Financial Services Report

Looking Ahead
Near Term

  • The Senate is poised to pass a funding bill for the Defense Department that will also include a continuing resolution keeping the government funded until December 7th.
  • The Senate Banking Committee will hold a FinTech hearing on data and technology on Tuesday. 
  • The Senate Judiciary Committee could advance the nomination of Justice Kavanaugh to the full Senate this week.
  • The House is out of Session

Further Out

  • The House will return next week and attempt to pass the Defense Appropriations / CR bill to keep the government from shutting down.
  • On September 26th, the Senate Commerce Committee will hold a hearing that examines the safeguards for consumer data privacy.
  • On October 2nd the Senate Banking Committee will hear from four banking regulators about the implementation of S. 2155.  This hearing was rescheduled from last week. 
  • On October 3rd, the Senate Judiciary Committee will hold a hearing that examines oversight of the enforcement of antitrust laws.
  • The CFTC is slated to hold its first ever Fintech conference on October 3 and 4th.

The Past Week
Legislative Branch
House Passes State Insurance Regulation and FinCen Improvement Bills
On Wednesday, during the consideration of a slew of measures being taking up on the less controversial Suspension of the Rules procedure, the House passed two bills of interest to the Financial Services industry.   First, was a bill sponsored by Reps. Keith Rothfus (R-PA) and Joyce Beatty (D-OH), the State Insurance Regulation Preservation Act (H.R. 5059), that would require the Federal Reserve to tailor its banking-targeted regulations to insurance savings and loan holding companies. Next the House passed, the FinCEN Improvement Act (H.R. 6411), that requires the Financial Crimes Enforcement Network (FinCEN) to collaborate with other countries’ financial intelligence units on cryptocurrency-related initiatives and add tribal law enforcement to FinCEN’s list of “partners.”  
House Republicans Unveil, Mark-Up, and pass out of Committee, Tax Reform 2.0
On Monday, House Ways and Means Committee Chairman Kevin Brady (R-TX) released the text of House Republicans’ “tax reform 2.0” package. The package is composed of three bills including: (1) The Protecting Families and Small Business Tax Cuts Act (H.R. 6760; Summary) that would make permanent many of the individual tax provisions in the Tax Cuts and Jobs Act (TCJA); (2) The Family Savings Act (H.R. 6757; Summary) that would create a tax-free Universal Savings Account (USA) and loosen requirements around the offering of Multiple Employer Plans (MEP), among other provisions; and (3) the American Innovation Act (H.R. 6756; Summary) that would aim to facilitate business startups, most notably by increasing their ability to deduct start-up costs. During an all-day markup in the Ways and Means Committee on Thursday, the Committee voted in favor of advancing the first two bills on party line votes and in favor of advancing the American Innovation Act by a voice vote. During the markup, the committee voted down several Democratic amendments to the tax cuts bill, also along party lines. While Republican leaders have said they hope to hold a floor vote on the package towards the end of the month, at this point it seems highly unlikely that the entire package could be signed into law, as Senate passage seems improbable.  However, it is conceivable that portions of the measure – especially those contained within the Family Savings Act – could be incorporated into another, moving, legislative vehicle that could be passed by the end of the lame duck session. 
House Financial Services Committee Votes to Advance 12 Bills
On Thursday, the House Financial Services Committee (HFSC) held a markup of 12 bills (summary) on the Federal Reserve, Financial Crimes Enforcement Network (FinCEN), and a variety of other topics. Although the committee voted to advance all of the bills, several attracted significant controversy, including: (1) Rep. Blaine Luekemeyer’s (R-MO) bill (H.R. 6743) to establish a national data security and breach notification standard; (2) Rep. Andy Barr’s (R-KY) Federal Reserve Reform Act (H.R. 6741) which would reform the Federal Open Market Committee (FOMC) and require it to adopt a “plain English” monetary policy strategy; and (3) Rep. Warren Davidson’s (R-OH) bill (H.R. 2128) that would allow Securities and Exchange Commission (SEC) respondents to have their case moved from the SEC administrative court to a federal district court.  The complete results of the markup can be found here.  
Financial Services-General Government Appropriations to Be Extended in CR
On Thursday, House and Senate conferees reached a deal on a conference report on the three-bill “minibus” package combining the annual education, defense, and labor-health and human services (HHS) appropriations bills. While the $800 billion package accounts for nearly 90% of annual discretionary spending, the conference report will be accompanied by a continuing resolution (CR) funding the rest of the government. The CR will fund the rest of the government at current levels through December 7, including the financial services-general government appropriations bill which provides funding for key regulators including the Department of the Treasury and Federal Deposit Insurance Corporation (FDIC). With the fiscal year set to end on September 30, the package will mark Congress’s first on-time passage of the three bills in a decade. Despite concerns that President Donald Trump may veto any appropriations deal or CR sans what he views as sufficient funding for a wall along the U.S.-Mexico border, the President is expected to sign the package, pushing appropriations talks into the lame duck Congress.
Senate Confirms Rettig as IRS Commissioner
On Wednesday, the Senate voted 64-33 in favor of confirming Charles Rettig to be Commissioner of the Internal Revenue Service (IRS) with a term expiring in November 2022. All 33 no-votes came from Democrats who voted against Rettig’s nomination in protest of a recent the Treasury Department decision rolling back non-profit donor disclosure requirements and other grievances. With the IRS having been without a permanent Commissioner for nearly a year since John Koskinen’s term ended in November 2017, Rettig faces a number of pressing challenges, including implementation of the Tax Cuts and Jobs Act (TCJA), cybersecurity, and technological modernization.  
Senate Banking Committee Holds Russia Sanctions Hearing
On Wednesday, the Senate Banking Committee held its third hearing on the implementation of sanctions against Russia featuring witnesses from the think tank community. Members discussed next steps for Russia sanctions, with particular interest directed towards a prohibition on the purchase of Russian sovereign debt, restrictions on investment in and technology transfers to the Russian oil and gas industry, and transparency measures. The same day, the Trump Administration released an executive order (text) authorizing, but not requiring, the Secretaries of State and Treasury to impose additional sanctions on individuals found to have interfered in U.S. elections. Witnesses and several Members criticized the order for failing to impose mandatory sanctions or provide additional sanction authority and argued in favor of mandatory, as opposed to discretionary, sanctions. Additionally, Sen. Chris Van Hollen (D-MD) promoted his Defending Elections from Threats by Establishing Redlines (DETER) Act (S. 2313) which would require the Administration to, on a strict timeline, determine if hacking occurred during an election and impose sweeping sanctions if it is determined to have taken place.
Select Highlights from the Administration
The White House
Mnuchin Proposes New Trade Talks with China
On Wednesday, Treasury Secretary Steven Mnuchin invited Chinese officials to another round of negotiations in an attempt to stave off Section 301 tariffs on an additional $200 billion in Chinese goods. While Chinese authorities confirmed they received the invitation, no additional talks have been planned. Despite the renewed attempt at negotiation, President Trump reportedly instructed aids on Thursday to proceed with the tariffs, saying that he wasn’t concerned about the escalation impacting negotiations. The Administration is currently in the process of finalizing the list of goods to be hit by the tariffs—which will vary between 10 and 25 percent—after the public comment period on the proposed list ended earlier in the month. It is unclear both when the final list will be released and when the tariffs will take effect.
Trump Suggests he will Rename NAFTA the US, Mexico, Canada Pact
On Thursday, President Donald Trump told donors that he hopes to rename the North American Free Trade Agreement (NAFTA) the United States, Mexico, Canada (USMC) Pact, adding a willingness to “drop the C” if Canada is unable to  secure its entry to the renegotiated deal. With talks continuing last week, President Trump described negotiations as “coming along very well” and Canadian Foreign Minister pushed back on speculation that her absence from the talks indicates a lack of progress. U.S. Chief Agricultural Negotiator Greg Doud however put the brakes on speculation of a quick deal, describing the negotiation over Canada’s dairy policy as the “most difficult [issue] [he’s] ever seen.” Canada’s omission from the deal stands as a significant barrier to Congressional approval—leaders from both parties have warned President Trump against submitting a deal that excludes Canada and a number of Members have questioned if such a deal could be compliant with Trade Promotion Authority (TPA).
Department of the Treasury
FSOC Allows Zions to “check out” of SIFI Status
On Wednesday, the Financial Stability Oversight Council (FSOC) gave final approval to remove Zions Bancorp’s systemically important financial institution label. In July, FSOC voted to remove de-designate Zions, which has $66 billion in assets, on a preliminary basis in response to the firm’s decision to move away from its bank holding company structure. After the Economic Growth, Regulatory Relief, Consumer Protection Act (S. 2155) raised the threshold for designation to $250 billion, the Federal Reserve opted not to release the stress test results of Zions and other smaller banks earlier in the year and has said that it will not enforce regulations—including enhance prudential standards and liquidity coverage ration requirements—against firms with less than $100 billion in assets.   
Treasury Issues Initial GILTI Regulations
On Thursday, the Treasury Department issued its first proposed guidance (text) on the Global Intangible Low-Taxed Income (GILTI) tax created under the Tax Cuts and Jobs Act (TCJA). Intended as an anti-base erosion measure amid TCJA’s shift towards a territorial system, the GILTI generally requires U.S. firms to count profits from controlled foreign corporations (CFC) in their U.S. tax filings at an effective rate starting at 10.5%. To this end, last week’s guidance focuses on several “mechanical clarifications,” including how to treat separate subsidiaries filing consolidated tax returns, which Treasury will treat as a single U.S. shareholder for GILTI purposes. With GILTI considered one of the most complicated parts of tax reform, the Treasury Department is dividing up the task of enforcing the measure into several steps, with forthcoming regulations set to tackle key clarifications such as the role of foreign tax credits in GILTI calculation.
Federal Reserve
Regulators Clarify Role of Supervisory Guidance
On Tuesday, five federal regulators—the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NACU), Office of the Comptroller of the Currency (OCC), and Consumer Financial Protection Bureau (CFPB)—issued a statement (text) clarifying that supervisory guidance does not have the force of law. In the release, agencies contrasted supervisory guidance with a law or regulation, saying “supervisory guidance outlines the agencies’ supervisory expectations or priorities and articulates the agencies’ general views regarding appropriate practices for a given subject area.” Additionally, the release outlined other steps the agencies expect to take with respect to clarifying the role of supervisory guidance including: (1) limiting the use of numerical thresholds and other “bright-lines;” (2) refraining from criticizing financial institutions for supervisory guidance “violations;” (3) clarifying that seeking public comment on guidance does not mean that the guidance is intended to be a regulation; (4) reducing the issuance of multiple supervisory guidance on the same topic; and (5) maintaining clear communication with financial institutions under regulatory oversight.
Consumer Financial Protection Bureau
CFPB Updates FCRA Model Disclosures
On Wednesday, the Consumer Financial Protection Bureau (CFPB) issued an interim rule (text) updating its Fair Credit Reporting Act (FCRA) model disclosures. The updates incorporate two FCRA changes included in May’s Economic Growth, Regulatory Relief, Consumer Protection Act (S. 2155): (1) a requirement for nationwide consumer reporting agencies to provide “national security freezes” and notify consumers receiving a Summary of Consumer Rights of the change; and (2) extending from 90 days to one year the minimum time that consumer agencies must include an initial fraud alert in the consumer’s file. For compliance purposes, companies will also be able to use a previous model disclosure with an attached separate sheet disclosing the new information.
Securities and Exchange Commission
SEC takes Action to Regulate Crypto
On Tuesday, the Securities and Exchange Commission (SEC) announced two actions stepping up the Commission’s involvement in regulating cryptocurrencies. In the first announcement, The SEC announced a settlement with coin secondary market website, marking its first case against a third-party selling digital tokens as an alleged unregistered broker dealer. In another first of its kind action, the SEC also released its enforcement order against a “crypto asset fund” that regulators allege operated as an unregistered investment firm. In related news, the Financial Industry Regulatory Authority (FINRA), the industry’s SRO, issued its first disciplinary action involving cryptocurrency after it charged  a Massachusetts broker with fraud for allegedly unlawful distribution of unregistered crypto currency,  Also last week, U.S. District Judge Raymond Dearie ruled that SEC rules apply to initial coin offerings (ICO).
Federal Deposit Insurance Corporation
FDIC Releases Proposed Rule on Reciprocal Deposits
On Thursday, the Federal Deposit Insurance Corporation (FDIC) released its proposed rule (text) to implement Section 202 of the Economic Growth, Regulatory Relief, Consumer Protection Act (S. 2155). Under the proposed rule, well-capitalized institutions are no longer required to treat reciprocal deposits as brokered deposits up to 20% of total deposits or $5 billion. While regulators generally treat brokered deposits as riskier than non-brokered deposits given that brokers have a higher likelihood of moving funds, reciprocal deposits—whereby to banks place a portion of their customer deposits with each other, generally in order to keep accounts below the $250,000 deposit insurance limit—do not carry the same risk as other brokered deposits given that a withdrawal results in the bank getting the original deposit back. The proposal is the first of a two-part effort to modernize FDIC’s brokered deposit regulation, with the agency expected to seek comments on its overall brokered deposit and rate cap regulations later this year.