THE BIG PICTURE
On Tuesday, after months of rumored tension, President Trump fired Secretary of State Rex Tillerson via twitter. The President announced that he planned to tap CIA Director Mike Pompeo to replace Secretary Tillerson at State, and to nominate Deputy Director Gina Haspel to succeed Pompeo at the CIA. Pompeo and Haspel may face an uphill battle in confirmation hearings, with Sen. Rand Paul (R-KY) already announcing his opposition, and many others seeming wary of Ms. Haspel’s controversial history with the CIA’s torture program. This shake-up is just one in a number of changes the President is reportedly contemplating in his cabinet and among key advisors, with reports that National Security Advisor H.R. McMaster may be next on the chopping block.
Democrat Conor Lamb defeated Republican Rick Saccone in a special election held Tuesday in Pennsylvania’s 18th District. While President Trump handily won the district by 20 points, the race between Lamb and Saccone came down to the wire, with Lamb winning by a mere 627 votes. The race drew nationwide attention as it was viewed as a bellwether for how Republicans might fare in the 2018 mid-term elections, with Republicans spending nearly US$10M dollars in recent weeks, and the President traveling to the district to hold a campaign rally. The election has little practical import, as the district will disappear in November when Pennsylvania’s new congressional districts go into effect, following a ruling by the Pennsylvania Supreme Court that the current map is unconstitutionally partisan.
The Department of the Treasury on Thursday announced a series of sanctions related to Russian interference in the 2016 election. The sanctions will target five entities and 19 individuals from Russia, freezing their assets and prohibiting Americans from doing business with them, partly mirroring Special Counsel Robert Mueller’s recent indictment. Secretary Steven Mnuchin said, “The Administration is confronting and countering malign Russian cyber activity, including their attempted interference in U.S. elections, destructive cyber-attacks, and intrusions targeting critical infrastructure.” The sanctions are the first actions taken by the Trump administration to punish Russia for meddling in the 2016 election, but fall short of the penalties authorized by Congress last year.
Late on Friday evening, Attorney General Jeff Sessions announced the firing of FBI Deputy Director Andrew McCabe, just 26 hours before his planned retirement, in a move seemingly intended to deprive Mr. McCabe of his pension. Mr. McCabe had stepped down from his position in January, and had been using leave to fill in the gap before his retirement. In a fiery response, Mr. McCabe said “This attack on my credibility is one part of a larger effort not just to slander me personally, but to taint the FBI, law enforcement, and intelligence professionals more generally. It is part of this Administration’s ongoing war on the FBI and the efforts of the Special Counsel investigation, which continue to this day. Their persistence in this campaign only highlights the importance of the Special Counsel’s work.” The President meanwhile took to twitter to celebrate, declaring it a “great day for Democracy.”
Other highlights of last week include:
- Rep. Louise Slaughter (D-NY) passed away on Friday at age 88 after falling and suffering a concussion earlier in the week. Rep. Slaughter had served for over three decades and was the first woman to chair the powerful House Rules Committee, she was known for championing women’s rights and her support for manufacturing. In a statement, House Speaker Paul Ryan (R-WI) remembered her as “tough, unfailingly gracious, and unrelenting in fighting for her ideas. She was simply great.”
- Sen. Dean Heller (R-NV) has President Trump to thank after the President convinced would-be challenger Danny Tarkanian to run for a House seat instead of opposing Sen. Heller in a primary.
- President Trump selected conservative media analyst Larry Kudlow to succeed Gary Cohn as head of the National Economic Council.
- Despite the House announcing the end of their investigation, Special Counsel Robert Mueller’s investigation continues apace, and he has reportedly subpoenaed the Trump Organization for documents.
LAST WEEK ON THE HILL
HOUSE FINANCIAL SERVICES COMMITTEE
Hearing entitled “Examining the Cryptocurrencies and ICO Markets”: On Wednesday, the Subcommittee on Capital Markets, Securities, and Investment held a hearing entitled “Examining the Cryptocurrencies and ICO Markets.” The purpose of the hearing was to conduct an overview of the cryptocurrency and Initial Coin Offering (ICO) markets, and examine the economic efficiencies and potential capital formation opportunities that cryptocurrencies and ICOs potentially offer to businesses and investors, and review the adherence to applicable laws so that investors receive the full protections afforded by the federal securities laws. Subcommittee Chair Bill Huizenga (R-MI) emphasized that, “as further action on how to regulate cryptocurrency and ICO markets is considered, it is important that innovation in the area of digital currencies and capital formation are not stifled while still ensuring that consumers are protected, fraud is prevented, and securities laws are followed.”
Hearing entitled “Evaluating CFIUS: Administration Perspectives”: On Thursday, the Subcommittee on Monetary Policy and Trade held a hearing on “Evaluating CFIUS: Administration Perspectives.” The purpose of the hearing was to examine the history, operations, and any operational challenges of the multi-agency panel known as the Committee on Foreign Investment in the United States (CFIUS) and provide the Subcommittee with the Administration’s perspectives on CFIUS’s effectiveness, any challenges it faces in the current national security environment, and potential improvements that could be made to increase its effectiveness. This was the third in a series of hearings held by the Subcommittee. Subcommittee Chairman Andy Barr (R-KY) summarized the key takeaways from the hearing by saying, “it is clear that we must improve our security review process to ensure that bad actors do not get American technology or information that can be used against us. At the same time, we must make certain that the CFIUS process does not create disincentives for foreign direct investment in the United States killing jobs and the much needed capital source for national security advancements.”
Hearing entitled “After the Breach: the Monetization and Illicit Use of Stolen Data”: On Thursday, the Subcommittee on Terrorism and Illicit Finance held a hearing entitled “After the Breach: the Monetization and Illicit Use of Stolen Data.” The purpose of the hearing was to examine the economics of cybercrime, the role of “Dark Web” marketplaces and cryptocurrencies in facilitating the monetization of stolen data, and the methods through which criminals and other nefarious actors integrate their ill-gotten gains into the legitimate financial system.
ON THE FLOOR
Senate Passes Bank Regulation Rollback: On Wednesday, the Senate passed S.2155, the Economic Growth, Regulatory Relief and Consumer Protection Act (Sen. Mike Crapo, R-ID) by a vote of 67-31. Among other provisions, the bill would ease constraints on banks with less than US$250B in assets, by raising the threshold to be considered a systemically important financial institution. Before the final vote, Sen. Crapo remarked that this was “a rare, bipartisan moment that had been years in the making.” He praised the bipartisan support of the bill, saying “This bill shows that we can work together and do big things that make a difference in the lives of people across this country.” However, not everyone shared his rosy view. Sen. Sherrod Brown (D-OH), who has been vocal in his opposition to the bill, released a statement saying, “We missed an opportunity to pass meaningful bipartisan legislation that would help community banks and provide real protections for consumers. Instead, we rolled back accountability measures for some of the biggest domestic and foreign banks at the expense of taxpayers.” The bill now heads to the House, where many in the Senate are wary that proposed changes go too far in upsetting the balance and risk the bill’s bipartisan support.
House Passes TAILOR Act: On Wednesday, the House passed H.R. 1116, the Taking Account of Institutions with Low Operation Risk (TAILOR) Act of 2017 (Rep. Scott Tipton, R-CO), by a vote of 247-169. The bill would require federal financial regulatory agencies to (1) tailor any regulatory actions so as to limit burdens on the institutions involved, with consideration of the risk profiles and business models of those institutions; and (2) report to Congress on specific actions taken to do so, as well as on other related issues. The bill’s tailoring requirement would apply not only to future regulatory actions but also to regulations adopted within the last seven years. Rep. Maxine Waters (D-CA) criticized the bill, describing it as “direct[ing] financial regulators to prioritize reducing costs for financial institutions, including megabanks, over protecting consumers and the economy.”
Other House Bills Passed Include:
- H.R. 4545, the Financial Institutions Examination Fairness and Reform Act (Rep. Scott Tipton, R-CO), by a vote of 283-133. The bill would amend the Federal Financial Institutions Examination Council Act of 1978 by (1) setting deadlines for final examination reports and exit interviews of a financial institution by a federal financial regulatory agency, and (2) establishing an Office of Independent Examination Review to adjudicate appeals and investigate complaints from financial institutions concerning examination reports. It would also require the establishment of an independent internal agency appellate process at the Consumer Financial Protection Bureau for the review of supervisory determinations made at institutions supervised by the CFPB.
- H.R. 4263, the Regulation A+ Improvement Act of 2017 (Rep. Thomas MacArthur, R-NJ), by a vote of 246-170. The bill would amend the Securities Act of 1933 to increase the dollar limit of certain securities offerings exempt from registration requirements from US$50M annually to US$75M annually, adjusted in future years for inflation.
LEGISLATION INTRODUCED AND PROPOSED
S.2544: Sponsored by Sen. Elizabeth Warren (D-MA) would stop financial institution crime, require certain officers of companies to certify that they have conducted due diligence relating to criminal conduct or civil fraud, create accountability in deferred prosecution agreements, and for other purposes.
THIS WEEK ON THE HILL
House Financial Services Subcommittee on Terrorism and Illicit Finance, hearing entitled “Exploring the Financial Nexus of Terrorism, Drug Trafficking, and Organized Crime” 2:00 PM in 2128 Rayburn House Office Building.
Senate Banking Committee, hearing entitled “Oversight of HUD” 10:00 AM in 538 Dirksen Senate Office Building.
CFTC Commissioner Quintenz Praises Winklevoss Twins’ Self-Regulation Plan: The Winklevoss twins, who run Gemini, an exchange for trading cryptocurrencies like Bitcoin and Ether, have drafted a proposal to create a self-regulatory organization they’ve named the Virtual Commodity Association. In a blog post announcing their plan, they said “The SRO approach has historically worked to protect and police various markets. . . . We believe a thoughtful SRO framework that provides a virtual commodity regulatory program for the virtual commodity industry is the next logical step in the maturation of this market.” CFTC Commissioner Quintenz praised the plan in a statement, saying “I congratulate Cameron and Tyler Winklevoss on their energetic leadership and thoughtful approach in outlining a virtual commodity self-regulatory organization concept.”
SEC Chairman Calls Cybersecurity Breach Disclosure Guidelines a “Focal Point”: Following the issuance of updated guidance on cybersecurity breach disclosures in February, Chairman Jay Clayton indicated the SEC will be closely monitoring its implementation saying, “It will be a focal point for staff review, in terms of our market intermediaries.” He declined to discuss whether explicit requirements might be established.
SEC Charges Former Equifax Executive With Insider Trading: On Wednesday, the Securities and Exchange Commission charged former chief information officer of Equifax’s U.S. Information Solutions unit, Jun Ying, with insider trading in advance of the company’s September 2017 announcement about a massive data breach that exposed the social security numbers and other personal information of approximately 148 million U.S. customers. The SEC alleges that before Equifax’s public disclosure of the data breach, Ying exercised all of his vested Equifax stock options and then sold the shares, reaping proceeds of nearly $1 million. Mr. Ying was also indicted on criminal insider trading charges.
SEC Proposes Transaction Fee Pilot for NMS Stocks: On Wednesday, the SEC voted to propose new Rule 610T of Regulation NMS to conduct a Transaction Fee Pilot in NMS stocks. The proposed pilot would subject stock exchange transaction fee pricing, including “maker-taker” fee-and-rebate pricing models, to new temporary pricing restrictions across three test groups, and require the exchanges to prepare and publicly post data. Chairman Jay Clayton said, “The proposed pilot is designed to generate data that will provide the Commission, market participants, and the public with information to facilitate an informed, data-driven discussion about transaction fees and rebates and their impact on order routing behavior, execution quality, and market quality in general.”
SEC Proposes Targeted Changes to Public Liquidity Risk Management Disclosure: On Wednesday, the SEC proposed amendments to public liquidity-related disclosure requirements for certain open-end investment management companies. Under the proposal, funds would discuss in their annual report the operation and effectiveness of their liquidity risk management program, replacing a pending requirement that funds publicly provide the aggregate liquidity classification profile of their portfolios on Form N-PORT on a quarterly basis. The Commission adopted the open-end fund liquidity rule in October 2016 in an effort to promote effective liquidity risk management programs in the fund industry. Chairman Jay Clayton said, “Today’s proposed rule is another step toward completing the implementation of the 2016 final rule in a manner that protects investors while minimizing unnecessary costs on funds.”
SEC Working on “Dozens” of Cryptocurrency Investigations: Speaking at an Investment Adviser Association conference in Washington on Thursday, SEC Enforcement Division Co-Director Stephanie Avakian revealed that, “We are very active [in the cryptocurrency space], and I would just expect to see more and more.”
CFPB Issues Request for Information on Adopted Regulations and New Rulemaking Authorities: On Wednesday, the Consumer Financial Protection Bureau issued the 8th in its series of Requests for Information (RFI). This Request is seeking comments and information from interested parties to assist the Bureau in considering whether it should amend any rules it has issued since its creation or issue rules under new rulemaking authority provided for by the Dodd-Frank Act.
Sen. Nelson Questions Treasury on Venezuelan Petro Token: In a letter to Secretary Mnuchin, Sen. Nelson (D-FL) expressed his concern that, “rogue regimes in Russia and Venezuela seek to use cryptocurrencies to avoid U.S. and international sanctions.” He emphasized that Venezuelan dictator Nicolás Maduro should be prevented from using cryptocurrency as a shield. His letter also requested information on what the Office of Foreign Assets Control is doing to prevent Maduro and others from undermining U.S. sanctions by using or creating cryptocurrencies, and whether more needs to be done.
COMINGS AND GOINGS AT THE AGENCIES
Circuit Split as 5th Circuit Strikes Down Department of Labor’s Fiduciary Rule, 10th Circuit Upholds It: On Thursday, the 5th Circuit Court of Appeals struck down a 2016 Obama-era rule intended to toughen standards on retirement investment advice. In a 2-1 decision the judges determined that the rule overstepped the Department’s authority, in an opinion that said “A perceived ‘need’ does not empower D.O.L. to craft de facto statutory amendments or to act beyond its expressly defined authority.” On Tuesday, the 10th Circuit upheld the rule. The rule may next end up before the Supreme Court to resolve the split.
D.C. Circuit Reverses Some Provisions in FCC’s TCPA Rules: On Friday, the D.C. Circuit Court of Appeals issued a unanimous ruling which narrowed a 2015 Federal Communications Commission Order that had expanded the Telephone Consumer Protection Act. FCC Chairman Ajit Pai praised the ruling saying, “I’m pleased today’s ruling does not impact (and, in fact, acknowledges) the current FCC’s efforts to combat illegal robocalls and spoofing.”
OTHER NOTEWORTHY ITEMS
Congressional Black Caucus Advocates for Diversity Among Asset Managers: In a letter sent Wednesday to financial lobbying groups, the Congressional Black Caucus urged them to encourage “frank conversations” about increasing diversity in firms, saying “Now is the time to make a more aggressive push so that the firms that you own understand the seriousness of the issues.”