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Financial Services Report

May 23, 2016

Our Take

If all goes according to plan, this week the House Resources Committee is expected to mark-up legislation to resolve the Puerto Rico fiscal crisis this week.  While the entire process is extremely fragile, assuming that the bill can survive the mark-up, it could be on the House floor as early as the week of June 7th, approved by the Senate shortly thereafter and on the President’s desk before the July 1st deadline for the next bond payment.   While the bumps in the road have been great the fact remains that this is how the proverbial sausage of legislation has traditionally been made.  The new dynamic is that there is a contingent of members of Congress unwilling seem as if they are unwilling to compromise.  As the President recently noted, democracy requires compromise, even when you are 100 percent right, because we live in a democracy not a dictatorship and in a democracy you need work with people to find middle ground, but then also be willing to publicly say “this was as good a deal as we could get.”   In this era of balkanized media sources, with ever more people getting their news from an echo chamber of their choosing, it becomes harder for Congress to reach those compromises, in part because Congress used to have to debate differences of opinion, but now it seems to have to debate differences of fact.  That said, this Puerto Rico fiscal crisis solution, if enacted, would be example that Congress still has the ability to rise to the occasion and find consensus.

Looking Ahead

Near Term

  • House Natural Resources Committee is expected to mark-up its Puerto Rico solution.
  • House Financial Services Committee and the Senate Banking Committee both take on a sanctions motif with hearings about terrorist financing and Iranian sanctions.
  • The full Senate Chamber is expected to start consideration of its version of the National Defense Authorization Act (NDAA) one week after the House passed its own version last week.
  • The House will take up the Energy and Water Appropriations bill before turning to legislation to modernize a law to protect individuals from toxic chemicals.  Both chambers will leave for the Memorial Day District Work period at the completion of the week.

Further Out

  • On June 2nd the Consumer Financial Protection Bureau (CFPB) will be holding a field hearing in Kansas City, Missouri on small dollar lending, featuring remarks from CFPB Director Richard Cordray. The Bureau may release anticipated proposed rulemaking on small dollar lending at the event. Details here.
  • On June 9th the Federal Trade Commission will host a forum series exploring emerging financial technology and its implications for consumers. Details here.
  • On June 23, 2016, the OCC will hold a forum in Washington, D.C. on “Supporting Responsible Innovation in the Federal Banking System.”  The forum will bring together representatives from banks, financial technology companies, and community and consumer groups to discuss developments, opportunities, and challenges related to financial innovation. 

 

The Past Week

Legislative Branch
 

House
Capital Markets Subcommittee holds hearing on Trio of Bills
On Tuesday, the House Financial Services Committee's Subcommittee on Capital Markets and Government Sponsored Enterprises held a hearing entitled “Legislative Proposals to Enhance Capital Formation, Transparency, and Regulatory Accountability.” According to the Chairman, the hearing focused on the “the current competitiveness of U.S. capital markets and regulatory burdens impacting capital formation, job creation, and economic growth.”   During the hearing, the subcommittee examined three Republican proposals to scale back private equity firm regulations, heighten economic analysis at the Securities and Exchange Commission (SEC), and establish new rules for proxy advisory firms. The first measure targets a Dodd-Frank provision that required private equity funds with more than $150 million to register with the SEC, while the other two would mandate the SEC to perform additional analysis when proposing rulemaking and require proxy adviser firms to register with SEC and adhere to certain conduct standards.
 
Financial Institutions Subcommittee Holds Hearing on CFPB Arbitration NPRM
On Wednesday, at  a hearing of the House Financial Services Financial Institutions and Consumer Credit Subcommittee, Members discussed the merit of a recent proposed rulemaking from the Consumer Financial Protection Bureau (CFPB) to limit the use of arbitration for dispute resolution for certain financial products and services. The proposal was fiercely criticized by Republican members, who insist that the Bureau’s rule would only increase costs for business, without any positive impact for consumers. Although they were more measured in their remarks, most Democrats were supportive of the CFPB proposal, which would likely encourage the use of class action lawsuits for dispute resolution.
 
Republicans and panelists both heavily faulted the study that forms the basis of the CFPB’s rule, saying that certain class-action outliers manipulated the data to promote a conclusion that litigation was superior to arbitration. Additionally, some compromise provisions were offered by panelists – such as class-action arbitrations, further education on arbitration clauses to consumers, and automatic notices to the CFPB on disputes with potential class implications – but none were endorsed enthusiastically by Members of either party.
 
Financial Services Subcommittee Continues to Examine Federal Reserve
On May 17, the House Financial Services Committee's Subcommittee on Monetary Policy and Trade held a hearing entitled “Interest on Reserves and the Fed's Balance Sheet.” The hearing focused on the Federal Reserve's policy of paying interest on excess reserves and issue that was quite controversial at the end of last year as the excess dividends were being considered as a “payfor” various legislative initiatives. 
 
House Oversight Committee Advances Fed Audit Legislation
On Tuesday, the House Oversight and Government Reform Committee approved an “Audit the Fed” bill that would subject the Federal Reserve’s monetary policy decisions to Government Accountability (GAO) reports and recommendations. The proposal, sponsored by Rep. Thomas Massie (R-KY), is similar to a bill that earned bipartisan support in the House during the last Congress. However, Senate Democrats blocked Sen. Rand Paul’s Audit the Fed measure in January, indicating that the legislation is unlikely to reach the president’s desk during the current Congress. Fed Chair Janet Yellen has opposed the measure, saying it would undermine the central bank’s independence.
 
Waters Introduces Bill Facilitating Credit Report Fixes
On Thursday, House Financial Services Committee Ranking Member Maxine Waters (D-CA) introduced a measure (H.R. 5282) aiming to strengthen requirements for credit reporting agencies to ensure their credit reports are accurate. Specifically, the bill intends to cut punitive retention periods for adverse credit information to four years, increase monitoring of credit score use, and update the credit report dispute process.
 
Senate
Senate Banking Committee Advances SEC Nominees; Brown Calls for Further Action
On Thursday, the Senate Banking Committee’s approval of two delayed nominations to the Securities and Exchange Commission generated an appeal from Ranking Member Sherrod Brown (D-OH) to push forward nominees for other posts. Sen. Brown called for committee leadership to “clear the growing backlog” of key nominations, notably the 15 nominations that the committee has received since January 2015. The nominations approved last week – which were delayed after a partisan impasse in February – include Hester Peirce and Lisa Fairfax to be respective Republican and Democrat Commissioners on the SEC, Jay Lerner to be Inspector General of the FDIC, and Amias Gerety to be Assistant Secretary for Financial Institutions at the Treasury.
 
Senate Dems Write Letter to GAO Requesting Info on Mobile Payments Regs
On Monday, Senate Democrats Tom Carper (D-DE), Gary Peters (D-MI), and Chris Coons (D-DE) wrote a letter asking for additional information on the regulatory scheme for mobile payments at the state and federal payments. The senators touted the innovation in the sector, but added that payment facilitators are currently overseen by a “disparate group of regulators,” and that Congress has a responsibility to “ensure that laws and regulations related to mobile payments foster innovation while protecting consumers.”   
 
Banking Subcommittee Examines Access to Capital Issues
On Thursday, the Senate Banking Committee's Subcommittee on Securities, Insurance, and Investment held a hearing entitled “Improving Communities' and Businesses' Access to Capital and Economic Development.”  The hearing, among other things, focused on the ability of middle market private equity funds to provide capital to small and mid-sized businesses.   It also examined legislation related to Business Development Companies and Money Market Funds. 
 
Senate Judiciary to Take up ECPA Reform Bill
The Senate Judiciary Committee announced it would hold a mark-up of a bill that broadens the warrant requirement for law enforcement access to e-mails by replacing the text of a Senate measure with the text that had passed the House Judiciary Committee last week.   That bill, H.R. 699, would eliminate language in the Electronic Communications Privacy Act treating e-mails more than 180 days old as abandoned and thus obtainable with a subpoena or court order, rather than a warrant.
 

Select Highlights from the Administration

Federal Reserve
Fed Governor Previews Upcoming Insurance Regulation; Rulemaking Expected in ‘Weeks’
On Friday, Federal Reserve Governor Daniel Tarullo spoke at the National Association of Insurance Commissioners (NAIC) annual event in Washington and previewed upcoming rulemaking from the Fed on the insurance industry. Tarullo outlined a two-part approach for capital standards for insurers, one for firms that are supervised because they own a bank or thrift and another for firms designated as systemically important. For insurance companies that FSOC has not designated as systemically important, Tarullo said the Fed would take a "building block approach" that would aggregate capital requirements across different legal entities of the same insurer and asserted that the regulatory burden would be “relatively low.” He also emphasized that he did not think the Fed would not adopt international regulatory regimes, such as Europe’s Solvency II or proposals from the International Association of Insurance Supervisors.
 
Treasury
Officials Ask for Tools to Monitor Treasury Trades
On Monday, policymakers moved to improve oversight of the $13 trillion Treasury market by asking the Financial Industry Regulatory Authority (FINRA) to create a data feed for government officials to use to track Treasury trades. The announcement marks a departure from the laissez-faire approach regulators have previously taken in the market, and may be a result of the violent swings seen in the Treasury markets on Oct. 15, 2015, when 10-year notes plummeted and rebounded without any obvious cause. Officials have increasingly sought real-time access to market data as faster trading firms now represent more than half of Treasury trading volume.    
 
Consumer Financial Protection Bureau (CFPB)
CFPB Issues New Guidance on Practices for Deposit Account Discrepancies
On Wednesday, the CFPB, joined by four other federal regulatory agencies, issued guidance on how financial institutions should approach consumer deposit discrepancies. The guidance suggests that banks should avoid or reconcile, or resolve, discrepancies between the amount credited to an account and how much was actually deposit.
 
Securities and Exchange Commission
SEC to Propose Fiduciary Rule April 2017
On Thursday, the SEC released a long-term regulatory agenda that, among other things, suggested that it plans to propose rules for its own “fiduciary rule” next spring.  The agency does not have to adhere to the timetable, and while Chair Mary Jo White has offered support for a fiduciary rule, she also indicated last year that a majority of the five-person commission does not yet agree with her, though with two new members expected to join shortly, perhaps the math has changed.
 
White Suggests More Regulations Coming for ETFs
On Friday, SEC Chair Mary Jo White hinted in a speech for the Investment Company Institute (ICI) that new regulations may be coming for the exchange-traded fund industry. SEC staff have been reviewing trading during the May 2010 flash crash and unusual price moves for stocks on Aug. 24, 2015 to determine if additional regulation beyond enhanced disclosure is necessary.
 

Next Week’s Schedule

Tues. (5/24)

  • Markup: House Natural Resources on Puerto Rico Debt Bill – 10:00 AM – The House Natural Resources Committee will hold a markup for H.R. 5278, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Details here.  
  • Legislative Hearing: House E&C Subcommittee on 17 FTC Bills – 10:00 AM – The House Energy and Commerce Commerce, Manufacturing, and Trade Subcommittee will hold a legislative hearing on 17 bills related to the Federal Trade Commission (FTC). Details here.
  • Hearing: House Financial Services Task Force on Terror Financing – 10:00 AM – The House Financial Services Committee Task Force to Investigate Terrorism Financing will hold a hearing entitled “Stopping Terror Finance: A Coordinated Government Effort.” Details here.
  • Hearing: House Small Business on Sharing Economy – 10:00 AM – The House Small Business Committee will hold a hearing entitled, “The Sharing Economy:  A Taxing Experience for New Entrepreneurs, Part I.” Details here.
  • Hearing: Senate Banking on Iran Sanctions – 10:30 AM – The Senate Banking Committee will hold a hearing entitled, “Understanding the Role of Sanctions Under the Iran Deal.” Details here.
  • Hearing: Senate Finance on Corporate Integration Considerations – 10:00 AM – The Senate Finance Committee will hold a hearing entitled, “Debt versus Equity: Corporate Integration Considerations.” Details here.

Wed. (5/25)

  • Markup: House Appropriations Subcommittee on Financial Services Appropriations – 9:30 AM – The House Appropriations Subcommittee on Financial Services and General Government will markup the FY 2017 Financial Services Appropriations Bill. Details here.
  • Markup: House Natural Resources on Puerto Rico Debt Bill – 10:00 AM – The House Natural Resources Committee will hold a markup for H.R. 5278, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). Details here.  
  • Meeting: FDIC Advisory Committee on Economic Inclusion on Mobile Banking – 9:00 AM – The Federal Deposit Insurance Corporation (FDIC) Advisory Committee on Economic Inclusion (ComE-IN) will hold a meeting on mobile banking research and payment system modernization among other topics. Details here.
  • Hearing: Senate Banking on Iran Sanctions – 2:30 PM – The Senate Banking Committee will hold a hearing entitled “Understanding the Role of Sanctions Under the Iran Deal: Administration Perspectives,” featuring testimony from Under Secretary for Terrorism and Financial Crimes Adam Szubin. Details here.

Thurs. (5/26)

  • Meeting: FACI on Flood Insurance, Globalization of Insurance Marketplace – 1:00 PM – The Treasury Department’s Federal Advisory Committee on Insurance (FACI) will hold a meeting on the affordability of the National Flood Insurance Program and the globalization of the insurance marketplace, among other topics. Details here.
  • Speech: Fed Governor Powell at Peterson Institute – 12:15 PM – Federal Reserve Governor Jerome Powell will give a speech entitled “Recent Economic Developments, the Productive Potential of the Economy, and Monetary Policy: Learning from the Recovery,” at the Peterson Institute for International Economics. Details here.
  • Hearing: House Small Business on Sharing Economy – 10:00 AM – The House Small Business Committee will hold a hearing entitled, “The Sharing Economy:  A Taxing Experience for New Entrepreneurs, Part II.” Details here.
  • Meeting: SEC Closed Meeting – 2:00 PM – The Securities and Exchange Commission (SEC) will hold a closed meeting at SEC Headquarters in Washington. Details here.