Financial Services Report

Our Take

Much has been made over the past few weeks about the stock market’s volatility.   While the market seemed to spend much of 2017 in a straight upward trajectory, since January the major indices have been marked by tremendous swings in both directions, with some analysts attributing the instability to the ad hoc nature of the current Administration’s policy making. Although the unpredictable nature of the Administration has become somewhat predictable, and therefore to an extent, manageable, last week saw a major shift as Congress was rocked by similar volatility by the announcement that Paul Ryan wouldn’t run for re-election in 2018. 

While Ryan is certainly the latest, and biggest name to announce his decision, he is not alone.  As the Pew Research Center noted, as of Friday, 55 representatives (38 Republicans and 17 Democrats) have announced they’re not standing for re-election.   In addition, two other members (Blake Farenthold and John Conyers) announced their resignations.   That means that at least 13% of the House’s full voting membership will be new next year, and those numbers are certainly expected to climb between future announcements and election losses.  Keep in mind that the average “churn” in Congress is around 30-35 seats, so the 116^th Congress will certainly have a lot of folks new to the job.   Combine that with an administration that also continues to see a lot of churn and it is safe to expect more “volatility” out of Washington.
 

Looking Ahead

Near Term

• Well that escalated quickly.   After easing into things last week, Congress is back at full steam this week with multiple hearings impacting the financial services industry. 
• Keynoting the week will be the semi-annual testimony of Fed Governor Randy Quarles before both the House and then the Senate.
• Other key hearings include both the Senate Commerce and House Commerce Committees holding separate hearings on robocalls and the need to update the TCPA, a hearing at the Senate Finance Committee on open MEPS as the effort to push the Retirement Enhancement and Savings Act (RESA).
• The SEC is scheduled to hold an open meeting where it will announce its harmonized fiduciary rule for brokers and advisers.
• The Supreme Court is going to hear a case on Tuesday that while ostensibly about a state’s ability to collect sales taxes on sellers operating outside of their borders, could actually have much broader impacts on how states regulate a whole host of industries outside of their borders.
• On the House Floor this week there are three bills on tap – two of which would impose significant reforms on the IRS, which should not be surprising as Tuesday is tax filing day.  The Senate has a water rights bill teed up, but there are strong rumors that the chamber may also take up a Congressional Review Act (CRA) resolution of the CFPB guidance for indirect auto lending.

The Past Week

Legislative Branch
House
Speaker Ryan Announces Retirement; Touts Dodd-Frank ‘Repeal’
On Wednesday, House Speaker Paul Ryan (R-WI) announced his intention to step down from the chamber’s top post after this session of Congress and that he would not be running for re-election. Citing his desire to spend more time with his family, the Speaker said he was leaving Congress in the hope that he had completed “my little part in history to set us on a better course.” Among the achievements he is still hoping to add before retiring, Speaker Ryan referred to the bipartisan regulatory relief bill (S. 2155) passed by the Senate and added that Republicans will be “repealing and replacing Dodd-Frank.” The Senate bill falls well short of that mark but would be the first significant modification to Dodd-Frank since the statutory framework was enacted in 2010.
 
House Passes FSOC, Stress Tests Bills
As part of the ongoing bicameral negotiation over a financial regulatory relief package, the House passed three bills on large bipartisan votes last week. On Wednesday, the chamber cleared H.R. 4061 on a 297-121 vote, which would force the Financial Stability Oversight Council (FSOC) to clear more hurdles in order to designate nonbanks as ‘systemically important.’ H.R. 4293 also passed Wednesday, on a 245-174 vote, and would reduce the frequency of bank stress as well as limit the Fed's ability to seek changes at banks that fall short on stress tests as part of its annual review of major banks.  The third bill involved reforms to the Volcker Rule.
 
House Clears Volcker Rule Change Bill on Broad Bipartisan Vote
On Friday, the House passed H.R. 4790 on a vote of 300-104.  The measure would exempt banks with total consolidated assets (including those of any controlling company) of less than $10 billion from Dodd-Frank’s Volcker Rule that prohibits banking institutions from engaging in proprietary trading.  This language mirrors a provision in S. 2155, the Senate’s reg relief bill.  In addition, the House bill would grant exclusive rulemaking authority under the Volcker Rule board to the Federal Reserve as opposed to the current model which requires all five banking regulators — the Fed, Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission, and Commodity Futures Trading Commission (CFTC) — to be responsible for implementing, overseeing and modifying the rule.  
 
Mulvaney Encourages CFPB Reform, Additions to Reg Bill in HFSC Oversight Hearing
On Wednesday, the House Financial Services Committee held their first hearing about the Consumer Financial Protection Bureau (CFPB) since Richard Cordray left the agency left last year. Acting Director Mick Mulvaney came up to deliver his semi-annual report, and even his presence was controversial given that most Democrats support an ongoing legal challenge that would install Deputy Director Leandra English into the agency’s top spot. Nevertheless, Mulvaney provided details on the Bureau’s work for the past five months, while also advocating for statutory changes that would lessen the independence of the Bureau from congressional and executive branch oversight, such as putting the CFPB under Congressional appropriations. Mulvaney also subtly split from the White House by encouraging House lawmakers to include additional provisions in the Senate’s regulatory relief bill, while calling the Senate bill as drafted a “great fallback.”  He was noticeably silent as to whether he still believed the CFPB should be run by a five person commission.
 
Mnuchin Says Trump Backs Operational Ex-Im in Approps Hearing
On Thursday, Treasury Secretary Steven Mnuchin appeared in front of a House Appropriations Subcommittee for a hearing on fiscal 2019 international priorities. In his comments, Secretary Mnuchin said that President Trump is “very interested” in reopening the Export-Import Bank and that they prefer to have it fully functioning. Rep. Charlie Dent (R-PA) replied that the Administration should show more leadership on making it happen. Most of the hearing focused on the Treasury’s role in implementing sanctions against foreign powers such as Iran and Russia, with Secretary Mnuchin saying that those sanctions do not necessarily undermine the nuclear deal struck with Iran by the Obama Administration.
 
Acosta Commits to Non-Enforcement of Fiduciary Rule, Defends Tip Pool Decision
On Thursday, Labor Secretary Alexander Acosta also appeared in a House Appropriations Subcommittee hearing to discuss the Department’s fiscal 2019 budget request. Sen. Roy Blunt (R-MO) asked Secretary Acosta about the implementation of the fiduciary rule, with Acosta replying that DOL is not currently enforcing the rule and had an 18-month delay was in effect on portions of the rule.  He further stated that “we have not yet made a determination as an Administration how to proceed on this matter.” Democrats at the hearing focused on the DOL’s decision to reverse a tip pool rule initiated under the Obama Administration and to not disclose how much money employers would keep as a result.
 
Senate
Banking Committee Avoids Fireworks, Talks Payday Lending in CFPB Oversight Hearing
On Thursday, the Senate Banking Committee held a hearing on oversight of the Consumer Financial Protection Bureau (CFPB) in connection with the agency’s semi-annual report to Congress. The hearing was the second in as many days for CFPB Acting Director Mick Mulvaney, who continued to urge restructuring of the Bureau while acting as its chief officer. In discussion, Democrats focused on payday lending and Mulvaney’s hiring practices, with Mulvaney vehemently defending his actions on both fronts. Republicans, meanwhile, focused on the CFPB’s data collection policies and its statutory structure, with Chair Crapo saying the CFPB was a part of his broader concern around the use of big data. Finally, while many observers expected fireworks from Sen. Elizabeth Warren (D-MA) — who is the brainchild of the Bureau — the conversation took a relatively civil tone and neither Sen. Warren nor Mulvaney leveled the expected personal attacks.
 
Select Highlights from the Administration
The White House
President Hints at Rejoining TPP
On Thursday, the President ordered NEC Chairman Kudlow and other senior members of his administration to examine the possibility of rejoining the Trans-Pacific Partnership or TPP.  TPP is currently an 11 nation trade pact that the President announced the United States withdrawal from on his third day in office.  While many in the media made the President’s announcement seem like a capitulation – especially in the context of the simmering trade war with China – the fact is that he had previously indicated an interest in rejoining the deal, so long as it was “substantially better.”  However, with all the other parties having already negotiated the deal, it is unclear at this point how the administration would be able to extract changes to make the necessary improvements. 
 
Financial Stability Oversight Council (FSOC)
FSOC Discusses Possible Amendments to Nonbank Guidance in Meeting
On Thursday, Treasury Secretary Steven Mnuchin convened a meeting of the Financial Stability Oversight Council (FSOC) to discuss potential amendments to the FSOC’s interpretive guidance regarding nonbank financial company designations. The meeting’s readout notes that the Council also discussed the ongoing annual reevaluation of a nonbank — likely Prudential Financial — designated as a systemically important financial institution (SIFI).
 
Department of the Treasury
Treasury Reaches Deal with OMB on Review of Tax Rules
On Thursday, the Treasury Department and the Office of Management and Budget (OMB) offered a joint memorandum saying that they had agreed to a new “framework for the review of tax regulations.” Per the memo, some tax rules will be reviewed by OMB as requested by an executive order from President Trump in April 2017. The announcement says that the new framework “meets the twin objectives of increasing the economic analysis and review of tax rules while preserving timely tax guidance for taxpayers.”
 
Consumer Financial Protection Bureau (CFPB)
CFPB Issues RFI on Consumer Complaints and Inquiries
On Wednesday, in a continuation of their series of requests for information (RFI) on the CFPB’s practices, the Bureau issued one aimed to gather information on its handling of consumer complaints. In their announcement, the Bureau says that it’s “assessing its handling of consumer complaints and consumer inquiries and, consistent with law, considering whether changes to its processes would be appropriate.” This week’s RFI marks the 12^th since Mick Mulvaney took charge at the agency late last year.  
 
Federal Reserve
Fed, OCC Propose Lowering Capital Requirements for Major Banks; Brainard, Gruenberg Oppose
On Wednesday, the Federal Reserve and Office of the Comptroller of the Currency (OCC) released a controversial proposal to tailor leverage ratio requirements to the business activities and risk profiles for the nation’s largest banks. The move effectively lowers the amount of capital that banks would have to carry, leading to the opposition of Fed Governor Lael Brainard. Federal Deposit Insurance Corporation Chair Martin Gruenberg added to the criticism on Friday saying that the current supplemental leverage ratio (SLR) rule “has served well in addressing the excessive leverage that helped deepen the financial crisis.” The joint Fed and OCC rule is subject to notice and comment on the Federal Register for the next thirty days.
 
Office of the Comptroller of the Currency (OCC)
Otting Aims Easing of Bank Rules, Promises Fintech Charter Decision in Next 90 Days
On Monday, Comptroller of the Currency Joseph Otting told the Independent Community Bankers of America that he intended to treat them as “customers” and said that he wanted to take steps to ease regulations for the industry. Specifically, Otting noted potential changes to the Volcker Rule and said he would make a decision on a special charter process for financial technology companies within the next 60 to 90 days. Otting, a former banker himself, also cited easing Bank Secrecy Act (BSA) rules, de-centralizing bank supervision, and broadening activities to satisfy Community Reinvestment Act requirements as steps that he would like to take as one of the nation’s foremost financial regulators.