TRP Financial Services Report

May 4, 2015

In the past weeks Congress has passed the SGR fix, the budget resolution and the House is roughly 1/6th of the way finished with getting through its appropriations work.  To the casual observer it might seem like the institution is finally working.  However, perhaps the better analogy is that Congress is like a duck.  On the surface it appears to gliding effortlessly, but under the surface it is churning and paddling.  Take the appropriations bills for example, although the House was, after a brief hiccup, able to pass two bills last week, both were passed under threat of veto, and ultimately didn’t attract enough Democratic support to override.  In addition, Senate Democrats have made it clear they will block all spending bills that lock in the sequestration-level spending caps.  All this means that we might be heading towards another government shut-down in October – just in time for government funding to once again get comingled with the need to raise the debt limit.   

Looking Ahead

Near Term:

  • The House is in Recess Next week
  • The Senate will return on Monday and continue its consideration of the veto override of S. J. Res. 8, a bill dealing with Congressional disapproval of an NRLB rule.  Later in the week, the Senate is expected to continue its work on the Iran Sanctions Review Act.  Following the disposition of that bill, the Senate may take up the Trade Promotion Authority (TPA) bill. 

Further Out:

  • Senate Banking Committee intends to meet on May 14th to consider legislation that would provide regulatory relief to regional banks as well as impose changes on FSOC.
  • Senate Banking will hold two hearings (6/2 and 6/4) on Ex-Im – though it is unclear whether these hearings will occur after the House holds a secret vote of the Republican Conference on the issue … or not
  • The FTC will commence its “Debt Collections Dialogues” in Buffalo, NY on June 15th.  NY AG Eric T. Schneiderman and a representative from the CFPB are expected to be in attendance. 
  • 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
    • Sept. 30: End of the Federal Fiscal Year
    • End of September or October: Extraordinary Measures for dealing the Debt Ceiling run out and default becomes possible.
The Past Week
Legislative Branch

House Passes Budget, and the First Two Appropriations Bills
After a brief hiccup nearly derailed its consideration, the House debated and eventually approved both the Military Construction and Veterans Affairs and the Energy and Water appropriations measures.    The vote on the MilCon-VA was 255-163 and E&W was 240-177.  Neither bill achieved enough Democratic support to override a veto, which the President has threatened for both measures. 
In addition, by a vote of 226-197, the House passed the FY16 Budget conference, which uses dynamic scoring to balance the budget in ten years by attributing $124 billion dollars of deficit reduction to economic growth.  The Senate is expected to take up the measure this week.
Democrats File Discharge Petition for Ex-Im
Earlier this week, House Democrats filed a discharge petition, a procedural maneuver to by-pass the Committee and bring a bill straight to the floor, for H.R. 1031, their version of legislation to renew the Ex-Im bank.  These petitions require 218 signatures in order to discharge the bill to the floor, so Democrats will need to find 30 Republicans to sign-on if they are to succeed, which may be difficult now that the Majority Leader announced his preference for both using regular order and closing down the bank.  There was also another Financial Services and Oversight Committee joint subcommittee hearing this week where supporters and opponents of the bank took turns defending and attacking Fred Hochberg, President and Chairman of the Ex-Im Bank.
Lawmakers Question Fed on International Insurance Negotiations
Not to be left behind, on Wednesday the Housing and Insurance Subcommittee held a hearing entitled, “The Impact of International Regulatory Standards on the Competitiveness of U.S. Insurers,” where members of the subcommittee expressed their concerns with pending negotiations surrounding international insurance standards and the impact of the application of those standards to US based insurance companies.  There was bipartisan evidence of this concern, as Rep. Capuano (D-MA) asked the regulators at the witness table to cite the statutory authority for Treasury or the Fed to regulate insurance companies that do not engage in banking activities or those that are not SIFI- designated.   During the hearing Rep. Sean Duffy (R-WI) announced his intention to introduce legislation to ensure that Congress has greater oversight of the federal regulators participating in these international insurance negotiations.  As described by the Congressman the measure appears to be stricter than a similar bill introduced by Senators Heller (R-NV) and Tester (D-MT).
Capital Markets Subcommittee Examines Dozen of Capital Formation Bills
On Wednesday, the Subcommittee held a legislative hearing to examine a dozen measures intended to help spur capital formation, many of which passed the House last Congress but never were signed into law.  The hearing focused on the following bills: 
• H.R. 432, sponsored by Rep. Blaine Luetkemeyer (R-Mo.), would exempt advisers of small business investment companies from Investment Advisers Act registration requirements with respect to advising venture capital funds. It passed the House in the previous Congress.
• H.R. 686, sponsored by Rep. Bill Huizenga (R-Mich.), would allow merger-and-acquisition brokers dealing in private companies to register with the Securities and Exchange Commission via public-notice filing. It passed the House last Congress.
• H.R. 1317, sponsored by Rep. Gwen Moore (D-Wis.), would change how clearing requirements apply to certain affiliate transactions.
• H.R. 1334, sponsored by Rep. Steve Womack (R-Ark.), would modify the JOBS Act to give savings and loan companies relief from shareholder reporting requirements. It passed the House last Congress.
• H.R. 1525, sponsored by Rep. Scott Garrett (R-N.J.), would require the SEC to amend Form 10-K by allowing filers to include a summary section, and to make rules scaling back Regulation S-K. It passed the House last Congress.
• H.R. 1675, sponsored by Rep. Randy Hultgren (R-Ill.), would raise the amount of stock options a company may give to employees without making additional investor disclosures. A legislative package including substantially similar language passed the House in January.
• H.R. 1723, sponsored by Rep. Ann Wagner (R-Mo.), would allow smaller reporting companies to make incorporations by reference to past filings on its Form S-1.
• H.R. 1839, sponsored by Rep. Patrick McHenry (R-N.C.), would allow for private resale of restricted securities in a general solicitation.
• H.R. 1847, sponsored by Rep. Rick Crawford (R-Ark.), would undo the Dodd-Frank requirement that U.S. and overseas regulators indemnify swap data repositories when requesting sensitive data from them. A similar bill passed the House in 2013.
• H.R. 1965, sponsored by Rep. Robert Hurt (R-Va.), would exempt emerging growth companies from using eXtensible business reporting language to file financial statements. It passed the House in 2014.
• H.R. 1975, sponsored by Rep. Gregory Meeks (D-N.Y.), would allow exchanges to get future credits on overpayments to the SEC under Section 31 of the 1934 Securities Exchange Act.
• H.R. 2064, sponsored by Rep. Stephen Fincher (R-Tenn.), would tweak the JOBS Act's Title I provisions on financial disclosure and registration for EGCs. A similar bill passed the House last Congress.
Capital Markets Subcommittee holds FINRA Oversight Hearing
On Friday, the Capital Markets Subcommittee held a hearing entitled, “Oversight of the Financial Industry Regulatory Authority.”  The sole witness was FINRA Chairman and CEO, Richard Ketchum, who used the hearing as an opportunity to note that FINRA was delaying the introduction of its controversial CARDS program, though after the hearing he made it clear that the proposal was not dead.    In addition, numerous members used the hearing to press Ketchum for his thoughts on the uniform fiduciary standard currently pending with the DOL. 
Senate Banking Committee Expresses Concerns International Insurance Negotiations Are Impacting U.S. Tradition of State Regulation
On Tuesday, the Senate Banking Committee held the first of two hearings on insurance regulation, with the witnesses for this hearing consisting of a variety of regulators.  Chairman Shelby used the hearing as a platform to express his concern about the potential role the Financial Stability Board (FSB) may have in domestic regulatory efforts, noting that “[a]n international regulatory regime should not dictate how US regulators supervise American or US-based companies.”  He went on to add, that “the FSB is not a US regulator, and it is not accountable to Congress or the American people, and therefore, the FSOC should not merely be a rubber stamp for the decisions made by an unaccountable international body like the FSB.”
This sentiment was echoed by Florida State Insurance Commissioner Kevin McCarty, appearing on behalf of the National Association of Insurance Commissioners (NAIC), who told the panel that trying to impose a European model of capital standards, which is significantly different than the current US model would create a “potential for great disruption in the delivery of different services in the marketplace, a potential raise in prices for consumers in the United States and potentially jeopardizes the availability of products.” 
The hearing also served as a forum for Senators Dean Heller (R-NV) and Jon Tester (D-MT) to highlight the introduction of their legislation, the “International Insurance Capital Standards Accountability Act.”
Insurance Subcommittee Hears from Insurance Industry
On Thursday, the Senate Subcommittee on Securities, Insurance and Investment heard from a variety of witnesses from industry and academia as part of a hearing entitled, “Examining Insurance Capital Rules and the FSOC Process.” Similar to other hearings last week, significant attention was given, both by Committee members and the witnesses on how international negotiations on capital standards for systemically important financial institutions had the potential to impact rules for non-SIFI domestic insurers.  In addition, both Chairman Crapo (R-ID) and Ranking Member Warner (D-VA), along with other members of the subcommittee discussed how the FSOC designated and also “un-designated” companies.  

Financial Services Related Legislation Introduced Last Week

S.1102   A bill to provide for institutional risk-sharing in the Federal student loan programs.
Sponsor: Sen. Jack F. Reed (D-RI)
S.1086   A bill to establish an insurance policy advisory committee on international capital standards, and for other purposes.
Sponsor: Sen. Dean Heller (R-NV)
H.R.2064   To amend certain provisions of the securities laws relating to the treatment of emerging growth companies.
Sponsor: Rep. Stephen Fincher (R-TN-08)
S.1109   A bill to require adequate information regarding the tax treatment of payments under settlement agreements entered into by Federal agencies, and for other purposes.
Sponsor: Sen. Elizabeth A. Warren (D-MA)
H.R.2079   To provide that chapter 1 of title 9 of the United States Code, relating to the enforcement of arbitration agreements, shall not apply to enrollment agreements made between students and certain institutions of higher education; and to prohibit limitations on the ability of students to pursue claims against certain institutions of higher education.
Sponsor: Rep. Maxine Waters (D-CA-43)
H.R.2076   To create protections for depository institutions that provide financial services to marijuana-related businesses, and for other purposes.
Sponsor: Rep. Ed G. Perlmutter (D-CO-07)
H.R.2121   To amend the S.A.F.E. Mortgage Licensing Act of 2008 to provide a temporary license for loan originators transitioning between employers, and for other purposes.
Sponsor: Rep. Steve E. Stivers (R-OH-15)
S.1133   A bill to amend title 9 of the United States Code with respect to arbitration.
Sponsor: Sen. Al Franken (D-MN)
H.R.2087   To amend title 9 of the United States Code with respect to arbitration.
Sponsor: Rep. Hank Johnson (D-GA-04)
H.R.2113   To amend title 5, United States Code, to provide for a corporate responsibility investment option under the Thrift Savings Plan.
Sponsor: Rep. Jim R. Langevin (D-RI-02)
H.R.2096   To amend the Internal Revenue Code of 1986 and the Small Business Act to expand the availability of employee stock ownership plans in S corporations, and for other purposes.
Sponsor: Rep. Dave G. Reichert (R-WA-08)
H.R.2115   To amend the Internal Revenue Code of 1986 to expand and make permanent rules related to investment by nonresident aliens in domestic mutual funds and business development companies.
Sponsor: Rep. Erik Paulsen (R-MN-03)
H.R.2094   To repeal titles I and II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Sponsor: Rep. Lynn A. Westmoreland (R-GA-03)
H.R.2099   To amend the Consumer Financial Protection Act of 2010 to require the Bureau of Consumer Financial Protection to develop a model form for a disclosure notice that shall be used by depository institutions and credit unions, and for other purposes.
Sponsor: Rep. John C. CarneyJr. (D-DE-01)
S.1158   A bill to ensure the privacy and security of sensitive personal information, to prevent and mitigate identity theft, to provide notice of security breaches involving sensitive personal information, and to enhance law enforcement assistance and other protections against security breaches, fraudulent access, and misuse of personal information.
Sponsor: Sen. Patrick J. Leahy (D-VT)

Select Highlights from the Administration

Consumer Financial Protection Bureau (CFPB)
First Enforcement Action on Overdraft Entered
On Tuesday, the CFPB announced its first enforcement action against a bank for overdraft violations, with Regions Bank agreeing to pay a $7.5 million dollar fine and refund $49 million to customers.  In addition, the CFPB required the bank to identify and fix all instances of negative credit reporting caused by the overdraft fees.
Securities and Exchange Commission (SEC)
SEC Releases Proposals on Derivatives Trades, Pay for Performance
On Wednesday, the Securities and Exchange Commission (SEC) published a pair of proposals on long-awaited Dodd-Frank regulations. First, the Commission voted unanimously to propose a measure that would allow overseas banks to conduct some derivatives trades without having to comply with U.S. regulations.  Under the proposal, large banks would win a break from Dodd-Frank rules designed to increase competition for prices in the market by forcing trading onto public platforms – the SEC proposal carves out certain stock and credit-default trades from the requirement.  U.S. banks have argued that the restrictions could hurt their ability to compete with foreign rivals, who may not be subject to the same price-transparency requirements.
Next, on a 3-2 vote, the SEC also released a proposal that would require public companies to show the relationship between the compensation of their top executives and the company’s financial performance. These so-called “pay for performance” rules would require companies to report compensation—including stock options and other benefits—for their top executives for the last five years.  Notably, the rule would allow companies to omit new stock and options, which can make up the biggest part of compensation.  The SEC’s proposal hews closely to models used by many public companies, which for years have given investors supplemental disclosures with pay totals that strip out unvested stock and options as well as changes in pension value. Both derivatives proposal and the pay for performance rule will be open for public comment for 60 days.
Federal Reserve Board
FOMC Leaves Benchmark Rate Unchanged
On Wednesday, by a unanimous vote, the Federal Reserve Open Markets Committee announced that it would continue to leave the benchmark rate at between zero and .25%.   Perhaps most interesting was the comment that even as the FOMC works to remove “policy accommodation” economic conditions may result in the Fed continuing to keep the target federal fund rate below levels that it would view as “normal in the longer run” even if employment and inflation return to “near mandate levels.” 
Tarullo Speaks To Easing Regulatory Burdens for Small Banks
On Thursday, Federal Reserve Governor Daniel Tarullo spoke before the Independent Community Bank Association (ICBA) annual Washington, DC conference an indicated that he supported reducing the regulatory burdens for banks with $10 billion or less in assets.  During his speech, Tarullo also noted that he had instructed his staff to use the Economic Growth and Regulatory Paperwork Reduction Act, an every 10 year review of banking regulations, to consider a more “holistic view” of the regulatory structure."

Next Week’s Schedule

The House is Recess
No relevant Senate Subcommittee hearings scheduled