Financial Services Report

Our Take

The comedian Jerry Seinfeld has a bit about how our allegiances to our local sports teams is nothing more than rooting for laundry, and the same might be said for our politics as well.   This past week, President Donald Trump and the House Republican conference was able to cobble together a 217-213 win on their collective efforts to repeal Obamacare, however in doing so, was forced to utilize many of the same techniques that voters cite when criticizing Washington, DC, and which Republicans regularly repudiated when they were in the minority.   Perhaps, as Seinfeld wryly noted, we are not in love with the players – just the uniforms they wear.

Looking Ahead

Near Term

• The House is in Recess for the week.
• The Senate is in session and will take up the two nominations (one for FDA commission and one military.  In addition, among other items possibly up for consideration may be two Congressional Review Act (CRA) measures, one on methane and one on the CFPB’s prepaid card rule.  In addition, the Senate may also take up other nominations, including possibly Robert Lighthizer to be the Trade Representative. 

 
Further Out

• The Senate Banking Committee has announced two hearings for the week May 15^th.  First an Executive Session to consider multiple pending nominations.  Then on May 18^th, Treasury Secretary Mnuchin will testify at a hearing entitled, “Domestic and International Policy Update.”
• The CHOICE Act is likely to come before the full Congress, possibly before the end of June.

 
The Past Week

Legislative Branch
House
House Financial Services Committee Passes CHOICE Act Following Contentious Three Day Markup
Last week, the House Financial Services Committee held a three-day markup of H.R. 10, the Financial CHOICE Act.  The legislation would replace much of the Dodd-Frank financial reform law passed in 2010 by the Democratic-led Congress with a different, and significantly lighter touch of regulation.   Following a contentious, and drawn out mark-up the bill was reported favorably to the full house on a strict party line vote (34-26).  While Democrats had hoped to create an environment similar to what we saw during the mark-up of the health care bill in the Energy and Commerce Committee, for a variety of reasons, this mark-up, despite lasting three days, ultimately did not create a similar buzz. 
 
After starting with two hours of opening statements by members from both sides on day one, the Democrats, lead by Rep. Carolyn Maloney (D-NY), blocked a request to dispense with the reading of the nearly 600-page bill, forcing House clerks to read legislative text aloud for about three hours.   After securing some concessions from the Chairman, the Democrats allowed the reading to be dispensed with, and turned their attention to the amendment process.   For the remainder of that day (until around Midnight) and then for an equally long second day, the Committee proceeded to debate the first handful of the eventual 19 amendments that Democrats offered. 
 
While Democrats reportedly had over 150 amendments drafted, an informal agreement among the Committee (which ultimately wasn’t exactly adhered to) limited the number of actual amendments that were filed.   These amendments were “messaging” amendments, and dealt with such things as changes to the Consumer Financial Protection Bureau’s (CFPB) and the Labor Department’s contentious fiduciary rule.  All amendments failed on party-line votes.   A much anticipated amendment on the repeal of the so-called Durbin Provision never materialized though it is rumored that an amendment will come up when the CHOICE Act comes to the floor.  Chairman Hensarling has implied that CHOICE will be on the floor in the near term – though specific timing remains unclear.  
 
House Passes Three Financial Services Suspension Bills
Early in the week, House lawmakers passed three bills on nearly unanimous votes that would make minor tweaks to securities law. Specifically the bills would require the SEC to ease rules for research reports on exchange traded funds (H.R. 910); require the SEC to respond to recommendations from the Government-Business Forum on Small Business Capital Formation (H.R. 1312); and eliminate regulatory exemptions for investment companies in Puerto Rico and the Virgin Islands (H.R. 1366).
 
House Democrats Write in Favor of APIs for consumer data access
Last Wednesday, eight Democratic lawmakers penned a letter to the CFPB advocating their strong support for open consumer financial data access through application programming interfaces – a crucial way for banks to allow for controlled access to data by third-party application providers. “While access to data is critical for financial empowerment, we also want to ensure that these third-party services are safe and transparent to consumers,” the letter reads. The letter comes in the context of a request for information on consumer data access conducted by the CFPB. Data has become a hot topic in financial services, as startups that provide aggregation services in which consumers can access and manage accounts from different banks and financial institutions have gained popularity.
 
House Republicans Sharply Criticize DOL Statement on Fiduciary Rule in Letter to Acosta  
Last Tuesday, more than 100 House Republicans signed a letter to new Labor Secretary Alexander Acosta strongly criticizing the Department of Labor’s statement that the fiduciary rule will become applicable on June 9th before the completion of a review ordered by the President. The letter also notes that that decision was made before the comment period closed regarding the effects of the fiduciary rule. The letter urges Acosta to immediately delay the June 9^th date. Additionally, the letter asks Acosta to provide, by May 12, all communications between DOL staff and any non-governmental entity relating to (1) the President’s memorandum ordering the review of the fiduciary rule, (2) the proposed delay, (3) the final delay and the (4) the cost/benefit analysis of the final delay. The letter also asks for all communications between DOL staff and employees of other executive branch entities relating to implementation of the President’s memorandum.
 
Luetkemeyer Introduces Flood Insurance Reform Bill
On Monday, House Financial Services Financial Institutions Subcommittee Chairman Blaine Luetkemeyer (R-MO) introduced legislation designed to improve the financial solvency of the National Flood Insurance Program (NFIP). Specifically, the bill would require the Federal Emergency Management Agency (FEMA) to purchase additional reinsurance or seek capital market options for the struggling NFIP. The legislation also seeks greater local involvement in designing federal flood mapping and makes other reforms to the NFIP. The NFIP needs to be reauthorized by Sep. 30 and the Financial Services Committee is reportedly working on a reauthorization bill that may incorporate some elements of the Luetkemeyer legislation.
 
Senate
Congress Reaches Omnibus Deal, Avoids Shutdown
Early in the week, congressional negotiators reached an agreement on a spending bill that will provide government funding through the end of the 2017 fiscal year. The $1 trillion deal, which was signed into law by President Trump on Friday, includes increased funds for border security and defense, two Republican priorities, as well as a permanent extension for a program that provides health benefits to coal miners. According to some Democrats, there were over 160 “poison pill” policy riders” that were included in the original offer by Republicans, including some that would have impacted the operations of the CFPB and the implementation of the DOL’s fiduciary rule.   However, at the end of the day, both sides were able to find common ground and keep the government functioning through the end of September.  While some in the media lambasted the President for signing an “Obama” spending bill, the reality is that the Administration and the GOP will have significantly more leverage when this temporary funding bill runs out at the end of September, as it will coincide with the need to raise the debt ceiling and other statutory deadlines. 
 
Senate Confirms Clayton as SEC Chair
The Senate confirmed Jay Clayton to the Securities and Exchange Commission (SEC) last week, clearing the way for him to assume the chairmanship and reshape the agency following the tenure of Mary Jo White as SEC Chair. Clayton, a Wall Street lawyer, gained some bipartisan support in the 61-37 confirmation vote. Along with independent Angus King (I-ME), eight Democrats voted to confirm Clayton, namely Sens. Michael Bennet (D-CO), Tom Carper (D-DE), Joe Manchin (D-WV), Claire McCaskill (D-MO), Bill Nelson (D-FL), Jeanne Shaheen (D-NH), Jon Tester (D-MT), and Mark Warner (D-VA).
 
Banking Committee Holds Hearing on EU-U.S. Covered Agreement
On Tuesday, the Senate Banking Committee held a hearing on the recently finalized covered agreement between the United States and the European Union (EU) on insurance regulation for companies operating in both the American and European markets. The agreement, which was finalized in January shortly before President Trump took office, has been questioned by some Republicans, and the current Administration has yet to take a formal position on whether they plan on signing and implementing the deal. State regulators have worried about implementation given perceived “ambiguities” in the agreement’s text and the proposed dispute resolution process. In the hearing, Republicans were more skeptical of the deal than Democrats, but Chairman Mike Crapo (R-ID) seemed to hope that the concerns could be addressed without renegotiating the entire agreement.
 
In a separate development, Chairman Crapo and Ranking Member Sen. Sherrod Brown (D-OH) agreed to address statutory ambiguity in Dodd-Frank related to the expiration of Roy Woodall’s term as the Financial Stability Oversight Council’s (FSOC) Independent Member with Insurance Expertise.
 
Senate Passes CRA to Undo Labor Rule Encouraging State-Based Retirement Plans
On Thursday, the Senate passed a resolution (H.J. Res. 66) on a narrow 50-49 vote that would rescind a Labor Department rule encouraging the development of state-government backed retirement savings plans. The so-called Auto IRA rule was established during the Administration to allow states and municipalities to establish auto enrollment, payroll-deduction plans for private sector employees of companies that do not offer 401(k) plans and exempts certain plans from Employee Retirement Income Security Act (ERISA) regulations. The move was praised by the retirement industry, who saw the rule as undermining private retirement investors. Republican Sens. Bob Corker (R-TN) and Todd Young (R-IN) voted against the resolution.
 
Democrats Reintroduce Carried Interest Legislation
Last Tuesday, Sen. Tammy Baldwin (D-WI) and Rep. Sander Levin (D-MI) reintroduced legislation that would end the current preferential tax treatment that investment fund managers get on carried interest. The legislation would ensure that carried interest is taxed as ordinary income, which has a current top tax rate of 39.6 percent, instead of a capital gains rate of 23.8 percent that includes taxes from the Affordable Care Act. Although the one-page tax framework that Trump’s administration released last week failed to mention carried interest, the president did indicate his intention to target the provision in a recent interview with CBS’s “Face the Nation.”  
 
Select Highlights from the Administration
The White House
Trump Says White House ‘Looking At’ Breaking Up Banks – Or Perhaps Just New Divisions
On Monday, President Trump told Bloomberg News that the White House was considering a revival of the Glass-Steagall.  “There’s some people that want to go back to the old system, right? So we’re going to look at that,” the President said. The idea has divided Republicans, with the President and NEC Director Steve Cohn reportedly for the idea, even though the traditional banking industry is firmly against it. Then on Tuesday, Cohn reportedly told a group of community bankers visiting the White House that his vision of a 21^st Glass-Steagall involved different sets of rules for larger banks and smaller banks as opposed to the mre traditional prohibitions between retail and investment banking. 
 
Trump Replaces Curry at OCC with Interim Comptroller
On Wednesday, Treasury Secretary Steven Mnuchin announced that the Administration had decided to release Comptroller of the Currency Tom Curry from his duties, choosing Kith Noreika to serve as an interim replacement before a permanent Comptroller is nominated and confirmed. Curry’s term as head of the Office of the Comptroller of the Currency (OCC) had technically ended on Apr. 9, but he would have been able to continue serving as Comptroller until the Trump White House nominated a permanent replacement.  Noreika takes control of the agency at a time when the Trump Administration is seeking to roll back financial regulations related to the Dodd-Frank and the OCC is pushing forward on plans to create a special purpose bank charter for financial technology companies.
 
Department of Labor
Acosta  Hires Fellow Harvard, Alito Alum as Counselor
Labor Secretary Alexander Acosta hired Washington attorney Paul Ray as his counselor, the first known personnel move since the secretary was sworn in. Ray was most recently an associate at international law firm Sidley Austin LLP, after clerking for Justice Samuel Alito on the U.S. Supreme Court. He started his job at DOL May 1, Acosta's first full day as secretary, following his April 27 Senate confirmation.
 
Justice Department
DOJ Asks Court to Suspend Appeal of MetLife SIFI Designation
On Friday, the Justice Department asked a federal court to suspend litigation 60 days in MetLife’s case against the government regarding the designation of the insurer as a systemically important financial institution (SIFI) by the Financial Stability Oversight Council (FSOC). A lower court ruled in favor of MetLife last year, and it has been unclear whether the government will continue to press its case following the exit of the Obama Administration in January. The Justice Department’s request cited a request from FSOC for “additional time for deliberation among the Council’s members.”
 
Supreme Court
Supreme Court Rules for Miami in Case Against Wells Fargo, Bank of America
Last Monday, the U.S. Supreme Court granted the city of Miami the authority to bring a lawsuit against Bank of America and Wells Fargo under anti-discriminatory housing laws in a 5-3 decision. With Chief Justice John Roberts siding with the court’s liberals, Miami was allowed to proceed with a lawsuit under the Fair Housing Act that alleged Bank of America and Wells Fargo intentionally targeted blacks and Hispanics with predatory practices. The justices did not rule on the merits of Miami’s allegations but said “the city’s financial injuries fall within the zone of interests that the FHA protects.” However, in remanding the case for further proceedings, the justices said lower courts should define when the FHA applies to Miami’s claims for lost property-tax revenue and increased expenses, a hurdle that could make it hard for the city's lawsuit to ultimately prevail.