Financial Services Report

September 28, 2015

Our Take
Speaker Boehner’s announcement on Friday that he would resign from Congress on October 30th may have been one of the ultimate profiles in political courage.  Whether or not he could have ultimately prevailed in the vote to vacate the chair we will never know.  But by stepping down at the end of the month he not only gave the conservatives the scalp they were looking for, he was also able to protect those Republicans who would have voted for him from a bruising primary battle.  Additionally, by waiting till the end of the month – which perhaps coincidentally coincides with the expiration of the surface transportation bill – he left himself one last chance to make a big, “drop the mike” type of deal on his way out the day.  Could it include an Ex-Im reauthorization, the transportation bill and raising the debt ceiling?  That remains to be seen.  However, that he may need to utilize Democratic votes to get it done, in part a reason for his resignation, also proves how his announcement further exemplifies the breakdown of Congress and our democratic system.  On the other hand, the fact that he can resign the Speakership is also an ultimate example of the strength of our democracy.

Looking Ahead

Near Term

  • Washington attempts to return to a sense of normalcy following visits by the Pope and Chinese President Xi Jinping and the unexpected announcement of Speaker Boehner’s resignation from Congress last week.
  • While many pundits and analysts saw the Speaker’s resignation as a good indicator that government will not shut down on September 30th, Congress still has to go through the process of passing a CR before midnight on Wednesday. 
  • The Senate is expected to vote on a “clean” CR that will fund the government through December 11th at 5:30pm, and once that bill goes over to the House things have the potential to get interesting.   The House is expected to pass a budget reconciliation bill that would defund Planned Parenthood and repeal Obamacare, which even if it passes the senate (it would only need 51 votes) is guaranteed to be vetoed.  After dealing with the reconciliation the House will then have to pass the CR to keep the lights on.    
  • The House Financial Services Committee will hear from CFPB Director Cordray, who should anticipate a series of questions on the CFPB’s practices on auto lending following a serious expose by the American Banker about the Bureau’s efforts to use enforcement actions to effect market pricing in an industry they were specifically exempted by Congress from regulating.  The day after Cordary’s appearance the Financial Services Committee will also mark-up a series of bills including legislation to replace the single director at the CFPB with a bipartisan commission.
  • The Financial Services Housing and Insurance Subcommittee will hold a hearing on the insurance industry on Tuesday afternoon.   
  • Senate Banking holds a nominations hearing on Tuesday and then the Securities Subcommittee holds a hearing on the SIPC on Wednesday.
  • A Ways and Means Subcommittee will hold a hearing on Wednesday about the DOL Fiduciary Rule following the closure of the second round of public comment last week.  See below for more.

Further Out

  • Funding for the Federal Government runs out on September 30th
  • Highway Trust Fund Expires October 29th
  • Speaker John Boehner resigns from Congress on October 30th
  • The Debt Limit expires sometime between October 30th and the end of the year.

The Past Week

Boehner Resigns from The House
On Friday, in a surprise announcement, House Speaker John Boehner announced he would resign from Congress effective October 30th.  The new sent shockwaves through DC, both because many were hearing that the Speaker had been able to get the votes to survive the motion to vacate and because it immediately set off a leadership scramble amongst the Republican conference.  According to reports, Boehner had intended to announce his resignation on his birthday in November, but felt now was better to spare the party from what would be multiple motions to vacate his chair.  While Majority Leader Kevin McCarthy is expected to assume the Speakership, the whole leadership slate is far from certain.  House Financial Services Chairman Jeb Hensarling, who has long eyed a leadership role, has remained mum about his future intentions, though many speculate he would run for the Majority Leader role. 
Over Half of Democrat Caucus Send Letter to DOL
Earlier this week 96 members of the Democratic Caucus signed onto a letter to DOL Secretary Perez that urged the Secretary to make some specific changes to the proposed Fiduciary rule as well as encouraged the Secretary to “consider options for convening a small working group of industry professionals and consumer advocates to aid with the finalization of the Rule as to further ease any final implementation issues.”  Interestingly, proponents of the rule had mixed views on the impact of the letter, with Barbara Roper calling it a “positive development” since the changes suggested in the letter do not go to “the heart of the rule’s [consumer] protections.”  Taking a different view was the AARP who questioned whether the DOL could convene small working groups without running afoul of the Administrative Procedures Act (APA).   The letter came as the second public comment period on the rule closed on September 24th.  While the timing of the publication of the final rule is unclear, with some thinking it could be completed as early as the end of this year, it is clear that Republicans hope to include language in the final CR that would delay the process.

Warren Calls on Treasury to Finalize Private Equity Fee Rules
On Monday Senator Elizabeth Warren, along with her Democratic colleagues Al Franken (MN), Tammy Baldwin (WI) and Sheldon Whitehouse (RI) sent a letter urging the Treasury to quickly finalize a rule, first proposed in July, aimed at private equity managers.  Final public comments can be sent until October 21st on the rule which would reclassify how management fees are taxes in an effort to make it harder for firms to convert fees subject to high taxes into the lower-taxed carried interest rate. 
Brown and Collins Call on Regulators to Examine Structured Settlements
According to BGov, on Wednesday, Senators Sherrod Brown (D-OH) and Susan Collins (R-ME) became the latest members of Congress to urge regulators to examine the industry of buying structured settlements.  Collins and Brown specifically asked the FTC, the CFPB, the IRS and the SEC to “take steps to curb unscrupulous activities.”   The Senator’s effort follows on similar calls by Senator Jack Reed (D-RI), and Representatives Van Hollen (D-MD) and Slaughter (D-NY).
Select Highlights from the Administration

FSOC Approves 2016 Budget
On Monday, the Financial Stability Oversight Council held its monthly meeting where among other things it approved its FY2016 Budget. In addition, there were continued conversations about the impact of the asset management industry on the financial stability of the United States and whether the regulators responsible for governing central counterparty are doing an appropriate job in adequately addressing the risks posed by these instruments.   
Consumer Financial Protection Bureau (CFPB)
CFPB Finalizes QM Rule
On Monday, the CFPB finalized its ability to pay (a/k/a qualified mortgage or QM) rule and in doing so codified changes that expanded the definition of “small creditor” by raising the loan origination limit for small-creditor status from 500 first-lien mortgage loans to 2,000 and excludes loans held in portfolio by the creditor and its affiliates from that limit.  In addition to providing banks more implementation time, until 2016, this final rule changed how the assets of the creditor's mortgage-originating affiliates are included in calculating whether a creditor is under the $2 billion threshold for small creditor status.  In addition, the final rule expanded the definition of “rural” areas to include census blocks that are not in an urban area as defined by the Census Bureau and added two safe harbors for determining whether a property location meets the definition of rural.
Securities and Exchange Commission (S)EC
Commission Unanimously Proposes New Rules For Mutual Funds
On Tuesday, on a 5-0 vote, the SEC proposed new rules to mitigate investor runs within the mutual fund industry.  Under the proposal, funds, including exchange traded funds, would be forced to adopt liquidity-management plans and classify how long it would take to convert positions to cash. Funds would also have to hold a minimum amount of cash or cash equivalents.  In addition, the proposal would allow mutual funds to permit “swing pricing,” meaning that exiting investors would receive a price that is slightly lower than a fund’s net-asset value.   Comments on the proposed rule will be due around the of the year.

Next Week’s Schedule

On Tuesday, September 29th at 10:00am in 2128 Rayburn the House Financial Services Committee will hold a hearing entitled, The Semi-Annual Report of the Bureau of Consumer Financial Protection” with CFPB  Director Cordray as the sole witness.
On Tuesday, September 29th at 10:00am in 538 Dirksen, the Senate Banking Committee holds a nominations hearing.
On Tuesday, September 29th at 10:00a, in 215 Dirksen, the Senate Finance Committee holds a hearing entitled, “Financial and Economic Challenges in Puerto Rico.”
On Tuesday, September 29th at 2:00pm in 2128 Rayburn, the Housing and Insurance Subcommittee will hold a hearing entitled, “The Impact of Domestic Regulatory Standards on the U.S. Insurance Market.”
On Wednesday, September 30th at 10:00am in 2128 Rayburn, the Financial Services Committee will hold a mark-up of the following bills:

  • H.R. 414, the “Burdensome Data Collection Relief Act”;
  • H.R. 957, the “Bureau of Consumer Financial Protection-Inspector General Reform Act of 2015”;
  • H.R. 1090, the “Retail Investor Protection Act”;
  • H.R. 1266, the “Financial Product Safety Commission Act of 2015"; and
  • H.R. 2769, the “Risk-Based Capital Study Act of 2015”

On Wednesday, September 30th at 10:00am in 1100 Longworth, the Ways and Means Oversight and Investigations subcommittee will hold a hearing on the Department of Labor’s Proposed Fiduciary Rule.
On Wednesday, September 30th at 10:00am in 538 Dirksen the Subcommittee on Securities, Insurance, and Investment will hold a hearing entitled, “Oversight of the Securities Investor Protection Corporation.”
On Thursday, October 1st at 10:00am in 538 Dirksen, the Senate Banking Committee will hold a mark-up of the “American Crude Oil Export Equality Act.”