Insights

Financial Services Report

June 19, 2018

Our Take

One of the hot topics percolating around DC is what will happen in November.   While we are still months away from the elections, and still really two months until Labor Day when the majority of voters have traditionally started to focus on them, it does not prevent all kind of prognostications.  While we aren’t making any predictions right now, it is worth noting that as of this writing, by many metrics the nation’s economy seems to be doing well – and that may temper a Democratic wave in the fall.  It is also worth noting that yesterday was the 78th anniversary of the signing of the Smoot-Hawley Tariffs into law.   While it would be unfair to make a direct comparison with the disastrous effect of Smoot-Hawley and last week’s tit-for-tat announcements of tariffs between the US and China – given the significant differences in our economy versus 1929 and the level of the trade barriers announced – it is worth noting that sometimes the economy can be a fickle creature, and if these decisions have negative ramifications the effect might impact both the GDP and the GOP. 

Looking Ahead

Near Term

  • The House will attempt to tackle another comprehensive bill intended to deal with the Opioids Crisis and is likely also going to vote on an immigration proposal.
  • The House Financial Services Committee will hold a series of hearing this week, including one with SEC Chair Jay Clayton.
  • The Senate will continue its work on the NDAA, with a final vote expected early this week.  It is then expected to turn to first of several, “minibus” spending bills.
  • Speaking of spending bills, the Senate FSGG subcommittee will vote on its version of the FY18 spending measure on Thursday.  The full House Appropriations Committee passed its version last week.
  • The Senate Banking Committee will continue its work on laying a foundation for an update to the BSA/AML laws with a hearing Wednesday on combatting money laundering.

Further Out

  • The House Financial Services Committee is expected to hold yet another mark-up the week of June 25th (though it is rumored that it may happen this week if the Leadership extends the July 4th recess week into that last week of June).

The Past Week

Legislative Branch
House
OCC’s Otting Focuses on CRA, Small Dollar lending — No New Insight into FinTech Charter offered
On Wednesday, the House Financial Services Committee held a hearing for oversight of the Office of the Comptroller of the Currency (OCC) and the agency’s role in regulating the financial industry. The hearing marked the first time that Comptroller of the Currency Joseph Otting has appeared before the Committee since taking over at the banking regulator in November 2017. Otting has had a busy start to his reign at the agency, and outlined his priorities on issues such as modernizing Community Reinvestment Act (CRA) rules and the possibility of a special purpose charter for financial technology companies. Otting, in his best Lebron James impression reiterated his announcement that the expects to make an announcement on the charter next month.
 
Member questioning focused on the policy areas that Otting had noted were current priorities, most notably fintech regulation and small-dollar lending. On small-dollar lending, Otting pointed to the agency’s bulletin encouraging banks to enter that market and said the agency may take more actions on loans that last 45 days or less in the future. Additionally, Democrats at the hearing pressed Otting about his views on the prevalence of discriminatory lending — and discrimination more broadly — after the Comptroller offered an indecisive answer on whether such lending exists. While ideologically linked to the OCC’s rumored changes to CRA enforcement, the discussions also offered a window into Democrats’ prioritization of equality issues in the financial services space. 
 
House Approves Financial Services Approps Bill Including IRS Funding Bump, CFPB Changes
On Wednesday, the House Appropriations Committee approved the FY19 Financial Services General Government appropriations bill on a 28-20 party-line vote. The $23.4 billion measure includes a small funding bump for the Internal Revenue Service (IRS) as Republicans hope to give the agency additional resources to implement the tax reform law enacted late last year. The Securities and Exchange Commission (SEC) would see a $201 million cut — including a one-time cost due to not renewing lease renewals — while also creating a $585 million fund to that cannot be used until the federal budget deficit is eliminated. One of the most contentious provisions would subject the Consumer Financial Protection Bureau (CFPB) to the congressional appropriations process after 2020.
 
House Financial Services Advances Four More Bills During Markup
On Thursday, the House Financial Services Committee held yet another markup as the Committee continues its blistering pace in 2018. Last week’s markup featured the passage of four bills, namely (1) a bill to require regulators to implement a risk-adjusted approach to value centrally-cleared options as it relates to capital rules to better and more accurately reflect exposure and promote options market-making activity (H.R. 5749); (2) a bill aiming to address the challenges that certain charities face with the CFPB’s TILA-RESPA Integrated Disclosure (TRID) rule (H.R. 5953); (3) a bill to allow a well-known seasoned issuer (WKSI) to authorize an underwriter or dealer to act as its agent or representative in communicating about offerings of the issuer’s securities prior to the filing of a registration statement (H.R. 6035); and, (4) a bill that requires the Comptroller General of the United States to carry out a study on how virtual currencies and online marketplaces are used to facilitate the financing of illicit activities (H.R. 6069). Only H.R. 6035 faced any Democratic opposition, passing on a party-line vote of 31-23.
 
Cap Markets Subcommittee holds hearing on Securities Law Enforcement in Hearing
On Wednesday, the House Financial Services Subcommittee on Capital Markets, Securities, and Investments held a hearing focused on the Securities and Exchange Commission’s regulation of equity markets, with a focus on “areas of the law that would benefit from greater clarity and transparency to ensure that our capital markets are fair, attractive, and efficient.” The hearing focused on two legislative proposals, namely a bill to permit individuals to force the SEC to go to court in a civil action rather than administrative proceedings (H.R. 2128) and another that would provide exclusive federal jurisdiction over securities fraud actions (H.R. 5037).
 
Senate
Banking Committee Advances Fed Nominees to Senate Floor
On Tuesday, the Senate Banking Committee approved President Trump’s two most recent nominees to the Board of Governors for the Federal Reserve, Richard Clarida and Michelle Bowman, on bipartisan votes. Clarida — a former Treasury official — is in line to become the Fed’s Vice-Chair after being approved on a 20-5 vote with seven Democrats joining all Republicans in approving the nomination. Meanwhile, Bowman was approved on a slightly smaller margin in an 18-5 vote, despite Ranking Member Sherrod Brown saying he was “not confident” in either of the nominees. Clarida and Bowman now join Marvin Goodfiend as Fed nominees awaiting final confirmation in the Senate queue.
 
Dems Focus on ‘Discrimination’ Remark in Otting’s Senate Banking Hearing
On Thursday, the Senate Banking Committee held its own hearing with Comptroller Otting.  Coming 24 hours after his appearance before the House Financial Services Committee, Otting faced a number of questions from Senate Democrats who pressed the Comptroller on his previous comments about discrimination. Given the effective “do over” Otting offered a better response, defended his record and touted the reforms he intends to make aimed at improving enforcement of the Community Reinvestment Act (CRA). Compared to Wednesday hearing, the Senate Banking Hearing did not last nearly as long, but in this shorter appearance, Otting was able to offer comment on the disapproval of the Madden doctrine, implementation of the recently-passed banking regulatory reform bill, and the agency’s openness to changes following its proposal on reforms to the Volcker Rule.
 
After Hearing, Dems Want More Details on OCC Industry Report
On Thursday, Senate Democrats followed up Comptroller of the Currency Joseph Otting’s appearance in the House Financial Services Committee with a letter to his agency asking for more details on a review on bank sales practices that was completed in response to the Wells Fargo fake accounts scandal. Otting alluded to the review in both of his hearings last week, saying that the OCC found no “pervasiveness” in the practice of creating false accounts, although the agency did make a series of policy recommendations to the banks who were subject to the review.
 
Senate Dems Push for Investigation on if SEC Official Pressured Bank on Gun Policies
On Wednesday, several Senate Democrats sent a letter to the Securities and Exchange Commission’s Inspector General Carl Hoecker asking the agency watchdog to investigate whether SEC Commissioner Michael Piwowar tried to influence Citigroup earlier this year on whether to reverse a policy that would require clients to restrict firearm sales. The letter offers concerns that the Commissioner met with Citigroup and tried to pressure the bank to avoid “straying into social policy.”  The executives at the meeting allegedly described Piwowar’s comments as a “thinly veiled threat,” with the SEC Commissioner apparently suggesting that the move could lead to Republican appointees opposing easing derivative regulations. Republican lawmakers have opposed the moves by some banks to restrict their connections to the gun industry, with Banking Chair Mike Crapo (R-ID) sending letters to both Bank of America and Citigroup on the issue in April.
 
Select Highlights from the Administration

Federal Reserve
Fed Raises Interest Rates as Job Market Booms
On Wednesday, Federal Reserve Chair Jerome Powell announced that the Federal Open Markets Committee elected to bump interest rates a quarter point in response to a tightening labor market and rising inflation levels. Chair Powell’s statement added that the Fed expects inflation to rise to 2.2 percent on a regular basis through 2020 — above the central bank’s 2 percent target — but also noted that raising interest rates too quickly could drive up unemployment. This is the second increase under Chair Powell as the Fed moves towards bringing interest rates to historical averages, and the central bank is expected to raise rates two more times in 2018 if strengthening economic conditions continue. However, Chair Powell suggested that the Fed will be taking stock of the impact of growing trade tensions and keeping a close eye on international economic indicators.
 
The White House
White House Announces Next CFPB Director
On Saturday, the President announced that he was nominating Kathy Kraninger, a little-known White House budget official, as the next director of the Consumer Financial Protection Bureau.  The decision to nominate Kraninger, who works under Mulvaney at the Office of Budget and Mangement, came as surprise, and appeared to leapfrog her over bigger names like Rep. Darrell Issa (R-CA), or current NCUA Administrator McWaters.   Some view this nomination as a red herring, as the announcement resets the 210 day clock that Mulvaney has to serve in his acting director role.   Under the Vacancies Act, if the nomination isn't approved by the end of the year, Mulvaney's clock would reset again while another appointment is determined. 
 
White House, In Shift, Pushes to Revive U.S. Export-Import Bank
Reports emerged last week that the Trump Administration is expected to nominate Kimberly Reed to fill the top position at U.S. Export-Import Bank in the hope of bringing the bank back to full strength. Reed’s nomination comes six months after the Senate rejected the prior nominee — former congressman Scott Garrett — and the bank has continued to be hobbled without leadership in place. Reed will join three other nominees waiting on Senate confirmation to the Ex-Im Bank’s Board as the White House seeks to bring the Bank back after three years of stagnation. The bank itself has seen mixed political support that cuts across party lines, with conservatives opposing the use of government funds to support exporting companies. It remains to be seen whether Reed’s nomination will enjoy widespread support, and it’s possible she’ll face the same coalition of conservatives and Democrats that sunk Garrett’s nomination late last year.
 
Consumer Financial Protection Bureau (CFPB)
Mulvaney Aims 20 Percent Cut to CFPB Budget
Last week, the Wall Street Journal reported that CFPB Acting Director Mick Mulvaney would seek only $65.7 million for the consumer watchdog in the third quarter of 2018, making the total for the current fiscal year $381 million. That is a sharp reduction from the agency’s previous levels and Mulvaney has reportedly told staff to seek out cuts for a 20 percent cut in the 2019 fiscal year. A spokesman for the CFPB said that the cuts would be focused on “non-personnel spending, including major reductions in how much [the agency] pays for travel.”
 
The Judicial Branch
5th Circuit Court of Appeals
Fiduciary Rule Set to Expire After DOJ Declines to Appeal 5th Circuit Decision
A deadline for the Justice Department to file an appeal the 5th Circuit’ decision on the fiduciary rule passed last week without any action, leaving the Obama-era rule on the brink of being officially wiped off the books after a years-long legal battle. The Department of Justice could have appealed the 5th Circuit’s ruling to strike down the Labor Department’s rule, but did not do so, meaning that the 5th Circuit can issue a mandate that effectively eliminates the rule permanently. Timing on that final move has yet to be signaled by the appeals court, but it appears that the demise of the rule is now only a matter of time.
 
DC District Court
District Judge Approves AT&T $85 Billion Merger With Time Warner Without Conditions
On Tuesday, Judge Richard Leon of Washington D.C.’s U.S. District Court approved the mammoth $85.4 billion merger of AT&T and Time Warner over the protests of the Department of Justice. The decision is being viewed as a watershed moment and is expected to trigger a number of major acquisitions in the coming months. Judge Leon said in his opinion that his decision was due in part to a “dramatically different assessment of the current state of the relevant market” between the industry and the government, but tried to caution that the decision should not be viewed as “something more than a resolution of this specific case.”