Financial Services Report

July 3, 2018

Our Take

Wednesday marks the 242nd anniversary of the signing of the Declaration of Independence.   As anyone who has seen or heard “Hamilton” knows, people most frequently quote the document’s most famous lines, about life, liberty and the pursuit of happiness.  But those are the start of the Declarations’ second paragraph.   As any good history nerd knows, the first line is,
When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We seem to be entering a summer where our country is dealing with the dissolving of political bands that have connected us for some time (see, Crowley, Joseph).  But, as Jefferson also said,  a little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical.  It is clear that people are angry.   Whether this anger foretells the conclusion of the American experiment, however, remains to be seen.

Looking Ahead

Near Term

  • The House and Senate are in Recess in this week

Further Out

  • The Senate Banking Committee has announced an active schedule for July including:

    • A hearing on the Credit Bureaus on July 12th
    • The Humphrey-Hawkins Semi-Annual Report from the Fed on July 17th
    • A nomination hearing for Laura Kraniger to be head of the CFPB on July 19th
    • And another nomination hearing on the 24th for the soon to be vacant SEC Commissioner seat as well as for the nominee to head Ginnie Mae
  • The House Financial Services Committee is rumored to be preparing to do two mark-ups in July as Chairman Hensarling continues to maximize the remainder of his tenure as Chairman.
  • The President has indicated that he intends to announce his nominee to replace Justice Kennedy on July 9th and Leader McConnell has also indicated he intends to move the nominee as quickly as possible to confirmation.

The Past Week

Legislative Branch
House Approves Three Financial Services Via the Suspension Process
Last week the House approved three bills impacting the financial services industry, all of which passed by the suspension calendar, a process for moving less controversial measures.  These measures include: (1) legislation (H.R. 5783) to create a safe harbor for banks keeping suspicious accounts open at the request of law enforcement; (2) a bill (H.R. 435) that would allow companies and the Department of Housing and Urban Development to provide credit bureaus with information on housing rental payments and telecom and utility bill payments; and (3) a bill (H.R. 6069) that would require the Government Accountability Office to study how virtual currencies and online market places are used in sex trafficking and drug trafficking.
House Panel Holds Hearing on De-Risking Consequences, with Focus on Remittances, Choke Point
On Tuesday, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing on the consequences of de-risking — primarily related to the closure of bank accounts due to perceived compliance costs — both for customers and for banks. The hearing focused on the Bank Secrecy Act (BSA) and anti-money laundering compliance regime, and whether those regulations are too restrictive in preventing banks from conducting business with small businesses, remittance agencies, and other high-risk entities. Panelists represented a wide-variety of stakeholders, including one technology company that partners with banks and attempts to provide a third-party verification for risk management. Members also used the opportunity to again criticize Operation Choke Point, an Obama-era Justice Department initiative that has been criticized as politically targeting companies with money laundering enforcement investigations.
HUD Secretary Carson Appears at House Financial Services Committee Oversight Hearing
On Wednesday, the House Financial Services Committee held a hearing for the Department of Housing and Urban Development (HUD) featuring testimony from Secretary Ben Carson. Chair Jeb Hensarling criticized the agency for failing to provide a sufficient return on investment in his opening statement, but credited Secretary Carson with moving towards an approach that emphasized “lives of dignity and self-respect that comes from self-sufficiency.” Democrats, meanwhile, used the hearing to question Carson’s actions on housing discrimination, particularly the reversal of an Obama-era regulation known as the Affirmatively Furthering Fair Housing Rule.
Senate Passes Farm Bill Including NFIP Extension
On Thursday, the Senate passed their version of the agriculture and nutrition subsidy package known colloquially as the “farm bill” on a bipartisan 86-11 vote. The Senate’s package lacked some of the more controversial work for benefits requirements included in the House version but did include a number of amendments not considered by the House, most notably a 6-month extension for the National Flood Insurance Program (NFIP) that was due to expire on July 31. It is unclear whether the NFIP extension will be tolerated by the House in conference negotiations to come later this month as House Financial Services Committee Chairman Hensarling called the move to include NFIP in the farm bill “one of the uniquely bad ideas I’ve heard before.”
Jones, Scott Introduce Bill to Give Voting Power to FSOC Insurance Expert
Last week, Banking Committee Members Sens. Tim Scott (R-SC) and Doug Jones (D-AL) introduced a bill that would give the Financial Stability Oversight Council’s (FSOC) state insurance commissioner a vote on FSOC decisions. As constituted, the FSOC affords votes only to the body’s appointed insurance expert — currently Thomas Workman — whereas a state insurance commissioner is one of FSOC’s five non-voting members. The bill — dubbed the Primary Regulators of Insurance Vote Act — has the support of major insurance interest groups, including the National Association of Insurance Commissioners (NAIC) and American Council of Life Insurers (ACLI) and is the companion measure to legislation in the House authored by Representatives Duffy and Heck.
Finance Committee Holds Hearing for IRS Nominee Rettig
On Thursday, the Senate Finance Committee held a hearing to consider President Trump’s nominee to be the next Commissioner of Internal Revenue, Charles Rettig. The former tax lawyer faced fierce questions as members of both parties have accused the IRS of having political motivations in recent years. Rettig emphasized that his goal was to “strengthen and rebuild the trust between the IRS, the American people and their representatives in Congress,” and added that he is hoping to improve the tax agency’s customer services and information technology. Despite the tough questioning, Rettig is expected to be confirmed, although a date for both the Finance Committee and the full Senate to vote on his nomination has not yet been scheduled.
Brown Among Senators Blocking Tariff Oversight Amendment
During last week’s Senate consideration of the farm bill, President Trump got an unlikely ally in Sen. Sherrod Brown (D-OH) during a debate on whether the bill should include an amendment that would give Congress the power to overrule the president on national security tariffs. The effort was led by some Republicans who have criticized the Administration for its trade policy, but Sen. Brown blocked the amendment and defended the President’s tariff decisions saying that the moves were “long overdue actions.” Similar language was also blocked during the Senate’s consideration of the National Defense Authorization Act, but a standalone measure is currently being crafted in the Senate Finance Committee.  
Banking Committee Talks Corporate Governance, Capital Formation Legislative Proposals
Across two hearings on Tuesday and Thursday, the Senate Banking Committee discussed a range of legislative proposals intended to boost capital formation and improve corporate governance, respectively. On the first issue, the Committee discussed a number of bills that have passed out of the House Financial Services Committee with bipartisan support, such as a measure to ease the process for start-up companies to access angel investor groups. The latter hearing meanwhile, focused on more novel proposals, with Chair Crapo listing measures that would aim to: expand the definition of accredited investor; shorten the Schedule 13D filing window and increase disclosure of short positions; require the Financial Industry Regulatory Authority (FINRA) to create a relief fund to cover unpaid arbitration awards to investors; draw attention to cybersecurity experience at the board level; address concerns that a gap exists between the time a firm learns of material nonpublic information and its disclosure; and highlight the unique challenges to rural area small businesses. A markup in the Committee has not yet been scheduled.
Warren & Blumenthal Lead Letter Asking Ross for Information on Controversial Trades
On Thursday, a bicameral group of Democrats — Sens. Elizabeth Warren (D-MA), Richard Blumenthal (D-CT) and Rep. Elijah Cummings (D-MD) — sent a letter to SEC Chair Jay Clayton asking for an investigation into whether Commerce Secretary Wilbur Ross violated insider trading laws when selling stock in a shipping company with deep ties to the Russian government. Ross had shorted shares of the company after The New York Times reached out to him to comment on a story they were planning to publish on his connection to the Russian-linked company, and reports suggest that Ross likely made a profit of $100,000 to $250,000 after the story was published. The Democratic lawmakers want the SEC to determine whether Ross violated either rules restricting government officials or more general laws that block insider trading.

Select Highlights from the Administration

Consumer Financial Protection Bureau (CFPB)
CFPB Settles Citibank Case for $335 Million in Customer Payback
On Friday, the Consumer Financial Protection Bureau announced it had reached a settlement with Citibank over violations of the Truth in Lending Act for $335 million in restitution to effected consumers. The settlement stems from Citibank’s self-reported failure to reevaluate and reduce the annual percentage rates on nearly 2 million credit card accounts as prescribed by regulation. The Bureau elected not to assess any civil money penalties based on “a number of factors, including that Citibank self-identified and self-reported the violations to the Bureau, and self-initiated remediation to affected consumers.”
Securities and Exchange Commission (SEC)
SEC Unanimously Approves Proposal to Jumpstart ETFs
On Thursday, the SEC voted 5-0 to get public comment on a proposal aiming to make it easier to bring new exchange-traded funds (ETFs) to market. The crux of the proposal would set guidelines for less-complicated funds and eliminate the need for many issuers to get a special order from the SEC in order to conduct operations. In announcing the plan, SEC Chair Jay Clayton said it would affect most currently-operating ETFs, although some more complicated products would not be eligible for the streamlined process.
Federal Reserve
Boston Fed’s President Backs Higher Capital Requirement for Banks
In an interview on Wednesday, Boston Fed President Eric Rosengren said that he believes the nation’s central bank should require banks to hold more loss-absorbing capital than they currently are to protect against future economic difficulties. The requirement is currently set at zero, but Fed Governor Lael Brainard raised the possibility of a hike at a Fed meeting in April. Rosengren’s comments come as the American economy continues to expand at a stronger pace, which he argued makes this the “ideal time” to institute a bigger buffer.
Fed, FDIC Pitch Living Will Changes
On Friday, the Federal Reserve and Federal Deposit Insurance Corporation (FDIC) announced that they are seeking comment on proposed revisions to the resolution plan — also known as a living will — guidance for the eight largest, most complex U.S. banks. The proposed guidance would make changes to the agencies’ expectations regarding derivatives and trading activities, as well as its payment, clearing, and settlement (PCS) activities. The comment period for the guidance will be open for 60 days.
In the States
California Passes Precedent-Setting Data Privacy Bill

On Thursday, California’s state legislature passed a bill that would significantly broaden data protections and restrict tech companies’ use of personal data. Among the specific provisions, the bill would cast a wider net in what qualifies as personal information and block companies from selling that information to third parties. Many observers in the tech sector see the bill as a precedent setting event — in the same vein as the EU’s recently-enacted General Data Protection Regulation — given that its privacy policies are typically easier to roll out for all users rather than based on any geographic area. The bill — which goes into effect in 2020 — could also be a starting point for federal legislation on the topic as lawmakers look to respond to recent major data breaches in the public and private sectors.