TRP Financial Services Report

As we close the books on one of the most productive weeks in Congress this year (and perhaps in recent memory), we can’t help but note that it occurred just before the convergence of the Easter and Passover holidays this year.  Perhaps it is just coincidence, but one can’t help but wonder if we should take it all as a sign of a rebirth of old school congressional deal-making.   After all, if Speaker Boehner and Democratic Leader Pelosi can find agreement on a bill that blends entitlement reforms, increases in community health spending and takes the annual headache of the so-called “Doc Fix” off the table, perhaps future deals are in the works.     

As we’ve said many times, this is a year of deadlines, most, if not all are that are creatures of Congressional creation.  So far Congress has managed to successfully deal with the first two – albeit one more smoothly than the other.  Next up is the Surface Transportation funding bill – but it looks like that might need a short term punt since no one seems able to find consensus around a funding mechanism, which means the next real “cliff” is the Export-Import Bank authorization set to expire on June 30^th.  While the conventional wisdom is that current odds are it is more likely than not that Congress will reauthorize the Bank, simply because it requires proactive action in the face of the opposition of at least one, if not two Committee Chairs, the fact remains that there is a sizable bipartisan group of members who support reauthorization.  As with any financial advice, past performance is never an indicator of future success, but if the Speaker and Leader Pelosi can find common ground to pass the SGR deal by a vote of 392-37 then perhaps they can replicate that success to find a path forward to reauthorize the Ex-Im Bank and on the other remaining “cliffs” that Congress has to deal with this year, including the likely union of the debt ceiling and funding the government towards the end of the year. 
 
Near Term 

• The House and Senate are in Recess until April 13^th

 
Further Out

• The remaining statutorily imposed deadlines for the year are:
  • 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
  • End of September or October: Extraordinary Measures for dealing the Debt Ceiling run out and default becomes possible.

 
The Past Week
Legislative Branch
 
House
House Passes Budget
This past week the House dusted off a little known procedural rule called “Queen of the Hill” that allowed everyone a shot at getting their budget passed.  As a result there were six separate votes with the budget resolution that received the most votes wining.  Not surprisingly, all three Democratic-backed alternate budgets, offered by the Democrats, the Progressive Caucus and the Black Caucus) were all defeated.  The Republican Study Committee’s alternative was also rejected by a vote of 132-294 with 112 Republicans voting against the RSC proposal.  Then the House also rejected the so-called “Price 1” budget proposal by a vote of 105-319, before approving the “Price 2” proposal that included an extra $2 billion dollars in Oversees Contingency Operations Defense Spending by a 219-208 vote. 
 
Financial Services Committee Marks-Up Series of Bills
On Thursday March 26, and Friday March 27, the House Financial Services Committee marked-up and approved 11 different bills. The various pieces of legislation covered a wide range of from mortgages, privacy and the availability of funds to the Northern Mariana Islands, to modifications to the CFPB.  A full list of the bills and their vote tallies include:
 
H.R. 299, Capital Access for Small Community Financial Institutions Act of 2015 was approved by a vote of 56-1
H.R. 601, the Eliminate Privacy Notice Confusion Act was approved by a vote of 57- 0
H.R. 650, the Preserving Access to Manufactured Housing Act of 2015 approved by a vote of 43-15
H.R. 685, the Mortgage Choice Act of 2015 was approved by a vote of 43-12
H.R. 1195, the Bureau of Consumer Financial Protection Advisory Boards Act was approved by a vote of 53-5
H.R. 1259, the Helping Expand Lending Practices in Rural Communities Act was approved by a vote of 56-2
H.R. 1265, the Bureau Advisory Commission Transparency Act was approved by a vote of 56-2
H.R. 1367, to amend the Expedited Funds Availability Act to clarify the application of that Act to American Samoa and the Northern Mariana Islands was approved by a vote of 58 – 0
H.R. 1408, the Mortgage Servicing Asset Capital Requirements Act of 2015 was approved by a vote of 49-9
H.R. 1480, the SAFE Act Confidentiality and Privilege Enhancement Act approved by a vote of 58-0
H.R. 1529, the Community Institution Mortgage Relief Act of 2015 approved by a vote of 48-10
​ 
Committee Grills White on SEC Agenda
On Tuesday, during a 3 and half hour hearing, SEC Chair White answered questions from members of the Financial Services Committee.  While many members focused their time on the pending fiduciary duty rule and the Chair’s recent announcement that she wanted the Commission to move forward on a rule, other topics discussed included: liquidity in the bond market; the Volcker Rule, the FSOC decision making process; Insider Trading, and the pending FASB modification of the treatment of leases, among others.  With regard to the Fiduciary Rule, Chair White made it clear that the Commission was at the start of the process and resisted numerous attempts by Republicans to say that that the Department of Labor should wait till the Commission acts before moving forward with its own Fiduciary rule.  In general, members on the Republican side of the aisle seemed exasperated by the timeline of the Chair’s decision to act while any Democrat who waded into the conversation praised the Chair’s decision.  Ranking Member Waters once again called for Congress to impose a fee on Investment Advisers to fund a 3^rd party examination, an idea that White didn’t endorse but didn’t outright oppose either.  Finally, the most interesting moment of the hearing may have come in response to a question about the standards FSOC uses for non-bank SIFI designation and de-designation, when Chair White implied that there were ten criteria used by the FSOC, which seemed to take Rep. Luetkemeyer by surprise as he noted that neither Janet Yellen and Jack Lew had never admitted the criteria’s existence.
 
Waters Introduces Legislation Aimed at SEC Waiver Process
On Tuesday, just before SEC Chair White testified before her committee, Maxine Waters, the Ranking Member of the Financial Services Committee introduced the “Bad Actors Disqualification Act of 2015” which would, “increase transparency and establish a more vigorous, fair and public process for [how the SEC grants] waivers of bad actor disqualifications.”
 
Himes Womack Introduce Bill Aimed at Curtailing Insider Trading
On Wednesday, Rep. Jim Himes (D-CT) and Rep. Steve Womack (R-AR) introduced a bill that would ban trading on “material, nonpublic” information, as well as communicating such information to someone who would likely trade on it.  The legislation comes in response, and supersedes, a recent 2^nd Circuit decision known as Newman, where the court held that a tippee must know that the tipper received a personal benefit from passing along the information.
 
Bipartisan Bill to Codify FSOC Transparency Measures Introduced  
On Thursday, Representatives Dennis Ross (R-FL) and John Delaney (D-MD) introduced H.R. 1550, that would codify some of the transparency initiatives that the FSOC announced earlier this year, as well as require the FSOC to provide more notice to companies potentially under investigation for being systemically important.  A similar version of the legislation was introduced last year but failed to move.
 
Issa to Introduce MADOFF Act
On Tuesday, Rep. Darrell Issa (R-CA) announced that he intended to introduce the Making All Data Open for Financial (MADOFF) Transparency Act.  According to the press release, the legislation would direct federal financial regulators to adopt consistent standards, while providing greater public access by increasing the ability of the information to be in a searchable form.  The release was silent as to where the second “F” from the acronym would come from. 
 
Energy and Commerce Subcommittee Marks Up Data Breach Notification Law
On Wednesday, the Energy and Commerce Subcommittee on Commerce, Manufacturing and Trade marked-up the Data Security and Breach Notification Act of 2015.  The bill, which now goes to the full Committee, is cosponsored by Reps. Blackburn (R-TN) and Welch (D-VT) but the mark-up devolved into a partisan affair, with Democrats trying to undo much of the preemption provisions in the bill.  While the bill advanced on a voice vote, it seemed that there were only two Democrats willing to support it, Welch and Tony Cardenas, as the other Democrats on the subcommittee to issue with what they considered the bill’s narrow definition of personally identifiable information (PII) and the preemption provisions that allow this federal statute to overtake state laws, including those with more stringent requirements for companies whose databases are breached.  
 
Senate
Another year of Vote-a-Rama Drama
Early Friday morning the Senate concluded its vote-a-rama on the Budget Resolution, ultimately passing the budget by a vote of 52-46.  The process, which some have complained has become more political over the years as both parties try to make the other side take votes that can be used in future campaign ads, is important in that the creation of deficit-neutral reserve funds serves as placeholders for appropriations strategies.  During the evening and into early morning hours the Senate voted on numerous amendments, including one by Senator Portman that improved the use of dynamic scoring in the budget (a help to those seeking tax reform) and one by Senator Brown that established a deficit-neutral reserve fund to end “too big to fail” bailouts for “mega-banks” (i.e., those with over $500 billion in total assets).    House and Senate negotiators must now reconcile their respective bills so that a final budget, one that Republicans will be sure to include reconciliation instructions, can be agreed to and passed by both chambers.
 
Banking Committee Continues to Examine FSOC and its Designation Process
On Thursday the Senate Banking Committee held its second hearing on the Federal Stability Oversight Council (FSOC), this time hearing from Treasury Secretary Jack Lew and then a panel of industry representatives.  While Chairman Shelby called the $50 billion threshold arbitrary, Senators Warren and Brown cautioned against a carte blanche shift.  Warren in particular appeared to indicate that keeping the threshold low while allowing the Fed greater flexibility in making a case-by-case basis for determination might be a more preferable route, while Brown seemed to be concerned that the FSOC isn’t moving fast enough to designate more institutions.  Interestingly, Warren seemed to jump head first into the growing question of how a designated company “de-designates” and implied that a faster off-ramp from the SIFI designation would be more productive to reducing risk in the financial system.   
 
Securities, Insurance and Investment Subcommittee Examines Small Business Capital Formation
On March 24, the Senate Banking Committee's Subcommittee on Securities, Insurance, and Investment held a hearing entitled “Capital Formation and Reducing Small Business Burdens.” The hearing focused on several bills aimed at capital formation.  Some of these bills had passed the House in the 113^th Congress but never gained much traction in the Senate.  During the hearing the subcommittee discussed the SBIC Advisers Relief Act, the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2014, the Eliminating Swaps Data Indemnification Requirements, the Improving Access to Capital for Emerging Growth Companies Act, and the Encouraging Employee Ownership Act.  In addition the subcommittee considered ways to help small businesses access capital and whether the regulators are conducting proper cost-benefit analysis.
 
Crapo Introduces Bill to Include Dodd-Frank Rules in 10-Year Review
On Friday, Senator Mike Crapo (R-ID) introduced legislation​ that would guarantee all rules, including recent CFPB and Dodd-Frank regulations, are reviewed under the existing Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review process which requires agencies to consider how to best reduce regulatory burdens every ten years. 
 
 
Select Highlights from the Administration
 
Federal Reserve Board
Yellen Makes Case for Gradual Rate Increase
On Friday, while speaking in San Francisco, Fed Chair Yellen indicated that an increase in interest rates “may well be warranted” later in the year, especially if the economy improves.  However, she also noted that any return of federal fund rates to “normal levels” will be gradual as an easy policy is needed for some time and the “appropriate time” to lift rates has “not yet arrived.”  She went on to add that while the Fed is reasonably confident that inflation will return to 2% it would not be “prudent” to tie raising rates until after reaching a 2% inflation goal.
 
Non-Bank SIFIs get Six Extra Months to File “Living Wills”
On Thursday, the Federal Reserve and the FDIC announced that they were permanently changing the deadline for non-bank systemically important financial institutions (SIFIs) to file their living wills to December 31^st starting in 2016.  Currently non-bank SIFIs were expected to file these documents by July 31^st each year.
 
Securities and Exchange Commission (SEC)
SEC Approves High-Frequency Trading Oversight, Rules Allowing Mini-IPOs
On Wednesday, the Securities and Exchange Commission (SEC) took the first steps toward ratcheting up oversight of high-frequency trading (HFT), announcing a plan that will require computer-driven trading firms to register with the Financial Industry Regulatory Authority (FINRA).  The move, that will reportedly impact about 125 firms, will boost the SEC’s ability to monitor markets for potential fraud and abuse. Such traders have avoided FINRA oversight because they typically are private firms trading on behalf of their owners and not for customers, taking advantage of a decades-old loophole for so-called proprietary traders. The SEC will collect comment on the measure and would have to vote on it again before it could go into effect.
 
Also on Wednesday, the SEC voted unanimously to finalize long-awaited rules that would allow startups and other privately held companies to raise up to $50 million from the general public, avoiding state regulation of their offerings. The changes would update the SEC’s Regulation A, which currently allows private companies to sell up to $5 million of public stock.  Investors who put money into firms through the mini-IPOs could eventually trade the shares on so-called venture exchanges, which are being studied by the SEC. State regulators have warned the less-regulated offerings open the door to fraud, as many deals greater than $20 million will be exempt from state review.
 
Gallagher Continues to Advocate for JOBS Act Crowdfunding and Reg D Reform
On Friday, while speaking at a conference at Vanderbilt Law School, SEC Commission Daniel Gallagher called on the SEC to move forward with its JOBS Act crowdfunding rulemaking as well as to reconsider modifying Reg D now that it has finished with Reg A plus.  During his speech Gallagher appeared to imply that the SEC could improve Reg D by broadening it in order to raise offering limits, preempt state laws and expand the general solicitation provision.
 
Consumer Financial Protection Bureau (CFPB)
CFPB Takes Expected Next Steps in Small Dollar Lending
On Thursday, as part of its announcement that the Bureau was going to convene Small Business Review panels as the next step as it moves forward to implement new rules in the Pay Day / Small Dollar lending market, the CFPB also offered additional insight into how it intends to regulate this industry.  At the moment, it appears that the CFPB intends to divide the industry into two segments – short term (i.e., a term of 45 days or less) and then a long term (terms longer than 45 days).  The CFPB laid out how it intends to regulate either product in this Fact Sheet, which shows the CFPB not only intends to impose restrictions on the interest rate lenders can charge, the frequency consumers can renew, and the underwriting required before issuing credit, but also how lenders will be able to collect on their loans.  At the same time the CFPB was announcing its intentions the President was speaking in Alabama and throwing his full weight and support behind the Bureau’s proposals – perhaps coincidentally around the time that Republican Senators were trying to pass budget amendments to modify the make-up and Congressional oversight of the Bureau. 
 
 
Miscellaneous
New York City Comptroller to Call for New Fiduciary Disclosures by Brokers
On Wednesday, the Scott Stringer, New York City Comptroller entered into the growing “fiduciary duty” fight.  His office released a report that will be the basis for his efforts to persuade lawmakers in Albany to enact a rule requiring brokers to provide actual or prospective clients with the following disclosure; “I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected return for you.”  According to Stringer, he anticipates that the bill will be introduced “very soon” and will have “many co-sponsors.” 
 
Next Week’s Schedule
 
The House and Senate are in Recess until April 13th