THE BIG PICTURE

Last week was a busy one in DC. The White House, the House Ways and Means Committee, and the Senate Finance Committee released their proposal for tax reform on September 27. Broad provisions include: individual tax rates of 12%, 25%, and 35%; doubling standard deduction to US$24K for married couples and US$12K for single filers; cutting corporate tax rate to 20%; eliminating valuable tax breaks including most itemized deductions; and eliminating the estate tax. The National Association of Home Builders endorsed the White House plan to reduce the mortgage cap for the mortgage interest tax deduction, a tax break once thought untouchable. This breaks with industry allies, such as the National Association of Realtors, who still oppose eliminating the mortgage interest tax deduction.

On September 29, the Senate released its fiscal 2018 budget resolution that paves the way for a tax overhaul. The resolution allows the Senate Finance Committee to add up to US $1.5T to the deficit over the next 10 years, and includes instructions for the Senate Committee on Energy and Natural Resources to save at least US$1B over the next 10 years. The resolution did not include language to roll back Dodd-Frank regulations.

The Obamacare repeal effort is dead for now, with Senate Republicans deciding last week not to vote on the Graham-Cassidy bill. The decision was reached on September 26 after it became clear the bill would fail, with three key Republican Senators defecting (Susan Collins (R-ME), John McCain (R-AZ), and Rand Paul (R-KY)).

Congress approved H.R. 3823, a tax relief package for victims of Hurricanes Harvey, Irma, and Maria. The legislation creates a deduction for personal casualty losses otherwise uncompensated in disaster areas. It eliminates a requirement that losses must exceed 10 percent of a victim’s adjusted gross income. The legislation also includes a six-month FAA extension. In order for the House to pass the legislation, the Senate had to strip a controversial flood insurance provision.

In other hurricane-related news, President Trump also lifted the Jones Act, waiving shipping restrictions to encourage hurricane relief efforts for Puerto Rico. The President also announced on September 26 that he has plans to visit the hurricane-ravaged country, and said that he planned to make the trip on Tuesday of this week.

Equifax CEO Richard Smith announced his retirement last week, but is expected to testify before the Senate Banking Committee on Wednesday. House Financial Services Ranking Member Maxine Waters (D-CA) issued a statement saying that the CEO’s retirement “does not relieve the company of its duty to provide answers to… the many millions of Americans who had their sensitive financial and personally identifiable information exposed due to the company’s failures to safeguard consumers’ data.” The company also announced last week that it will offer free lifetime credit freezes. The Credit Union National Administration announced on September 29 that it will be filing a lawsuit against the company.

On the election front, the victory of Roy Moore in Alabama’s Republican Senate primary over incumbent Senator Luther Strange (R-AL) has bolstered Breitbart News and Chairman Steve Bannon’s effort to fight the GOP establishment. According to Breitbart, they will be expanding their target list in 2018. In Arizona, Democratic Rep. Kyrsten Sinema will take on GOP Sen. Jeff Flake.

In other news, former Representative Anthony Weiner (D-NY) was sentenced last week to 21 months in prison for sending lewd texts to a minor, after pleading guilty earlier this year to a related charge. To top off the week, Department of Health and Human Services Secretary Tom Price resigned on September 29 amid scandal regarding the number and expense of private flights chartered using government funds. The total was upwards of US$400K.

LAST WEEK ON THE HILL

Bipartisan Flood Insurance Reform Passes House: On September 28, the House voted 264-155 for legislation that includes a bipartisan effort to encourage the creation of private flood insurance markets. The bipartisan Flood Insurance Market Parity and Modernization Act, sponsored by Reps. Dennis Ross (R-FL) and Kathy Castor (D-FL), would alter how homeowners are insured against flood damage. Currently, the vast majority of flood insurance policies are provided through the government’s National Flood Insurance Program (NFIP). The bipartisan Ross-Castor bill clarifies how non-government flood insurance policies can satisfy the federal flood insurance mandate for properties that are located in high-risk areas. The Senate is not expected to act on the legislation.

House Passes Exchange-Traded Funds Research Bill: On September 27, the House passed S. 327, the Fair Access to Investment Research Act. The legislation allows banks to prepare reports regarding exchange-traded funds (ETFs). Currently, brokerage firms are not permitted to write research reports about ETFs in the same manner they are allowed to write about public companies. The legislation is now headed to the President’s desk.

Senator Blocks Bill to Extend Need-Based Student Loan Program: The Perkins Loan program expired at midnight on Saturday, after Senator Lamar Alexander (R-TN) blocked a bill to extend it. The lapse may deprive tens of thousands of college students financial aid that consists of federal dollars and college contributions. The program provided US$1.2B in funding to 528,000 students in the 2014-15 school year.

HOUSE FINANCIAL SERVICES COMMITTEE

Subcommittee Holds Hearing on Low-Income Housing Program: On September 27, the Subcommittee on Housing and Insurance held a hearing to examine the Family Self-Sufficiency Program (FSS), a program that enables HUD-assisted families to increase their earned income and reduce their dependency on welfare assistance and rental subsidies. “Today’s subcommittee on the Family Self-Sufficiency Program was essential in learning what needs to be done to achieve our goal of helping families both increase their employability and become less dependent on government assistance,” said Subcommittee Chairman Sean Duffy (R-WI). Witnesses included:

Subcommittee Holds Hearing on Insurance for Non-Profit Organizations: On September 28, the Subcommittee on Housing and Insurance held a hearing entitled “Examining Insurance for Non-Profit Organizations.” The purpose of the hearing was to examine the ability of non-profit organizations to purchase property and auto insurance. “The input from this subcommittee hearing was an important opportunity to hear opinions about whether or not we change the rules expanding from liability to property coverage for non-profits,” said Subcommittee Chairman Sean Duffy (R-WI) after the hearing. Witnesses included:

  • Mr. Baird Webel, Specialist in Financial Economics, Congressional Research Service
  • Ms. Pamela E. Davis, Founder, President and Chief Executive Officer, Alliance of Nonprofits for Insurance
  • Mr. Kevin Cothron, President and Chief Executive Officer, Southeast Nonprofit Insurance Programs

Committee Members Form Bipartisan Working Group on Fannie and Freddie: Rep. Sean Duffy (R-WI), Chairman of the House Financial Services Subcommittee on Housing and Insurance, and Emanuel Cleaver (D-MO), Ranking Member, are creating a bipartisan working group to overhaul Fannie Mae and Freddie Mac. The two received the blessing of Committee Chairman Jeb Hensarling (R-TX) last week to work on the project, though Hensarling has said that he still plans to proceed with his PATH Act legislation. The PATH Act would wind down the government-backed mortgage companies.

SENATE BANKING COMMITTEE

Securities and Exchange Commission (SEC) Chairman Jay Clayton Testifies Before Committee: On September 26, the SEC Chairman testified before the Senate Banking Committee. The main topic of the hearing was the breach of the SEC’s filing system, EDGAR. Both Republicans and Democrats grilled Chairman Clayton on the SEC’s failure to timely disclose the breach, which occurred last year. Clayton said he immediately opened investigations as soon as he was informed of the breach in August. He said he is not aware of who knew of the breach when it occurred, but that the issue is part of the ongoing investigation.

Committee Holds Hearing on North Korea Sanctions: On September 28, the Committee held a hearing entitled “Evaluating Sanctions Enforcement and Policy Options on North Korea: Administration Perspectives.” In his written opening statement, Chairman Mike Crapo (R-ID) said that Kim Jong Un’s actions “only serve to suggest that if North Korea were to become a nuclear-armed state, it would present an existential threat to at least several of its Asian neighbors, while posing a great danger to American citizens.” Senators discussed options for North Korea sanctions and also addressed the President’s proposal to abandon the U.S.’s nuclear agreement with Iran. Witnesses included:

Senators Draft Letter to SEC on Consolidated Audit Trail: After it was revealed that the SEC’s EDGAR filing system was breached, Senators on the Banking Committee are drafting a letter to SEC Chairman Jay Clayton asking that the Commission delay implementing a stock market surveillance tool known as the “consolidated audit trail.” In the draft letter, Senators state that “in light of the recent revelation of a cyber-breach of the [SEC’s] EDGAR filing system, we urge the Commission to delay in implementing the CAT database until a full investigation can be conducted and proper countermeasures taken.”

LEGISLATION INTRODUCED AND PROPOSED

Senators Introduce Legislation to Raise “Systemically Important Financial Institution” Level: Senators David Perdue (R-GA) and Claire McCaskill (D-MO) introduced legislation that would remove the US$50B asset threshold established by the Dodd-Frank Act to designate a financial institution as “systemically important.” Instead, the legislation would implement an indicator test that takes into account factors such as size, interconnectedness, cross-border activities, and complexity. There is a companion bill in the House introduced by Rep. Blaine Luetkemeyer (R-MO).

THIS WEEK ON THE HILL

Tuesday, October 3

Senate Banking Committee, Hearing, “Wells Fargo: One Year Later,” 10:00AM, 538 Dirksen Senate Office Building

  • Mr. Timothy J. Sloan, Chief Executive Officer and President, Wells Fargo & Company

House Financial Services Committee, Hearing, “Sustainable Housing Finance: An Update from the Director of the Federal Housing Finance Agency,” 10:00AM, 2128 Rayburn House Office Building

  • The Honorable Jay Clayton, Chairman, U.S. Securities and Exchange Commission

Tuesday, October 3

House Financial Services Committee, Hearing, “Examining the Equifax Data Breach,” 10:00AM, 2128 Rayburn House Office Building

THE REGULATORS

Financial Stability Oversight Council (FSOC) De-designates American International Group (AIG) as Systemically Important Financial Institution: At an FSOC meeting on September 29, regulators agreed to relax supervision of insurer AIG, nine years after the government rescued the company from collapsing. The Council, chaired by Department of Treasury Secretary Steven Mnuchin, voted to drop AIG’s designation as a systemically important financial institution (SIFI), a label used for companies whose failure could threaten the economy. Both Secretary Mnuchin and Federal Reserve Chair Janet Yellen voted to de-designate the company.

SEC Provides Regulatory Relief and Assistance for Hurricane Victims: The SEC announced that it is providing regulatory relief to publicly traded companies, investment companies, accountants, transfer agents, municipal advisors, and others affected by Hurricane Harvey, Hurricane Irma, and Hurricane Maria. The loss of property, power, transportation, and mail delivery due to the hurricanes poses challenges for some individuals and entities that are required to provide information to the SEC and shareholders.

SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds: On September 29, the SEC charged a businessman and two companies with defrauding investors in a pair of initial coin offerings (ICOs) purportedly backed by investments in real estate and diamonds. The SEC alleges that Maksim Zaslavskiy and his companies have been selling unregistered securities, and the digital tokens or coins being peddled don’t really exist. According to the SEC’s complaint, investors in REcoin Group Foundation and DRC World (also known as Diamond Reserve Club) have been told they can expect sizeable returns from the companies’ operations when neither has any real operations.

Agencies Extend Next Resolution Plan Filing Deadline for Certain Domestic and Foreign Banks: On September 28, the Federal Reserve Board and the Federal Deposit Insurance Corporation extended the next resolution plan filing deadline for eight large domestic banks by one year to July 1, 2019. The extension will provide the time needed for firms to remediate any weaknesses identified in their July 2017 submissions and to prepare and improve their next resolution plan submissions.

Comptroller of Currency Keith Noreika Confirms that Fintech Charter Can Be Used by Commercial Firms: On September 28, Acting Comptroller Noreika affirmed that the agency’s fintech charter could be used by commercial companies. This is a pivot from former Comptroller Thomas Curry’s position, who said that “proposals that would mix banking and commerce are inconsistent with the OCC’s chartering standards and would not be approved.”

Agencies Propose Simplifying Regulatory Capital Rules: The Fed, the FDIC, and the Office of the Comptroller of the Currency on September 27 proposed a rule intended to reduce regulatory burden by simplifying several requirements in the agencies’ regulatory capital rule. The proposed rule simplifies the capital treatment for certain acquisition, development, and construction loans, mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interests. Most aspects of the proposed rule would apply only to banking organizations that are not subject to the “advanced approaches” in the capital rule, which are generally firms with less than US$250B in total consolidated assets and less than US$10B in total foreign exposure.

SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors: On September 25, the Securities and Exchange Commission announced two new initiatives that will build on its Enforcement Division’s ongoing efforts to address cyber-based threats and protect retail investors: the creation of a Cyber Unit that will focus on targeting cyber-related misconduct, including violations involving distributed ledger technology and initial coin offerings, and the establishment of a retail strategy task force that will implement initiatives that directly affect retail investors. These are two priority areas for SEC Chairman Jay Clayton.

Fannie Mae and Freddie Mac Send US$5.1B to Treasury Department: On September 29, Fannie and Freddie made their quarterly dividend payments to Treasury. The payments totaled over US$5.1B, bringing the total they’ve paid to date to nearly US$275.9B.

Consumer Financial Protection Bureau Releases First National Survey on Financial Well-Being: On September 26, the Consumer Financial Protection Bureau (CFPB) released the results of a national survey on the financial well-being of U.S. consumers that showed that more than 40 percent of U.S. adults struggle to make ends meet. The survey provides measurements and insights on the financial well-being of specific groups of consumers as well as the population as a whole. In addition to the survey, the Bureau also released an interactive online tool allowing consumers to measure their level of financial well-being.

Commodity Futures Trading Commission (CFTC) to Give Breaks to Companies That Self-Report: Speaking at NYU Law School on September 25, CFTC Enforcement Director James McDonald announced that the Commission is prepared to give substantial breaks in potential penalties to companies that self-report violations and cooperate in investigations. According to Director McDonald, “to achieve optimal deterrence, [agencies] in law enforcement need the buy-in from the communities [they] police.”

Treasury Department Sanctions Banks and Representatives Linked to North Korean Financial Networks: The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) took action on September 26 to further disrupt North Korea’s access to the international financial system. OFAC designated eight North Korean banks and 26 individuals linked to North Korean financial networks in response to North Korea’s ongoing development of weapons of mass destruction (WMD) and continued violations of United Nations Security Council Resolutions (UNSCRs). The individuals sanctioned are North Korean nationals operating in China, Russia, Libya, and the United Arab Emirates who act as representatives of North Korean banks.

Government Accountability Office Report Finds that Banks Held US$10.5T in Risky Derivatives: According to a report released by the GAO, rolling back the so-called “swaps pushout rule” enabled four large banks to retain US$10.5T in derivatives contracts for federally insured portions of their operations. The derivatives rule, included in Dodd-Frank, required banks to spin off derivatives trading operations that are in federally insured divisions.

NOMINATIONS, COMINGS AND GOINGS AT THE AGENCIES

Senate Confirms Heath Tarbet for Treasury Post: On September 27, the Senate voted 87-8 to confirm Heath Tarbet as Assistant Secretary for International Markets and Development, putting him in charge of the Committee on Foreign Investment in the United States (CFIUS). Tarbet is currently a financial services attorney.

Brian A. Bussey Named Director of the Division of Clearing and Risk at Commodity Futures Trading Commission: On September 28, U.S. Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo announced the appointment of Brian A. Bussey as the new Director of the agency’s Division of Clearing and Risk (DCR). Bussey is currently the Associate Director for Derivatives Policy and Trading Practices in the SEC’s Division of Trading and Markets.

Search for Next Fed Chair Continues: President Trump met with a number of candidates last week to take over the top job at the Federal Reserve. On the list are former Fed Governor Kevin Warsh, current Fed Governor Jerome Powell, and Director of the National Economic Council Gary Cohn. Current Chair Janet Yellen’s term ends in February.