Financial Services Report

February 15, 2017

Our Take

Earlier this week, in a very excellent piece that ran in Axios (totally worth adding to the morning subscription list if you haven’t already), Jim VandeHei laid out a very rationalized reason why he thinks the current state of American politics will only get worse.  While he may be correct, it seems the real question is one of scope – how long will it be worse before it gets better.  For years, there appeared to be a silent majority that understood, and more importantly, appreciated the American tradition of compromise.  The success of the tea party in 2010, and whatever liberal reflection is currently rising like a phoenix out of the ashes of the 2016 election, are willing to forgo incremental changes achieved via compromise in favor of intransigence.  Whether the anger currently being demonstrated on the left will lead to the same results is yet to be determined.  At the end of the day, Democrats, even liberal stalwarts like Senator Edward Kennedy, were always willing to take half a loaf in order to get the deal made.  For years, they had some Republicans willing to dance.  It seems like the music has stopped… for now. But even minor changes in the incentives to reach across the aisle could alter that process, and with the consummate deal maker sitting in the White House those changes could come sooner than conventional wisdom might think.

Looking Ahead

Near Term

  • Fed Chair Janet Yellen will appear before the House and Senate banking committees on Tuesday and Wednesday this week as part of her statutorily required semi-annual appearance. 
  • Newly minted Housing and Insurance Subcommittee Chairman Sean Duffy will helm his first hearing when the subcommittee examines the recently signed US-EU Covered agreement on Insurance.
  • The House will take up a series of CRAs this week, including two that would roll-back rules that allow auto-enrolling employees into state-run retirement plans, as well as another rule that allowed large cities and counties to set up auto-enrollment retirement savings programs.
  • Steve Mnuchin should be confirmed as Treasury Secretary by the Senate on Monday evening.

Further Out

  • With the House and Senate in recess (or as they like to say, District Work Period) for the coming week it will be interesting to see if the protests continue
  • Donald Trump is expected to give an address to a joint session of Congress on February 28th

The Past Week

Legislative Branch
House Set to Take up CRA’s for two Obama-era Retirement Rules
On Wednesday, House Education and Workforce Committee members Reps. Tim Walberg (R-MI) and Francis Rooney (R-FL) introduced a pair of resolutions of disapproval aimed at rolling back Obama-era regulations governing the treatment of small business retirement plans. Specifically, the first resolution (H.J. Res. 66)would eliminate the regulatory safe harbor that encouraged private-sector plans to use state-run individual retirement accounts (IRAs). The second resolution (H.J. Res. 67) would block the rule that extended the safe harbor to include city and county governments’ retirement plans. The Congressional Review Act (CRA) stipulates that Congress may undo any agency rule finalized in the last 60 legislative days of the previous session. The resolutions are expected to reach the House floor this week.
GSEs Could Use Alternative Credit Scoring Under New House Bill
A bipartisan group of House lawmakers introduced legislation (H.R. 898) last week that would enable Fannie Mae and Freddie Mac to consider alternative credit scoring models when making mortgage purchasing decisions. The bill, dubbed the Credit Score Competition Act, is backed by Republican Rep. Ed Royce (R-CA) and Democratic Reps. Kyrsten Sinema (D-AZ) and Terri Sewell (D-AL). “Alternative credit score consideration by the GSEs is a win-win,” said Rep. Royce in a statement. “It opens up the market in a responsible manner for those qualified to buy a home and eliminates the government-backed monopoly in credit scoring.”
E&C Subcommittee Passes Medicaid ‘Annuity Loophole’ Bill
On Tuesday, the House Energy and Commerce Subcommittee on Health passed a bill (H.R. 181) that would consider income from annuities when determining eligibility for Medicaid. The bill, which was paired with another bill (H.R. 829) aiming to add additional scrutiny to Medicaid eligibility, was passed on a party line vote in the subcommittee, 19-13.
Warren Highlights Industry Support for ‘Fiduciary’ Rule
Perhaps knowing of the immediacy of future activities related to the issue that were to come later in the week (see below), Senator Elizabeth Warren (D-MA) penned a letter on Tuesday to the acting head of the Labor Department urging him not to repeal the Obama Administration’s “fiduciary” rule, in part because it has received industry support. Last month, the Massachusetts senator wrote a letter to 33 companies gauging their views on the rule. In last week’s message, she noted that more than half of the companies responded, and that their overall message was clear: “This rule is good for workers saving for retirement and companies are prepared to meet the compliance deadline.” Other companies said they have spent cash to prepare for the measure and will be ready to serve customers by April 10 when the rule goes into effect.  It appears that generating the appearance of a split in the industry, combined with banking on the companies commitments due to sunk costs, is going to be part of a one-two punch that supporters of the rule will use in its defense.
Perdue Urges Colleagues to Disavow House Proposal for “Border Adjustment Tax”
On Wednesday, Sen. David Perdue (R-GA) clearly telegraphed the uphill battle that proponents for tax reform will face this year, when he sent a dear colleague letter urging Senators to renounce a “border adjustment tax” (BAT) currently under consideration by the House.  Calling the proposal “regressive” Senator Perdue claimed the 20 percent tax on all imports would raise consumer prices and halt economic growth, and cited a study that reported a 20 percent employment decline in some industries if the tax is imposed.   The BAT is seen by many as a critical component of the House’s reform plan, though it is unclear how much, if any, support there is for the concept in the Senate. 
Brown, Reed, Merkley Urge Fed to Strengthen, Finish Rules to Curb Wall Street Commodity Ownership
On Thursday, Sens. Sherrod Brown (D-OH), Jack Reed (D-RI), and Jeff Merkley (D-OR) penned a letter to the Federal Reserve urging the Fed to strengthen and complete its proposed rules regarding Wall Street banks’ ownership of physical commodities such as oil, coal and metals. The rules – proposed by the Fed in September – would require banks involved in physical commodity activities to boost capital to cover the risks of such investments. Banks would face tighter limits on trading in these markets, and could no longer engage in the business of running power plants. “By trading commodities, [financial holding companies] expose themselves to financial, legal, and reputational risk that may be difficult to fully understand, appreciate, and ultimately value, which in turn creates safety and soundness concerns,” the Senators wrote.
Select Highlights from the Administration
Department of Labor
Busy Week for Fiduciary Rule: Court Upholds Department’s Case while DOL Moves Forward with Delay
On Thursday, a Federal Judge in Texas upheld the Department of Labor’s defense of its so-called fiduciary rule.  In her decision, the Judge held that DOL did not exceed its authority, and did not violate rulemaking parameters.   Some reports concluded that the Judge actually endorsed DOL's analysis of how the rule would affect investors and financial firms.  Then on Friday, the Labor Department quietly announced it was proceeding with a delay of “fiduciary” rule for brokers through on a notice sent to the Office of Management and Budget.   Based on media reports, it would appear that the DOL is seeking a 180-day delay in the April 10 applicability date of the enforcement of the best interest contract that the rule requires.   The decision to delay will likely will be subject to a two-week comment period.
Securities and Exchange Commission
Acting SEC Chief Targets Pay Rule in Latest Effort to Ease Post-Crisis Rules
SEC Commissioner  Michael Piwowar, currently acting Chair of the Securities and Exchange Commission, announced his intent to take his second action against an existing Dodd-Frank rule, this time focusing on the regulation requiring companies disclose the pay gap between chief executives and their employees. Required by the 2010 Dodd-Frank law, the pay-ratio rule requires companies to disclose median worker pay—the point on the income scale at which half their employees earn more and half earn less—and compare it with CEO compensation. “It is my understanding that some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline,” said Piwowar in a written statement, adding he would ask SEC staff to “reconsider the implementation of the rule.”
Federal Reserve
Tarullo Announces Resignation
On Friday, Federal Reserve Governor Daniel Tarullo announced his intention to resign from the Federal Reserve “on or about April 5th”.   Tarullo, who has served as the Fed’s point person on numerous regulations since 2009, and effectively filled the role as the Fed’s Vice Chairman of Supervision, despite never being official nominated for the post.   With President Trump expected to nominate, and the Republican Senate likely to confirm, an actual Vice President of Supervision, Tarrullo’s announcement, despite the fact that his current term doesn’t expire until 2022, came as little surprise to veteran Fed watchers. 
Philadelphia Fed President Sees Fintech Regulation as Industry’s Best Interest
In a speech on Monday, Philadelphia Fed President Steven harper said that financial technology, or fintech, companies need trust to function, and that it is in their own self-interest to be regulated. The president acknowledged that regulation following crisis was unappealing to the industry, but served to protect the innovators by establishing a framework in which to operate. Harker, who votes on monetary policy this year, does not comment on economy or rates in text of speech.
Consumer Financial Protection Bureau (CFPB)
CFPB and New York AG Bring Suit Seeking Relief for 9/11 Workers
On Tuesday, the Consumer Financial Protection Bureau (CFPB) and New York Attorney General Eric Schneiderman filed a lawsuit against RD Legal Funding and Roni Dersovitz, the companies’ founder and owner, for allegedly scamming 9/11 heroes out of money intended to cover medical costs, lost income, and other critical needs. RD Legal also allegedly conned National Football League (NFL) concussion victims. The CFPB and Schneiderman allege that the scheme deceived the victims out of millions of dollars by luring them into costly advances on settlement payouts with lies about the terms of the deals.
Treasury Department
Financial Research Office Makes Case for Adding G-SIB Surcharge to Stress Tests
On Tuesday, the Office of Financial Research (OFR) issued a brief highlighting evidence in support of Federal Reserve Gov. Dan Tarullo’s proposal to incorporate more capital requirements for systemically important banks into the central bank’s annual stress testing. The Fed is phasing in a capital “surcharge” on the eight banks considered most important to the global financial system. OFR also noted that the requirements would help banks better prepare for financial stress, so they don't have to tap into the surcharge during an actual crisis, triggering dividend restrictions that could in turn lead to reduced lending.