Financial Services Report

September 24, 2018

Our Take

As this is probably the penultimate update before the midterm elections, it is worth taking a moment to put an element of the potential “blue wave” in perspective.   While newspapers and clickbait websites want to push a narrative that this primary season showed both a far-leftward and anti-establishment lurch by Democrats, a simple examination of the facts shows that is not the case.   Certainly, the primary losses by Representatives Crowley and Capuano may reflect those sentiments, but the reality is that the DCCC (i.e., the establishment) endorsed candidate won 95% of the time.  Further, the moderate Democrat (i.e., the New Democratic backed candidate) was successful about 87% of the time, while the ultra-progressive left-wing groups only had about a 30% win rate in the primaries.  While the current make-up of the Democratic party in the House favors the progressives, it seems pretty clear that any future Democratic majority will be built on a foundation of moderates, and that this should temper the agenda of the Democrats in 2019.  

Looking Ahead

Near Term

  • This should be the last week the House of Representatives is in session until the election and so there is a race to get as much done as possible. This includes voting on the the minibus package containing Defense-Labor, Health and Human Services, Education (Labor-HHS) FY 2019 funding bills, which also serves as the vehicle for the continuing resolution (CR) to fund the outstanding spending bills and keep the government open through December 7th.
  • House lawmakers are also expected to vote on the trio of "Tax Reform 2.0" bills that passed out of Committee last week, which includes (1) The Family Savings Act; The Protecting Family and Small Business Tax Cuts Act; and (3) The American Innovation Act.
  • The House is also expected to pass an FAA reauthorization bill through the suspension process, a method for taking up non-controversial pieces of legislation. 
  • The Senate continues to be engulfed by the Kavanaugh nomination, however, on the floor the Chamber will consider the nominations of Jackie Walcott to be a Representative of the United States to the International Atomic Energy Agency (IAEA), and Peter Feldman to be Commissioner of the Consumer Product Safety Commission (CPSC).
  • There are a slew of Committee hearings of interest this week, including a Senate Finance Committee examination of the impact of automobile tariffs, and a House Judiciary Subcommittee hearing on sports gambling.  The full list can be found at the end of this note

Further Out

  • The House is expected to adjourn for mid-term campaigning at the end of this week – perhaps as early as Thursday.  
  • The Senate is anticipated to stay in session for much of October, potentially until Friday, October 19th, as Leader McConnell will continue to grind out as many judicial nominations as possible.
  • The Senate Banking Committee will hear from four Banking Regulators about the roll out of S. 2155 on October 2nd
  • The Senate Judiciary Committee will hold a hearing on the enforcement of antirust laws on October 3rd.
  • The U.S. Commodity Futures Trading Commission (CFTC) is jumping into the FinTech sandbox with its first ever FinTech Conference Fintech Conference on Wednesday, October 3 and Thursday, October 4.
  • The Mid-Term elections are on November 6th

The Past Week
Legislative Branch
House Republicans Step Up NAFTA Pressure on Canada
On Tuesday, House Majority Whip Steve Scalise (R-LA) released a statement criticizing the Canadian negotiating tactics in the ongoing NAFTA deal.  With the Trump Administration operating under an October 1 deadline to submit agreement text to Congress, Whip Scalise also raised the possibility that Canada does not gain reentry into the deal, saying that “Congress takes seriously and intends to fully enforce the deadlines established in the Bipartisan Congressional Trade Priorities and Accountability Act (TPA).”  House Ways and Means Chairman Kevin Brady (R-TX) echoing those comments the following day, and the combination marked a significant escalation of Congressional rhetoric towards Canada.  Despite this, negotiations continued during the week. 
Tax Writers Request IRS Guidance on Virtual Currency
On Thursday, several Republican Members of the House Ways and Means Committee sent a letter to Internal Revenue Service (IRS) Commissioner David Kautter asking the IRS to issue updated guidance on tax obligations when using virtual currency. In “preliminary guidance,” issued in 2014, the IRS had indicated that virtual currency should be treated as property for tax purposes, and be subjected to capital gains taxes.  The letter requested that IRS respond no later than October 17 with an update on virtual currency guidance efforts, an outline of what the guidance will contain, and a timeline for its release.
Waters, Others Urge Quarles to Maintain G-SIB Surcharge
On Friday, a group of 19 House Democrats led by House Financial Services Committee Ranking Member Maxine Waters (D-CA) sent a letter to Fed Vice Chair for Supervision Randal Quarles urging the Fed to “maintain strong capital requirement” for Globally Systemically Important Banks (G-SIBS). The letter notes that G-SIB banks hold approximately half of all depository assets, argues that the G-SIB surcharge protects against another financial crisis, and cites a study concluding that strict capital requirements have increased the stability of the financial system.   The letter went on to criticize a Fed proposal to reduce the leverage limitation on G-SIBs’ depository institutions.
Senate Banking Committee Hears From Fintech Stakeholders
On Tuesday, the Senate Banking Committee held a hearing entitled “Fintech: Examining Digitization, Data, and Technology” featuring a variety of witnesses from industry and the thinktank community, that primarily focused on how FinTechs obtain and use consumer data.  During the hearing, the witnesses generally agreed on the importance of informed and affirmative consent for consumers sharing financial data with third parties. During the question and answer period, Members from both sides of the aisle discussed proposals to prevent data breaches, including a national data breach standard. The issues of non-financial firms gaining access to consumer financial data and the challenge of “falling behind” in fintech competitiveness similarly attracted bipartisan concern. Additionally, several Democrats use the hearing as a forum to criticize some of the proposals in the Department of the Treasury’s fintech report issued this summer. 
Select Highlights from the Administration
The White House
Trump to Nominate Former Fed Official Liang to Federal Reserve Board
On Wednesday, President Trump announced his intention to nominate former Fed economist Nellie Liang to the Federal Reserve Board of Governors with a term expiring in 2024. In 2010, Dr. Liang led efforts to form the Office of Financial Stability Policy and Research and served as director of the Office, which is tasked with overseeing risks to the financial system. As of Monday, when Richard Clarida was sworn in as Vice Chairman, the Fed Board of Governors now has three vacancies, with Dr. Liang joining Marvin Goodfriend and Michelle Bowman in awaiting Senate Confirmation. In less than two years in office, President Trump has nominated or filled six of the seven Fed Board of Governors positions.
Trump to Nominate Issa to Lead USTDA
On Wednesday, President Donald Trump announced his intention to nominate Rep. Darrell Issa (R-CA) to be director of the U.S. Trade and Development Agency. Rep. Issa, who is retiring at the end of this Congress rather than face a tough reelection fight in his suburban San Diego district, has been a vocal supporter of President Trump and his aggressive trade policy agenda. An independent agency of the federal government, the U.S. Trade and Development Agency exists to advance economic development and U.S. commercial interests in developing countries. Its supports exports and links U.S. businesses to developing country infrastructure by funding project planning activities, pilot projects, and reverse trade missions.
Securities and Exchange Commission
SEC’s Clayton Pushing Broker Conflict of Interest Rule
On Thursday, Securities and Exchange Commission (SEC) Chairman Jay Clayton attended an SEC roundtable in Baltimore where he promoted the SEC’s draft rule on financial broker conflicts of interest. While initial headlines indicating that Clayton was actively trying to get the proposal finalized as quickly as possible, perhaps as soon as early 2019, at the event, the Chairman attempted to defuse that situation saying, “we got a lot of feedback tonight, we have [public comment] letters, so I have no specific date set yet."
SEC Commissioner Jackson Criticizes Stock Exchanges
On Wednesday, Securities and Exchange Commission (SEC) Commissioner Robert J. Jackson Jr. delivered a speech at George Mason University in which he accused the SEC of having “stood on the sidelines” and allowed a number of abuses at the nation’s 13 stock exchanges. He alleged that the following issues are prevalent and harm investors: (1) increasing connection fees intended to circumnavigate the cap on exchange fees; (2) neglect of public information feeds, which exchanges are required by law to provide, in favor of for-profit, private data fees marketed by the exchanges; (3) limits on liability that treat exchanges as regulators instead of for-profit entities; (4) allegations that broker rebates constitute a conflict of interest for brokers; and (5) “opaque structure.” Mr. Jackson is one of two Democratic Commissioners on the Republican-controlled SEC.
Department of Commerce
Commerce Department Releases Q2 Repatriation Data
On Wednesday, the Department of Commerce announced that U.S. corporations repatriated $169.5 billion in offshore profits during the second quarter, bringing total repatriation this year to more than $460 billion. While the figure is a significant increase over the $34.9 billion repatriated during the same quarter last year, it is a drop from the $294.9 billion repatriated in the first quarter, immediately following the passage of last winter’s tax reform bill.  Under the Tax Cuts and Jobs Act, companies pay a tax—15.5 percent on cash and 8 percent on illiquid assets—on deemed foreign profits, a change from the previous requirement that firms pay the full 35% corporate rate but only on repatriated income. President Trump and Congressional Republicans have argued that this provision would incentivize companies to repatriate foreign profits and invest them in the United States.
Federal Reserve
Agencies Issue Final Amendment to Swap Margin Rule
On Friday, five federal agencies—the Farm Credit Administration (FCA), Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), Federal Reserve, and Office of the Comptroller of the Currency (OCC)—approved final amendments to their Swap Margin Rule (final rule). The amendment conforms the Swap Margin Rule to other Federal Reserve, OCC, and FDIC regulations by harmonizing the definition of “Eligible Master Netting Agreement” in the swap margin rule with recent changes to the definition of “Qualifying Master Netting Agreement.” Issued in 2015 with the intention of reducing risks associated with non-cleared swaps, the Swap Margin Rule imposes margin requirements for swaps not cleared through a clearing house.
Internal Revenue Service
New W-4 Form Delayed Until 2020
On Thursday, the Internal Revenue Service (IRS) announced that it would delay the rollout of a redesigned form W-4—the Employee’s Withholding Allowance Certificate—until 2020 as part of its continuing efforts to update the form to reflect last winter’s Tax Cuts and Jobs Act. For 2019, IRS is expected to instead release an update to the 2018 W-4 form currently in use. The delay comes amid criticisms of IRS’s W-4 draft form released earlier in the year—accountants and tax preparers have expressed concerns that the new form would endanger taxpayer privacy, pose a risk of underwitholding, and require taxpayers to forecast difficult-to-predict tax items.
United States Trade Representative
Administration Moves Forward with Tariffs on $200 billion in Chinese Goods; Beijing to Retaliate
On Monday, the United States Trade Representative (USTR) released the final list of products composing $200 billion in Chinese imports to be hit by an additional wave of Section 301 tariffs aimed at China’s predatory technology policies. The 5,745 listed items include agricultural products and high-tech components that will be subject to a 10 percent tariff starting on September 24—escalating to 25 percent on January 1. On Tuesday, China announced plans to retaliate by imposing new tariffs on $60 billion in U.S. exports, to which President Trump responded by threatening further tariffs. In light of the escalation, the Chinese government also has yet to accept an invitation from Treasury Secretary Steven Mnuchin to hold additional talks on the issue. The Administration has already imposed tariffs on $50 billion in Chinese goods.
Federal Courts
Card Providers Reach Swipe Fee Settlement
On Tuesday, Visa and Mastercard released a settlement under which the firms agreed to pay out between $5.54 billion and $6.24 billion to more than 12 million merchants who allege that the payment giants violated anti-trust laws by colluding to raise swipe fees. While the settlement resolves the issue of monetary damages, it does not stipulate changes to corporate policies by either firm. A separate group of retailers is suing for changes to their corporate swipe fee policies, over which additional litigation expected to take place. With the lawsuit dating to 2005, Tuesday’s settlement is the second attempt to achieve a financial resolution to the matter. In 2016, federal courts struck down a $5.7 billion settlement in response to criticisms that a provision prohibiting future swipe fee lawsuits was unfair.