Insights

Financial Services Report

January 17, 2017

Our Take
One looking for a juxtaposition that may shed some light on the current state of world events needs not look any further than this week which starts with the commencement of the World Economic Forum in Davos and concludes with the inauguration of Donald Trump as the 45th President of the United States.    As has been reported, the exclusive attendees at Davos need to take a good look into their echo chamber to determine if their love of open markets and globalization has sown the seeds of the populist “revolutions” that sprung up in 2017.   Whether the reports of the demise of the western world order are real or greatly exaggerated, this new administration is certainly going to do things differently.  Perhaps the thread the combines these two divergent events is that no matter how much things seem like they are changing, they really are just the same.         

Looking Ahead

Near Term

  • Commerce Secretary designee Wilbur Ross gets his hearing on Wednesday, while Treasury designee Steve Mnuchin will appear before the Finance Committee on Thursday.
  • Donald Trump will be inaugurated as the 45th President of the United States on Friday.

The Past Week

Presidential Transition
Mnuchin Hearing Set for Thursday; Dems Ask for but are denied on OneWest Witnesses
The nomination hearing for Treasury Secretary nominee Steven Mnuchin has been scheduled in the Senate Finance Committee for Thursday at 10 a.m. Ahead of the hearing, twenty-five Senate Democrats have asked panel chairman Sen. Orrin Hatch (R-UT) to include witnesses to speak on Mnuchin’s time at OneWest, a bank that foreclosed on thousands of homes at the height of the 2008 financial crisis. The Goldman Sachs executive will face sharp questioning from Democrats, but his confirmation is not expected to be blocked.  
 
SkyBridge Capital Adviser, Goldman Sachs’ Powell Added to Trump White House Team
Last week, reports suggested that the founder of SkyBridge Capital, Anthony Scaramucci, will join President-elect Donald Trump’s White House team as a special adviser. Additionally, Goldman Sachs partner Dina Powell, who reportedly has a close relationship with Ivanka Trump, was named as an adviser to the President-elect on economic initiatives.  
 
Atkins Will Remain in Private Sector
On Thursday, it was reported that the President-elect’s top advisor on financial regulation, Paul Atkins, would not be joining the incoming administration in a formal capacity when Trump takes office on Friday. As a former SEC member, Atkins had been considered on the short list to be the Fed’s Vice-Chair for regulation, but he has told reporters he intends to stay at his consulting firm, Patokmak Global Partners.  
 
Legislative Branch
House
House Passes CFTC Reauthorization Easing Swaps Rules; SEC Oversight Bill
On Thursday, the House approved two financial services bills, including one (H.R. 238) that would reauthorize the Commodity Futures Trading Commission (CFTC), including language to ease some of the agency’s rules related to swaps trades made overseas and an additional provision that would make it more difficult for the regulator to justify new rules. The bill passed 239-182, with support from seven Democrats despite Agriculture Committee Ranking Member Collin Peterson (D-MN) saying it would “hamstring the agency’s efforts” to regulate derivatives. On a similarly partisan basis, the House approved a bill (H.R. 78) 243-184 that would require the Securities and Exchange Commission to consider the cost and benefits of proposed regulations. That bill would also prevent the SEC from issuing a rule unless it could make a “reasoned determination” that the benefits would outweigh the costs.   
 
Bill Changing Process for Federal Rulemaking Passes House
On Wednesday, a wide-ranging bill (H.R. 5) that would force all federal agencies to meet new requirements when issuing rules passed the House on a 238-183 vote. Five Democrats – Reps. Jim Costa (D-CA), Henry Cuellar (D-TX), Stephanie Murphy (D-FL), Collin Peterson (D-MN), and Kurt Schrader (D-OR) – joined a unanimous Republican caucus in voting in favor of the bill.
 
House Approves Angel Investor Bill for 115th Congress
On Tuesday, the House approved a bill (H.R. 79) on a bipartisan 344-73 vote that would give startups more access to so-called “angel investors” who provide capital to early stage entrepreneurs and act in a mentoring capacity. The bill is similar to a measure (H.R. 4498) passed by the House last year.
 
House Dems Urge Trump to Keep Cordray
On Tuesday, shortly after two Republican senators told the President-elect to fire CFPB Director Richard Cordray, House Democrats on the Financial Services, led by Ranking Member Rep. Maxine Waters (D-CA), committee wrote a letter to Trump urging him to keep the embattled federal regulator. Although a recent court case established that the President has the authority to fire the CFPB Director, the lawmakers cautioned against Trump engaging in a “protracted – and likely unsuccessful legal battle to oust” Cordray before his term expires in 2018.  
 
House Dem Asks SEC to Investigate HHS Nominee Price over Health Stocks
On Tuesday, House Democrat Rep. Louise Slaughter (D-NY) wrote to the Securities and Exchange Commission (SEC) requesting that the Commission’s regulators look into the stock trading practices of Health and Human Services Secretary nominee Rep. Tom Price (R-GA). The letter comes after Price recently admitted to making stock trades involving health care companies while serving on the House Ways and Means Health Subcommittee.
 
House Appropriations, Financial Services Committees Take shape
Last week Republicans announced the new “Cardinals” or Appropriations Subcommittee Chiars.   With the retirement of Ander Crenshaw, there is a new Chairman of the House Appropriations Financial Services Subcommittee, Rep. Tom Graves (R-GA).   In addition, Leader Pelosi announced that there would be four new members coming on to the House Financial Services Committee: Reps. Josh Gottheimer (D-NJ), Vincente Gonzalez (D-TX), Charlie Crist (D-FL), and Ruben Kihuen (D-NV).   The House Financial Services Committee is expected to organize when Members return the week of the 23rd.
 
Senate
Brown, Merkley and State Regulators Voice Concerns over Fintech Charter
On Monday, Senate Banking Committee members, Sens. Sherrod Brown (D-OH) and Jeff Merkley (D-OR) wrote to Comptroller of the Currency Tom Curry detailing their concerns with a recently proposed Office of the Comptroller of the Currency (OCC) plan to create a bank chartering process for financial technology, or fintech, companies. Specifically, the senators were concerned that a new charter to non-bank companies would be “at odds with the goals of financial stability, financial inclusion, customer protection, and separation of banking and commerce.” The senators also fear a new process would allow “predatory financial services providers” to spread more quickly and eliminate existing state-based protections. Later in the week, the Conference of State Bank Supervisors wrote their own letter to the OCC offering a strongly worded condemnation of the new charter process. Arguing that the OCC did not have statutory authority, the letter says that any attempt to create a nonbank charter would be “unlawful and invalid.”
 
GOP Senators Ask Trump to Fire Cordray; Brown Fires Back
On Monday, two Republican senators who were initially skeptical of the candidacy of President-elect Donald Trump – Sens. Ben Sasse (R-NE) and Mike Lee (R-UT) – wrote to the President-elect asking him to depose of Consumer Financial Protection Bureau (CFPB) Director Richard Cordray. The letter, which was addressed to Trump transition team chairman Vice President-elect Mike Pence, said that Cordray has moved forward with regulations that harm growth and that his removal would help roll back the controversial agency. Citing pending court cases involving the agency, the letter also requests that the Justice Department stop defending the agency in court. Almost immediately,  Banking Committee Ranking Member Sen. Sherrod Brown (D-OH) responded to the letter with his own statement saying that firing Cordray would “shatter President-elect Trump’s promise to hold Wall Street accountable and protect working people.”
 
Senate Dems Introduce Bill to Force Trump to Divest
On Tuesday, nearly half the Senate Democratic caucus signed on as original co-sponsors to a bill (bill text) that would force President-elect Donald Trump to disclose and divest any potential conflicts of interest. The President-elect’s global network of business dealings has come under increased scrutiny ahead of his inauguration this week, and many ethics officials have decried his plan to transfer the Trump brand over to his two sons as insufficient to address conflict of interest concerns.
 
Senate Banking Dems Question Wells Fargo on Overdraft Income
On Wednesday, Democrats on the Senate Banking Committee wrote to the chief executive of Wells Fargo asking whether the bank’s growth in income from overdraft charges is connected to the phantom accounts scandal uncovered late last year. According to the Financial Times, the bank’s overdraft charge income outpaced that of its competitors during the investigation of its sales practices that were later deemed illegal. The Senators wrote that even if the overdraft income and fake accounts were unrelated, they are concerned that it may reflect “similar troubling consumer sales practices” at the bank.  
 
Select Highlights from the Administration
Department of the Treasury
US, EU Complete Negotiations on Insurance Covered Agreement
On Friday, outgoing Treasury Secretary Jack Lew announced that the US and EU have completed negotiations on a covered agreement for US insurers doing business in the EU. Both the Treasury and Office of the United States Trade Representative (USTR) sent letters to Congress informing them that the discussions were completed. The goal of the agreement, which has been in the works since February 2016, is to resolve uncertainty on the regulation of insurance in both markets while guaranteeing a standard set of protections for American and European consumers.  
 
Federal Deposit Insurance Corporation (FDIC)
FDIC Sues Bank of America for Deposit Insurance Payments
On Monday, the Federal Deposit Insurance Corporation filed suit against Bank of America for $542 million that the federal agency alleges the bank has failed to pay for its deposit insurance. The FDIC believes that for the past five years, Bank of America has underreported its counterparty exposure by failing to account for exposures at the “consolidated entity level,” which amount to “tens of billions of dollars each quarter.” Federal regulators are still calculating the payments that Bank of America may need to pay, and have said the final total may be over $1 billion. A spokesperson for Bank of America said that the bank believes it is “in compliance with the FDIC’s several rules, including those which have been recently interpreted.”
 
Consumer Financial Protection Bureau (CFPB)
CFPB Says 1 in 4 Consumers Threatened by Debt Collectors; Releases Online Debt Sales Report
On Thursday, the CFPB released a new survey saying that over a quarter of all consumers contacted by debt collectors felt threatened. The first-ever national survey also found that 40 percent of consumers contacted by a collector requested that they stop contacting them, but often to little avail. The survey was coupled with a study detailing consumer risks in online debt sales, especially the handling of personal information.  
 
Department of Labor
DOL Provides Answers to Some Questions on Fiduciary Rule
On Friday, the Department of Labor released answers to 35 questions in an effort to bring further clarity for financial advisers and their clients as they work to prepare for the key components of the fiduciary rule to become effective in April.  Among the questions the Department hoped to answer was, “what was a recommendation” and “when is a conversation education or when is it advice.”   The controversial rule is widely expected to be a top priority of the investment industry in the coming year.
  
Securities and Exchange Commission (SEC)
On Thursday, the SEC said that it had added concerns over automated investing advice to its list of potential risks for the upcoming year. The annual prioritization report noted that examinations in the industry will focus on “registrants’ compliance programs, marketing, formulation of investment recommendations, data protection, and disclosures to conflicts of interest.” The prioritization document comes amid a period of change at the agency, with previous chair Mary Jo White giving way to Trump nominee Jay Clayton.
 
Supreme Court
Court to Hear Case on Credit-Card Surcharge Bans
On Tuesday, the U.S. Supreme Court considered a case against a New York law that bans retailers from imposing surcharges on credit-card purchases, with merchants arguing that the law limits their free speech rights. Justices mostly questioned what the New York law specifically prohibits, however, a decision in the case could affect nine other “no-surcharge” states across the country. Retailers use the surcharges to help cover $50 billion in swipe fees that they pay to credit card companies each year.
 
Next Week’s Schedule

Tues. (1/17)

  • Brookings Fiscal Policy Conversation with Fed Governor Brainard – 10:00 AM – The Brookings Institution will hold an event entitled, “The impact of fiscal policy on monetary policy,” featuring remarks from Federal Reserve Governor Lael Brainard. Details here.
  • Hearing: Senate HELP Confirmation Hearing for Education Nominee DeVos – 5:00 PM – The Senate Health, Education, Labor, and Pensions (HELP) Committee will hold a hearing on the nomination of Betsy DeVos to be the next Secretary of Education. This hearing was originally scheduled last week, but was postponed to allow for the nominee to complete ethics and financial disclosures. Details here.

Wed. (1/18)

  • Hearing: Senate Commerce Confirmation Hearing for Commerce Nominee Ross – 10:00 AM – The Senate Commerce Committee will hold a hearing to consider the nomination of Wilbur Ross to be Commerce Secretary. Details here.

Thurs. (1/19)

  • Hearing: Senate Finance Confirmation Hearing for Treasury Nominee Mnuchin – 10:00 AM – The Senate Finance Committee will hold a hearing to consider the nomination of Steven Mnuchin to be Treasury Secretary. Details here.

Fri. (1/20) – Inauguration Day

  • President Trump Inauguration Speech – 12:00 PM – The 45th President of the United States will begin his presidency with a speech on the National Mall.