Financial Services Report

July 6, 2017

Our Take

While it would be too easy to write that Members of Congress fled town this week like rats off a sinking ship, the reality is that the dysfunction and gridlock of Washington only continues to grow and it is highly likely that all 535 members of Congress and the Senate were incredibly grateful to head out of our Nation’s capital.  Democrats may enjoy the schadenfreude of watching their Republican colleagues suffer as they try grapple within their own caucus and the President on how to move a health care reform package, and Republicans must be frustrated by their inability to move the agenda they campaigned on – and which gave them control of all three branches of government. 

As we come up on the 4th of July and the 228th anniversary of our country’s independence, now is the time to remember that incremental change and compromise are the hallmarks of American democracy.   While the political debate currently panders to both party’s respective bases, relying solely on those fringes fails to create a workable foundation for any real solutions.   Hopefully, with members in their Districts and out of the “swamp” they will have some time to reflect on that and come back eager to roll up their sleeves and get to work.

Looking Ahead

Near Term

  • House and Senate are in recess this week.

Further Out

  • When Congress returns to DC on July 10th it will have just three weeks before the start of the August Recess (or perhaps not).  When they return they are expected to continue working on healthcare as the goal is to wrap it up by the start of the August recess.
  • Fed Chair Janet Yellen will testify before the House Financial Services Committee on July 12th.

The Past Week

Legislative Branch

Congressional Budget Office
New CBO Analysis Suggests U.S. to Hit Debt Limit in October
A Congressional Budget Office (CBO) report released on Thursday suggested the U.S. would reach the end of its borrowing authority in “early to mid-October,” creating some breathing room from previous concerns that the borrowing authority would be extinguished in August or early September.  While technically speaking the authority expired in March, the Treasury Department has been able to utilize its “extraordinary measures” authority to prioritize government payments and temporarily avoid a default.  It is unclear whether this new report will reduce the impetus to pass an extension of the debt limit prior to the August recess.   It is also worth noting that on Thursday, while speaking at the White House on North Korea sanctions, Treasury Secretary Steven Mnuchin continued to push back on the idea that the Treasury Department could prioritize the government’s payments in the event of Congress failing to raise the ceiling in time, as he once again called on Congress to quickly pass a clean debt ceiling bill.
House Appropriations Subcommittee Approves Financial Services Bill with FSOC, CFPB Changes
On Thursday, the House Appropriations Financial Services and General Government Subcommittee approved its fiscal 2018 spending bill, including some policy riders targeting Dodd-Frank financial reforms. Once again, the bill contains language that would place the Consumer Financial Protection Bureau’s (CFPB) budget under the spending authority of Congress rather than receiving its funding from the Federal Reserve.  Other controversial riders in the bill included a repeal Dodd-Frank’s Volcker rule banning banks from conducting speculative trading, and eliminating the Financial Stability Oversight Council’s (FSOC) ability to subject systemically important financial institutions (SIFIs) under additional regulatory scrutiny from the Fed. The bill passed on a voice vote, although Democrats are likely to oppose many of the policy provisions when it comes before the full Appropriations Committee later this month.
House Financial Services Subcommittee Talks AML Efforts, BSA Reform
On Wednesday, the House Financial Services Financial Institutions and Consumer Credit Subcommittee held a hearing today to examine the federal government’s anti-money laundering (AML) efforts under the Bank Secrecy Act (BSA). The session focused on AML regulatory requirements that are carried out by financial institutions, with representatives from those institutions testifying on the burdens of their compliance programs. Chairman Blaine Luetkemeyer (R-MO) suggested that his subcommittee is working on the “bank side” and will coordinate eventual legislative action with the Terrorism and Illicit Finance Subcommittee. According to Chairman Luetkemeyer, the central push of that legislation is likely to modernize bank rules — such as raising the monetary threshold for which banks have to submit Suspicious Activity Reports (SARs) — utilizing technology to track customer data, and streamlining the communication process between regulators and banks.
Executives Offer Concerns on Market Structure in Capital Markets Subcommittee Hearing
In a House Financial Services Capital Markets Subcommittee hearing on Tuesday, witnesses from leading financial firms and stock exchanges offered their thoughts on the nation’s equity market structure and the health of American markets. Some panelists, namely Investors Exchange CEO Brad Katsuyama and Charles Schwab Senior Vice President Jeff Brown, said that the system was in need of a regulatory overhaul in order to address conflicts of interests for those who self-regulate. Panelists also expressed concerns on the rebates exchanges pay to brokers that send them resting orders for others to trade against, which the Securities and Exchange Commission (SEC) is reportedly considering addressing through a rulemaking that would reduce the maximum amount exchanges can charge brokers to execute orders on their platforms.
House Financial Services to Hear Yellen Testimony July 12
House Financial Services Committee Chairman Jeb Hensarling (R-TX) announced that the Committee will host Federal Reserve Chair Janet Yellen for the Fed’s semi-annual report to Congress on July 12. The hearing will be preceded by the release of the Fed’s report on the U.S. economy and central bank policy. Among the issues likely to be discussed are Congress’s increased attention towards regulatory reform, the normalization of interest rates from the Fed, and the impending nomination of a Vice-Chair of Supervision at the Fed.
Bipartisan, Bicameral Legislation to Extend Insurance Expert on FSOC Introduced
Senate Banking Chairman Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) joined together in introducing legislation to allow the Financial Stability Oversight Council independent insurance member to serve beyond the end of their term.   This legislation is necessary as the current member, Roy Woodall’s term is currently slated to end on September 30th.   The legislation is a technical fix to the Dodd-Frank financial reform statute that established FSOC, and determined that the independent insurance member cannot serve beyond his or her term. The new bill would allow for the insurance member to continue serving in their capacity for 18 months absent the confirmation of a successor. A companion bill was introduced in the House by House Financial Services Ranking Member Maxine Waters (D-CA) and Housing and Insurance Subcommittee Chair Bill Huizenga (R-MI).   
Banking Committee Optimistic on GSE Reform Prospects After Hearing
At a Senate Banking Committee hearing on Thursday entitled “Principles of Housing Finance Reform,” the gaps between Democrats and Republicans on the reform of government-sponsored enterprises (GSE)Fannie Mae and Freddie Mac appeared to narrow as senators from both sides spoke positively on the effort. Sen. Bob Corker (R-TN) said he saw a “real consolidation of ideas” and that “GSE reform is coming to a place where I truly believe we’re going to be able to pass a piece of legislation this year.” Democrats have prioritized affordable housing as part of a GSE reform package, with Sen. Elizabeth Warren (D-MA) saying at the hearing, “I am all for ending government conservatorship, but I can’t be for reform if it doesn’t address the affordable housing crisis in the country.”
Senate Agriculture Committee Advances CFTC Nominee Giancarlo to Senate Floor
On Thursday, the Senate Agriculture Committee approved the nomination of Commodity Futures Trading Commission (CFTC) Acting Chair Christopher Giancarlo to become the panel’s permanent chairman on a 16-5 vote. Five Democrats voted against the nominee, namely Sens. Patrick Leahy (D-VT), Sherrod Brown (D-OH), Kirsten Gillibrand (D-NY), Joe Donnelly (D-IN), and Chris Van Hollen (D-MD).  
Politico: Senate Flood Insurance Effort Slows over Privatization
According to reporting in Politico, Senate discussions on how to reauthorize and reform the National Flood Insurance Program (NFIP) slowed last week as lawmakers disagreed over the role of the private sector in the insurance market. At issue is a proposal from Senators Dean Heller (R-NV) and Jon Tester (D-MT) that would increase private competition with government plans.  This proposal has apparently split lawmakers, with Senate Minority Leader Chuck Schumer (D-NY) and Banking Committee member Robert Menendez (D-NJ) reportedly having concerns on the impact insurance companies “cherry-picking” lucrative areas and the downstream impacts on the industry as a whole. The Federal Flood Insurance program is currently slated to expire on September 30th.
Select Highlights from the Administration
Federal Reserve
Fed Approves U.S. Banks in Second Phase of Stress Testing
The Federal Reserve announced last week that the nation’s largest banks all passed the second phase of its annual stress test. Also known as the “qualitative portion” of the test, the Fed assesses whether banks can provide dividends to its shareholders in the event of an economic downturn. It marks the first round of tests where all banks passed, meaning that they can return up to 100 percent of their profits to shareholders as opposed to the 65 percent cap imposed last year when some banks failed. The stress testing program however remains somewhat controversial, as some Fed officials, including Governor Jerome Powell, have suggested that the central bank get rid of the qualitative portion of the test in future years.
Consumer Financial Protection Bureau (CFPB)
CFPB State-Level Monthly Snapshot Shows 7 Percent Increase in Complaint Volume
On Tuesday, the Consumer Financial Protection Bureau (CFPB) released a special edition of its monthly complaint report focused on providing state-level data on complaint volume, the types of products generating companies, and company response rates. Among the report’s findings was that complaint volume rose 7 percent between 2015 and 2016, and that companies provided a timely response to 97 percent of complaints that they received from the CFPB. Director Richard Cordray said in a statement that the report “provides valuable information to the CFPB and the public about issues and trends we are seeing from each state.”
Department of Labor
DOL Publishes Pre-Publication of Fiduciary Rule RFI
Last week, the Department of Labor (DOL) published a pre-publication version of the request for information (RFI) it intends to file for a review of the Department’s fiduciary rule. The proposed RFI includes 18 questions, with the first asking whether a delay from the current Jan. 1, 2018 applicability date for major provisions of the rule — including the best interest contract and prohibited transaction exemption 84-24 — would be helpful to financial services institutions. The pre-publication of the RFI comes ahead of its anticipated full release, but the document did not provide a timeline for when the effective RFI may be published in the Federal Register.   
Securities and Exchange Commission (SEC)
SEC to Allow Firms to Submit Paperwork Privately Before IPO
On Thursday, the Securities and Exchange Commission announced that it would use the statutory authority provide by the Jumpstart Our Business Startups (JOBS) Act to allow companies file paperwork confidentially ahead of their initial public offerings (IPO). While current law allows publicly-traded companies with revenues of $1 billion or less to file confidential IPO forms, the change will extend that policy to all businesses. The policy is designed to boost the fledgling IPO market and will take effect on July 10.