TRP Financial Services Report

February 9, 2015
Last week we once again witnessed an annual rite of passage in Washington.  The President also released his budget, and although the recent budget battles have been more akin to the film classic Groundhog Day than your classic legislative process, last week’s release of the budget on Groundhog Day offered some constructive steps towards a roadmap forward.  As discussed in more detail below, the President’s budget was a strong liberal statement and in some ways was seen by observers as more of a check on Hillary Clinton than Congressional Republicans, however it also offered just enough morsels to give Republicans a few areas for agreement.  While this budget as a whole is clearly DOA in Congress, there are clearly certain areas, including tax reform, where both sides can find mutual areas for agreement.  

Looking Ahead
Near Term 
  • The House is scheduled to take up the Senate-passed legislation that would force approval of the Keystone XL oil pipeline, setting up a veto confrontation with Obama. The Senate passed the measure on Jan. 29 by 62-36, short of the two-thirds majority that would be needed to override a veto. The amended Senate bill has a number of items not in the House-passed Keystone approval bill, including energy efficiency provisions and language that states “climate change is real and not a hoax.” 
  • In addition the House also plans to vote on two tax packages — one related to charitable giving, and another focused on small businesses. The first (H.R. 644) would combine four charity-related tax bills. It would make permanent the tax deduction for donations of food inventory, tax-free donations of money from individual retirement accounts and deductions for property donated for conservation. The excise tax on investment income of private foundations also would be reduced. The second (H.R.636) would make permanent expensing rules under section 179 of the tax code. It would be expanded to cover rules relating to S corporations.
  • The Senate is expected to try to move away from the stalled DHS funding bill and could move onto bringing up a House-passed measure that would repeal the 2010 Affordable Care Act and call for a replacement.
Further Out 
  • Federal Reserve Chair Janet Yellen will testify before the Senate Banking Committee on February 24th.  She is likely to testify later that week before the House Financial Services Committee as part of the Fed’s semi-annual appearance.
  • We are quickly approaching on the first of multiple legislative deadlines, as we near February 27th, the date current funding for the Department of Homeland Security run out. 
  • Other Key Dates in the Congressional calendar include:
o   Sometime After March 15: Debt Limit
o   March 31: “Doc Fix”
o   May 31: Surface Transportation
o   June 1: USA PATRIOT Act
o   June 30: Export-Import Bank
o   Sept. 30: CHIP Funding
o   Sept. 30: Child Nutrition & WIC
o    Sept. 30: FAA Authorization
The Past Week
Legislative Branch
Lew Testifies Before Ways and Means
On February 3, the House Ways and Means Committee held a hearing with Treasury Secretary Jacob J. Lew on the President's Fiscal Year 2016 Budget Proposal.  Chairman Ryan led off the hearing by expressing his interest in moving tax reform and Trade Promotion Authority (TPA) this year.  During the hearing other members of the committee expressed their interest in tackling tax reform, though it was clear that there is a real difference of opinion between Democrats and Republicans on how to structure any reform. 
Pelosi Questions Republican Obsession with Dodd-Frank Reforms
During a speech at the Brookings Institute on Tuesday, House Minority Leader Nancy Pelosi (D-CA) called out Republican efforts to amend or repeal Dodd-Frank as an obsession founded on an affinity for trickle-down economics.  The Minority Leader’s harsh tone only underscored the necessity in properly messaging and getting the politics right that any proponents of amending Dodd-Frank will face in persuading Democrats to get on board with their proposed modifications.
House Passes Bill to Cap CFPB Budget
On Wednesday, by a vote of 250-173, with only 9 Democrats crossing the aisle, the House voted to approve the Unfunded Mandates Information and Transparency Act of 2015, which will impose new obligations for Federal rule writing.  However, contained within this bill was a provision, added in the Rule Committee that would cap the CFPB’s funding at $550 million dollars.  The CFPB receives its funding from the Federal Reserve, and the estimate for its 2016 budget allocation is expected to be a maximum of $631.7 million.
Lew Testifies Before Senate Finance
On Thursday, Treasury Secretary Jack Lew appeared before the Senate Finance Committee to defend the Administration’s budget request for the Treasury and related agencies.   Senator Hatch opened the hearing by outlining multiple areas of the budget he vehemently disagreed with before noting that there was a consensus on the need to tackle tax reform.  Ranking Member Wyden, along with other members of the Committee also noted the need for comprehensive tax reform, and much of the question and answer period of the hearing was devoted to discussions about various elements of tax reform. 
Aging Committee Holds Hearing on Financial Exploitation of Seniors
On February 4, the Senate Special Committee on Aging held a hearing entitled “Broken Trust: Combating Financial Exploitation of Vulnerable Seniors.”  During the hearing, Chairwoman Collins noted that the Committee will be primarily focusing on three topics this year: (1) retirement security; (2) biomedical research investment; and (3) financial schemes targeting older Americans.  During the hearing, Senator Warren (D-MA) expressed concerns about the fee incentives given to financial advisers and asked the witnesses what could be done to ensure advisers act in the best interest of their clients.  Interestingly, one witness, Judith Shaw, Securities Administrator of Maine and President-Elect of The North American Securities Administrators Association (NASAA) responded by urging the SEC to adopt a uniform fiduciary standard.
Commerce Committee Holds Hearing on Cyber Security and Data Sharing
On Wednesday, the Commerce Committee held a hearing entitled, “Building a More Secure Cyber Future: Examining Private Sector Experience with the NIST Framework,” where the Committee examined whether the current voluntary system was sufficient to ensure adequate data sharing or whether a mandatory sharing system would be better. 
Select Highlights from the Administration
White House
White House Unveils FY2016 Budget
On Monday, the President released his $4 trillion fiscal year (FY) 2016 budget blueprint, a plan that would raise taxes on corporations and the nation’s top earners, fund major investments in infrastructure and education, and stabilize – but not eliminate – the annual U.S. budget deficit.  The budget calls for a major spending boost for both domestic programs and the military, including about $74 billion in additional discretionary spending – about 7 percent above the level set under sequestration (up to $1.091 trillion).  Of that $74 billion, $38 billion would be added above the cap for defense and national security spending, for a total of $561 billion. The budget will also call for non-defense discretionary spending to be increased by $37 billion over the current limit to $530 billion.
The Administration’s plan is the opening salvo in what will be a nearly yearlong negotiation over the final FY16 spending numbers.  In terms rhetoric the budget makes it clear that the Administration and likely Congressional Democrats will focus on the overseas coffers of corporations, as it would pay for $478 billion in infrastructure funding for the next six years by taxing overseas earnings at a 14% rate.  It also includes a 19% levy on future foreign earnings of US Corporations.  In addition, the Administration continues to push for a new tax on large financial firms (i.e., more than $50 billion in assets) by imposing a 7 basis point fee on their liabilities.  While a similar proposal was in the Camp draft from last Congress, to date, Chairman Ryan has not expressed any interest in reviving the proposal. 
President Obama’s budget includes his highest-ever funding requests for a pair of financial regulators charged with implementing Dodd-Frank: the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).  The funding requests would raise the SEC’s budget 15 percent to $1.7 billion, and the CFTC would get a 29 percent increase to $322 million.  
FSOC Adopts New Procedures
On Wednesday, the Financial Stability Oversight Council (FSOC) announced that it was formally adopting three reforms to shed more transparency on its process for deciding which large financial firms should be designated for additional oversight because they pose systemic market risks.  Under these reforms, companies should get more notice when they are under consideration for designation, as well as have greater opportunity to advocate that their designation is no longer warranted.  The move was applauded by numerous groups, including the Bipartisan Policy Center and SIFMA.
Interim TRIA Guidance Released
On Wednesday, Treasury released interim guidance on the Terrorism Risk Insurance Program Reauthorization Act addressing “ambiguities regarding application of certain sections of the Program regulations” in light of 2015 reauthorization.  This document indicates that that Treasury plans to issue a proposal to amend TRIA regulations, but that the interim guidance providing a basis that “may be relied upon by members of the public until superseded by the Program regulations, as amended, or by subsequent guidance.” Treasury notes that it considers the existing TRIA regulations to be in effect except to the extent any are inconsistent with the 2015 reauthorization, in which case the 2015 reauthorization’s provisions apply.
Office of Financial Research Launches Public Website
On Tuesday, the Office of Financial Research (OFR), the research arm of the FSOC, announced it had a website to make its data and analyses publicly available.  According to a press release announcing the development, the website would include an inventory of the financial data that has been purchased, collected and developed by FSOC member agencies; updates on the OFR-led initiative on the Legal Entity Identifier (LEI), an international data standard used to identify the participants in financial transactions; and information on the OFR's Financial Research Advisory Committee (FRAC), which helps the office work on best practices for data management, data standards and research methods.
Securities and Exchange Commission (SEC)
Commission Releases Cyber Security Report
On Tuesday, the SEC released a report that concluded that while the “vast majority” of broker-dealers and investment advisors of a sample examination period have adopted cyber security policies and conducted risk assessments for cyber threats, most of the firms had also claimed to have been a victim of at least one cyber-related incident.   The report noted that 88% of broker-dealers and 74% of adviser claim to have experienced cyber-attacked directly or through a vendor, most of which are related to fraudulent e-mails and malware.  The threat of cyber attacks was also underscored by a similar report issued by The Financial Industry Regulatory Authority (FINA) that identified “hacking, inside threats and operational risks, including power outages and natural disasters” as three top cyber security concerns. 
Stein and Aguilar Dissent on Oppenheimer Waiver Decision
On Tuesday, SEC Commissioners Luis Aguilar and Kara Stein issued “a scathing dissent” to a waiver granted by the SEC to Oppenheimer funds to allow the company to continue to engage in certain capital-raising deals in light of the fact that a subsidiary of the company had agreed to pay a $20 million dollar fine related to allegations of improperly facilitating penny stock trades. 
Aguilar Calls for Commission to Impose New Rules on Target Date Funds
While speaking at the American Retirement Initiative Conference this past week, SEC Commissioner Luis Aguilar indicated his belief that the SEC should “dust off” rules proposed back in June of 2010 that would impose new reporting obligations on target date funds. 

Consumer Financial Protection Bureau (CFPB)
CFPB Announces Nearly Half a Billion Dollars in Debt Forgiveness
On Tuesday, the CFPB and the Department of Education announced that the new owner of the for profit Corinthian College company had agreed to forgive $480 million dollars in student loan debt by students who had taken loans from Corinthian.  In addition, the new company, ECMC, agreed to refrain from issuing its own private loans for the next seven years, as well as to halt certain debt collection practices. 

Global Regulators Warn on Over-Reliance on Banks’ Risk Models
On Thursday, the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and International Association of Insurance Supervisors released a report suggesting that banks and supervisors should be wary of relying on lenders’ own risk models to calculate capital needs.  In a statement published on the website for the Bank for International Settlements, the group of global financial regulators said that bank supervisors should be “cautious against over-reliance on internal models for credit risk management,” and should use “simple measures” to calculate capital where appropriate.  Among their additional recommendations, supervisors should: (1) be cognizant of the growth of risk-taking behaviors such as “search for yield” mechanisms, (2) be aware of the growing need for high-quality liquid collateral to meet margin requirements for OTC derivatives sectors, and (3) consider whether firms are accurately capturing central counterparty exposures as part of their credit risk management.  Comments on the report may be submitted here until March 4.
Next Week’s Schedule
Tuesday February 10th
Senate Banking Committee, 10:00am in 538 Dirksen: "Regulatory Relief for Community Banks and Credit Unions."
Senate Finance Committee,  10:00am in 215 Dirksen: "Getting to Yes on Tax Reform: What Lessons Can Congress Learn from the Tax Reform Act of 1986?"
Wednesday, February 11th
House Appropriations Agriculture Subcommittee, 10:00am in 2362-A Rayburn: Hearing on the CFTC
House Financial Services Committee, 10:00am in HVC-210, "The Future of Housing in America: Oversight of the Federal Housing Administration."
Thursday, February 12th
Senate Banking Committee, 10:00am in 538 Dirksen: "Regulatory Relief for Community Banks and Credit Unions."