Bill Huizenga (R-MI), who contrasted their style to the “broken windows” tactics of former SEC Chair Mary Jo White.
 
New Dem Release Economic Agenda Highlighting Opportunity Gap, Worker Investment
On Thursday, the moderate New Democrat Coalition revealed their economic opportunity agenda, dubbed “A Future that Works.” The forward-looking agenda focuses on the so-called skills gap between workers and the positions they’re intended to fill, and marks the first in a series focused on the impact of a changing economy. Thursday’s release defines three key principles to be addressed in a dynamic economy, namely (1) give every American access to the tools to succeed in the 21st century economy; (2) remove obstacles for Americans to access middle-skill jobs and close the opportunity gap; and, (3) create a culture of lifelong learning and make it easier for workers to invest in their future. A full report is expected to be released this week.
 
Ways and Means Panel Examines Future of Social Security Number
On Wednesday, the House Ways and Means Subcommittee on Social Security held a hearing entitled “Securing Americans’ Identities: The Future of the Social Security Number.” The hearing focused on the consequences of using the Social Security Number (SSN) as both an identifier and authenticator in both the public and private sectors. Lawmakers engaged with the panel — which consisted of the Acting Director of the Social Security Administration, the Director of Education, Workforce and Income Security at the Government Accountability Office (GAO), and five representatives from policy and stakeholder organizations — on policy recommendations and solutions to mitigate the consequences of SSN loss or theft. Citing high-profile data breaches and cyber security incidents, members on both sides of the aisle stressed the need for action that limits the use of SSNs in authentication and identification capacities.
 
Financial Services Subcommittee Holds Hearing on FinCEN CDD Rule
On Thursday, the House Financial Services Subcommittee on Terrorism and Illicit Finance held a hearing featuring testimony from the Director of the Financial Crimes Enforcement Network (FinCEN), Kenneth Blanco, on the implementation of the agency’s customer due diligence (CDD) rule. Lawmakers were primarily concerned with the regulatory burden that the rule may have on financial institutions, particularly small ones. Blanco fended off those suggestions, saying that the information collected was “critical” and that the rule was the result of industry feedback. He also said that the agency anticipated a transition period as banks come into compliance, with regulators providing an official 90-day exemption for certificates of deposit (CD) and similar products. However, Blanco conceded that unnecessary de-risking was possible under the rule, although he said regulators will work to avoid that occurrence.
CFIUS Bill to Be Marked Up Tuesday at Both HFSC and SBC
A bicameral effort to reform the review of foreign transactions in the United States is set to take another step forward this week as both the House Financial Services Committee and Senate Banking Committee aim to mark up their bills addressing the issue. The removal of language allowing the Committee on Foreign Investment in the United States (CFIUS) to review joint-ventures has seemingly cleared the path for the legislation, which now proposes to review foreign deals through a more stringent export controls process. The bill — which was precipitated by a renewed scrutiny of Chinese investment in the U.S. — also tightens other processes dealing with both foreign investment in the U.S. and American investment abroad. Both the House and Senate versions of the bill are expected to get bipartisan support and may be added to the defense authorization measure.
 
Hensarling Previews S.2155 ‘Sidecar’ at Politico Event
On Thursday, House Financial Services Chair Jeb Hensarling (R-TX) spoke with Politico’s Ben White at an event in Washington on the issues of the day, primarily the House’s upcoming consideration of a Senate-passed financial regulatory relief bill (S. 2155). As part of his decision to withdraw his opposition to the bill reaching the House floor, Hensarling has reportedly secured the promises of House and Senate Republican leadership to bring up an additional regulatory package that would include some of the bills passed in the House but not included in S. 2155. Hensarling said on Wednesday that those bills would primarily be related to capital formation and that he expects for it to be passed this summer.
 
Ellison Releases Report on CEO Pay Using SEC Pay-Ratio Rule Data
On Wednesday, Deputy Chairman of the Democratic National Committee and House Rep. Keith Ellison (D-MN) released a report detailing the difference in salary between the median employee and a chief executive officer at a selection of companies that were required to disclose the information per the 2010 Dodd-Frank law. The Securities and Exchange Commission (SEC) finalized a rule requiring the disclosure back in 2015, but slow implementation has meant that the disclosures have only started recently. According to the report, the average CEO is making 39 times the pay of the company’s median worker.
 
Senate
Senate Banking Committee Considers Fed Governor Nominees Bowman, Clarida
On Tuesday, the Senate Banking Committee held a hearing to consider the nominations of Michelle Bowman and Richard Clarida to join the Board of Governors of the Federal Reserve System, with the latter nominee under consideration to become Vice-Chair of the body. While few senators openly offered how they intended to vote on the nominees, the Committee largely agreed that they were well-qualified.  As is becoming standard operating procedure, the only sharp questioning came from Sen. Elizabeth Warren (D-MA), who interrogated both nominees’ for their opinion of the Federal Reserve’s recent proposal to lower capital standards for banks.  Other topics of discussion included enforcement of the Community Reinvestment Act (CRA) and plans to reduce the Fed’s balance sheet.
 
Senate Dems Send Letter to DOL Criticizing Secretary’s Administrative Analysis on Fiduciary Rule
On Friday, Senators Patty Murray, Elizabeth Warren and Cory Booker, sent a letter to Labor Secretary Alexander Acosta accusing the Secretary of having “prejudged” the outcome of the Department’s freezing of its fiduciary rule.   That letter followed another letter sent by a group of Democratic senators saying that without the vacated fiduciary rule, investors may be receiving conflicted retirement investment advice. That letter goes on to ask what the Department of Labor is doing to inform retirement savers that the fiduciary rule no longer applies and any future actions the agency may take in the area.
 
Democrats Urge Mulvaney to Maintain Public Access to CFPB Complaint Database
On Thursday, a group of thirty-five Senate Democrats wrote to Consumer Financial Protection Bureau (CFPB) Acting Director Mick Mulvaney to maintain the agency’s public consumer complaints database. Mulvaney has expressed some significant skepticism of the database, calling it “Yelp for financial services sponsored by the federal government.” Nevertheless, the Democrat senators argue that the database “creates the right incentives for financial institutions to follow the rules and treat consumers fairly where there’s a dispute.” The CFPB currently has a number of requests for information (RFI) out and available for comment, including on the complaint database.
 
Senate Reaches Agreement to Move Forward With Montgomery Nom for FHA
Last week, Senate leaders on both sides reached a deal to allow for the nomination of Brian Montgomery to head the Federal Housing Administration (FHA) to reach the Senate floor. Montgomery, who was nominated by President Trump in September and approved by the Senate Banking Committee in November, has faced opposition from some Democrats over his role at the FHA during the housing crisis and at the Department of Housing and Urban Development (HUD) during the relief efforts for Hurricane Katrina. A vote on the nomination could be held as early as next week.
  
Select Highlights from the Administration
The White House
White House Reportedly Hoping to Keep Mulvaney at CFPB Until End of 2018
According to a report in the American Banker, it appears that the White House is hoping to keep Mick Mulvaney as Acting Director of the Consumer Financial Protection Bureau (CFPB) until the end of the year or longer. While President Trump is expected to tap National Credit Union Administration Chairman Mark McWatters as his nominee to take the post permanently, Mulvaney can stay in his current role until McWatters is confirmed by the Senate, which may take months. However, the rules governing temporary agency heads means that the White House needs to name a nominee before June.
 
The Judicial Branch
Supreme Court
Court Ruling Clears Path for Legal Sports Betting in All 50 States
On Monday, the Supreme Court ruled in a 6-3 decision that it was unconstitutional for the federal government to prohibit states from creating laws to permit sports gambling. The ruling comes as a boon for New Jersey and other states seeking to regulate and tax sports betting outside of its traditional home in Nevada. Professional sports associations had lined up in opposition to overturning existing law, and reacted to the decision by asking for a firm regulatory framework to be put into place. Senate Finance Chair Orrin Hatch (R-UT), one of the few remaining authors of the bill overturned by the Court still in Congress, said that he would introduce sports gambling legislation to “help protect honesty and principle in the athletic arena.” It is unclear whether Congress will have any appetite for the bill this year.   
 
5th Circuit
States Appeal 5th Circuit Denial of Fiduciary Case
On Thursday, attorneys representing California, New York, and Oregon appealed the 5th Circuit Court of Appeals’ decision to deny a request for the states to enter the case as defendants once the Trump Administration Department of Justice elected not to continue the case. The states are asking for the 5th Circuit to hear their motion to intervene en banc, which would precede an appeal of the 5th Circuit’s March 15 decision that vacated the DOL rule. Both the motion to intervene and the continued appeals are highly unlikely to succeed.