Last week, in a lengthy post on LinkedIn, investor Ray Dalio put forth his ideas on “Why and How Capitalism needs to be reformed.” Refraining from questioning how certain Republican Congressmen would quantify Mr. Dalio’s position, his essay raises significant questions about whether or current structure of government is able to take on the very serious challenge he sees on the horizon. Dalio, of course, is not the first to call attention to these issues, nor even the first billionaire, and I am confident he will not be the last. And while there is much to dissect in Dalio’s post, let us focus on one part, his call for strong political leadership to right this ship. It is worth noting that while it has been popular of late to blast the moderates, the fact is that reforms outlined by Dalio, and others require a strong center, because Democracy demands the ability to compromise, and unfortunately the leadership from the fringes of both parties’ views compromise as capitulation. This mindset easily leads at worst to an authoritarian position, trampling minority rights, or at best, in a closely divided electorate such as America, a frequent flip-flopping between ideological extremes. In many ways the capitalist society of our country has been predicated on a strong rule of law – overly politicizing our government threatens to undermine that stability. If you believe in Dalio’s thesis then it seems you should support the moderates in both parties.
The House will take up its Net Neutrality bill before possibly considering legislation to raise the budget caps, before leaving on Wednesday so the Democrats can attend their Caucus retreat.
For many, the real action next week will be in the Committees with Treasury Secretary Mnuchin scheduled to testify before two House Committees on Tuesday and then the CEOs of the largest banks testifying before the House Financial Services Committee on Wednesday.
In the Senate, the IRS Commissioner will testify on Wednesday before the Senate Finance Committee, which could be interesting given Chairman Neal's recent decision to request the President's tax returns. And then on Thursday, a Commerce subcommittee hearing on robocalls should be worthy of attention .
Last Week in the House
Last week, the House passed legislation to reauthorize the Violence Against Women Act (HR 1585), as well as a resolution (H.Res. 271) opposing the Trump Administration's support of a lawsuit invalidating the Affordable Care Act. It did not consider any significant legislation pertinent to financial services.
Hearings and Markups
Ways and Means Markup (4/2): On Tuesday, the Ways and Means Committee held a markup of three bills, including the bipartisan Setting Every Community Up for Retirement Enhancement (SECURE) Act (HR 1994; section-by-section) which includes more than two dozen provisions aimed at expanding retirement savings through auto-enrollment, 401(k) safe harbor, and tax incentives.
During the hearing, Chairman Richard Neal (D-MA) offered a manager's amendment which included multiple employer plan (MEPs) expansion language. While several Republicans expressed concern at a provision providing pension funding relief to community newspapers, the bill passed by a voice vote without further amendment. In addition to the SECURE Act, the Committee also advanced the Taxpayers First Act (HR 1957) IRS reform bill, as well as the BRIDGE for Works Act (HR 1759), which deals with expanding reemployment opportunities.
Rural Housing (4/2): On Tuesday, the Financial Services Subcommittee on Housing held a hearing entitled "The Affordable Housing Crisis in Rural America," during which the Committee debated five legislative proposals (committee memo) dealing with rural housing. The bills under consideration would: (1) require USDA to develop a plan to preserve Section 515 and 514 properties; (2) expand eligibility for rural development vouchers to all residents of Section 515 and 514 properties at risk of displacement due to loan maturation or foreclosure; (3) decouple Section 515 and 514 loans from RA contracts and ensure that when a loan matures, a new RA contract is offered to the owner; (4) clarify that women with RD vouchers are protected by the Violence against Women Act; and (5) increase the Section 514 and 516 assistance to $3 million.
Fair Housing Act (4/2): On Tuesday, the Financial Services Committee held a hearing reviewing enforcement of the Fair Housing Act. During the hearing, the Committee considered four Democratic bills (committee memo) related to housing discrimination that would: (1) reverse several fair housing actions by HUD Secretary Ben Carson; (2) cover sexual and gender identity under the Fair Housing Act; (3) establish a $15 million HUD program to test for housing discrimination; and (4) require HUD to report on sexual harassment complaints in its annual fair housing report.
Corporate Accountability (4/3): On Wednesday, the House Financial Services Subcommittee on Investor Protection held a hearing entitled: “Putting Investors First: Reviewing Proposals to Hold Executives Accountable.” During the hearing, Members considered several pieces of draft legislation (committee memo) that would: (1) codify the prohibition on insider trading; (2) prohibit forced arbitration clauses in securities contracts; (3) ban insider trading during the four-day “8-K” gap; (4) require the SEC to complete rulemaking on executive compensation transparency and clawbacks; and (5) provide whistleblower protections to employees who report misconduct internally. While Committee Democrats broadly supported all the pieces of draft legislation, Ranking Member Bill Huizenga (R-MI), echoed by other Republicans Members, said that the bills under consideration would do "more harm than good" and "very little to truly protect investors."
Women's Retirement Protection Act (Underwood and Schakowsky): Includes several provisions aimed at improving women's retirement security, including: (1) expanding existing spousal protections for defined benefit plans to defined contributions plans to prevent one spouse from making decisions without the other’s consent; (2) changing minimum participation standards for long-term, part-time workers, most of whom are women; (3) providing grants to community-based women's financial education; and (4) providing grants to assist domestic violence survivors in obtaining qualified domestic relations orders allowing the division of retirement benefits. Sen. Patty Murray (D-WA) introduced companion legislation in the Senate.
Firearms Lending (Williams): Restricts banks that deny service to legal firearms businesses from accessing the Fed discount window. The bill is the House companion to Sen. Kevin Cramer's (R-ND) Freedom Financing Act, introduced in the Senate last month.
Financial Literacy (Beatty and Stivers): A resolution "supporting the goals and ideals of Financial Literacy Month."
McHenry Chamber Speech: On Tuesday, HFSC Ranking Member Patrick McHenry (R-NC) delivered remarks at the US Chamber of Commerce's 13th Annual Capital Markets Summit. In his speech, Ranking Member McHenry described a "circus atmosphere" towards bank regulation and warned that if the Committee does not stop "politicizing banking," it may miss the next threat to global financial stability. He identified the "looming Chinese debt burden," cyber security, and implications of Brexit as alternative areas on which the Committee should focus its attention.
Pelosi Pumps Break on Speedy NAFTA 2.0 Consideration: On Tuesday, House Speaker Nancy Pelosi told Politico Playbook that the House would not vote on the US-Mexico-Canada Agreement until Mexico has implemented labor law reforms. "We have to see that [Mexico passes] the legislation," Speaker Pelosi said, adding that "enforcement has to be in the treaty, not in the implementing legislation.” With Mexican President Andres Manuel Lopez Obrador aiming to pass the necessary legislation by the end of April, Pelosi's comments present a further barrier to the Trump Administration's goal of having the agreement approved this summer, before the 2020 Presidential elections heat up.
Last Week in the Senate
On Thursday, the Senate approved the nomination of Mark Calabria to be Director of the Federal Housing Finance Agency (FHFA) in a 52-44 party line vote. Dr. Calabria—a former Banking Committee staffer and Chief Economist to the Vice President—had faced substantial Democratic opposition throughout the nomination process over previous comments on the 30-year fixed-rate mortgage and GSE affordable housing goals.
Dr. Calabria's confirmation came a day after Senate Republicans invoked a "nuclear option" reducing the post-cloture debate time on sub-Cabinet executive nominees from 30 hours to two hours, a move that will significantly speed up the Presidential nominations queue.
Hearings and Markups
Environmental, Social, and Governance Investing (4/2): On Tuesday, the Banking Committee held a hearing entitled: “The Application of Environmental, Social, and Governance Principles in Investing and the Role of Asset Managers, Proxy Advisors, and Other Intermediaries.” Partisan divisions persisted on Environmental, Social, and Governance (ESG) practices.
Throughout the hearing, Committee Republicans—joined on the witnesses stand by former Sen. Phil Gramm and the Manhattan Institute’s James Copland—consistently expressed concern that shareholder votes are being used to pursue “social and political objectives” rather than to increase long-term value for shareholders. Several raised concerns that this dynamic has been worsened by the increased dominance of institutional investors, an insufficiently high threshold for offering items for shareholder votes, and potential conflicts of interest by proxy advisory firms. In contrast, Committee Democrats largely focused on ESG practices as a tool of achieving long-term growth by improving workforce management and mitigating reputational risks—rather than a social consideration tangential to shareholder value.
Arbitration (4/2): On Tuesday, the Judiciary Committee held a hearing to examine the current state of arbitration policy. Predispute arbitration contracts were a key discussion point at the hearing, with Senators on both sides of the aisle arguing that consumers and employers are losing their rights when they enter into the arbitration agreements. The panel expressed a bipartisan consensus that Congress must reform arbitration policy to protect the interests of consumers, employers, small businesses, veterans, and victims of sexual assault. Though it is worth noting that Chairman Graham appeared to tie these changes to class action reform, indicating a potential challenging path. However, both Graham and Democratic Senators also suggested that the Federal Arbitration Act (FAA) is outdated, and that any reforms should: (1) boost transparency and accountability; (2) promote consumer choice and flexibility; and (3) mitigate burdens to consumers and businesses.
Retirement Enhancement and Savings Act (Grassley and Wyden): Contains a number of provisions aimed at increasing retirement savings, including: (1) the expansion of multiple employer plans (MEPs); (2) a fiduciary safe harbor for employers hat offer lifetime-income products as part of a defined contribution plan; (3) improved portability; and (4) providing for automatic increases to 401(k) contributions. This year's version of the Finance Committee's flagship retirement savings reform package makes minor updates to last year's RESA, most notably deleting section 505, which provided for an acceleration of PBGC premiums.
Savings Bills (Young, Cotton, Booker, and Jones): The four Senators have jointly sponsored four standalone bills that would: (1) remove regulatory barriers preventing small businesses from participating in multiple employer retirement plans; (2) allow employers to automatically enroll workers in emergency savings accounts; (3) allow taxpayers to pre-commit refunds to "Rainy Day" savings accounts; and (4) incentivize and increase the flexibility for employers to offer automatic enrollment plans. Sens. Young, Cotton, and Booker, along with former Sen. Heidi Heitkamp (D-ND), introduced a similar package of bills last summer.
Savings for the Future Act (Klobuchar and Coons): Requires businesses to offer a minimum employer contribution to a savings plan of 50 cents per hour worked, which comes out to roughly $1000 dollars a year. Businesses with fewer than 10 employees would be allowed to opt out, while businesses with fewer than 100 employees would be allowed to make the contribution through a portable, government-run account. Businesses of all sizes would receive tax credits offsetting the costs of offering a plan, up to 50% for firms with fewer than 15 workers. Companion legislation in the House was also introduced by Reps. Scott Peteres (D-CA), Lucy McBath (D-GA), and Lisa Blunt Rochester (D-DE).
Corporate Executive Accountability Act (Warren): Establishes criminal liability—including jail time—for "negligent executives" of corporations with more than $1 billion in annual revenue that meet certain criteria.
Empowering States' Rights to Protect Consumers Act (Whitehouse, Warren, Merkley, and Reed): Restores states' ability to limit consumer loan interest rates offered to residents by out of state lenders.
Wyden Proposes Taxing Unrealized Capital Gains: On Tuesday, Finance Committee Ranking Member Ron Wyden (D-OR) announced that he would release a proposal in the coming weeks to tax unrealized capital gains. Under the proposal, unrealized gains in investment value would be taxed annually at the same rates as other income—rather than only when they are sold and at a maximum rate of 23.8%. Ranking Member Wyden's office clarified that under the plan, capital losses would still be able to be deducted from gains, asset owners would not be required to pay additional taxes when selling an investment, and that there would be exemptions for primary residences and certain retirement investments.
Crapo Data Privacy Comments: On Tuesday, Banking Committee Chairman Mike Crapo (R-ID) said during a speech at the American Bankers Association Washington Summit that his approach to financial services data privacy will focus on examining how data influences bank lending practices towards "politically disfavored" industries. Additionally, he commented that he and Banking Committee Ranking Member Sherrod Brown (D-OH) are "determining next steps"after releasing a request for feedback on potential financial data privacy and security legislation in February.
Brown, Wyden Stephen Moore Letter: On Wednesday, Banking Committee Ranking Member Sherrod Brown (D-OH) and Finance Committee Ranking Member Ron Wyden (D-OR) sent a letter to Federal Reserve Board nominee Stephen Moore requesting information on his reported $75,000 owed in back taxes to the IRS and $300,000 in unpaid child support. The letter requests that he explain both situations, particularly a reported inappropriate deduction of child support, by April 15.
Warren CFPB Letter: On Tuesday, a group of six Democratic Senators led by Sen. Elizabeth Warren (D-MA) sent a letter to Consumer Financial Protection Bureau Director Kathleen Kraninger requesting information on CFPB's oversight of the Public Service Loan Forgiveness Program (PSLF). Citing several allegations of PSLF violations by loan servicers, the letter expresses concern that "CFPB leadership has abandoned its supervision and enforcement activities related to student loan servicers."
Last Week in the Administration
Trump Taps Cain for Fed Board
On Thursday, President Trump announced his intention to nominate former Godfather's Pizza CEO, Kansas Fed Chair, and 2012 Presidential candidate Herman Cain to serve on the Federal Reserve Board of Governors. Mr. Cain's impending nomination received a lukewarm reception on the hill, with Sen. Mitt Romney (R-UT) joking that if Mr. Cain were a Fed Governor, "the interest rate would soon be 9-9-9." Several observers have also noted that past allegations of sexual misconduct against Mr. Cain would likely post a significant obstacle to Senate confirmation. Mr. Cain joins Heritage Foundation Economist Stephen Moore—who has faced his own scrutiny for reported unpaid taxes and child support, as well as comments supporting aggressively accommodative monetary policy—in awaiting formal nomination to the two open spots on the Fed Board.
Trump: Four Weeks Until "Epic" China Deal
On Thursday, President Trump said that it may take up to another four weeks for the United States and China to reach an "epic" trade agreement resolving the ongoing trade dispute between the two countries. With Chinese Vice Premier Liu He in Washington last week to discuss outstanding sticking points including intellectual property protections, reports had indicated that President Trump was likely to announce a summit with Chinese President Xi Jinping. White House advisors, however, reportedly convinced the President not to agree to a face-to-face summit with President Xi until a deal is finalized.
Treasury Chief of Staff Miller Departs Ahead of Tax Return Skirmish
On Friday, Treasury Department Chief of Staff Eli Miller announced his imminent departure from the agency. Mr. Miller, a confident of Treasury Secretary Mnuchin who previously served as Chief Operating Officer of Finance for President Trump's 2016 campaign, is expected to rejoin the private sector. His departure comes ahead of increased scrutiny of the department, most notably Congressional Democrats' request for the President's tax returns.
Agencies Issue Proposal to Minimize G-SIB Contagion Risk
On Tuesday, the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency issued a proposed rule requiring globally systemically important (G-SIB) banks to hold additional capital against large amounts of total-losses absorbing capital (TLAC) debt. The proposed rule is intended to reduce the potential contagion of the failure of a G-SIB bank by disincentivizing banks from purchasing large amounts of TLAC debt—debt issued to recapitalize a bank in the event of a failure—and in turn reducing the overall interconnectedness of G-SIBs.
White House Taps Lee for SEC
On Tuesday, the White House announced that it would nominate Allison Lee to fill the vacant Democratic seat on the Securities and Exchange Commission (SEC). Lee's nomination was long speculated and appeared to be delayed for an unusual amount of time. If confirmed she would bring the Commission to a full roster, though it is unclear whether she will be seated in time to impact the pending Regulation Best Interest rule.
SEC FinHub Publishes Crypto Framework
On Wednesday, the SEC's Strategic Hub for Innovation and Financial Technology (FinHub) issued a framework for determining when a digital asset qualifies as a security under federal law. While stakeholders responded favorably to further clarity on the consistently unclear topic of when cryptocurrencies qualify as securities, some crypto-advocates have expressed concern that the framework is overly broad, treating almost all tokens—crypto-assets representing particular fungible assets or utilities—as securities. SEC has stressed that the framework does not constitute legal advice or rulemaking.
Job Numbers Quiet Recession Worries
On Friday, the Bureau of Labor and Statistics reported that the economy added 196,000 jobs in March—beating economist expectations of 180,000 jobs and alleviating concerns of an impending economic slowdown. While the unemployment rate remained the same at 3.8%, the jobs numbers also reported a lower than expected wage growth of .1%.
This Week's Schedule
Federal Reserve Open Board Meeting – 10:00 AM – The Federal Reserve Board of Governors will hold an open meeting to discuss proposed rules on prudential standards for foreign banking organizations and resolution plan requirements for foreign and domestic banking organizations. Details here.
BPC Event on Tax Filing – 1:30 PM – The Bipartisan Policy Center (BPC) will host an event entitled "Life is Complicated. Filing Your Taxes Shouldn't Be." Details here.
Hearing: House Education and Labor on Education Policy – 9:00 AM – The House Education and Labor Committee will hold a hearing with Department of Education Secretary Betsy DeVos entitled “Examining the Policies and Priorities of the U.S. Department of Education." Details here.
FTC Hearing on Consumer Privacy – 9:00 AM – The Federal Trade Commission (FTC) will host a two-day hearing entitled "The FTC's Approach to Consumer Privacy." Details here.
Hearing: House Financial Services Sub. on the Community Reinvestment Act – 10:00 AM – The House Financial Services Subcommittee on Consumer Protection and Financial Institutions will hold a hearing entitled, “The Community Reinvestment Act: Assessing the Law’s Impact on Discrimination and Redlining.” Details here.
Hearing: FSGG on the Department of Treasury Budget– 10:00 AM – The House Appropriations Subcommittee on Financial Services and General Government (FSGG) will hold a hearing with Treasury Secretary Steven Mnuchin to examine the Department of Treasury's FY 2020 budget request. Details here.
Hearing: House Energy and Commerce Sub. on CPSC Oversight – 10:15 AM – The House Energy and Commerce Subcommittee on Consumer Protection and Commerce will hold an oversight hearing of the Consumer Product Safety Commission (CPSC) Details here.
Hearing: House Financial Services Committee on the State of the International Financial System – 2:00 PM – The House Financial Services Committee will hold a hearing to receive the annual testimony of the Secretary of the Treasury on the State of the International Financial System. Details here.
Hearing: FSGG on the IRS Budget– 2:00 PM – The House Appropriations Subcommittee on Financial Services and General Government (FSGG) will hold a hearing with IRS Commissioner Charles Rettig to examine the Internal Revenue Service's FY 2020 budget request. Details here.
Hearing: House Transportation Sub. on the Economic Development Administration – 2:00 PM – The House Transportation and Infrastructure Subcommittee on Economic Development, Public Buildings, and Emergency Management will hold a hearing entitled “Building Prosperity: EDA’s Role in Economic Development and Recovery." Details here.
Hearing: House Financial Services Committee on Big Banks – 9:00 AM – The House Financial Services Committee will hold a hearing with the CEOs of JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. , Goldman Sachs Group Inc., Wells Fargo & Co., and Morgan Stanley entitled, “Holding Megabanks Accountable: A Review of Global Systemically Important Banks 10 years after the Financial Crisis.” Details here.
FTC Hearing on Consumer Privacy – 9:00 AM – The Federal Trade Commission (FTC) will host a two-day hearing entitled "The FTC's Approach to Consumer Privacy." Details here.
Hearing: House Small Business Committee on SBA Budget and Fee Structure Changes – 10:00 AM – The House Small Business Committee will hold a hearing to examine the Small Business Administration's (SBA) budget, as well as the impact of fee structure changes. Details here.
Hearing: Senate Commerce Committee on Broadband Mapping– 10:00 AM – The Senate Committee on Commerce, Science, and Transportation will hold a hearing entitled "Broadband Mapping: Challenges and Solutions." Details here.
Hearing: Senate HELP Committee on HEA Reauthorization– 10:00 AM – The Senate Committee on Health, Education, Labor, and Pensions (HELP) will hold a hearing entitled "Reauthorizing the Higher Education Act: Strengthening Accountability to Protect Students and Taxpayers." Details here.
Hearing: Senate Finance Committee on the IRS – 10:15 AM – The Senate Finance Committee will hold a hearing with IRS Commissioner Charles Rettig entitled "The 2019 Tax Filing Season and the 21st Century IRS." Details here.
Hearing: Senate Small Business Committee on Reauthorization of the SBA's International Trade Programs – 2:30 PM – The Senate Committee on Small Business and Entrepreneurship will hold a hearing to discuss reauthorization of the Small Business Administration's (SBA) International Trade programs. Details here.
Hearing: Senate Commerce Sub. on Robocalls – 10:00 AM – The Senate Commerce Subcommittee on Communications, Technology, Innovation, and the Internet will hold a hearing entitled "Illegal Robocalls: Calling All To Stop The Scourge." Details here.
FDIC Webinar on CECL – 2:00 PM – The Federal Deposit Insurance Corporation, as well as the Securities and Exchange Commission (SEC) and Conference of State Bank Supervisors (CSBS), will host a webinar on the Current Expected Credit Losses (CECL) Weighted-Average Remaining Maturity (WARM) method. Details here.
FTC Hearing on Mergers – 9:00 AM – The Federal Trade Commission (FTC) will host a hearing entitled "Merger Retrospectives." Details here.
FDIC-Duke Financial Technology Conference – April 24 – The FDIC and Duke University’s Fuqua School of Business and Innovation and Entrepreneurship Initiative will host a conference entitled "Fintech and the Future of Banking." Details here.