Financial Services Report

October 30, 2017

Our Take

Short Termism.   A term usually associated with concerns about the perspective of corporate executives willing to sacrifice long term growths for short term gains.   Whether the capital markets suffer from excessive short termism is open for debate.  However, it appears that this phenomenon is not confined to the business world, and it may be strangling our political system.  While there had always been an immediate term focus in politics, especially in the House of Representatives with its shorter terms, the beauty of our political system was to allow that near-term perspective to influence, but not consume the longer-term policies.   Unfortunately, over the last twenty-five years, there has been an increase in the philosophy that “good politics makes good policy” resulting in a fractured Congress with little incentive to sacrifice immediate benefit for long term gains.  Perhaps this is a byproduct of our on-demand society and its balkanized news sources.  Whatever the cause, the recent decisions by Senators Corker and Flake, while heralded by some of the left, are the epitome of this problem.   Sure, the odds were against them in their respective races – but favorites don’t always win – and that’s why we play the games.  Their failure to even give their supporters a chance to show that the extremist politics espoused by their primary candidates is not viable, means that in the long run, the trend to short termism will likely grow even stronger.  Another, and perhaps even more troubling example of this pernicious problem can be seen in the current treatment of Senator McConnell by right-wing media outlets.  Just last year he led the effort to stall (some say steal) the nomination of a Supreme Court Justice, all but ensuring a conservative voice in that Chamber for decades.   On issues so close to many conservative’s hearts, this decision is far more important than any one election.  And yet, they continue to villainize him.  

Looking Ahead

Near Term

  • It’s finally here.  The week that House Republicans unveil their plans for tax reform.  
  • On Wednesday the House is expected to have its final “great reveal”.   At least we know some of what will not be in it. 
  • Over in the Senate, the floor time will be consumed with a “Judicial Frenzy” as a series of confirmation votes on Judges expected.
  • The Senate Banking Committee holds a hearing on Ex-Im nominations with all nominees scheduled to appear.
  • The House Financial Services Committee has a few hearings scheduled, including one on Small Business Capital on Friday. 

Further Out

  • The House and Senate have set out an *ambitious* agenda to complete tax reform in the next two months.   Next week the Ways and Means Committee is scheduled to hold its mark-up, and then that bill will be on the floor the following week.  Also during the week before Thanksgiving, the Senate Finance Committee is expected to hold its mark-up of its reform bill.  
  • Also in early November, the House Financial Services Committee is scheduled to hold another mark-up as Chairman Hensarling continues to try to move various standalone measures that could be melded into a larger reg reform package.
  • There is a rumor circulating that Senate Majority Leader Mitch McConnell (R-KY) is considering canceling part of the Thanksgiving week recess in order to consider tax reform legislation.    His Whip has indicated that the goal is to get the tax bill out of the Senate by Thanksgiving, which also sets up a possibility that the House could simply pick up and pass the Senate-passed bill rather than going to conference, as it did with the Budget Resolution this week.
  • Speaking of rumors, there continues to be significant chatter about the possibility of a Crapo-Brown bill in the Senate on reg relief.  While a key meeting has yet to happen, it sounds like negotiations are continuing. 
  • Funding for the Federal Government runs out on December 8th.

The Past Week

Legislative Branch
House Narrowly Passes FY18 Budget Advancing Tax Reform Effort
On Thursday, the House voted 216-212 to pass the Senate’s budget resolution (H. Con. Res. 71), clearing the way for Republicans to move forward with their tax overhaul without needing any Senate Democratic votes. The budget resolution — which now heads to President Trump’s desk — would allow the Senate Finance and House Ways and Means Committees to increase the deficit by $1.5 trillion during the next decade in order to advance a tax reform bill, and sends instructions to the Senate Energy and Natural Resources and House Natural Resources Committees to reduce the deficit by $1 billion during the 10-year budget window (a potential vehicle to open up oil and gas exploration in Alaska). The budget saw a late threat from House Republicans in high tax states who may be negatively affected by the tax reform package’s proposed elimination of the state and local tax (SALT) deduction, and the majority of the following 20 Republicans who voted no come from states impacted by that deduction: 

  • Rep. Justin Amash (R-MI)
  • Rep. Ken Buck (R-CO)
  • Rep. Dan Donovan (R-NY)
  • Rep. John Duncan (R-TN)
  • Rep. John Faso (R-NY)
  • Rep. Brian Fitzpatrick (R-PA)
  • Rep. Matt Gaetz (R-FL)
  • Rep. Lynn Jenkins (R-KS)
  • Rep. Walter Jones (R-NC)
  • Rep. John Katko (R-NY)
  • Rep. Pete King (R-NY)
  • Rep. Leonard Lance (R-NJ)
  • Rep. Frank LoBiondo (R-NJ)
  • Rep. Tom MacArthur (R-NJ)
  • Rep. Thomas Massie (R-KY)
  • Rep. Mark Sanford (R-SC)
  • Rep. Chris Smith (R-NJ)
  • Rep. Elise Stefanik (R-NY)
  • Rep. Claudia Tenney (R-GA)
  • Rep. Lee Zeldin (R-NY)

House Small Business Panel Holds Brief Session on Fintech Small Business Lending
On Thursday, the House Small Business Subcommittee on Economic Growth held a hearing entitled, “Financing Through Fintech: Online Lending’s Role in Improving Small Business Capital Access.” The hearing was sparsely attended as lawmakers cut the session short in order to vote on the fiscal 2018 budget resolution being considered on the House floor. However, the members who did attend asked technical questions on issues such as the implementation of Section 1071 of Dodd-Frank, alternative data for lending decisions, and the use of merchant cash advances (MCAs).
House Financial Services Insurance Sub Talks Federal Role in Insurance Regulation
On Tuesday, House Financial Services Subcommittee on Housing and Insurance held a hearing debating the appropriate role for the federal government in regulating the insurance industry. Specifically, the hearing examined the work of the Federal Insurance Office (FIO) and how it may change under two proposals (H.R. 3762 and H.R. 3861) backed by Chair Sean Duffy (R-WI) and Democrat Member of the panel Denny Heck (D-WA). The Committee was unequivocal in its support for the primacy of state-based regulation, but Members differed on the appropriate scope of federal involvement and whether it had a positive effect on state regulators.
New Dem Coalition Releases Comprehensive Cyber Policy Proposal
On Thursday, a group of House Democrats known as the New Democrat Coalition released a broad proposal covering cybersecurity policy in response to a series of high-profile data breaches. The plan pushes for the creation of additional public-private partnerships to attack the issue and encourages a broad rethink of policy in both the private and public sectors. The group touted the plan as focusing on five central themes, namely: (1) fostering and encouraging public-private and industry-wide information sharing; (2) developing stronger defenses and partnerships to protect critical infrastructure against cyberattacks; (3) developing a strong cyber workforce pipeline and attracting them to both the private and public sectors; (4) investing in and developing stronger technologies and defenses for data and information security at the public sector, private sector, and individual levels; and (5) securing and defending the Internet of Things (IoT).
Senate Approves Arbitration CRA on Pence’s Tiebreaking Vote
Late Tuesday night, a Congressional Review Act (CRA) resolution (H.J. Res. 111) to disapprove of the Consumer Financial Protection Bureau’s rule banning the use of mandatory arbitration clauses in certain consumer contracts.  The measure passed on a tie-breaking vote from Vice-President Mike Pence, as Sens. Lindsay Graham (R-SC) and John Kennedy (R-LA) joined all Democrats in opposing the measure. Proponents of the rule see it as an empowerment of consumers’ legal rights, while opponents believe that it would unnecessarily remove a streamlined dispute process that benefits both companies and consumers.
Senate Dems Send Another Letter on Rothifaction – This Time Using President’s Tweet as Impetus
Last week, six Democrats from the Senate Finance Committee sent a letter to the ‘Big Six’ tax writing group asking for protection of current treatment of contributions to 401(k) retirement plans.  The letter comes after more rumors about changes to the popular retirement program were floated.  Interestingly, the letter expressly supports the President’s tweet from earlier in the week that “There will be NO change to your 401(k),” a first for many of the signatories.   With the future of “rothification” still uncertain after the President walked back his statement, many in the retirement industry are keenly watching for evidence that these efforts are truly dead. 
Republican Lawmakers Introduce Bill to Increase Scrutiny on Foreign Investment
Last week, Republican lawmakers Sen. John Cornyn (R-TX) and Rep. Robert Pittenger (R-NC) introduced legislation in their respective chambers to increase the scrutiny given to foreign investment in the United States. The bill aims to accomplish this goal by bolstering the Committee on Foreign Investment in the United States (CFIUS) with new authorities to cover the technology sector. Some lawmakers have become concerned with the influence of joint ventures involving American firms in China and want to ensure that CFIUS can monitor emerging technologies as part of their national security review. The White House is expected to back the bill and the sponsors have said they are expecting to pick up Democratic cosponsors.
Select Highlights from the Administration

The White House
Trump Hints Finale Of “Who Wants to Be Fed Chair” to Come Soon
In an apparent effort to drive up ratings, on Friday, the President released a cryptic Instagram video apparently touting the forthcoming announcement of his Fed Chairmanship.   While closely watched by markets and analysts, the Fed Chair is one of the most boring Government officials the President appoints.   While the first effort at an audience selection lead to inconclusive results, conventional wisdom has settled on five candidates, with current Fed Governor Jerome Powell considered a favorite. 
Securities and Exchange Commission (SEC)
SEC Approves Rule to Require Additional Disclosure of Audit Results
On Monday, the Securities and Exchange Commission (SEC) announced that they were giving final approval to an accounting rule that will require auditors to tell investors more about what they learn when they audit a company’s records. The rule stems from the Public Company Accounting Oversight Board (PCOAB) assessment earlier this year that auditors should inform investors about “critical audit matters” and other more detailed information in an expanded audit report. The move comes despite opposition from business groups, with SEC Chair Jay Clayton saying in a statement on Monday that the agency remains “sensitive” to the industry’s concerns on the rule. The rule is due to go into effect in mid-2019.  
Clayton Cites DOL Role on Fiduciary Standard
On Tuesday, Securities and Exchange Commission (SEC) Chair Jay Clayton spoke at the Securities Industry and Financial Markets Association (SIFMA) annual meeting and pushed back against the suggestion that the SEC could take a singular role in setting investment advice standards. Specifically, Acosta said that “We [SEC] have the authority and the expertise to be leaders in this space,” but maintained that the “DOL has a responsibility.” Opponents of the DOL’s fiduciary rule have hoped for the SEC to take a broad approach to create their own — theoretically more industry friendly — conflict of interest rules for brokers. Clayton cautioned last week, however, that there was no “silver bullet” in the regulation of advice and suggested that the SEC is still wading through the public comments submitted through the agency’s request for information (RFI) on the issue.  
Department of Treasury
Treasury Calls for Lighter Regulatory Touch for Insurers in Dodd-Frank Review
In the third installment of its review of the Dodd-Frank Act and financial regulations, the Department of Treasury released a report on Thursday that called for changes in the regulatory approach to the insurance industry. Specifically, the report says that regulators should avoid “entity-based systemic risk evaluations of insurance companies,” arguing that federal officials should instead be focused on “potential risks arising from insurance products and activities, and on implementing regulations that strengthen the insurance industry as a whole.” That approach seemingly pushes back against the current authority of the Financial Stability Oversight Council (FSOC) to subject some firms to additional layers of scrutiny by deeming them “systemically important financial institutions.”
OFR Report Recommends Changes to Dodd-Frank Bank Riskiness Determination
The Treasury’s Office of Financial Research (OFR) released a report on Thursday suggesting that regulators should take a broader approach in considering how to determine whether a bank’s failure would pose a significant risk to the financial system if it failed. Under the Dodd-Frank Act, all banks with over $50 billion in assets trigger an additional layer of scrutiny on riskiness, but the OFR asserts in its report that “bank size alone does not equate to risks a firm may pose to financial stability.” Senate Banking Committee leaders Chair Mike Crapo (R-ID) and Ranking Member Sherrod Brown (D-OH) are reportedly working on legislation to boost economic growth, with a change to the $50 billion threshold likely to be a central component.
Treasury Attacks CFPB Arbitration Rule in New Report
The Treasury Department released a report last week adding on to the criticism of the Consumer Financial Protection Bureau’s (CFPB) rule on mandatory arbitration clauses, saying that the Bureau failed to do adequate cost-benefit analyses when considering the regulation. Treasury officials assert in the report that the CFPB’s work did not meet the statutory requirements outlined by the Dodd-Frank Act in creating a rule that would ban the use of mandatory arbitration clauses in certain contracts. The report further cites “massive economic costs” that could result from implementation of the rule. The Senate approved a resolution rescinding the rule last week, sending the measure to the president’s desk for likely signage.  
Consumer Financial Protection Bureau (CFPB)
Cordray Disputes Treasury Report on Arbitration Rule
On Wednesday, CFPB Director Richard Cordray responded to the Treasury Department’s report challenging the analyses upon which the Bureau based its rule banning the use of arbitration clauses in certain consumer contracts. According to Cordray’s memo, the Treasury report “underestimates the benefits from class action settlements, underestimates the deterrence effect of class actions, overstates the cost of class actions and misstates the impact of the arbitration rule on individual arbitration.” However, the CFPB Director’s point is likely moot after the Senate approved a resolution to rescind the rule last week.