Financial Services Report

March 19, 2018

Looking Ahead

Near Term

  • The House and Senate race to complete a spending bill as the Friday, March 23rd deadline for current funding to expire quickly approaches.  Reportedly the text of the proposal is supposed to be released Monday evening, though it is possible it could slip.  It is also possible that negotiations could fail.  This could mean the government shuts down at the end of the week (a scenario we view as unlikely) or that there is another short term continuing resolution passed (more likely), punting these issues down the road once again.

  • The House Financial Services Committee will mark-up a series of eight bills on Wednesday, as much of the Financial Services Industry watches the standoff between Chairman Hensarling, Chairman Crapo and the Senate Democrats on the scope of any changes that will be made to the Reg Relief bill that was passed last week.
  • The Senate Banking Committee will hold a hearing focused on oversight of the Department of Housing and Urban Development and Secretary Carson will appear before the committee.  

Further Out

  • Assuming that Congress can pass a spending measure before the Friday deadline, both the House and Senate are expected to head into a two-week recess for the Passover and Easter Holidays.  

The Past Week

Legislative Branch
RESA Reintroduced in the House; Hotlined in the Senate
This week, Reps. Mike Kelly (R-PA) and Ron Kind (D-WI), along with 14 additional bipartisan cosponsors, introduced, H.R. 5282, the Retirement Enhancement and Savings Act (RESA) ahead of Congress’s consideration of an omnibus spending bill.  Then, on Thursday, the Senate started the hotline process on a companion (i.e., identical) bill that was authored by Senators Hatch and Wyden.   The hotline is a procedural maneuver designed to expedite passage of non-controversial bills and this bill is expedited to clear the hotline process on Monday evening, potentially clearing the way for its inclusion in the omnibus spending bill that is being negotiated.
House Financial Services Panel Discusses Securities vs. Commodities in Crypto Hearing
On Wednesday, the House Financial Services Subcommittee on Capital Markets, Securities, and Investment held a hearing focused on cryptocurrencies and initial coin offering (ICO) markets as those areas continue to expand. Policymakers have largely been trying to grapple with the appropriate regulatory formula for the different uses of blockchain technology, which acts as a ledger to record transactions between two parties in a secure and verifiable manner. That dynamic characterized the hearing as lawmakers sought to distinguish the technology between tokens that act as securities and those that act as commodities.
Unlike some other regulatory areas, cryptocurrency regulation has so far cut across partisan lines and largely avoided becoming entangled in deeply ideological arguments. Those pragmatic discussions continued in the hearing, as lawmakers sought additional information on the current work of the Securities and Exchange Commission (SEC) and Commodity and Futures Trading Commission (CFTC) in regulating blockchain products and what action was needed for investor protection. An additional point of topic was the broader use of blockchain in fields other than financial services, with lawmakers and panelists briefly discussing the regulation of the technology in other contexts.
Bipartisan Bill Would Create CFPB Commission
Last week, Reps. Dennis Ross, Kyrsten Sinema, Ann Wagner, and David Scott introduced H.R. 5266, the Financial Product Safety Commission Act of 2018.  Legislation that would replace the CFPB’s sole director with a bipartisan, five-member commission. This idea has long been in conversations since the CFPB’s creation, however, the likelihood of passing both chambers continues to be low due to the overwhelming opposition to the concept by multiple Senate Democrats, who argue that a Commission would obstruct the Bureau’s overall mission.
Senate Approves Banking Regulatory Relief Bill; Future in the House Unclear
Last Wednesday, the Senate approved (67-31) the comprehensive banking regulatory relief bill (S. 2155) negotiated between Senate Banking Committee Chair Mike Crapo (R-ID) and a handful of moderate Democrats. The bill marks the most sweeping financial reform act since Dodd-Frank, aiming to boost community banks by providing some relief from Dodd-Frank regulatory scrutiny, and including a few further reforms on issues such as credit monitoring and student loans that were inserted via substitute amendment in a vote just prior to the one on the underlying bill. The House has made it clear – at least initially – that it intends to put its own mark on this legislation, as House Financial Services Chairman Jeb Hensarling (R-TX) clearly indicated following passage of the bill.  An interesting procedural side note, according to published reports it appears that S. 2155 will stay at the Speakers desk and will not be referred to Committee.   This means that if at some future point Speaker Ryan and the House leadership decide the time has come to pass the bill unchanged they can simply put it on the floor rather than need Hensarling to pass it out of Committee.  
Select Highlights from the Administration
White House

Kudlow Nominated to Take Over National Economic Council
On Wednesday, it was reported that CNBC Commentator Larry Kudlow had been offered and accepted the job to replace soon to be outgoing NEC Director Gary Cohn.  Kudlow, who previously served in the White House during the Reagan administration, is widely expected to push for decreasing regulation but may continue to clash with the President on trade policies. 
FSOC Creates Process for Offramp from Fed Oversight
On Tuesday, the FSOC approved a process for how the Federal Reserve can be petitioned by industry participants seeking to get out of Fed supervision.   The issue is relevant as Zions Bancorporation is seeking to rid itself of Fed oversight following the change of its previous bank holding company structure.  As a bank with more than $50 billion in assets that had received TARP funding, Zions decision to eliminate its holding company structured would trigger it to be deemed systemically important by the FSOC.  This new process, which is effective immediately, though potentially subject to future amendment, would allow FSOC to waive that designation. 
Federal Reserve
Trump Considering Quarles For Top Global Regulatory Post
It was reported last week that officials in the Trump administration are considering Federal Reserve Vice Chairman for Supervision Randal Quarles as a candidate for chairman of the global Financial Stability Board, according to unnamed sources familiar with the discussions. Quarles — who is seen as more sympathetic to GOP sentiments on overregulation —  would have to win the approval of other countries involved in the FSB, which has been led by Bank of England Governor Mark Carney since 2011
Securities and Exchange Commission (SEC)
Divided SEC Proposes to Roll Back Mutual Fund Rules
The Securities and Exchange Commission on Wednesday proposed to roll back regulations that require mutual fund companies to disclose more information about their holdings. In a 3-2 vote along party lines, the SEC commissioners proposed to halt certain disclosure regulations the agency adopted in 2016. The disclosures, which are scheduled to start in 2019, stemmed in part from the implosion of a mutual fund in December 2015.
Peirce Wants Fiduciary Reform to Preserve Investor Options
SEC Commissioner Hester Peirce discussed investment advice reform last Thursday, noting that she wants to make sure that investors can still turn to either an investment adviser or a broker for advice. She stressed the need to “maintain options for people” and ensure that there are a variety of payment models and levels of service. The comments come as the SEC works on its proposed fiduciary rule for retail investment advice, which could be unveiled as soon as the second quarter. Commissioner Peirce said that an SEC rule would likely involve sections pertaining to disclosure, clarifying the broker standard of care and "providing guidance" for investment advisers.
Consumer Financial Protection Bureau (CFPB)
CFPB COO Announces Intention to Depart
On Friday, it was reported that Sartaj Alag, Chief Operating Officer  for the Consumer Financial Protection Bureau had announced his intention to depart next month.   Alag had been serving as the CFPB’s COO since July 2013 and he is the first high-profile employee of the embattled agency to depart since acting Director Mick Mulvaney ascended to his role at the CFPB last year.   Alag had been with the CFPB since the earliest days of the agency’s formation.  He did not announce what he planned to do after he departed.
CFPB Issues RFI on Adopted Regulations and New Rulemaking Authorities
Those who believe they’ve been negatively affected by rulemakings and regulation since the start of the CFPB should feel a sense of relief, this week, the CFPB issued a Request for Information on the Bureau’s adopted regulations and new rulemaking authorities. The Bureau is seeking comments and information from interested parties to assist the Bureau in considering whether it should amend any rules it has issued since its creation or issue rules under new rulemaking authority provided for by the Dodd-Frank Act. 
Department of Labor
DOL Fiduciary Rule Struck Down by Fifth Circuit
Late Thursday, the Fifth Circuit Court of Appeals announced its much awaited decision regarding the Department of Labor’s Fiduciary Rule.   In a 2-1 vote, the judges vacated the Labor Department's fiduciary rule in total, both the definition of fiduciary that had been promulgated as well as the new rules that were to accompany them.   It is possible, though unlikely, that the entire 5th Circuit could still take up this issue if it is petitioned for an en banc rehearing.   If that doesn’t happen, then the decision would go into effect on May 7th.  This decision should bolster the efforts of the Securities and Exchange Commission which has been working on a unified standard of advice for retirement and investment products.
Bipartisan State Attorney Generals Effort on Fiduciary Standard Rule
Pennsylvania State Treasurer Joe Torsella this week announced he, and a bipartisan coalition of State Treasurers that has mailed a joint letter to the U.S. Department of Labor (DOL) urging the agency to not revise the Fiduciary Standard Rule. "More than 55 million Americans are without access to workplace retirement plans, dramatically changing the landscape of how so many try to plan for their future," said Torsella.  The announcement of the letter came prior to the 5th Circuit ruling (see above) but following the decision of a number of states to enact their own standards for investment advice.