Financial Services Report

April 30, 2018

Looking Ahead

Near Term

  • The House and Senate are in Recess Next week

Further Out

  • A deal on the Reg Reform bill?
  • The House is expected to consider the Congressional Review Act vote on the CFPB Guidance on fair lending in the auto industry the week of May 7th.

The Past Week

Legislative Branch
Hensarling Eases Demands, House Expected to Consider Senate Reg Relief Bill
Last week, while speaking at a US Chamber of Commerce event on Capital Markets, House Financial Services Committee Chair Jeb Hensarling (R-TX) appeared to indicate that he could allow the Senate-passed financial regulatory relief bill (S. 2155) to move forward in the House so long as there were other opportunities to pass what he characterized as broadly bipartisan measures.   The move clears the path for the bill to be considered in the lower chamber, where it is expected to pass thanks to the Republican majority and a likely cadre of Democratic moderates.  While the Senate reg relief bill primarily deals with consumer lending, including a roll back of Dodd-Frank that would raise the threshold for banks to qualify for additional regulatory scrutiny from $50 billion to $250 billion, there is little in the legislation dealing with the capital markets.   At the Chamber event, Hensarling appeared to indicate that this is where he would want to focus attention on for subsequent efforts, though as noted above, he was speaking at a capital markets event and may have been playing to his audience.  What is clear that the Chairman doesn’t see the passage of S. 2155 as the final say in regulatory relief this Congress. 
House Approps Subcommittee Hears from SEC Chair on Best Interest Standard, Cybersecurity
On Thursday, the House Appropriations Committee’s Financial Services and General Government Subcommittee held a hearing to examine the Securities and Exchange Commission’s (SEC) budget proposal for the 2019 fiscal year featuring testimony from SEC Chair Jay Clayton. The hearing comes on the heels of the SEC’s vote earlier this month to move forward with public comment on a proposal to create a best interest standard for broker dealers and investment advisers, answering contentious work done by the Department of Labor (DOL) on their own proposal that has been caught in legal fights over the past two years. In broad terms, Clayton said that the SEC proposal was based on the same “core fiduciary principles” that the DOL had attempted to impose in its fiduciary rule. Other issues discussed included the SEC’s ongoing effort to bolster its cybersecurity and information technology (IT) infrastructure, as well as a proposal linked with the best interest standard on what broker dealers and other industry participants may use as their titles.
Housing Subcommittee Holds Hearing on Rental Assistance
On Wednesday, the Housing and Insurance Subcommittee held a hearing entitled “HUD’s Role in Rental Assistance: An Oversight and Review of Legislative Proposals on Rent Reform.”  Witnesses included, Mr. Richard C. Gentry, President and CEO, San Diego, California Housing Commission; Mr. Will Fischer, Senior Policy Analyst, Center on Budget and Policy Priorities; Mr. William Russell III, President and CEO, Sarasota, Florida Housing Authority; and Ms. Adrianne Todman, Chief Executive Officer, National Association of Housing and Redevelopment Officials.  The hearing occurred the same day that HUD unveiled its plan , which would raise the amount of rent that recipients of federal housing assistance would need to pay – from the current level of 30% to 35% of gross income. 
SEC Division of Corporate Finance Appears before Cap Markets Subcommittee
On Thursday, Mr. William Hinman, Director of Corporate Finance at the SEC was the sole witness at a Capital Markets, Securities and Investment Subcommittee hearing entitled, “Oversight of the SEC’s Division of Corporation Finance.”  During the hearing, Hinman responded to questions about the SEC’s ability, and or interest, in regulating initial coin offerings (ICOs), and spoke about the Commission’s efforts to implement its Dodd-Frank obligations, as well as ongoing efforts related to disclosure reform, among other things.
Financial Institutions Subcommittee Examines FinCen’s Customer Due Diligence Rule
On Friday, the Financial Institutions Subcommittee held a hearing entitled, ““Implementation of FinCEN’s Customer Due Diligence Rule – Financial Institution Perspective.”  There were four witnesses, all from bank organizations of different sizes.   The purpose of the hearing was to discuss efforts financial institutions have taken to update anti-money laundering procedures and implement processes to identify and verify underlying beneficial ownership information as required under FinCen’s Customer Due Diligence Rule.
New Dems Write to USTR on NAFTA Concerns, Want More Attention to De Minimis Threshold
On Thursday, members of the moderate New Democrats Coalition wrote a letter to United States Trade Representative Robert Lighthizer to warn the trade official on their concerns that the “Administration is putting its focus in the wrong places” in regard to negotiations on the North American Free Trade Agreement (NAFTA). Among the group’s top issue priorities are enforceable labor and environment rules, strong digital trade provisions, and ensuring that Canada and Mexico raise their de minimis threshold. They accuse American negotiators of focusing too heavily on a seasonal trade remedy proposal and auto rules that “are expected to drive American auto jobs overseas.”
McHenry Hints At Reintroduction of FinTech Bill
On Wednesday, while speaking at a Women in Housing and Finance Forum, Rep. Patrick McHenry indicated that he intended to reintroduce legislation to create what is generally referred to as a “regulatory sandbox” for financial technology firms.  McHerny subsequently shared with reporters that this version will be different than the previous effort though he didn’t provide specifics about those changes.   According to press reports, he intends to introduce the proposal sometime in May. 
Finance Committee Holds Hearing on Early Impressions of Tax Law
On Tuesday, the Senate Finance Committee held a hearing entitled, “Early Impressions of the New Tax Law,” providing Members their first opportunity to wade back into the political debate on the contentious tax reform package that was enacted into law late last year. Witnesses — including two professors, an industry activist, and a business owner — were also split along partisan lines, setting up a predictable back-and-forth on whether the new law was positive. Democrats specifically focused on the law’s benefits for wealthy individuals, while Republicans praised the law’s new territorial tax system and the benefits of the pass-through provisions for small businesses. Sen. Ben Cardin (D-MD) waded into the policy debate on how the tax bill would impact retirement policy, arguing that the tax law increases the need to help Americans save more for their retirement years.
Brown Calls on Mulvaney to Resign After Lobbyist Comments
Senate Banking Committee Ranking Member Sherrod Brown (D-OH) called on Consumer Financial Protection Bureau Acting Director and Office of Management and Budget Director Mick Mulvaney to resign last week following controversial comments that the former congressman made on his treatment of campaign contributions from lobbyists. Mulvaney reportedly told the American Bankers Association that during his time in Congress, he would “meet only with lobbyists if they had contributed to his campaign.” Sen. Brown — who has opposed Mulvaney on a number of other political and policy fronts — said that his comments represented ‘pay to play’ and that Mulvaney should be replaced by a “permanent CFPB Director with bipartisan support and a moral compass.”
Warren Sends Letter to CFPB on Mulvaney Lobbyist Connections
On Friday, Sen. Elizabeth Warren (D-MA) added to the Democratic chorus of criticism towards CFPB Acting Director Mick Mulvaney, sending a letter to the Bureau’s ethics office asking for details on how the Bureau ensured that Mulvaney is excluded from decisions that affect banks and other organizations that gave him campaign donations. She noted that Mulvaney had received $92,000 in campaign contributions from financial banks and credit unions and argued that his actions in office at the CFPB have benefitted those institutions.
Hatch Continues Assault on Credit Union Tax Status
On Tuesday, Senate Finance Chairman Orin Hatch sent a letter to the acting commissioner of the Internal Revenue Service (IRS) David Kautter, suggesting that large credit unions should file Form 990 information returns to lay out their balance sheets and compensation.  With the exception of credit unions, houses of worship and the very smallest nonprofits, all tax-exempt entities are required to file 990s annually.  Almost immediately, the credit unions sent their own letter to Mr. Kautter, noting that requiring credit unions to file additional tax forms would “impose increased regulatory burden on the credit union system” and also “contravene directives from President Trump and the U.S. Department of the Treasury to achieve regulatory reform and rollback throughout the financial system.”  It is unclear whether the IRS intends to take up Chairman Hatch’s suggestion.
Tester Sends Letter to White House on NARAB Vacancies
Earlier this month, Sen. Jon Tester (D-MT) sent a letter to President Trump urging him to fill the thirteen open spots in the National Association of Registered Agents and Brokers (NARAB). The letter notes that the positions have been open since the Association was formed in 2015, which are supposed to be filled by five market participants and eight state insurance regulators. Sen. Tester argued that no progress can be made by NARAB until the positions are filled and that the board will “help consumers and support continued economic growth.”
20 Democratic Senators Call on Trump to Nominate New President of Ex-Im
On Friday, Senators Maria Cantwell and Heidi Heitkamp, along with 18 of their Democratic colleagues sent a letter to the President urging him to to nominate a permanent president to lead the Export-Import Bank and to push for Senate confirmation of four other nominees to serve on its board to bring the agency back to full working capacity.  The letter comes less than a week the White House announced that Deputy U.S. Trade Representative Jeffrey Gerrish had been nominated to serve as acting Ex-Im president.
Select Highlights from the Administration
Consumer Financial Protection Bureau (CFPB)
CFPB Finalizes Changes to ‘Know Before You Owe’
On Thursday, the CFPB — or as newly branded by Acting Director Mick Mulvaney, the Bureau of Consumer Financial Protection — announced that it had finalized an amendment to the “Know Before You Owe” mortgage disclosure rule that addresses when mortgage lenders may pass on increased closing costs to consumers. Saying that the changes are intended to “provide clarity and certainty to the mortgage industry,” the CFPB’s amendment would remove a timing restriction on when a creditor may use a Closing Disclosure to communicate cost increases to a consumer. The underlying rule took effect in 2015 and the new amendment will go into effect in thirty days.
Department of the Treasury
Treasury Releases Report on Regulatory Reform Accomplishments
On Tuesday, the Treasury Department released a report detailing the accomplishments it has made in the area of regulatory reform since President Trump took office in January 2017. Among the specific successes listed were eliminating over 300 “deadwood” regulations, cutting the Treasury’s regulatory agenda by about 100 items, and introducing no new significant regulatory actions per the provisions of President Trump’s executive order mandating that each new regulation be offset by the cutting of two other rules. In announcing the report, Treasury Secretary Steven Mnuchin said that he was “proud of the diligent work we have done at Treasury to ensure that we have an effective and efficient regulatory system,” and pledged that Treasury would continue to “identify and reduce outdated regulations.”
Office of the Comptroller of the Currency (OCC)
Otting Urges Passage of Senate Bank Relief Bill
On Wednesday, Comptroller of the Currency Joseph Otting urged the American Bankers Association to push for passage of the Senate’s financial regulatory reform bill, calling it “incredibly positive for the industry without increasing the risk to the industry.“ He also said that one had to “admire” the work of House Financial Services Chair Jeb Hensarling. While the remarks raised eyebrows among some government watchdogs, in is neither uncommon nor illegal for regulators to comment on legislation that falls within their expertise.
Otting Suggests Volcker Revisions in Mid-May, Further AML Rule Changes Possible
In two separate speeches last week, one before the American Bankers and one before the Chamber of Commerce, Comptroller Otting suggested that an upcoming proposed rule to simplify the Volcker Rule will likely be released by financial regulators in the middle of next month. Speaking on the five-headed regulator team dedicated to enforcement of the rule, Otting said that “everyone has to go through their internal approval processes,” but that all of the regulators are on board with the revision. Otting added that regulators — namely the OCC, Federal Reserve, and Federal Deposit Insurance Corporation — will be meeting soon to finalize recommendations for easing anti-money laundering regulations, calling them “almost impossible to comply with” as currently written.
Securities and Exchange Commission (SEC)
Clayton Criticizes Industry Sales Tactics in Push for New Best Interest Proposal
On Wednesday, SEC Chair Jay Clayton told reporters that the financial industry has hurt small advisers through their use of sales incentives including trips and other perks to push customers into certain investment products. The comments came just Clayton’s appearance before the House Appropriations Subcommittee earlier in the week, and the Commission’s official proposal of a new best interest standard earlier this month. The SEC Chair also called the status quo “unacceptable to me” and urged implementation of the SEC’s rule given that the DOL’s proposal was vacated by a 5th Circuit Court of Appeals decision in March.
Federal Deposit Insurance Corporation (FDIC)
Hoenig Announces His Departure
Last week, FDIC Vice Chairman Thomas Hoenig announced that he would step down from the FDIC on Monday April 30th.  The Vice Chairman’s term had expired and was expected.  It clears the way for Jelena McWilliams, a former Senate Banking Committee staffer to be confirmed as Chair of the for the FDIC, as current chair, Martin Gruenberg will relinquish the Chairman’s title once she is confirmed.    Once McWilliams assumes the Chair, the FDIC board would have four members, including Mick Mulvaney, Joseph Otting and Mr. Gruenberg. It will also have one vacancy. Mr. Gruenberg’s slot and the vacancy can’t be filled by a Republican because of rules mandating bipartisanship on the FDIC board, though it is unclear that Mr. Gruenberg intends to leave the FDIC anytime soon.
The Judicial Branch
States Appeal Fiduciary Rule Decision to 5th Circuit

On Thursday, the Attorneys General for California, New York, and Oregon appealed to the 5th Circuit Court of Appeals to reconsider their decision to halt implementation of the Department of Labor’s fiduciary rule. The rule — which was promulgated during the Obama Administration — would require retirement advisers to act in their client’s best interest but has been criticized by industry advocates as overly burdensome and damaging to the broker-model of investment advice. The original ruling saw the 5th Circuit decide in a 2-1 vote that the fiduciary rule bears the hallmarks of “unreasonableness,” and marked an arbitrary and capricious exercise of power by the executive branch. A joint statement from industry groups — including the U.S. Chamber of Commerce, the Financial Services Roundtable, and the Insured Retirement Institute — said that the 5th Circuit had ruled correctly and that they will “oppose any motion to intervene in this case at this late stage.”
5th Circuit Will Hear Case on CFPB Structure
On Tuesday, the 5th Circuit Court of Appeals announced that it would consider a case against the CFPB’s single-director structure brought by companies represented by former U.S. Solicitor General Ted Olsen. The appellate court agreed to hear an appeal to a lower court’s decision that upheld the agency’s constitutionality. The plaintiffs are companies who were subject of a 2016 CFPB enforcement action, although the constitutionality of the agency’s structure has been challenged in a handful of jurisdictions across the country.