Financial Services Report

September 20, 2017

Our Take

This past week the President appeared to cut a deal with Democrats on DACA, walk back his commitment to pull-out of the Paris Climate Agreement and announced his intention to wade into a nasty election in Alabama.   Whether this is part of some calculated political agenda, or just because he “really likes” Senator Schumer, the fact is that this is a President who is trying to get deals done.   It is not without irony that for so long Democrats (and those non-tea party Republicans), were complaining about how Washington was broken.  Now, with a President who fancies himself the second-coming of LBJ’s deal making prowess, folks on the left and the right continue to express concern, while others are worried that this marks the end of the parties (unlikely).    

Looking Ahead

Near Term

  • The House is in Recess this week.
  • The Senate returns to conclude consideration of the National Defense Authorization Act (NDAA) and is expected to pass the bill early in the week. 
  • The Senate Finance Committee will hold a hearing on Business Tax Reform as they continue to work toward a comprehensive tax reform bill.
  • The FSOC will meet on Friday to discuss its budget as well as the annual revaluation of a its designation of a non-bank SIFI.
  • The Fed will hold its monthly open markets meeting on Wednesday and Thursday.
  • Speculation, expectation and perhaps frustration continues to grow about the future of CFPB Director Cordray, who has been the center of multiple “will he or won’t he” questions all year.

Further Out

  • When the House returns it needs to deal with two major programs that are expiring at the end of the month – the Children’s Health Insurance Program (CHIP) and Federal Aviation Administration act (FAA).  Lawmakers are hoping to pass a short patch before reaching an agreement on a long-term deal for CHIP in early October, while the FAA is likely to see a short-term reauthorization before the end of the month.
  • Equifax will be before Congress for the first of what may be as many as six hearings.  Currently, only the hearing before the House Energy and Commerce Committee is scheduled for October 3rd
  • The outline of tax reform is expected to be released on September 25th.
  • SEC Chair Clayton is expected to testify before the House Financial Services Committee on October 4th.

The Past Week

Legislative Branch
House Passes Approps Bill Including Dodd-Frank Rollback – Senate Consideration Unlikely
On Thursday, the House advanced its eight-bill appropriations “minibus” (H.R. 3354), delayed in part to allow members time to get back from Florida, Texas and other parts of the Southeastern United States on a narrow 211-198 vote, as 14 Republicans broke ranks to vote with all but one Democrat against the measure. The bill includes a number of the provisions of the Financial CHOICE Act rolling back financial regulations enacted by the 2010 Dodd-Frank law.  However, the bill stands no chance in in being scheduled for a vote in the Senate, and serves either as a messaging exercise, or an opening offer in what will be a much larger funding fight in the fall. 
Financial Services Panel Talks Fed Policy and Regulation
On Tuesday, a pair of House Financial Services Subcommittees — Financial Institutions and Consumer Credit, and Monetary Policy and Trade — held a hearing entitled, “Examining the Relationship Between Prudential Regulation and Monetary Policy at the Federal Reserve.” Members from the two sub-panels covered a range of topics with panelists from academia and the Financial Services Roundtable (FSR). Of particular note was discussion on regular reform and the Volcker Rule, with Rep. Robert Pittenger (R-NC) asking what role Congress should play in making changes to the Volcker regime barring commercial banks from engaging in speculative trading. Democrats, meanwhile, sought to defend the Fed’s independence from charges that it should be subject to the congressional appropriations process.
While North Korea Launches another Missle, HFSC Subcommittee Considers Sanctions Package
On Wednesday, the House Financial Services Subcommittee on Monetary Policy and Trade held a hearing on a legislative proposal (text) to “impede North Korea’s Access to Finance.” The legislation would impose new financial sanctions targeting Pyongyang, including some measures that may affect Chinese banks. The hearing came less than 48 hours before North Korea tested its second intercontinental ballistic missile (ICBM) crossing Japanese airspace, significantly escalating the already-mounting tension in East Asia.  
Joint Economic Committee Holds Hearing on Digital Trade
On Tuesday, in a hearing of the Joint Economic Committee, a joint group of Members of the House and Senate met to discuss digital trade issues, with an emphasis on the benefits to small businesses. Panelists advocated for a laundry list of policy reforms that would improve digital trade — namely raising global de minimis thresholds — as the hearing took a largely technical, informational tone. Members largely supported the reforms, and also encouraged the broadening of broadband internet access for rural areas both in the United States and around the world.
Senate Confirms Hassett as Chair of CEA; Trump Names Burkhauser as Final CEA Member
The Senate confirmed Kevin Hassett to be Chair of the Council of Economic Advisers (CEA) on Tuesday by a 81-16 margin. Hassett is known as a free-market economist, previously working as a tax expert at the American Enterprise Institute and economist at the Federal Reserve. Later in the week, President Trump named Richard Burkhauser — a Cornell professor known for critiquing tax-and-spend fiscal policy — as his final selection for the three-person panel.
Senate Approves Securities Bills by Unanimous Consent
On Monday, the Senate advanced a package of six banking committee bills by unanimous consent.  Most of the bills were part of the unique markup of the Senate Banking Committee in March, that took place on the same day the legislation was passed by the House.  Among the package was a bill (S. 444) that would raise the ceiling of accredited investors’ venture capital funds can acquire from 100 to 250 before SEC registration is required in an effort to provide greater access to capital for small businesses. The rest of the package consisted of:

  • S. 327 – The Fair Access to Investment Research Act, including an amendment from Sen. Elizabeth Warren 
  • S. 484 – The U.S. Territories Investor Protection Act
  • S. 488 – The Encouraging Employee Ownership Act
  • S. 462 – The Securities and Exchange Commission Overpayment Credit Act
  • S. 416 – The Small Business Capital Formation Enhancement Act

Banking Committee Holds Fintech Hearing
On Tuesday, Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Examining the Fintech Landscape.” With the Equifax data breach fresh on Congress’ mind, the Senate panel focused a good part of the conversation on fintech cybersecurity efforts, and offered plentiful criticism for Equifax’s handling of the situation. The committee also held a broad discussion on what the regulatory framework for fintech companies should look like moving forward, soliciting feedback from the panel as to what reforms should be put in place to ensure a sound framework for fintech companies. As in previous sessions on the issue, panelists were quick to endorse the idea of “regulatory sandboxes” to promote innovation within the industry.  
CFIUS Focus of Banking Hearing
The Senate Banking Committee met on Thursday for a hearing examining the Committee of Foreign Investment in the United States (CFIUS), which is charged with reviewing the national security implications of foreign investments in U.S. companies. Witnesses at the hearing included Clay Lowery, a Bush Administration Treasury official; Kevin Wolf, an Obama Administration Commerce official; and James Lewis, Senior Vice President at the Center for Strategic and International Studies. Although not a member of the Banking Committee, Senate Majority Whip John Cornyn (R-TX) is backing a bill to reform the CFIUS by forcing the body to conduct more extensive reviews of proposed acquisitions from rival nations.  The hearing was one day after the President blocked the sale of Lattice Semiconductor to an investment group led by a Chinese investment fund.
Finance Committee Focuses on Impact on Individuals in Tax Reform Hearing
On Thursday, the Senate Finance Committee held a hearing on tax reform focusing on the impact of changes to individual income taxes. Chairman Orrin Hatch (R-UT) — who is one of the so-called “Big Six” guiding the tax reform effort — said that the framework will focus on expanding the standard deduction, lowering the number of tax credits and deductions and increase the earned income tax credit. He also emphasized that he hopes for a “consensus” tax reform bill, although it is still expected that Republicans will seek to push through a package using the budget reconciliation process. A hearing is scheduled in the committee next week focusing on business tax policy.
Dems Move to Protect Preferred Tax Treatment of 401(k)
As rumors swirl about the possibility of the so-called “Rothfication” of the 401(K) contributions – i.e., requiring the funds to be taxed before being put away, as one of the “pay-fors” of the Republican tax plan, a handful of Democrats last week sent a a letter led by Senate Banking Committee Ranking Member Sherrod Brown (D-OH), and Senate Finance Committee Ranking Member Ron Wyden urging the Trump Administration to allow contributions to 401(k) accounts to continue being tax-free. While it is still expected that tax reform will be completed through the strength of the Republican majority and budget reconciliation, President Trump has met with a number of moderate Democrats in recent weeks hoping to garner some support for the Administration’s eventual package.  
Warren, Schatz Introduce Bill in Response to Equifax Hack; Warren Sends Letter to Regulators Asking for Additional Info
On Friday, Senators Elizabeth Warren (D-MA) and Brian Schatz (D-HI) introduced a bill that would provide additional flexibility to consumers hoping to freeze their credit scores in the wake of the hack of Equifax earlier this month. The hack affected an estimated 143 million Americans and the fallout from the release of potentially compromising credit information continues to develop. The bill would grant credit freezes for those seeking them in most situations, and require credit reporting agencies to refund any fees charged for freezes related to the data breach.  Though it did not go so far as to alter the current “opt-in” paradigm for requesting a credit freeze.  Senator Warren also sent a flurry of letters to credit agencies and federal regulators seeking additional information on the hack, saying she was “launching an investigation” into its causes, Equifax’s response, and possible next steps.   
Cruz Backs Dodd-Frank Repeal in Tax Reform Bill
Last week, at a speech at an event hosted by the Tax Foundation, Senator Ted Cruz (R-TX) potentially offered a glimpse into future negotiations on both tax reform and financial regulation reform last week when he said that he hopes to couple the two packages by circumventing the budgetary constraints of budget reconciliation and avoiding a Democratic filibuster. In addition, Cruz became the second Republican Senator to indicate his support for extending the budget window for tax rate cuts to 20 or 30 years, echoing the sentiment of Senator Pat Toomey (R-PA).   Currently, this theory, which is intended to allow for dynamic scoring to get the bill to revenue neutrality has not gained much traction among Republican leadership.
Select Highlights from the Administration
Consumer Financial Protection Bureau
CFPB Issues First No-Action Letter to Upstart Network
On Thursday, the CFPB issued a no-action letter to Upstart Network, a company that uses alternative data  in making credit and pricing decisions. Per the letter’s conditions, Upstart will regularly report compliance information to the CFPB as they seek to gain a greater understanding of the use of alternative data in lending decision-making. It marks the first use of a no-action letter in the CFPB’s short history, with the intention that the Bureau has no intent to press an enforcement action on Upstart, but the CFPB warned in a press release that it “does not serve as an endorsement of the use of any particular variables or modeling techniques.”
Office of the Comptroller of the Currency
Noreika Announces OCC Not Ready to Accept Fintech Charter Applications
Last week, Acting Comptroller of the Currency Keith Noreika announced that the agency is not yet ready to begin accepting applications from financial technology, or fintech, companies seeking special purpose charters. At a speech in New York, Noreika said the agency was still in the “exploratory phase” of creating the charter, which was initially announced by previous comptroller Tom Curry last year. There has been opposition to the special purpose chartering plan, especially from state regulators, some of which sued the OCC over the issue last year. Despite the uncertainty on the special purpose chartering initiative, the OCC has continued to process applications from fintech companies seeking a traditional bank charter.