TRP Financial Services Report

March 9, 2015
The drama surrounding the eventual resolution of the Department of Homeland Security funding made two things very clear.  First, that despite having majorities in both Houses, Republicans still have intra-chamber differences, and second, because of those differences Democrats still matter.  With Leader McConnell reaffirming his commitment not to let the nation default on the debt limit, and with the end of extraordinary measures likely coinciding with the end of the fiscal year, it should all but guarantee an exciting fall. 

In the interim, both Democrats and Republicans continue to work through their internal “purity tests” which play out both inside of Congress and out.

Looking Ahead
Near Term 

  • The House is in recess this week
  • After initially considering bring up an Iranian Sanctions bill, Leader McConnell changed direction late last week and instead the Senate will consider the Justice for Victims of Trafficking Act of 2015 (S. 178), would establish a new fund for domestic trafficking victims.  In addition, Democrats will continue to press for confirmation of Loretta Lynch to be the next Attorney General. 
  • On Tuesday, the CFPB will hold a field hearing in Newark, NJ where it is expected to announce new rules on the use of pre-dispute mandatory arbitration in credit card agreements. 

Further Out 

  • House and Senate Budget Committees are expected to begin marking up their respective budgets the next week.
  • Senator Shelby has announced his March schedule, which will include two hearings (March 17th and 19th) on the threshold for designating systematically important financial institutions.  Senator Shelby has indicated that he intends to mark-up legislation to amend the current standard set by Dodd-Frank sometime in April. 
  • Then on March 24th the Banking Committee will hold a hearing on the Financial Stability Oversight Council (FSOC) focusing on the FSOC’s accountability and stability.
  • Having barely survived successfully dealing with the DHS funding, it important to keep in mind the remaining statutorily imposed deadlines:

    • March 31: “Doc Fix”
    • May 31: Surface Transportation
    • June 1: USA PATRIOT Act
    • June 30: Export-Import Bank
    • Sept. 30: CHIP Funding
    • Sept. 30: Child Nutrition & WIC
    • Sept. 30: FAA Authorization
    • Late Fall: Extraordinary Measures for the Debt Ceiling run out.

The Past Week
Legislative Branch
CFPB Semi Annual Report Hearing Lasts Nearly 4 Hours

On Tuesday March 3rd the House Financial Services Committee held a hearing to hear from CFPB Director Richard Cordray testify about the Bureau’s Semi-Annual Report to Congress.  The hearing last over 4 hours as the Director stayed to answer every question asked.  Despite the length of the hearing, attendance was sparse, especially on the Democratic side of the aisle with most Democratic members of the committee opting to skip the hearing (or leave before asking a question of the witness).  While a variety of topics were covered, significant attention was paid on the pending payday / small dollar lending rules, the pending prepaid card rules, the Bureau’s efforts in the indirect auto lending space and the recent CFPB actions on QM. 

Neugabuer Introduces Legislation to Modify CFPB Leadership

On Wednesday Congressman Randy Neugebauer (R-TX) introduced legislation, H.R. 1266 to replace the Consumer Finance Protection Bureau's single director structure with a five-person commission.  As of today the bill has 20 cosponsors, though they are all Republicans.  Despite arguments by Neugebauer and others that Democrats like Elizabeth Warren and Barney Frank originally advocated for a five-member Commission, it is unlikely that this proposal will obtain Democrat support.

Luetkemeyer Introduces Legislation to Raise SIFI Designation Threshold

On March 4th, Congressman Blaine Luetkeyer introduced H.R. 1309, the Systemic Risk Designation Improvement Act, which would remove the $50 billion dollar threshold for SIFI designation and replace it with a standard based on risk.   The bill was introduced with four Democratic cosponsors, Murphy (FL), Sinema (AZ), Sewell (AL) and Scott (GA).  The bill’s introduction occurred during the same week that the Treasury Secretary Lew was on the Hill testifying before House and Senate Appropriations Subcommittees about Treasury’s budget and in response to a question from a Senator noted that just because a financial institution has more than $50 billion in assets it wouldn’t automatically be designated. 

New Democrats Offer Moderate Path Forward

On Wednesday the New Democratic Coalition released its vision for a Democratic prosperity agenda, with a broad 23 point  outline grouped under three main pillars; (1) the Economy; (2) Education; and (3) Good government initiatives.  As a rising star in the group has noted, the plan doesn’t fit on a bumper sticker, but it is clear effort on trying to find consensus amongst a Democratic party that appears to be fracturing over issues and messaging, but has been fortunate that their troubles have been overshadowed by the majority.   However, areas like TPA, domestic energy production and revising the tax code will likely be difficult gaps to bridge.  While it was reported that a meeting between representatives of the New Democrats and Leadership took place following the announcement of the agenda, there were no public commitments, and it remains unclear how much of this proposal will be incorporated into broader Democratic messaging and policies. 

Lynch Introduces Legislation to Require SEC to Study Maker-Taker

On Tuesday, Representative Stephen Lynch (D-MA) introduced H.R. 1216, a bill that would require the SEC to carry out a pilot program in order to study the impact of alternatives to the so-called maker-taker pricing model.  According to a press release, if enacted the bill would require the SEC to identify a random sample of 50 of 100 of the most heavily traded U.S. stocks, and then prohibit payment of rebates for trades during a six month period. 

Senate Appropriators Weigh in on DOL Fiduciary Rule

Last week saw another round of volleys in the back and forth of the Department of Labor’s so-called Fiduciary Rule.  First, the Chairmen of the House and Senate Appropriations Subcommittee on Financial Services sent a joint letter to the Office of Management and Budget (OMB) indicating that they believed the proposed DOL rule would only create “investor harm and confusion surrounding different standards of care,” and that the SEC should really take the lead on this issue.  Further, he Chairmen, Senator John Boozman (R-AR) and Rep. Ander Crenshaw (R-FL) also urged OMB to ensure that the DOL guarantees at least 90 days of public review of the proposed rule.  Then, the following day, Senators Roy Blunt, Thad Cochran, Jerry Moran, Lindsey Graham, Mark Kirk, Bill Cassidy, Shelley Moore Capito and James Lankford, all Republican members of the Appropriations committee also sent a letter to OMB stating that they weren’t convinced that the DOL has shown the rule is necessary. 

Banking Holds Hearing on Fed Accountability

On March 3rd the Senate Banking Committee held a hearing entitled, “Federal Reserve Accountability and Reform.”  During the hearing, it became clear that the path for Senator Paul’s Audit the Fed bill got much more difficult, but that Banking Committee Chairman Shelby intends to try to move legislation that would make other changes to the Federal Reserve Board system, such as rotating positions on the FOMC (as suggested by Dallas Fed President Fischer) and expediting the time frame for releasing FOMC transcripts.   As was widely reported, Shelby appears more focused on moving a bipartisan bill that address concerns about the Fed being expressed on both sides of the aisle.  While it is unclear when the Chairman will introduce a bill, he has expressed his belief that more hearings are necessary.

Finance Examines Fairness In Tax Code

On March 3rd the Senate Finance Committee held a hearing entitled, “Fairness in Taxiation” and heard from Dr Lawrence Lindsey, Deroy Murdock, Dr. Heather Boushey, and Steven Rattner.  Mr. Rattner, an investment banker, raised the ire of the Private Equity industry by using his appearance to advocate for closing many loopholes, including modifying the carried interest provision that many in private equity use as a means of compensation.  Chairman Hatch and Ranking Member Wyden also touched on the need for progressivity in the code.  Hatch’s opening statement noted that although some exceptions are necessary for “truly needy” the code should be progressive enough to acknowledge individual taxpayers ability to pay, and his belief that any overhaul of the code needs to address the current situation where half population is “shielded” from bearing the cost of funding the federal government.  On the other hand, Wyden argued that any reform should incorporate the two standards of fairness set by the 86 Act:  (1) Give fair treatment to wage earners; and (2) crack down on “tax cheats who pry open loopholes and skirt their responsibilities.

select Highlights from the Administration
Lew Urges for Swift Passage of Debt Limit

On Friday, it was reported that Treasury Secretary Lew wrote to Senate and House leadership to inform them that the United States will hit its debt limit on March 16th and to urge for quick passage of legislation to raise the debt ceiling.  The letter comes following a CBO announcement that the so-called extraordinary measures that Treasury has at its disposal will keep the Government operating through late October or early November. 

FSOC to Meet Next Week – Premature to Speculate on Activity on Asset Managers

FSOC to meet  March 11th.  But speaking at an Investment Adviser Compliance Conference, FSOC Executive Director Patrick Pinschmidt said it was ‘premature to speculate' on what the council might to do manage systemic risk in the asset management industry and reiterated earlier reports that the Council was still in the risk-identification stage of the process with regard to asset managers.  Though he did note that the FSOC was “particularly interested in the growth in vehicles investing in less-liquid assets, such as high-yield bonds, and whether any redemption incentives could be magnified in a time of market stress.”

Federal Reserve Board
Latest Stress Test Results Positive for All Participants

On March 5th the Fed released the latest round of stress test for the 31 largest banks in the United States and all passed.  While some banks apparently passed by the narrowest of margins, nonetheless the results are a positive sign for the economy, which continues to improve since the depths of the recession. 

Securities and Exchange Commission (SEC)
White Hints at Return of  SEC to Examine Issues Related to Venture Exchanges

On Wednesday, while addressing the SEC’s Advisory Committee on Small and Emerging Businesses, Chair White, noted that the SEC needs to carefully study past experiences with venture exchanges in order to learn from previous mistakes as the Commission moves forward with implementing new ones.   The Chair went on to note that “the staff is considering whether the development of appropriately structured venture exchanges could provide more liquidity for the securities of smaller companies.”  At the same meeting, Commissioner Aguillar also spoke about venture exchanges, noting that efforts by other exchanges have stalled and that he is concerned that retail investors could be harmed if venture exchanges were to be brought online in the U.S.

Next Week’s Schedule
The House is Recess
Tuesday March 10th
Senate Finance Committee hearing on "Tax Complexity, Compliance, and Administration: The Merits of Simplification in Tax Reform."  10:00 a.m. ET   215 Dirksen Senate Office Building
Senate Banking Committee hearing on "Venture Exchanges and Small-Cap Companies."
10:00 a.m. ET  538 Dirksen Senate Office Building
Thursday, March 12th
Senate Finance Committee hearing on "Protecting Taxpayers from Schemes and Scams During the 2015 Tax Filing Season." 10:00 a.m. ET  215 Dirksen Senate Office Building
Senate Aging Committee hearing on "Bridging the Gap: How Prepared are Americans for Retirement?" 10:30 a.m. ET 562 Dirksen Senate Office Building