Financial Services Report

Our Take

The 2015 Congressional calendar was one defined by a series of statutorily imposed deadlines that gave us a modicum of certainty – in as much as that is ever possible with the United States Congress – of when, and in most cases “what” was coming down the pike.   This year, and perhaps in large part due to efforts to return to “regular order” the ability to plan and predict has been less clear.   This has been most apparent in the consideration of the spending bills.  While the House is set to try to pass another one this week, Senate Democrats blocked the usually popular Defense Spending bill last week, and all but made certain that there would be a continuing resolution for funding the government in September.  At issue is whether that measure – known in town as a CR – will keep the government open until a lame duck session or whether it will punt all spending decisions into March and put the questions on the new President’s desk.   Speaking of which, as of this writing, Secretary Clinton is a nearly 80% favorite to win the election in November – but as any gambler know – 5:1 odds aren’t impossible.  Clearly this is a year of unpredictability – and it looks like we should anticipate a very bumpy ride over the next 120 days until the election.   

Looking Ahead

Near Term

• Congress has just one week left until their scheduled recess for the national conventions and the traditional August break, with a slate of significant time-sensitive legislation still awaiting action. Namely, the body’s to-do list includes airport security and Federal Aviation Administration (FAA) reauthorization, Iran sanctions, and a long-debated funding package to combat the Zika virus.   
• The House Financial Services Committee has a busy week planned, with multiple hearings plus a mark-up related to a variety of issues dealing with Iran and the Ex-Im bank.  One of the hearings will be about the online lending component of FinTech.  Hopefully this hearing presents an opportunity for policymakers to define, at least this portion, of the FinTech phenomenon.  If not, at least the hearing will spawn even more articles and think pieces. 
• Chairman Hensarling has also scheduled a hearing on his “Financial Choice” bill that would replace Dodd-Frank. 
• The Oversight and Government Reform Committee is getting in on the financial services action with a hearing on the FDIC bank charter process. 

 
Further Out

• Nothing but crickets on Capitol Hill until after Labor Day as Congress starts its summer recess early due to the Presidential nominating conventions at the end of the week.

 
The Past Week

Legislative Branch
House
House Passes Financial Services Spending Bill, Includes Block of CFPB, SEC Dodd-Frank Rules
On Thursday evening, the House approved the Financial Services spending bill (H.R. 5485) on a 239-185 party line vote. The legislation included a series of amendments that were comprised of bills that had passed the Financial Services Committee or the full house.  Many of which that were considered poison bills by Democratic leadership, even if the underlying legislation had passed previously with broad bipartisan support.   Examples of these “riders” included provisions that would block the designation of nonbank systemically important financial institutions (SIFIs), prevent the Securities and Exchange Commission from implementing a rule requiring proxy access disclosure of board director nominees, and stop the Consumer Financial Protection Bureau (CFPB) from issuing guidance on auto lending.  
 
Crowdfunding, Innovation Bills Passed by House
On Tuesday, House lawmakers approved a pair of financial services measures by significant margins. The first (H.R. 4855), approved on a nearly unanimous 394-4 vote, would raise the threshold for projects to be exempted from securities rules and alter rules on capital formation, disclosure, and registration requirements in order to encourage investors to raise money through crowdfunding. The second (H.R. 4854), passed on a vote of 388-9, would expand the exemption for venture capital funds to avoid being defined as an “investment company.”  
 
Lee Amendment on Removing Fiduciary Rule Rider Fails in Labor-HHS Markup
On Thursday, the House Appropriations Subcommittee on Labor, Health and Human Services (HHS), and Education held a markup of the Labor-HHS spending bill. During the markup, Congresswoman Barbara Lee (D-CA) offered an amendment that would remove 15 riders in the bill, including one that would preclude the Labor Department from implementing its fiduciary rule, but the amendment failed by a party line vote. The bill passed the subcommittee by a party line vote and will be marked up by the full committee on Wednesday.
 
Cummings, Merkley Introduce Bill to Protect Delinquent Borrowers
On Thursday, the bicameral Democrat pair of Rep. Elijah Cummings (D-MD) and Sen. Jeff Merkley (D-OR) introduced legislation that would make it more difficult for banks and other creditors to cut into workers’ paychecks to collect owed money. The bill would set a new federal limit on how much of an individual’s paycheck may be garnished by creditors seeking to collect overdue debt. Current law allows creditors to obtain a court order taking as much as 25 percent of a person’s wages to pay back various types of debt.
 
Senate
Bipartisan Group of Senators Urge FHFA to Wait for Congressional Input on Housing Finance Reform
On Thursday, a group of six bipartisan senators led by Sen. Bob Corker (R-TN) wrote a letter urging Federal Housing Finance Agency (FHFA) Director Mel Watt to hold off on releasing mortgage giants Fannie Mae and Freddie Mac from government conservatorship until Congress finishes its effort on housing reform. The letter asserts that discharging Fannie and Freddie would leave taxpayers liable to a bailout and that Congress will likely act on the issue next year.
 
Brown Urges SEC to Toughen Rules on Mutual Funds, Derivatives
On Wednesday, Senate Banking Committee Ranking Member Sen. Sherrod Brown (D-OH) wrote a letter asking Securities and Exchange Commission Chair Mary Jo White to clarify guidance on how mutual funds should categorize their assets. The letter emphasized the importance of transparency and said that “more detailed guidance” could provide considerable benefit to both investors and the SEC by reducing reliance on the determinations made by individual funds.
 
Select Highlights from the Administration
Securities and Exchange Commission
SEC Looking to Require Advisors and Investment Companies to Perform Stress Tests
On Tuesday, Securities and Exchange Commission (SEC) chief of staff Andrew Donohue suggested that the agency is working on a new proposed rule to require large investment advisors and investment companies to perform stress testing. The announcement follows the SEC’s June release of a plan to require investment advisors to implement business continuity and transition plans.
 
Federal Reserve
After Bank Hacks, Federal Regulators Working on Cybersecurity Rules
On Friday, industry outlets reported that the Federal Reserve – in conjunction with the Office of the Comptroller of Currency (OCC) and Federal Deposit Insurance Corporation (FDIC) – is working on rules that would require banks to have a baseline of protection against cyber threats. The move is seen as a response to the increasing frequency and severity in which financial institutions have been attacked by cyber criminals, with regulators focusing on preventing a breach that could have systemic effects. The agencies will likely seek public input before going through a prolonged rule process in 2017.   
 
Fed Gives Banks Extra Year to Comply with Volcker Rule
On Thursday, the Federal Reserve announced that it would extend the compliance date for banks to divest their ownership interests in private-equity and hedge funds to July 21, 2017. Under the rule, firms cannot engage in proprietary trading and also own or sponsor hedge funds, with the extra year of compliance being the last of three that the Fed could allow in order to avoid market disruptions due to divestitures.
 
Department of Labor
DOL Issues Correction in Fiduciary Rule Best Interest Contract
On Thursday, the Department of Labor (DOL) published a corrected version of the Best Interest Contract (BIC) exemption to ensure that insurance companies could use the BIC in its activities. The rule as originally written would have only allowed insurers that have completed an actuarial review with an independent firm of actuaries to use the BIC.
 
Next Week’s Schedule

Tues. (7/12)

• Hearing: House Financial Services on Financial CHOICE – 10:00 AM – The House Financial Services Committee will hold a hearing entitled, “Making a Financial Choice: More Capital or More Government Control?” Details here.
• Hearing: House Financial Services Subcommittee on FinTech – 2:00 PM – The House Financial Services Subcommittee on Financial Institutions and Consumer Credit will hold a hearing entitled, “Examining the Opportunities and Challenges with Financial Technology (“FinTech”): The Development of Online Marketplace Lending.” Details here.

 
Wed. (7/13)

• Hearing: House Ways and Means Subcommittee on Digital Trade and Exports – 10:00 AM – The House Ways and Means Subcommittee on Trade will hold a hearing entitled, “Hearing on Expanding U.S. Digital Trade and Eliminating Barriers to U.S. Digital Exports.” Details here.
• Hearing: House Financial Services on HUD Accountability – 10:00 AM – The House Financial Services Committee will hold a hearing entitled, “HUD Accountability,” featuring Housing and Urban Development Secretary Julian Castro. Details here.
• Hearing: House Oversight on FDIC Application Process – 10:00 AM – The House Oversight and Government Reform Committee will hold a hearing entitled, “Oversight of the FDIC Application Process.” Details here.
• Hearing: House Agriculture Committee – 10:00 AM – The House Agriculture Committee will hold a hearing entitled, “Examining the CFTC’s Proposed Rule: Regulation Automated Trading.” Details here.

 
Thurs. (7/14)

• Hearing: Senate Banking on Financial Risks of China – 10:00 AM – The Senate Banking Committee will hold a hearing entitled “Evaluating the Financial Risks of China.” Details here.
• Hearing: House Financial Services Subcommittee on FSOC and SIFI Designations – 11:00 AM – The House Financial Services Subcommittee on Oversight and Investigations will hold a hearing entitled, “The Financial Stability Oversight Council and the Designation of Non-Bank Financial Companies.” Details here.