Financial Services Report

December 21, 2015

Our Take
The First Session of the 114
th came to a close last week, fittingly with the passage of the FY16 spending bill and a tax measure dealing with a series of expiring provisions, to tie a bow on a year whose schedule had been dictated by statutorily imposed deadlines.  Despite some Sturm und Drang that the collective size of the two bills would unite liberal Democrats and Conservative Republicans both measures ultimately passed by wide margins.   Credit for the smooth sailing should go to Senate Majority Leader McConnell who appears to have delivered on his promise to get the Senate working again, as well as to former House Speaker John Boehner for setting up a budget deal that gave appropriators $25 billion in sequester relief that allowed appropriators to plus up just the right accounts to help get the deal done. 

As of today we are 43 days from the Iowa Caucuses and 51 days until the New Hampshire Primary, and that can be no clearer sign that we are about to enter the Congressional “silly season.”  While much has been made about the “light” legislative schedule for next year, it is clear to us that while most of the action in 2nd Session of the 114th Congress will come after the election, it will be critical to lay down the proper foundation to spring into action for what will undoubtedly be a very active lame duck session.    

Looking Ahead

Near Term

  • Digging out, checking out and decompressing

Further Out

  • The House returns on January 4th and is expected to consider the following legislation:

    • H.R.  1927 – the Fairness in Class Action Litigation Act
    • H.R. 712 – the Sunshine for Regulatory Decrees and Settlements Act
    • H.R. 1155 – the SCRUB Act of 2015
  • The Senate returns on January 11th and is expected to take up the “audit-the-fed” bill that has long been championed by the Paul Family.

The Past Week

Legislative Branch

End of Year Wrap Up

On Thursday and Friday the House, and then the Senate approved a $622 billion dollar  tax extenders package; (section-by-section summary) and a $1.1 trillion dollar omnibus spending bill (section-by-section summary) – that was collectively referred to as the taxibus deal.  Not nearly as appealing as the cromnibus of yore, but certainly more filling.
Both measures were passed easily, with the tax extenders passing the House 318-109 and the Omnibus passing by a vote of 316-113.  The measures were combined in the Senate and passed on a 65-33 vote, before going to the President who signed it on Friday.  As with any large piece of legislation there were winners and losers.  There are differing views on who fits into what category but here are two different takes:  One & Two.  

Legislative Alternative to DOL Fiduciary Rule Introduced
On Friday, Representatives Richard Neal, Peter Roskam, John John Larson and Phil Roe introduced two bills, one which amends the Internal Revenue Code with the other modifying the Employee Retirement Income Security Act (ERISA) that would effectively create a statutory modification to trump the pending Department of Labor’s Fiduciary Rule.  While the sponsors indicate their legislation would “require advisors serve their clients' best interests, strengthen protections for retirement savers, and maintain access to quality financial advice for small businesses and low- and middle-income Americans,” proponents of the DOL efforts viewed it differently, calling the legislation an "industry wish list from start to finish."

Senators Introduce Bills to Push Companies to Increase Cybersecurity Expertise
Earlier this week Senators Jack Reed and Susan Collins introduced the bipartisan Cybersecurity Disclosure Act of 2015. The bill, which the sponsors said was in response to cyber breaches at various companies, would require all publicly traded companies to disclose which members of the company’s Board of Directors is a cybersecurity expert, and if not, why having this expertise on the Board of Directors is not necessary because of other cybersecurity steps taken by the publicly traded company.  
Select Highlights from the Administration


Office of Financial Research Says Risks to US Stability on the Rise
On Tuesday, OFR released its first “Financial Stability report that concluded that threats to the financial stability of the United States are on the rise.  The report highlighted six areas of concern:

  1. Credit risks are elevated and rising for U.S. nonfinancial businesses and in many emerging markets. In the U.S., nonfinancial business debt is growing rapidly, boosting leverage; in relation to gross domestic product, it is at a historically elevated level.
  2. Persistently low interest rates and suppressed risk premiums in U.S. fixed-income markets contribute to excessive risk-taking and borrowing that could pose financial stability risks.
  3. The resilience of the financial system has improved significantly since the financial crisis, but it is uneven. Vulnerabilities persist and some new ones have emerged. Financial activity and risks have migrated outside the regulatory perimeter, market liquidity appears to have become more fragile in recent years, and interconnections among financial firms and markets are evolving in ways not fully understood.
  4. Central clearing of derivatives has benefits for risk management, but concentrates risk in central counterparties, or CCPs, and may transmit or amplify stress in new ways.
  5. Derivatives data reported to registered swap data repositories still have significant room for improvement. Further development of the framework to standardize and validate data is essential to improve data quality.
  6. Enhanced capital and leverage requirements have made banks more resilient, but they also can have unintended consequences. OFR analysis shows areas where these requirements may increase incentives for risk-taking by large, complex banking firms 

FSOC Keeps Prudential Designated
On Thursday, the Financial Stability Oversight Council (FSOC) conducted its monthly meeting by telephone, where it voted to continue to keep Prudential Life Insurance designated as a systemically important non-bank financial institution.  The vote was eight to one, with the FSOC member with insurance expertise voting no, and the SEC Chair and Treasury Secretary Lew each recusing themselves.
Federal Reserve

Fed Raises Rates
As expected, on Wednesday, the Federal Reserve raised the benchmark rate from zero to .25%, the first such increase in nearly ten years.  In announcing the decision the Fed noted that such an increase was appropriate and that future increases will continue to depend on economic outlook data.  However, at the moment the Fed sees risks to the economy and employment “as balanced” and so therefore expects future graduate adjustments will help the economy. Many anticipate a further increase following the Fed’s March meeting, while at least some others think that the trend in rate increases will be short-lived.
Next Week’s Schedule
The House and Senate Are in Recess until 2016