Money Matters: This Week in Washington

This Week in Washington for September 17, 2018

September 17, 2018

Dina Ellis

THE BIG PICTURE

In a surprising about-face, on Friday President Trump’s former campaign manager Paul Manafort pleaded guilty to two charges after reaching a cooperation agreement with Special Counsel Robert Mueller. The agreement came just days before his second trial was due to begin in D.C. District Court, following a Virginia trial where he was found guilty on eight charges. Pending his “successful cooperation,” Mr. Manafort will not face retrial on the 10 charges the Virginia jury deadlocked on, and will have his prison sentence capped at 10 years. Mr. Manafort is viewed by many as a key witness in the Mueller probe, which the President continues to describe as a “rigged witch hunt.”

With government funding set to run out on September 30th, Congress has been working to pass a series of spending bills in a bid to avoid a shutdown before the midterm elections. On Thursday, the House voted 377-20 to pass a US$147B “minibus” spending bill that would fund the Department of Veterans Affairs, Energy Department, and the legislative branch. Later that day, members of the House and Senate Appropriations committees announced that they had reached an agreement on a funding package for the departments of Defense, and Labor, Health and Human Services, and Education for FY2019, along with a stopgap continuing resolution that would fund the remaining agencies not covered by a separate bill through December 7th.

On Monday, House Republicans unveiled their plan for “Tax Reform 2.0” with House Ways and Means Committee Chair Kevin Brady (R-TX) announcing three legislative proposals intended to build on last year’s Tax Cuts and Jobs Act, including a provision to make the individual tax cuts and small business income deductions from the bill permanent, instead of allowing them to expire in 2025. Brady described the proposals as “our commitment to the American worker to ensure our tax code remains the most competitive in the world.”

Senate Judiciary Chairman Chuck Grassley (R-IA) set the final committee vote on Brett Kavanaugh’s Supreme Court nomination for September 20th. Over the weekend however, the revelation of allegations of sexual assault dating back to Judge Kavanaugh’s high school years called into question whether the vote would go forward as scheduled. Senator Jeff Flake (R-AZ), a member of the committee, said that he is “not comfortable voting yes” without first hearing from the alleged victim.

Other highlights of last week include:

• Republican Rep. Ron DeSantis announced his resignation from Congress on Monday, citing the need to focus his attention on his gubernatorial race against Democrat Andrew Gillum.

LAST WEEK ON THE HILL

HOUSE FINANCIAL SERVICES COMMITTEE

“Markup”: On Thursday, the Committee met to consider legislation, ultimately advancing 12 bills to the full House:

• H.R. 6751, the “Banking Transparency for Sanctioned Persons Act of 2018”, sponsored by Rep. Mia Love (R-UT), would require the Secretary of the Treasury to issue a semi-annual report to both the House Financial Services Committee and Senate Banking Committee regarding financial services provided to state sponsors of terrorism or certain sanctioned individuals. This bill was passed by a vote of 48-0.

• H.R. 6737, the “Protect Affordable Mortgages for Veterans Act of 2018”, sponsored by Rep. Lee Zeldin (R-NY), would amend the National Housing Act to provide a technical fix so that recently executed mortgage loans refinanced by the U.S. Department of Veterans Affairs Home Loans remain eligible for pooling in the Ginnie Mae securities. This bill was passed by a vote of 49-0.

• H.R. 6729, the “Empowering Financial Institutions to Fight Human Trafficking Act of 2018”, sponsored by Rep. Ann Wagner (R-MO), would instruct the Secretary of the Treasury to establish a mechanism for non-profit organizations to qualify for safe harbor when sharing specific information with financial institutions that facilitates their duties of customer due diligence and the reporting of suspicious activities relating to human trafficking. This bill was passed by a vote of 44-5.

• H.R. 4753, the “Federal Reserve Supervision Testimony Clarification Act”, sponsored by Rep. Frank Lucas (R-OK), would modify the Federal Reserve Act to require the Vice Chairman of the Board of Governors to fulfill the statutory requirement for semi-annual testimony of the Federal Reserve if the Vice Chairman for Supervision position is vacant. This bill was passed by a vote of 49-0.

• H.R. 6745, the “Access to Capital Creates Economic Strength and Supports Rural America Act”, sponsored by Rep. Sean Duffy (R-WI), would modify the Securities Exchange Act of 1934 to modify the shareholder threshold for registration defined under that Act so that issuers who receive Universal Service Funding are better protected in their decision to stay private or go public. This bill was passed by a vote of 37-15.

• H.R. 5534, the “Give Useful Information to Define Effective Compliance Act”, sponsored by Rep. Sean Duffy (R-WI), would modify Title X of the Dodd-Frank Act so that the CFPB has clearly defined procedures on how to issue guidance, including guidance necessary to comply with the law, and provides a safe harbor for good faith reliance on guidance issued by the Bureau. This bill was passed by a vote of 38-14.

• H.R. 6158, the “Brokered Deposit Affiliate-Subsidiary Moderation Act of 2018”, sponsored by Rep. Scott Tipton (R-CO), would revise the definition of “deposit broker” under the Federal Deposit Insurance Act (FDIA) to exempt funds collected through an insured depository institution’s affiliate or subsidiaries of an insured depository institution. This bill was passed by a vote of 34-17.

• H.R. 6743, the “Consumer Information Notification Requirement Act”, sponsored by Rep. Blaine Luetkemeyer (R-MO), would modify the Gramm-Leach-Bliley Act to direct the federal financial regulatory agencies to establish a federal standard for financial institutions regarding data security measures, as well as a notification system that responds to any breach or unauthorized access of customer information. This bill was passed by a vote of 32-20.

• H.R. 2128, the “Due Process Restoration Act of 2017”, sponsored by Rep. Warren Davidson (R-OH), would allow respondents in SEC enforcement cases to remove their proceedings out of the SEC’s administrative in-house tribunal to a federal district court. This bill was passed by a vote of 31-20.

• H.R. 4758, the “FOMC Policy Responsibility Act”, sponsored by Rep. Claudia Tenney (R-NY), would modify the Federal Reserve Act to clarify that the Federal Open Market Committee (FOMC) is responsible for establishing interest rates on reserve balances. This bill was passed by a voice vote.

• H.R. 6741, the “Federal Reserve Reform Act of 2018”, sponsored by Rep. Andy Barr (R-KY), would requires the Federal Open Market Committee (FOMC) to annually adopt a monetary policy strategy, as well as up to three reference rules that can increase policy transparency. This legislation also protects the Federal Reserve from political pressures to engage in credit policies through either unconventional asset purchases or emergency lending. This bill was passed by a vote of 30-21.

• H.R. 6021, the “Small Business Audit Correction Act of 2018”, sponsored by Rep. French Hill (R-AR), would modify the Sarbanes-Oxley Act of 2002 so that small, privately owned non-custodial brokers and dealers in good standing are no longer required to hire a Public Company Accounting Oversight Board (PCAOB)-registered audit firm in order to meet the annual reporting obligations outlined by Title I of that Act. This bill was passed by a vote of 36-16.

SENATE BANKING COMMITTEE

Hearing entitled “Countering Russia: Assessing New Tools”: On Wednesday, the Committee held their final of three hearings intended to consider the impact of current Russia sanctions, and what might be done to bolster their effectiveness. Committee Chairman Mike Crapo (R-ID) emphasized that “We must, as a nation, find that prescription for sanctions and other measures that break the factors contributing to a Russian resilience to economic sanctions and put real pressure on Putin to change his map for Kremlin hegemony.”

• Dr. Leon Aron, Resident Scholar and Director of Russian Studies, American Enterprise Institute

• Ms. Elizabeth Rosenberg, Senior Fellow and Director of the Energy, Economics and Security Program, Center for a New American Security

• Mr. Daleep Singh, Senior Fellow, Atlantic Council; and Adjunct Professor, Johns Hopkins University

ON THE FLOOR

House Passes Two Financial Services Bills: The House of Representatives passed two pieces of financial services legislation, both by voice vote.

• H.R. 5059, the “State Insurance Regulation Preservation Act,” sponsored by Keith Rothfus (R-PA), would create a definition of an Insurance Savings and Loan Holding Companies (ISLHC) and create a regulatory framework that would limit the Federal Reserve’s oversight of ISLHCs.

• H.R. 6411, the “FinCEN Improvement Act of 2018,” sponsored by Rep. Ed Perlmutter (D-CO), would require the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) to work with foreign financial intelligence units to thwart the use of virtual currencies used by terrorist groups for illicit activity and money laundering.

LEGISLATION INTRODUCED AND PROPOSED

H.R. 6757: The House Ways & Means Committee introduced H.R. 6757, a bill intended to change retirement savings laws. Committee Chairman Rep. Kevin Brady (R-TX) said it would aid families increase their retirement savings by “by making it easier for businesses to offer retirement savings plans while ensuring workers can easily participate in these plans.” Democrats were less enthusiastic about the bill, with Rep. Richard Neal (D-MA) criticizing it as a bid to “further enrich GOP donors and provide Republicans with more ammunition to attack programs like Medicare and Social Security.”

Climate Risk Bill: Sen. Elizabeth Warren (D-MA) introduced the “Climate Risk Disclosure Act” which would direct the SEC to create a rule requiring companies to disclose their greenhouse emissions, fossil fuel assets, and the potential impact of climate change on their business. In a statement Warren described climate change as “a real and present danger,” adding that “Investors need more information about climate-related risks so they can make the right decisions with their money.”

THIS WEEK ON THE HILL

The House is in recess all week, and the Senate will not be in session on Wednesday in observance of Yom Kippur.

Tuesday, September 18

Senate Banking Committee Hearing on “Fintech: Examining Digitization, Data, and Technology”: 10:00 AM Dirksen Senate Office Building 538.

THE REGULATORS

SEC Charges ICO Superstore and Owners with Operating as Unregistered Broker-Dealers: The Securities and Exchange Commission on Tuesday announced that TokenLot LLC, a self-described “ICO Superstore,” and its owners will settle charges that they acted as unregistered broker-dealers. This is the SEC’s first case charging unregistered broker-dealers for selling digital tokens after the SEC issued the DAO Report in 2017 cautioning that those who offer and sell digital securities must comply with the federal securities laws. “U.S. securities laws protect investors by subjecting broker-dealers and other gatekeepers to SEC oversight, including those offering ICOs and secondary trading in digital tokens,” said Stephanie Avakian, co-director of the SEC’s Enforcement Division.

SEC Charges Digital Asset Hedge Fund Manager with Misrepresentations and Registration Failures: The Securities and Exchange Commission on Tuesday announced its first-ever enforcement action finding an investment company registration violation by a hedge fund manager based on its investments in digital assets. The SEC entered an order finding that Crypto Asset Management LP (CAM) offered a fund that operated as an unregistered investment company while falsely marketing it as the “first regulated crypto asset fund in the United States.”

SEC Announces it is Monitoring Impact of Hurricane Florence on Capital Markets: The SEC announced it is closely monitoring the impact of Hurricane Florence on investors and capital markets. SEC Chairman Jay Clayton said in a statement that “dedicated staff stand ready to help ensure investors have access to their securities accounts, to evaluate the need to extend deadlines for filings and other regulatory requirements, and to keep a watchful eye for storm-related scams.”

SEC to Allow Tick Size Pilot Program to Expire: The SEC announced that it would allow the two year National Market System Plan to Implement a Tick Size Pilot Program to expire. The pilot had sought to widen the minimum quoting and trading increments–or tick sizes–for stocks of certain smaller companies. It began on October 3, 2016, and therefore will expire, at the end of trading on Tuesday, October 2, 2018.

CFPB Issues Updated FCRA Model Disclosures: On Wednesday, the CFPB issued an interim final rule updating two model disclosures to reflect changes made to the Fair Credit Reporting Act (FCRA) by the Economic Growth, Regulatory Relief, and Consumer Protection Act. To assist businesses in coming into compliance with the new law, the interim final rule updates the Bureau’s model forms, incorporating the new required notice and the change to the minimum duration of initial fraud alerts.

Financial Regulators Issue Statement Reaffirming the Role of Supervisory Guidance: The Federal Reserve, CFPB, FDIC, National Credit Union Administration and the Office of the Comptroller of the Currency released a statement clarifying the role of supervisory guidance for regulated institutions. The statement confirms that supervisory guidance does not have the force and effect of law, and the agencies do not take enforcement actions based on supervisory guidance. On Thursday, the SEC joined in affirming that its guidance is nonbinding, with Chairman Jay Clayton saying “staff statements are nonbinding and create no enforceable legal rights or obligations of the commission or other parties.”

Democrats Call on SEC to Increase Investor Protections: On Wednesday, four top Democrats – Rep. Maxine Waters (D-CA) Ranking Member of the House Financial Services Committee, Rep. Bobby Scott (D-VA) Ranking Member of the House Education and Workforce Committee, Sen. Sherrod Brown (D-OH) Ranking Member of the Senate Banking Committee, and Sen. Patty Murray (D-WA) Ranking Member of the Senate Health Committee, sent a letter to SEC Chairman Jay Clayton urging the SEC to revise its proposed regulations (Regulation BI) governing the standards of care owed by broker-dealers when providing retail investors with personalized investment recommendations. “For far too long, certain financial professionals have been able to game the system . . . put[ting] their interests and profit motives ahead of their retail clients,” the Ranking Members wrote. “As a result, hardworking Americans have lost out on millions of dollars that could have been used to save for their children’s college, buy a home, or save for retirement. While we are pleased that the SEC is finally acting to address this issue, Regulation BI falls woefully short.”

CFTC and Monetary Authority of Singapore Sign Arrangement to Cooperate on FinTech Innovation: The CFTC and the Monetary Authority of Singapore (MAS) on Thursday signed an arrangement to foster greater cooperation in FinTech. The agreement focuses on information sharing on FinTech market trends and developments, including sharing insights derived from each authority’s relevant FinTech sandbox, proofs of concept, and innovation competitions. This arrangement is the CFTC’s second FinTech cooperation arrangement with a non-U.S. authority and its first with an authority in Asia.

Treasury Official Warns of Competitive Threat on Fintech: Speaking at an event in Washington on Wednesday, Craig Phillips, counselor to Treasury Secretary Steven Mnuchin, discussed his view that the U.S. is lagging behind when it comes to FinTech innovation, saying that there is “a huge competitive threat if we don’t get the investment right,” adding that “There’s a huge risk the U.S. will fall behind, and with that a risk that jobs will go elsewhere.”

Treasury Sanctions North Korea-Controlled IT Companies in China and Russia: On Thursday the Treasury’s Office of Foreign Assets Control announced North Korea-related designations, continuing the implementation of existing sanctions. The action against two entities and one individual targets the revenue North Korea earns from overseas IT workers. “These actions are intended to stop the flow of illicit revenue to North Korea from overseas information technology workers disguising their true identities and hiding behind front companies, aliases, and third-party nationals. Treasury is once again warning the IT industry, businesses, and individuals across the globe to take precautions to ensure that they are not unwittingly employing North Korean workers for technology projects by doing business with companies like the ones designated today,” said Treasury Secretary Steven Mnuchin.

FDIC Seeks Comment on the Treatment of Reciprocal Deposits: The FDIC is seeking comment on a proposed rule to implement Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) to exempt certain reciprocal deposits from being considered as brokered deposits for certain insured institutions. Under the reciprocal deposit exception addressed in the proposed rule, well-capitalized and well rated institutions are not required to treat reciprocal deposits as brokered deposits up to the lesser of 20 percent of its total liabilities or $5 billion. Institutions that are not both well capitalized and well rated may also exclude reciprocal deposits from their brokered deposits under certain circumstances.

COMINGS AND GOINGS AT THE AGENCIES

Elad Roisman Sworn in as SEC Commissioner: On Tuesday, Elad Roisman was sworn into office as an SEC Commissioner by SEC Chairman Jay Clayton, after his nomination was confirmed by the U.S. Senate on September 5. Commissioner Roisman comes to the SEC from the Senate Banking Committee, where he served as Chief Counsel. He previously served as Counsel to SEC Commissioner Daniel Gallagher. He fills a term that expires on June 5, 2023.

Dawn Stump Sworn in to Serve as a Commissioner of the CFTC: On Wednesday, Dawn Stump was sworn in to serve as a Commissioner of the CFTC. Prior to her appointment, Stump was President of Stump Strategic, a consulting firm she founded in 2016. Before starting her firm, Stump was Executive Director and Senior Vice President of U.S. Policy for the Futures Industry Association (FIA) and a Vice President at the New York Stock Exchange.

Mary Daly Named Federal Reserve Bank of San Francisco President and Chief Executive Officer: The Federal Reserve Bank of San Francisco announced on Friday, that its Board of Directors has appointed Mary Daly to the position of president and chief executive officer, effective October 1, 2018. Daly, who has been serving as the Bank’s executive vice president and director of Research since 2017, succeeds John Williams as head of the San Francisco Fed. Williams assumed the role of president and chief executive officer of the Federal Reserve Bank of New York on June 18, 2018.

THE COURTS

New York Department of Financial Services Sues OCC over Fintech Charter Decision: The New York Department of Financial Services filed a lawsuit against the OCC over their decision to allow a special charter for FinTech firms, describing it as “lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York State.”

District Court Judge Rules ICO Is a Security: U.S. District Judge Raymond Dearie, in the Eastern District of New York, declined to dismiss United States v. Zaslavskiy, agreeing with federal prosecutors that initial coin offerings are covered by securities laws.

OTHER NOTEWORTHY ITEMS

New York State Department of Financial Services Approves “Stablecoins”: The New York State Department of Financial Services approved two new cryptocurrencies. The new currencies are known as “stablecoins” as they are pegged to the dollar, helping to hedge against market volatility. NYDFS Superintendent Maria Vullo said in a statement that “These approvals demonstrate that companies can create change and strong standards of compliance within a strong state regulatory framework that safeguards regulated entities and protects consumers.”