Financial Services Report

Much to the delight of Senate staff, a deal was reached last week for the Senate to stand in recess until November 13th.  With the House of Representatives already out of town to campaign this means that this is the last newsletter until after the mid-term elections.

Speaking of the mid-terms we are now three weeks out.   With both the House and Senate out of town, the DC stage has been ceded to the President – and it is likely that he will make active use of it.  How that impacts the elections will be determined on November 6th. 

The current conventional wisdom holds that the House is likely to go Democratic, while the Senate is expected to remain in Republican control.   That will likely change multiple times  – especially because the media has a strong incentive to sell the horse race narrative.    

Whatever the results, rest assured that our bipartisan team at Thorn Run is prepared to help you navigate the next Congress.  

Looking Ahead

Near Term

  • The House and Senate are out in until November 13th

Further Out

  • Mid-Term Elections November 6th
  • 2020 Presidential Election Starts on November 7th
  • House and Senate Return to Washington for the start of the Lame Duck on November 13th
  • Funding for the outstanding appropriations bills expires on December 5th

The Past Week

Legislative Branch
House
The House was out of session last week and will return November 13.
 
Senate
Banking Committee Hearing Caps Off Tough Week for Crypto
On Thursday, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Exploring the Cryptocurrency and Blockchain Ecosystem” featuring Dr. Nouriel Roubini, a cryptocurrency skeptic, and Mr. Peter Van Valkenburgh, an industry advocate. Despite acknowledging the potential benefits of blockchain deployment, Members showed widespread concern over price volatility, scams, and theft in cryptocurrency markets. The hearing capped off a tense week for cryptocurrency markets, which faced a number of other challenging developments including: (1) a widespread selloff on Thursday that wiped out $6.72 billion in market capitalization across various cryptocurrencies and corresponded to a global dip in equities markets; (2) reports that the Securities and Exchange Commission (SEC) has expanded its crackdown on initial coin offerings (ICO); (3) the SEC filing a complaint against cryptocurrency firm Blockvest alleging that the firm falsely claimed to have received an SEC endorsement; (4) a report by cybersecurity firm CipherTrace that cryptocurrency theft reached $927 million through the first nine months of this year, a 250 percent increase from 2017; and (5) an SEC Inspector General report that regulating cryptocurrency markets is burdening the Commission’s enforcement resources.
 
Commerce Committee Holds Hearing on CA/EU Data Privacy Laws
On Wednesday, the Senate Committee on Commerce, Science, and Transportation held its second hearing on the issue of privacy, and whether there should be national legislation.   This one, entitled “Consumer Data Privacy: Examining Lessons From the European Union’s General Data Protection Regulation and the California Consumer Privacy Act” featured consumer advocates and proponents of data privacy proposals in the European Union and California. During the question and answer period, Members generally endorsed the concept of a national data privacy standard, but clearly differed on their approach to such legislation. While Republicans were concerned about the impacts of vague or patchwork regulations. Several Democrats cautioned against any federal preemption absent a sufficiently strong regulation. Earlier this year, the European Union’s General Data Privacy Regulation (GDPR) came into effect and the California State Legislature passed the California Consumer Privacy Act (CCPA). Both regulations impose sweeping restrictions on data collection, although industry stakeholders have raised concerns that both laws are vague, difficult to comply with, and could drive smaller firms out of the marketplace.  This is clearly an issue that Congress will continue to grapple with in 2019.
 
Scott Expects Favorable Opportunity Zone Rules This Month
On Wednesday, published reports noted that Senator Tim Scott (R-SC) indicated he expects the Treasury Department to release guidance on the Opportunity Zone program by the end of the month. According to those reports, he also anticipates the guidance to provide flexibility for investors moving between funds tied to the program by preventing such transfers from triggering a capital gains tax, in addition to clarifying what the legislation means by “substantially all” tangible property and “substantial improvements” to opportunity zone real estate. Established under the Tax Cuts and Jobs Act (TCJA), the Opportunity Zone program provides a tax incentive for investors to invest unrealized capital gains into “Opportunity Funds” dedicated to investment in under-served census areas identified as “Opportunity Zones.”  Recently, Treasury Secretary Steven Mnuchin indicated that the market for this program could be more than $100 billion in investment.
 
Senate Recesses After Nominations Deal; To Consider Fed Nominee Bowman After Election
On Thursday, Senate Republicans and Democrats reached a deal to approve 15 judicial and 21 executive nominees and recess until after the midterm elections. Despite triggering backlash from portions of the party’s grassroots angered by allowing easy approval of more than a dozen judges immediately after Brett Kavanaugh’s confirmation, the deal constitutes a win for the 10 Senate Democrats up for reelection in states President Trump won in 2016 and who will now be free to dedicate themselves to the campaign trail, and realistically would have been the number of Judges that the Senate would have confirmed through regular order if it had stayed in session for the next couple of weeks.    The Senate will return to session on Tuesday, November 13 and is expected to consider the nomination of Michelle Bowman to be a Member of the Federal Reserve Board of Governors that week.
 
 
Select Highlights from the Administration
The White House
Trump Expresses his Criticism of Fed Chair Powell Over Interest Rates
On Thursday, President Donald Trump criticized Federal Reserve Chair Jerome Powell over the Fed’s recent decision to raise interest rates for the third time this year, saying “the Fed is out of control.” While President Trump also volunteered that he would not “fire” Chairman Powell, it is worth noting that the President cannot remove the Fed Chairman except for cause, and that some analysts have noted that that President’s statements represent a significant departure from the independence that past Presidents have traditionally afforded the central bank.  President Trump’s escalating posture towards Chairman Powell, whom he appointed, came after a two-day stock selloff during which the Dow Jones Industrial Average shed nearly 1,400 points, in part due to rising interest rates.  Last month the Fed decided to keep pace with planned increases and raised its benchmark rate by by one quarter of a percentage point.
 
Office of the Comptroller of the Currency
Special Purpose FinTech Charter to Move Forward Regardless of Litigation Risk
On Tuesday, the Online Lending Policy Institute held its Online Lending Policy Summit featuring policymakers and thought leaders on fintech regulation. Speaking at the event, Office of the Comptroller of the Currency (OCC) Senior Deputy Comptroller for Compliance and Community Affairs Grovetta Gardineer said that OCC would continue with its plan to grant limited-purpose bank charters to fintech firms regardless of litigation by state regulators. Since announcing in July its decision to accept special purpose bank charters from qualifying fintech firms seeking to report to a single primary federal regulator, OCC has faced the threat of significant litigation from state regulators alleging that the proposed charters illegally preempt state laws.  It is also worth noting that Craig Phillips, Counselor to Treasury Secretary Steven Mnuchin, was also at the event and used his tiemt o call on Congress to establish a national data breach notification standard, saying that such a proposal would be a “major building block” for the fintech industry.
 
Department of the Treasury
Treasury Releases Temporary Regulations for FIRRMA Pilot Programs
On Wednesday, the Department of the Treasury released interim regulations for a pilot program implementing Foreign Investment Risk Review Modernization Act (FIRRMA) regulations that did not come into effect when the law was signed. Starting November 10, the pilot program will begin limited implementation of two components of FIRRMA: (1) expanding to scope of Committee on Foreign Investment in the United States (CFIUS) review to include non-controlling investments in firms involved in certain critical technologies; and (2) making CFIUS declarations mandatory. The pilot program will require companies doing business in any of 27 product groups—a broad array of everything from defense, aerospace, and semiconductors, to energy, and telecom —to comply with the relevant provisions prior to their full enactment no later than February 2020. In addition to the pilot program, the Treasury also released an interim rule updating existing CFIUS regulations and clarifying already effective components of FIRRMA. Signed into law in August as part of the National Defense Authorization Act (NDAA) (H.R. 5515), FIRRMA substantially broadened the scope and authority of CFIUS review and is the first major update to the Committee in more than a decade.
 
Treasury Not Expected to Label China Currency Manipulator
On Thursday, it was reported that staff at the Department of the Treasury declined to label China a currency manipulator in their draft of the department’s semiannual report on foreign exchange rate practices. While Treasury Secretary Steven Mnuchin could at his discretion add China, the country will most likely stay on Treasury Department’s monitoring list—which also includes U.S. allies such as Japan, Korea, and Germany—in the report expected to be issued on October 15th.  On Friday, Secretary Mnuchin said that currency will be a topic of future trade discussions between the two countries, including a potential meeting between President Donald Trump and Chinese President Xi Jinping at November’s G20 summit in Buenos Aires, Argentina
 
FinCEN Issues Iran Sanctions Advisory
On Thursday, the Financial Crimes Enforcement Network (FinCEN) issued an advisory intended to help U.S. and foreign financial institutions navigate anti-money laundering/Combatting the Financing of Terrorism (AML/CFT) obligations as the Treasury Department continues re-imposing sanctions on Iran. The advisory outlines a number of ways that Iran has “abused” the international financial system, including: (1) using Central Bank of Iran officials and exchange houses to facilitate malign activity; (2) using shell companies as fronts to procure counterfeiting equipment, ballistic missile technology, and commercial aviation supplies; (3) using Iran-related shipping companies access to the U.S. financial system; and (4) using precious metals and cryptocurrencies to evade sanctions. For each category of misconduct, the report also lists red flags for firms to monitor and recommendations for maintaining due diligence. After President Donald Trump withdrew from the Joint Comprehensive Plan of Action (JCPOA) with Iran in May, the United States re-imposed certain sanctions on Iran in August and is expected to impose further sanctions on its shipping, energy, and financial sectors on November 5.
 
Securities and Exchange Commission
SEC Releases New Strategic Plan
On Thursday, the Securities and Exchange Commission (SEC) released its strategic plan for fiscal years 2018-2022. The plan identifies three goals for the Commission: (1) focus on the long-term interests of main street investors; (2) recognize significant developments and trends in evolving capital markets and adjust efforts to ensure effective allocation of resources; and (3) Elevate the SEC’s performance by enhancing analytical capabilities and human capital development. In a statement accompanying the release of the plan, SEC Chairman Jay Clayton said “Our new strategic plan is a concise, straight-forward explanation of the goals that will guide us as our markets evolve.”
 
Clayton Cautious on Filing Frequency Change for Most Publicly Traded Companies
On Thursday, while speaking at a Bipartisan Policy Center event, Securities and Exchange Commission (SEC) Chairman Jay Clayton indicated an openness to decreasing the SEC reporting frequency for firms valued at less than $1 billion but said that a move away from quarterly filing is unlikely to be in the cards for larger firms. According to reports, Clayton called the possibility of relaxing filing requirements for smaller firms a “good question” but cautioned that "I don't think quarterly reporting is going to change for our top names anytime soon” and "I'm not going to move in any quick direction.” Clayton’s comments, and the questions generating it come after a tweet by the President in August, where he urged the SEC to revisit its filing frequency practices in the belief that doing so could lessen regulatory and compliance costs.
 
Commodity Futures Trading Commission
CFTC Streamlines CPO and CTA regulations
On Tuesday, the Commodity Futures Trading Commission (CFTC) unanimously issued a proposed rule intended to simplify regulations for commodity pool operators (CPO) and commodity trading advisors (CTA). The recently approved rules contain a number of provisions including: (1) codifying long-standing staff advisories and no-action letter relief in Part 4 regulations; (2) banning individuals who are legally disqualified from operating investment pools from doing so; (3) streamlining registration requirements for CPOs operating in multiple jurisdictions; (4) equalizing terms of treatment for business development company investment advisors and investment advisors for registered investment companies; and (5) aligning certain CFTC regulations with parallel Securities and Exchange Commission (SEC) rules. The proposed changes are part of CFTC’s “Keep It Simple, Stupid” (KISS) initiative, which began last year and consists of an agency-wide review of Commission regulations intended to identify areas to decrease regulatory burden.
 
Next Week’s Schedule
 
The House and Senate are in Recess until November 13th