Financial Services Report
June 29, 2015Milton Friedman once famously said that there is nothing so permanent as a temporary government program. Chairman Hensarling is a believer in Friedman, and while it is too early to say the Bank is dead, the Chairman must be smiling because the charter of the Export-Import Bank expires on Tuesday and Congress is not in session at the moment to extend. While proponents of the of bank are meeting at the White House on July 8th to discuss next steps both Democrats and Republicans have acknowledged that once the charter expired it would be more difficult to renew.
At issue, once again, is whether the conservative forces pushing to kill the Export-Import Bank will view the expiration of a the charter as a moral victory or whether, smelling blood in the water, they are prepared to go to the mattresses to preserve their victory. Adding to the calculations is the current increase in tensions between the ultra-conservatives and House Leadership. Currently it looks like this will be a dominant issue for July – but if the Bank supporters are not able to attach the bill to the extension of the transportation reauthorization the odds for resurrecting the bank will on increase.
Looking Ahead
Near Term
· House and Senate on Recess next week
Further Out
· CFPB Director Cordray is expected to testify before the Senate Banking Committee the week of July 13th as part of his semi-annual testimony to the Committee.
· The week of the 13th is shaping up to be busy, as Fed Chair Janet Yellen is also expected to testify before the House Financial Services Committee on July 15th and the Senate Banking Committee on July 16th as part of the semi-annual Humphrey-Hawkins testimony.
· Now that the Supreme Court has affirmed the validity of Obama-care (much to the delight of many Republican political strategists) Congress now has until July 24th to decide whether to use the reconciliation process to repeal tax and spending elements of Obamacare. It is worth noting that while reconciliation only needs a simple majority to pass, should the President veto it (as he surely would if it contained arepeal) Republicans would then need a 2/3rds majority for the override. Something that it would appear they currently lack.
· One more big statutorily imposed deadline – July 31st for the Surface Transportation bill – which as noted above will likely have the Ex-Im reauthorization language included at some point in the legislative process, before we get to a bundle of deadlines tied into the end of the federal fiscal year on September 30th.
The Past Week
Legislative Branch
House
CFPB Discrimination Hearing Turns Racial
On Thursday, the Financial Services Oversight and Investigations Subcommittee held a hearing entitled, “Examining Continuing Allegations of Discrimination and Retaliation at the Consumer Financial Protection Bureau.” While the stated purpose of the hearing, the fifth on this issue, was to continue to hear from CFPB whistleblowers about allegations of racial discrimination at the CFPB, it quickly devolved into a partisan mudslinging about whether the Majority was using these claims to “take the down the CFPB” and which party was more concerned about discrimination.
Terrorism Task Force Hearing
On June 24, the House Financial Services Committee's Taskforce on Terrorism Financing held a hearing entitled “Evaluating the Security of the U.S. Financial Sector.” The hearing focused on the need for global standards to combat terrorism and ways that the U.S. could “play offense” protect their systems and infrastructure. Other issues that came up included cyber-attacks, data security and money laundering.
Another Carried Interest Bill Introduced
On Thursday, House Ways and Means Ranking Member Sandy Levin (D-MI) introduced H.R. 2889, the Carried Interest Fairness Act. The bill, which has a companion measure in the Senate introduced by Senator Tammy Baldwin (D-WI) would change the tax code so that the “carried interest” compensation received by investment fund managers would be taxed at ordinary income rates and treated as wage income subject to employment taxes. While the House has passed legislation to deal with carried interest on four previous occasions, the most recent in 2010, as an amendment to Senate-passed Unemployment Compensation Extension Act of 2010, the provision has never made it into law.
Senate
Senate Sends TPA to President’s Desk
Only a week after Congress issued President Obama a stern political rebuke on his trade agenda, on Wednesday, by a vote of 62-37, passed a stand-alone TPA bill. Then later in the week, the Senate passed, and the House also approved separate bills dealing with African trade and the more controversial Trade Adjustment Assistance (TAA). Leaving the customs reauthorization bill as the final package of the original quartet of bills, and that is expected to be resolved in a conference committee.
Banking Committee Hold Briefing but Cancels Hearing on Flood Insurance
On Tuesday, the Senate Banking Committee held a briefing to share its review of the National Flood Insurance Program. During the review, Senate Banking Committee investigative staff shared the results of their report and their investigation into issues surrounding the implementation of the program, and FEMA’s response in the wake of Superstorm Sandy. The day after the briefing the Committee was scheduled to hold a hearing with various FEMA witnesses but that hearing was postponed to a date TBD.
Democrats Call on Administration Investigate Discrimination in Foreclosure Market
On Tuesday, fifteen Democratic Senators, including four on the Senate Banking Committee (Menendez, Brown, Warren and Schumer) sent a letter to the seven regulators in charge of the housing finance market urging them to investigate reports of disparities between the way financial institutions manage and market foreclosed homes in communities of color compared to predominantly white neighborhoods.
Appropriations Keeps in DOL Fiduciary Rule Rider
On Thursday, by a vote of 16-14, the Senate Appropriations Committee advanced the Labor, Health and Human Services spending bill. That measure, which allocates $153.2 billion dollars in spending, also includes a controversial rider that would prohibit the Department of Labor from moving forward with its ERISA based fiduciary duty rule. The move came days after the House Appropriations Committee passed its own version of the L-HHS spending bill that also included similar language for the DOL.
Senators Introduce Bill to Ban Online Gaming
On Thursday, Senators Lindsey Graham (R-SC), Diane Feinstein (D-CA), Mike Lee (R-UT), Kelly Ayottee (R-NH), Marco Rubio (R-FL), Dan Coats (R-IN) and Thomas Tillis (R-NC) introduced S. 1668, a bill to ban online gaming. The legislation would restore an interpretation of federal law that had held that the wire act prohibited all forms of internet gaming. The issue is a major cause of casino magnate Sheldon Adelson, who is also a major donor to Republican causes and Presidential candidates.
Wyden Introduces Bill on Offshore Reinsurance Tax
On Thursday, Senator Ron Wyden (D-OR), the ranking Democrat on the Senate Finance Committee introduced The Offshore Reinsurance Tax Fairness Act. According to the Senator’s office, the bill would close the tax loophole which allows hedge fund reinsurers to take advantage of an exception to the passive foreign investment company (PFIC) rules of the U.S. law. The legislation would create an exemption for income derived from active conduct of insurance business and creates a bright-line test for determining whether company is truly an insurance company by requiring that one’s insurance liabilities must exceed 25% of assets to be considered insurance provider.
Select Highlights from the Administration
Supreme Court
Court Upholds Disparate Impact Theory
On Thursday, by a 5-4 vote the Supreme Court surprised many observers by upholding the ability of plaintiffs to use disparate impact theory in bringing cases under the Fair Housing Act. The case, Texas Department of Housing v. Inclusive Communities Project, was expected by many to be the death knell for disparate impact, which uses which uses statistical modeling to show discrimination. The decision was hailed by the Administration and Senator Sherrod Brown, among others.
Federal Reserve Board (The Fed)
Fed's Powell: Payment Technologies Should Account for Possible Risks
On Thursday, Federal Reserve governor Jerome Powell opined that more should be done to improve the security of the U.S. payment system, including the adoption of new technologies in a “prudent fashion.” In remarks at a Kansas City Fed conference on payment security, Powell said technological innovations can provide substantial benefits to payment system efficiency and security in the long run, yet often introduce risks that were note expected. As the U.S. relies more heavily on electronic payment methods and beefs up security with changes like chip-and-pin credit and debit cards, he emphasized that banks, data processors, and merchants need to keep pace with the criminal networks that are steadily improving their methods as well. Powell said the market should be the primary driver of change and that government should avoid stifling healthy innovation, but added that policy makers have a role, by listening to concerns from the public on barriers or gaps in regulatory regimes that may create disincentives for developing new products. The Fed has organized a series of task forces to work on issues like improving payment speed and security.
Consumer Financial Protection Bureau (CFPB)
CFPB Releases Over 7,000 Customer Complaints
On Thursday, the CFPB made public its database of more than 7,000 narratives of consumer complaints. The move was met with objection from industry who noted that the narratives are unverified. At the same time, the CFPB issued a Request for Information for how to “normalize” the raw complaint data that it is making available and searchable in the database.
Securities and Exchange Commission (SEC)
SEC to Meet on Clawback Rule
Last week, the SEC announced that it would on July 1 to consider proposing a rule requiring a clawback of executive compensation in case of company misconduct. The rule is required by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was enacted in 2010. The week before last, SEC staff had foreshadowed the announcement by stating that they were working through “tricky issues” related to the rule.
SEC Compliance Office to Expand Focus on Retirement Savings
On Tuesday, the SEC’s Office of Compliance Inspections and Examinations announced that it was launching an initiative to examine investment advisers, broker-dealers who deal with retirement savings. According to SEC documents, the program, known as the Retirement-Targeted Industry Reviews and Examinations (ReTire) Initiative will look at whether firms have basis for recommendation, are disclosing conflicts of interest and have adequate compliance controls.
Unions Press SEC on New Chief of Staff
On Thursday news broke that the AFL-CIO had submitted a Freedom of Information (FOIA) request to SEC related to whether recently appointed Chief of Staff Andrew Donohue received a “golden parachute” from Goldman Sachs for entering government service. The request is the latest salvo between the left and the Commission.
International
IOSCO Chairman Draws Line Between Banks and Asset Managers
On Monday, while speaking at the National Press Club in Washington, DC the Chairman of the International Organization of Securities Commissions Greg Medcaft indicated that International regulators “may have gone too far” in trying to impose a prudential supervisory standard for asset managers and others in market-based financing. Going further, Chairman Medcaft added that unlike banks and major insurance companies, asset managers may not be systemically risky based on size alone. The statement follows an announcement by IOSCO that like the FSB it would review asset managers on a products and activities basis.
Next Week’s Schedule
The House and Senate are in Recess for the July 4th Holiday