Insights

Financial Services Report

January 30, 2018

Looking Ahead

Near Term

  • On Tuesday the President will deliver his first State of the Union.  In addition to selling the tax reform bill he is expected to talk about how the economy (i.e., the stock market) is booming.  It would not be surprising if he talks about his plan for infrastructure investment, as well as potentially, the Administration’s plan for immigration reform.  
  • Beyond the State of the Union it will be a short week in the House as the Republicans depart for their Conference at the Greenbrier in West Virginia starting on Wednesday and for the rest of the week. However, the House will consider a series of financial services measures on the suspension docket, a full list of which can be found here.
  • The Financial Services Committee will hold two hearings this week, both on Tuesday.  First, the Financial Institutions Subcommittee will hold a hearing on FinTech, while later that afternoon the Oversight and Investigations Subcommittee will hear how Human Traffickers are exploiting the U.S. Financial markets.
  • The Senate Banking Committee will hear from US Treasury Secretary Mnuchin on Tuesday as he provides the annual report from the FSOC.   The Secretary will appear before the House on February 6th. 

Further Out

  • Another short week in the House next week as the Democratic retreat will take place in Cambridge, MD from February 7th to the 9th. Though with funding set to run out on the 8th, it is unclear whether they will have to curtail the retreat.
  • The White House is expected to release FY19 Budget on February 12th.

The Past Week

Legislative Branch
House
 
The House was in Recess last week
 
Senate
Shutdown Ends as Congress Agrees on CR to Feb. 8
The government shutdown came to an anticlimactic end on Monday as Democrats acquiesced to a 3-week continuing resolution (CR) after Senate Majority Leader Mitch McConnell (R-KY) promised to bring up an immigration bill after Feb. 8. The CR also includes add-ons that were a part of the original House-passed version — a 6-year reauthorization of the Children’s Health Insurance Program (CHIP) and a delay for certain Affordable Care Act (ACA) taxes. Some Democrats, including House Minority Leader Nancy Pelosi (D-CA), opposed the immigration compromise reached in the Senate, but the CR was able to pass on the strength of the Republican majority in the lower chamber. Despite the agreement, another CR will likely be necessary in order to keep the government funded beyond Feb. 8 as Congress struggles to negotiate an omnibus that would set the budget for the remainder of the 2018 fiscal year.
 
Senate Confirms Powell as Fed Chair
On Tuesday, the Senate voted to confirm Jerome Powell as the next Chair of the Federal Reserve in an 84-13 vote. Powell, a former investment banker and member of the Fed’s Board of Governors, will take over one of the world’s foremost economic posts at the end of current Chair Janet Yellen’s term next month. The 13 senators who voted against the nomination included potential Democratic presidential candidates Sens. Cory Booker (D-NJ), Kirsten Gillibrand (D-NY), Bernie Sanders (I-VT), and Elizabeth Warren (D-MA), as well as prominent Republicans Sens. Rand Paul (R-KY) and Marco Rubio (R-FL).
 
Banking Committee Holds Hearing to Consider FDIC, FSOC, Fed Noms
On Tuesday, he Senate Banking Committee held a hearing to consider three high level nominations for three different regulatory bodies: Jelena McWilliams to be a Chair of the Federal Deposit Insurance Corporation (FDIC) Board of Directors; Marvin Goodfriend to be a Member of the Federal Reserve Board of Governors; and Thomas Workman to be a Member with insurance expertise for the Financial Stability Oversight Council (FSOC). All three nominees are expected to be confirmed, although Goodfriend faced some hostility from Democrats on the panel over previous comments related to removing employment from the Fed’s traditional “dual mandate.” Workman would replace Roy Woodall at the FSOC, which has taken a new direction under the leadership of Treasury Secretary Steven Mnuchin.  Because of the way that the White House re-nominated Ms. McWilliams, she will not be able to join the FDIC until current Vice-Chairman Thomas Hoenig steps down, because despite Hoenig’s claims to be an independent, he technically holds a Republican seat, and the FDIC rules prohibit having more than three members of any party on the five-member board. Hoenig’s term is scheduled to end on Apr. 2.
 
Banking Committee Holds Hearing on CFIUS Reform Bill
On Thursday, the Senate Committee on Banking, Housing, and Urban Affairs met in open session for a hearing covering CFIUS and Administration officials’ views on the current process and the bill proposed by Sens. Dianne Feinstein (D-CA) and John Cornyn (R-TX), known as the Foreign Investment Risk Review Modernization Act (FIRRMA). Many members voiced concerns of the optics of FIRRMA and the appearance of the United States discouraging foreign investment. The witnesses combatted these views pointing out ways FIRRMA can streamline goodwill investments through the Treasury’s “white list” and that the updating of the CFIUS process was absolutely needed for our nation’s national security. Members on both sides of the aisle were in agreeance with updating and many voiced their support for FIRRMA, but wanted to make sure their priorities would be covered.
 
Select Highlights from the Administration
Consumer Financial Protection Bureau (CFPB)
CFPB Announces Changes to Prepaid Accounts Rule
On Thursday, the Consumer Financial Protection Bureau announced that it has finalized updates to its 2016 prepaid accounts rule.  In addition to extending the effective date of the rule by one year – until April 2019 – the Bureau also announced some substantive changes to the rule.  For example, the requirement for card issuers to resolve errors or thefts in the same way that credit card companies are required to will only apply once the card owner’s identity has been verified.  This change would require consumers to register with the prepaid issuers in order to take advantage of this protection.  Additionally, the Bureau modified the rules impact on digital wallets by allowing accounts linked to credit cards to run a negative balance in certain situations.   While consumer groups expressed disappointment with the announcements, as many of these modifications were set in place during Director Cordray’s tenure, it seems like they were the Bureau’s attempt to perfect a very complicated rule.
 
CFPB Issues RFI on Subpoena Powers
On Thursday, the CFPB issued another request for information (RFI) on its own authority, this time on the use of its subpoena powers and the conduct of its investigations. Acting Director Mick Mulvaney had announced earlier this month that he intended to review many of the CFPB’s existing practices and powers, which has also led to tweaks to specific rules such as the payday lending rule and the prepaid card rule. The RFI covers the CFPB’s subpoena-like powers to compel institutions to provide relevant information on its investigations as well as its ability to launch investigations through its enforcement office. According to the language of the request, the agency is looking specifically for input from recipients of civil investigative demands or lawyers who have represented them.
 
Appeals Court Agrees to Accelerated Timeline for CFPB Director Case
Last week, the D.C. Circuit of the U.S. District Court of Appeals said that it would agree to accelerate the appeal of a decision against CFPB Deputy Director Leandra English, who claimed to be the agency’s rightful Director after Richard Cordray left the post late last year. A lower court ruled in favor of Acting Director, and White House Office of Management and Budget (OMB) Director, Mick Mulvaney and the appeals court denied English’s request for a preliminary injunction that would have precluded Mulvaney from taking helm at the agency. According to reports, the case for an injunction needs to be provided by Jan. 30 while the Trump administration will have until Feb. 23 to provide its brief against the injunction.
 
Securities and Exchange Commission (SEC)
SEC Considers Blocking Investor Dispute Lawsuits
A report last week suggested that the SEC is laying the groundwork for a possible policy shift on investor disputes in an effort to boost stock listings. According to reports, the agency has privately signaled that it's open to at least considering whether companies should be able to force investors to settle disputes through arbitration rather than litigation.  Allowing companies to shield themselves from shareholder lawsuits would almost certainly upset investor advocates and Democratic lawmakers, but SEC Chair Jay Clayton appears to interested in reducing the potential barriers for companies who may go public.
 
SEC, CFTC Sound Alarm on Cryptocurrency Industry
In a rare joint effort, SEC Chair Jay Clayton and Commodity Futures Trading Commission Chair Christopher Giancarlo submitted an op-ed to The Wall Street Journal on cryptocurrency saying that they would “support policy efforts to revisit these [regulatory] frameworks and ensure they are effective and efficient for the digital era.” The remarks were largely reported to be a shot across the bow for the cryptocurrency industry — the title of the op-ed was “Regulators Are Looking at Cryptocurrency” — and a sign that the regulators may want to bring cryptocurrency products under their regulatory umbrella. However, that would likely require action from Congress, which has largely stayed out of the cryptocurrency debate. That may change soon though as the Senate Banking Committee is currently planning its first hearing on the subject to be held in early February.
 
Federal Deposit Insurance Corporation (FDIC)
FDIC Leads Federal Regulators in Using CRA for Hurricane Relief
Last week, the FDIC announced with other federal regulators that they would provide credit to any institution lending for Hurricane Maria relief efforts under the provisions of the Community Reinvestment Act (CRA). Typically, credit under the CRA is only given for a bank’s immediate “assessment area,” but the severity of the damage has led regulators to broaden credit availability to any institution that “has been responsive to the community development needs and opportunities of its own assessment areas.” Hurricane Maria struck in September, primarily in Puerto Rico, leaving wide swath of destruction on the island.
 
Justice Department
Appeals Court Dismisses MetLife Case
Following a request from the Justice Department last week, a federal court officially dismissed the government’s appeal of a ruling from last year that barred insurer MetLife from being designated a “systemically important financial institution” by the Financial Stability Oversight Council (FSOC). The dismissal ends a protracted court battle for MetLife, and the FSOC is expected to reconsider whether Prudential Financial should also lose its SIFI tag.