Insights

Financial Services Report

July 13, 2015

This week marks the 5th Anniversary of the passage of Dodd-Frank.  It also means we’ve been writing this newsletter for nearly six years.  With all the nostalgia surrounding the 5th anniversary of the passage of Dodd-Frank we thought it might be fun to take a look back at what was on our mind what we were saying about Dodd-Frank Five years ago. 

Financial Services Regulatory Reform Update
For the Week of July 12, 2010
 
On Thursday, the Senate (finally) voted 60-39 to approve the Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  The legislation is now on its way to President Obama, who is expected to sign it into law this week.  The one missing vote is that of the Sen. Byrd’s replacement, Carte Goodwin, who was only named by the West Virginia governor on Friday, and will be sworn in on Tuesday.  Three key Republicans – Senators Snowe, Collins and Scott Brown – also voted for Dodd-Frank.
 
The White House and their Congressional allies are attempting to spin the passage of the financial reform legislation as a major victory for the Obama administration.  However, the true measure of the success of this legislation (beyond whether it actually prevents another economic crisis) will be the political realities in the upcoming election. Democrats continue to believe that they can harness the populist anger against Wall Street by campaigning on their passage of Dodd-Frank and other anti-corporate measures, as a means of mitigating voter dissatisfaction by midterm elections in November. Republicans are already beginning to campaign on repealing the law, similar to their efforts on health care.
 
It is important to note that while Dodd-Frank is sweeping in its reforms, the legislation will only serve as a framework for the hundreds of rulemakings still to come, which will ultimately be the real implementation of the measure. As Senate Banking Committee Chair Chris Dodd (D-CT) stated, “Congress has 12 months to make most changes, as many provisions do not take effect for a year.”  Though the President hasn't yet signed the bill into law, a technical corrections bill is already being discussed on the Hill.  House Financial Services Chair Barney Frank (D-MA) is expected to begin work on this later in the year, to clarify the intent of Congress in several areas.  Dodd has also stated that he intends to specifically clarify new provisions on derivatives to protect end-users from expensive new margin and collateral requirements on existing contracts.  He also wants to ensure that the SEC and CFTC have clear instructions to follow the exact intent of Congress.
 
Looking Ahead

Near Term

  • With concerns about the Confederate Flag and other issues complicating consideration of the Financial Services and General Government Appropriations bill, the measure will not be on the floor this week as original indicated.
  • Instead, the House is expected to take up a series of Financial Services related bills under the Suspension Calendar this week including:

    • On Monday two bills coming out of the Small Business Committee:  H.R. 1023 – Small Business Investment Company Capital Act of 2015 & H.R. 2670 – Microloan Modernization Act of 2015 (Sponsored by Rep. Seth Moulton / Small Business Committee)
    • Then on Tuesday a slew of legislation coming out of the Financial Services Committee:  H.R. 251 – Homes for Heroes Act of 2015; H.R. 432 – SBIC Advisers Relief Act; H.R. 1047 – Housing Assistance Efficiency Act; H.R. 1334 – Holding Company Registration Threshold Equalization Act of 2015; H.R. 1408 – Mortgage Servicing Asset Capital Requirements Act of 2015; H.R. 1529 – Community Institution Mortgage Relief Act of 2015; H.R. 1675 – Encouraging Employee Ownership Act of 2015; H.R. 1723 – Small Company Simple Registration Act of 2015; H.R. 1847 – Swap Data Repository and Clearinghouse Indemnification Correction Act of 2015, (as amended); H.R. 2064 – Improving Access to Capital for Emerging Growth Companies Act; H.R.2354 –Streamlining Excessive and Costly Regulations Review Act; H.R. 2482 – Preservation Enhancement and Savings Opportunity Act of 2015;  H.R. 2722 – Breast Cancer Awareness Commemorative Coin Act, (as amended); and H.R. 2997 – Private Investment in Housing Act of 2015
  • In addition, Fed Chair Janet Yellen will be in front of the House Financial Services Committee on Wednesday, the day after the Oversight and Investigations Subcommittee holds a hearing entitled, “Fed Oversight: Lack of Transparency and Accountability.”
  • It is also shaping up to be a busy week in the Senate, with both CFPB Director Cordray and Fed Chair Yellen testifying before the Banking Committee on Wednesday and Thursday respectively. 

Further Out

  • With the July 31st deadline for Transportation Reauthorization fast approaching talks surrounding how to move forward continue to heat up.  Senators Schumer and Portman are trying to advance a plan that uses repatriation funds to bridge a short term bill (pun intended) although they have yet to persuade Majority Leader McConnell.  Complicating the path forward for this bill is the conventional wisdom that it will also serve as a vehicle for resurrecting the Export Import Bank charter. 
  • The Department of Labor is expected to hold its hearing with industry and other impacted parties about its Fiduciary Rule on August 10th.


The Past Week

Legislative Branch

House
Hensarling Holds Hearing on 5th Anniversary of Dodd-Frank
On July 9, the House Financial Services Committee held a hearing entitled “The Dodd-Frank Act Five Years Later: Are We More Stable?” The hearing focused on whether the financial system is more stable following passage of Dodd-Frank, with particular focus on a few components of the law, such as the SIFI process and the Volcker Rule.  As expected, Republicans used the hearing as a forum to criticize Dodd-Frank for handcuffing economic growth while Democrats took an opposite view, noting that the economy had added 13 million jobs since the passage Dodd-Frank, which they claimed eliminated much of the risk that had caused the crisis in the first place.  
 
Financial Institutions Subcommittee Holds Hearing on SIFI Process
On July 8, the House Financial Services Committee's Financial Institutions and Consumer Credit Subcommittee held a hearing entitled “Examining the Designation and Regulation of Bank Holding Company SIFIs.” The hearing focused on the whether the $50 billion asset thresholds for SIFI designations set by section 165 of the Dodd-Frank Act is the proper threshold level or whether it should modified.  Additional topics that were addressed during the hearing included whether the SIFI level should be set based on asset size alone or to the risk profile of an institution, the need for regulatory relief for small and community banks; and the costs of complying with increased regulations.
 
Senate
Banking Examines the Financial Stability Board
On Wednesday, the Senate Banking Committee held a hearing entitled “The Role of the Financial Stability Board in the U.S. Regulatory Framework.”    The focus of the hearing was to examine the activities of the Financial Stability Board (FSB) and the Treasury Department’s Financial Stability Oversight Council (FSOC), with particular focus on how the FSOC determines to designate institutions as “systemically important.” The hearing took a broad approach to discussing the FSB and FSOC and their process for determining SIFI designation, touching subjects including transparency, notice and comment for the FSB, and the creation of a de-designation process.  This question of “de-designation” was touched on by both Chairman Shelby and Senator Warren, though not surprisingly, they came at the question from different perspectives.  It is also worth noting that all of the witnesses appeared to support the need for addition of insurance experts to the ranks of the FSB and FSOC, noting that their reliance on central bankers can create an inappropriate “one-size-fits-all” approach.  
 
Senators Seek to Revive Glass-Steagall
On Tuesday, Senators Warren and McCain introduced the “21st Century Glass-Steagall Act” which would reinstate the wall between  “traditional banks” that have savings and checking accounts and are insured by the Federal Deposit Insurance Corp. from “riskier financial institutions” that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities.  Senator Cantwell (D-WA), who nearly voted against Dodd-Frank because of the lack of re-imposing Glass-Steagall and Angus Kind (I-ME) were also original cosponsors. 
 
Bill to Increase SEC Penalties Introduced
On Thursday, Senators Chuck Grassley (R-IA) and Jack Reed (D-RI) introduced S. 1730, a bill that would increase the statutory caps on civil penalties that the SEC can impose on in both civil and administrative enforcement actions.  The bill would increase the cap to $1 million per violation for individuals and $10 million per violation for firms or entities.  It would also triple the limit for repeat offenders with criminal or civil liability in the previous five years.  If enacted, the new fines would be significantly increased from the $160,000 or $775,000 per offense that can be imposed on individuals and entities respectively.
 
Democratic Senators Press CFPB on 1071 Report
On Friday, 19 Democratic Senators, including Cory Booker (D-NJ) sent a letter to the CFPB urging the Bureau to move forward and expeditiously finalize a rulemaking as required under 1071 of the Dodd-Frank Act, which requires the CFPB to collect and make public data on small business lending.  The letter follows on a similar effort by House Democrats earlier in the week.  While proponents of moving forward with this rulemaking argue that it would offer better insight into how entrepreneurs in underserved communities are obtaining credit, industry should be concerned that unless proper safeguards are in place, the CFPB will could essentially require businesses to compile their own ECOA violations.
 
Rounds Introduces Bill to Repeal Pay-Ratio Rule
On Friday, Senator Mike Rounds (R-SD) introduced S. 1722, that would repeal Section 953(b) of Dodd-Frank.  That provision requires the Securities and Exchange Commission to adopt a rule requiring companies to disclose “the median of the annual total compensation of all employees of the issuer, except the chief executive officer,” along with the CEO's pay and the ratio of both numbers – the so-called “Pay Ratio” rule.  The SEC had proposed the rule in September 2013 but it hasn’t adopted it, however, if adopted this would be one of the first pieces of legislation that outright repealed a provision of Dodd-Frank.
 
Select Highlights from the Administration

Consumer Financial Protection Bureau (CFPB)
CFPB Releases Report on Student Loan Challenges for Service Members
On Tuesday, the CFPB released a report entitled “Overseas & Underserved: Student Loan Servicing and the Cost to Our Men and Women in Uniform,” which outlined challenges faced by service members when they contact student loan servicers to attempt to invoke the military rights and protections afforded them under the Servicemembers Civil Relief Act (SCRA).  These reports often serve as the foundation for future CFPB action. 
 
Securities and Exchange Commission (SEC)
Investor Bulletin for Reg A Released
On Wednesday, the SEC’s Office of Investor Education and Advocacy July 8 released an investor bulletin explaining the ins and outs of Regulation A in light of its recent amendment and providing guidance on its proper implementation.  The bulletin expanded on several Reg A topics, including the applicable investment limitations for each tier, and the importance of obtaining the “accredited investor” status and reviewing information disclosed in the offering circular before making investment decisions.
 
Federal Deposit Insurance Corporation (FDIC)
FDIC Posts Living Wills
On Monday, the FDIC and the Federal Reserve Board posted the public portions of annual resolution plans (a/k/a “Living Wills”) for 12 large financial firms, including: Bank of America Corporation, Bank of New York Mellon Corporation, Barclays PLC, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, JPMorgan Chase & Co., Morgan Stanley, State Street Corporation, UBS AG, and Wells Fargo & Company.  These plans describe the company’s strategy for “rapid and orderly resolution” via bankruptcy in the event of a financial crisis or failure of the company. They are required by Dodd-Frank for those bank holding companies with total consolidated assets over $50 billion and also for any non-bank holding company designated as a SIFI by the FSOC.
 
 
Next Week’s Schedule
On Tuesday July 14th at 10:00am in 2128 Rayburn the Financial Services Oversight and Investigations Subcommittee will hold a hearing entitled, “Fed Oversight: Lack of Transparency and Accountability.”
 
On Wednesday July 15th at 10:00am in 2128 Rayburn the Financial Services Committee will hold a hearing entitled “Monetary Policy and the State of the Economy.”
 
On Wednesday July 15th at 10:00am in 538 Dirksen the Banking Committee will hold a hearing entitled, “The Consumer Financial Protection Bureau’s Semi-Annual Report to Congress.”
 
On Thursday July 16th at 2:30pm in 538 Dirksen the Banking Committee will hold a hearing entitled “the Semiannual Monetary Report to Congress.”