Financial Services Report

Our Take
The world lost a legal giant on Saturday and the death of Supreme Court Justice Antonin Scalia threw another monkey wrench into the already frazzled gears of the 2016 Presidential campaign.  Although it would mean leaving the seat vacant for more than 11 months, Republicans, led by Senate Leader McConnell, immediately indicated their preference to wait until the next President is sworn in before considering any nomination to replace Justice Scalia.  Expectedly, Democrats immediately pounced on the politicization of the appointment process, with some noting the irony of modifying the clear constitutional reading on appointments in order to replace one of the leading minds of the originalist theory of judicial interpretation.   With both sides digging in, it is hard to say what happens.  However, it is important to note that the court has some very important cases before it, and 4-4 decisions mean that lower court rulings are upheld, though without setting precedent. 

While neither side has clean hands on the politicization of the appointment process, the immediacy of the fallback into rhetoric that the next election should be determinate is systemic of the gridlock that has engulfed Congress, and a contributing factor to the anger that fuels the Trump and Sanders campaigns.
 
Looking Ahead

Near Term
 

• House and Senate are in recess for the President’s Day Break

The Past Week

Legislative Branch

House
Yellen Testifies Before Financial Services
The House Financial Services Committee got the Fed Chair’s first appearance in a hearing held on Wednesday.  Members from both parties seized on the Fed’s policy of paying large banks interest on excess reserves (IOER) to raise the federal funds rate, with Chair Yellen fiercely defending the practice as a mechanism to finance the Fed’s holdings and securities that generate far higher interest and are repaid to taxpayers. There were a number of partisan issues as well, with Democrats seizing on high unemployment rates among minorities and Republicans concerned about the burden of regulation on small banks.
 
House Passes Debt Ceiling Legislation
Just when you thought it was safe to go back into the proverbial pool without worrying about the debt ceiling, the House passed H.R. 3442, the Debt Management and Fiscal Responsibility Act of 2015.   Though the vote fell just short of a veto proof majority – 267-151 (though 6 Republicans did not vote) it is unlikely that the Senate would take up this bill, which requires the Treasury Secretary to testify before Congress in advance of any future increases in the debt limit. 
 
Financial Institutions Subcommittee Examines CFPB Small Dollar Lending Rule
On Thursday February 11^th, the House Financial Services Financial Institutions and Consumer Credit held a hearing entitled, “Short-term, Small Dollar Lending: The CFPB’s Assault on Access to Credit and Trampling of State and Tribal Sovereignty.”  With eight witnesses divided between two panels, and an issue that sharply divides Democrats and Republicans, it was little surprise that this turned into a marathon, nearly five hour hearing.  During the first panel Republicans focused much of their attention on attacking CFPB Deputy Director David Silberman, while Democrats used as much time defending him and the pending CFPB rules.  Cutting through all of the charged rhetoric on both sides, the hearing essentially boiled down to a philosophical question about whether it was good policy to implement rules that would likely have a seriously adverse impact on about 2/3rds of a market – potentially eliminating a clearly necessary financial product – where the collateral damage of the rule would also potentially eliminate about 1/3 of the market that is offering responsible and not predatory products. 
 
Lew Defends Treasury, Administration Before Ways and Means Committee
On February 11, the House Ways and Means Committee held a hearing entitled “President's Fiscal Year 2017 Budget Proposal.”   The sole witness was Treasury Secretary Jack Lew.   During the hearing a variety of issues were discussed, including the President’s proposed oil tax, corporate inversions and the possibility of corporate tax reform, as well as how to deal with Puerto Rico’s bond crisis.
 
Financial Services Rekindles Future of Housing Debate
On February 11^th, the Housing and Insurance Subcommittee held a hearing entitled, "The Future of Housing in America: Examining the Health of the Federal Housing Administration."  During the hearing,  Edward Golding, the deputy principal assistant secretary for FHA indicated it would continue to remain the policy of the FHA to charge borrowers an annual premium over the entire life of the loan and would ignore requests from housing advocates to modify this policy so that borrowers no longer need to pay premium’s when the loan to value ratio (LTV) of their mortgage reaches 78%.  In addition, Golding rejected suggestions offered by Republican Congressmen to increase the FHA’s capital standard to 4% or for the agency to conduct stress testing like a bank. 
 
Senate
Lew Testifies Before Finance
On February 10, the Senate Committee on Finance held a hearing entitled “The President's Fiscal Year 2017 Budget” with Treasury Secretary Jack Lew as the sole witness.  As expected, the hearing covered many well-worn topics, such as Republican criticism of the Earned Income Tax Credit and Democratic support for the IRS.  In addition, Secretary Lew, Chairman Hatch, Ranking Member Wyden and multiple members of the Committee all raised the pending financial crisis in Puerto Rico – though consensus on how to resolve the problem was not attained.  Another bipartisan issue that was brought up during the hearing was questions about the disparate treatment that financial services companies receive under the Trans-Pacific Partnership (TPP) agreement. 
 
Yellen Completes Second Day of Monetary Policy Hearings
On Thursday, Fed Chair Yellen had her second day of monetary policy hearings, this time in a hearing before the Senate Banking Committee.  Unlike the House hearing the day before, this hearing included more discussions on commodity prices and wage growth, as well as some of the Fed’s regulatory functions.   This included an exchange on the Fed’s role in applying capital insurance standards, as well as the role of the Financial Stability Oversight Council (FSOC) in designating non-bank entities as systemically important financial institutions (SIFIs). Yellen offered little in terms of new insight into either area , but did say that insurance capital standards would be subject to the notice and comment process and also suggested that regulation of SIFI designated companies is likely to be firm-specific. She also made it clear that firms branded by the SIFI designation should have an ability to shed that assessment.
 
Warren send Letter to Perez Alleging Industry Exaggerating Effect of Fiduciary Rule
On Thursday, Democrats Sen. Elizabeth Warren (D-MA) and Rep. Elijah Cummings (D-MD) wrote to Department of Labor (DOL) Secretary Thomas Perez and Office of Management and Budget (OMB) Director Shaun Donovan arguing that the financial services industry is overplaying the consequences of the DOL’s impending rule on fiduciary status for financial advisers. The letter alleges that messages from companies to their investors are much less critical of the impact of the rule than the strong concerns the industry has submitted to the DOL in its rulemaking process. The two Democrats urged both agencies to finalize the rule “as soon as possible.”
 
Select Highlights from the Administration
White House
Obama Releases Final Budget
On Tuesday, the White House released its roughly $4 trillion proposed budget – the final for President Obama – which included requests for more funds to research cancer and combat heroin addiction.  In terms of financial services related items the budget contained many of the usual funding increases including an 11% increase for the SEC and a 32% increase for the CFTC.  In addition, the budget endorsed the creation of open multiple employer plans (MEPs) that allow multiple employers to offer benefits through the same administrative structure as part of a series of proposals designed to incentives greater retirement savings.  Another one of these proposals was the requirement that every employer with more than 10 employees that does not already offer a retirement plan to automatically enroll their workers in an Individual Retirement Account (IRA).
 
Also of note was the proposal to require certain partners in hedge funds, private-equity firms and other businesses organized as “pass-throughs” to pay a 3.8 percent health-care income tax as extension of the "net investment income tax" for Medicare.  This, along with another proposal to require more business owners to pay self-employment taxes, was projected to raise $271.7 billion over the next decade.  In sum, the President’s various revenue proposals were collectively estimated to raise $2.6 trillion over the next ten years.  While these proposals are DOA in Congress they do serve as the foundation for negotiations for the budget and spending bills that will likely be passed at the end of the calendar year.  
 
Commodities Future Trading Commission
US & EU Strike Deal on Derivatives Regulation
On Thursday, regulators from the U.S. Commodity Futures Trading Commission (CFTC) and European Union (EU) finalized a long-negotiated agreement to coordinate rules governing derivative clearinghouses. Under the terms of the deal, American regulations will be considered “equivalent” to those of the EU, ending a multi-year stalemate and allowing for clearinghouses to operate more freely in both jurisdictions. The agreement marks a win for American clearinghouses, European firms doing business in the U.S., and CFTC Chairman Timothy Massad, who had made standardizing regulations with the agency’s European counterparts a priority.
  
Next Week’s Schedule
 
The house and Senate are in Recess