Financial Services Report

Our Take

Because of a quirk in the calendar, millions of Americans will be rushing to the Post Office today to file their taxes.  Without getting into a political discussion about whether our taxes are too high, or not high enough, it is worth noting that many defenders of the federal income tax often quote Supreme Court Justice Oliver Wendell Holmes, who famously said that taxes are the cost of living in a civilized society.   That quote comes from a 1927 case, Compania General de Tabacos de Filipinas v. Collector of Internal Revenue,  and the full quote is:

It is true, as indicated in the last cited case, that every exaction of money for an act is a discouragement to the extent of the payment required, but that which in its immediacy is a discouragement may be part of an encouragement when seen in its organic connection with the whole. Taxes are what we pay for civilized society, including the chance to insure. 

What does this have to do with anything?   While the rhetoric on the Presidential campaign trail this year continues to become more and more bombastic, one of the few areas that comes out of all the candidates is the need to reform our tax code.  While almost all agree that our code is in dramatic need for reform, the past few years have shown that there is less consensus on what shape that reform should take.   While all sides will continue to work to make reform a reality under the next President, it is important to note the entirety of Holmes’ statement and realize that perhaps until all sides see the “organic connection with the whole” it will continue to be a challenge to get reform across the finish line.     

Looking Ahead

Near Term

• The House continues to kill floor time, this week with legislation this week focused on the “tax day” motif.   The House is scheduled to take up six bills imposing various restrictions on the Internal Revenue Service.
• The Senate is expected to conclude its work on the FAA bill this week before turning its attention to the Energy and Water appropriations measure, the first appropriations bill to get to the floor this year.  The Energy Bill could also see action.
• The first FSOC meeting since the Met Life decision will take place on Monday, April 18^th.  The FSOC is scheduled to continue to consider pending work on the asset management industry and will meet in executive session about the Council’s 2016 annual report.

 
The Past Week

Legislative Branch

House
House Passes FSOC, Small Bank Regulation Bills over White House Veto Threat
On Thursday, House lawmakers approved a pair of financial services measures over opposition from congressional Democrats and the White House. The first (H.R. 3340), passed on a 239-179 vote, would subject the Financial Stability Oversight Council (FSOC) and the Treasury Department’s Office of Financial Research to the congressional appropriations process. A second measure (H.R. 3791), approved 247-171, would allow banks and thrifts with assets of less than $5 billion to incur higher amounts of debt when acquiring another firm. The Administration has threatened a veto of both measures.

 
House Panel Advances CFPB Reform, OLA Repeal Bills
On Wednesday, the House Financial Services Committee held a markup for two bills that targeted provisions in the 2010 Dodd-Frank financial reform law. The first bill (H.R.1486) would subject the Consumer Financial Protection Bureau (CFPB) to the congressional appropriations process, while the other (H.R. 4894) would repeal Dodd-Frank’s title II, which includes the Federal Deposit Insurance Corporation’s orderly liquidation authority (OLA). Democrats and Republicans and Democrats on the panel split sharply on both issues, with the bills eventually passed on party line votes of 33-20 and 34-22, respectively.     
 
House Passes Bill Changing Bankruptcy Process for Large Banks
On Tuesday, a bill (H.R. 2947) to create a new bankruptcy process for large financial institutions – those with $50 billion or more in assets – passed the House floor by a voice vote. The measure is intended to expedite the resolution of failed institutions and would allow for a quick transfer of assets so that operations could continue as a company restructures its debt. The bill is considered largely noncontroversial and the White House has not indicated its support or opposition.
 
Puerto Rico Bill Mark-up Delayed
On Wednesday, the Natural Resources Committee abruptly canceled its planed vote on a rescue package for Puerto Rico, as conservatives balked at provisions of the plan.  In response, Speaker Ryan held a conference meeting on the issue on Friday, though it is unclear if the GOP Conference had coalesced around a plan forward.  The issue of how to resolve the Puerto Rican debt crisis appears to be heading down a similar path of past crises, with Republican leadership caught between the rock of pleasing its most conservative members and the hard place of needing Democratic votes to ultimately get something done.   At the moment it is unclear whether a legislative solution can be enacted before the May 1^st deadline that had been set by the Speaker. 
 
Dems Demand Hearing for Insider Trading Bill
In a letter sent Wednesday, Democratic members of the House Financial Services Subcommittee on Capital Markets asked Subcommittee Chairman Scott Garrett (R-NJ) for a hearing on proposed legislation (H.R. 1625) that would codify a prohibition on insider trading. The letter was signed by the bill’s sponsor Rep. Jim Himes (D-CT) and Subcommittee Ranking Member Carolyn Maloney (D-NY).
 
Senate
Banking Committee Hears About Trends in the Fixed-Income Markets
On April 14, the Senate Banking Committee's Subcommittee on Securities, Insurance, and Investment and Subcommittee on Economic Policy held a joint hearing entitled “Examining Current Trends and Changes in the Fixed-Income Markets.”  Witnesses for the hearing were Fed Governor Jerome Powell, and Antonio Weiss, Counselor to the Secretary, U.S. Department of the Treasury.  While Chairman Crapo opened the hearing with a reference to the “flash rally” in Treasury’s from a few years ago, both Powell and Weiss reported that the current state of the fixed income markets is stable and functioning well.  Nonetheless, much of the hearing was devoted to concerns about market liquidity with the Senators and the witnesses sparing over the proper balance between regulation and market liquidity. 

 
Warren Claims GAO Report Shows ‘Dramatic’ Increase in Nonbank Mortgages
On Monday, leading Democrats from both chambers, Sen. Elizabeth Warren (D-MA) and Rep. Elijah Cummings (D-MD), sent a letter to Consumer Financial Protection Bureau (CFPB) Director Richard Cordray encouraging further action on nonbank mortgage servicers after the release of a Government Accountability Office (GAO) report detailing their prevalence. Specifically, the lawmakers ask for stronger oversight and “comprehensive data” on the identity and number of nonbank mortgage servicers. According to the GAO report, non-bank entities serviced 24% of all mortgages in 2015 vs 6.8% in 2012.  
 
Senate Appropriations Subcommittee Questions SEC Chair on Fiduciary Rule, Market Liquidity.
On Wednesday, in a hearing of the Senate Appropriations Subcommittee on Financial Services and General Government, senators discussed the fiscal year 2017 budget of the Securities and Exchange Commission (SEC) with SEC Chair Mary Jo White. In discussion with senators, Chair White confirmed that the SEC is not considering any rulemaking regarding the disclosure of political contributions and that market liquidity is a “issue of concern.” She also advocated for the SEC to move forward with a uniform fiduciary standard – without criticizing the Department of Labor’s recently finalized rule – but noted that such an effort is unlikely in the near future.
 
Select Highlights from the Administration

Federal Reserve (Fed)
Fed and FDIC Determine Most SIFI Bank’s Living Wills Insufficient
On Tuesday, the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve announced that the so-called “living wills” submitted by systemically important banks were not credible to produce an “orderly resolution” in the event of a financial crisis. The regulators ordered five large U.S. Banks – J.P. Morgan Chase, Wells Fargo, Bank of America, Bank of New York Mellon, and State Street – to make significant revisions to the wills by October 1 of this year or face possible regulatory sanctions.

However, a Government Accountability Office (GAO) report also released last week suggested that the financial regulators may provide more detailed information on the criteria used to evaluate the living wills and give big banks more time to complete them. GAO said the move would ensure that the banks have enough time to incorporate the regulators’ feedback into their plans.
 
Consumer Financial Protection Bureau (CFPB)
CFPB in Federal Appeals Court
On Tuesday, the DC Circuit Court heard arguments in PHH Corp. v. Consumer Financial Protection Bureau.  The case, which could have serious ramifications for the Bureau, is the result of the first administrative appeal of a CFPB ALJ case.   Under the Bureau’s set-up Director Cordray hears all administrative appeals and in the PHH case he upheld the CFPB’s appeal but also increased the penalty from $6.4 million to $109 million dollars.  In response, PHH appealed to the DC Circuit Court (also a first) challenging the fine and questioning the constitutionality of the bureau's single-director structure.  Reports of the hearing indicated that the three Republican appointed Judges seemed skeptical about the constitutionality of the CFPB’s single director framework.  

 
Next Week’s Schedule
On Tuesday the House Financial Services Committee will hold a hearing on countering the sale of illicit plundering by ISIS – 10:00am – The House Financial Services Task Force to Investigate Terrorism Financing will hold a hearing entitled, “Preventing Cultural Genocide: Countering the Plunder and Sale of Priceless Cultural Antiquities by ISIS.”  Details here.
 
On Thursday the House Financial Services Subcommittee will hold a hearing on Oversight of SEC – 9:15 AM – The House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises will hold a hearing entitled “Continued Oversight of the SEC’s Offices and Divisions.” Details here.
 
On Thursday the Senate Finance Committee will hold a hearing on Customs Oversight, Trade – 2:00 PM – The Senate Finance Committee will hold a hearing entitled, “Oversight of the United States Customs and Border Protection Agency,” including discussion on the Trans-Pacific Partnership (TPP). Details here.