Update 213 — From Regs to Riches:
HFSC’s Legislative Gift Basket for the Street
This afternoon, the House Financial Services Committee completed a two-day mark-up, favorably reporting out 22 bills affecting systemic risk, capital markets, consumers, homeowners, and retirees. The bills are overwhelmingly deregulatory, with most removing supposed barriers to capital access and trimming or eliminating regulatory hurdles facing firms.
Many measures are dead on arrival, some have the chance to be evaluated, adjusted, and forwarded to the Senate. What in this pile of feathers might actually become law? See below.
Two pieces of legislation focused on systemic risk. One of these is especially significant, seeking to eliminate the $50 billion consolidated asset threshold for heightened supervision of SIFIs. The other, while smaller, is pernicious — it would free credit rating agencies from supervisory examination by the SEC .
• H.R. 3312: Systemic Risk Designation Improvement Act (Rep. Luetkemeyer)
This measure, passing Committee with some Democratic support, would constrain the Fed’s scope of authority to regulate banks over $50 billion in assets but have not qualified as GSIBs according to the Fed’s current calculation. Previously covered firms would no longer face DFA’s Section 165 enhanced prudential standards, including capital and liquidity requirements, living wills, and stress testing by the Fed. Only the eight most systemically important Bank Holding Companies that qualify as GSIBs would face enhanced regulatory standards.
Introduced by Rep. Luetkemeyer, the bill has attracted some Democratic support in the House. And there is Democratic interest in the Senate — last month, Sen. Claire McCaskill, in cycle, introduced an identical bill, S.1893, with Republican Sen. David Perdue. S. 1893 has been formally referred to Senate Banking. It is in the conversation among Committee Chair Crapo and Ranking Member Brown, and Democratic moderates McCaskill, Tester and Heitkamp.
• H.R. 3911: Risk-Based Credit Examination Act (Rep. Wagner)
This measure would allow the SEC to choose not to examine credit rating agencies if it deems insufficiently risky. The insertion of the words “as appropriate” in the legislation makes the SEC liable for inappropriate examination to the credit rating agencies, including the agencies that wrongly rated housing issues and triggered the housing bubble burst of 2008v. There is no Senate version yet, but we will remain on watch after its passage in Committee today.
Legislative measures affecting capital markets feature strong deregulatory policies that remove barriers to accessing capital under the guise of spurring small business investment.
• H.R. 1116 : The TAILOR Act (Rep. Tipton)
Under the TAILOR Act, financial regulators would have to provide annual reports to Congress on any new rulemaking activity. Regulatory actions are expected to be adjusted to a account for risk profiles and business models. One of the furthest-reaching capital markets deregulatory bills, Senate Republicans may take it up.
• H.R. 477: The Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification (Rep. Huizenga)
This bill seeks to amend Section 15(b) of the Securities Exchange Act of 1934 and exempt brokers who service the transfer of ownership of smaller privately held companies from registration requirements. It would increase the revenue size of companies enjoying the exemption to $250,000,000 in gross revenues.
• H.R. 1585: The Fair Investment Opportunities for Professional Experts Act (Rep. Schweikert)
This proposal would modify the definition of an accredited investor put forth in the Securities Exchange Act of 1933. It expands the class to cover individual with a net worth of at least $1 million, income or joint income of at least $200,000 or $300,000 respectively, those who hold a securities-related license, and those the SEC deems professionally qualified. The bill had raised concerns regarding the expected increase in the private market investor pool.
• H.R. 1645: The Fostering Innovation Act (Reps. Synema and Hollingworth)
Introduced by Reps. Sinema, a Democrat, and Hollingsworth, a Republican, the bill would increase exemptions for emerging growth companies (ECGs) that would otherwise lose their exempt status at the end of a five-year period. An amendment to Section 404(b) of the Sarbanes-Oxley Act, the bill would include an extension of status for ten years after the ECG goes going public, the end of the fiscal year at which the firm’s average gross revenues exceed $50 million, or the ECG meets the SEC’s qualification for a large accelerated filer. This has an outside shot at being included in a Senate Banking relief bill. Way outside.
•. H.R. 2201: The Micro-Offering Safe Harbor Act (Rep. Emmer)
The bill amends the Securities Act of 1933 to exempt certain micro-offerings from registration requirements. Small businesses may be exempt if the purchaser has a substantive relationship with an official/shareholder of the issuer, there are no more than 35 purchasers, and all securities sold does not exceed $500,000 in a year. A previous iteration of the bill, H.R. 4850, died in the last Congress, and with only a slight adjustment made to the “Disqualifications” subsection, the bill shows a little promise.
• H.R. 3903: The Encouraging Public Offerings Act (Reps. Budd and Meeks)
H.R. 3903 expands certain provisions under Title I of the JOBS Act to all public companies. Under current law these provisions only apply to Emerging Growth Companies. Issuers would be allowed to submit to the SEC for confidential review draft registration and follow-on offerings within one year of an IPO. The bill demonstrates a bipartisan effort to strengthen the public market. With a Democratic cosponsor, the bill has a colorable chance of traction in the Senate.
End Users (Consumers, Homeowners, Retirees)
The Committee passed a mélange of bills focused on consumers, homeowners and retirees and “access to capital.”
• H.R. 1699: The Preserving Access to Manufactured Housing Act (Rep. Barr)
Rep. Barr’s bill would re-definition a mortgage originator and a high-cost mortgage in the Truth in Lending Act, effectively removing regulations for manufactured housing buyers. This would affect low-income people, the most common recipients manufactured home loans. H.R. 1699 likely has legs — not only is there a companion piece of legislation in the Senate, but it’s sponsored by a Democrat (Sen. Donnelly, S.1751). The bill passed committee with some Democrat and stands a substantial chance of becoming law.
• H.R. 2121: The Pension, Endowment, & Mutual Fund Access to Banking Act (Rep. Rothfus)
Rep. Rothfus’ bill would exempt large custodial banks from counting cash held at central banks when calculating the denominator of their supplemental leverage ratio (SLR). It would principally benefit two custody banks, BNY Mellon and State State, large enough to be subject to the SLR requirements. The measure has a passing chance of enactment. Critics say the bill would undermine the leverage ratio requirement for systemically important banks. But the legislation passed Committee with unanimous support. Watch for a companion bill in the Senate.
• H.R. 2706: The Financial Institution Customer Protection Act (Rep. Luetkemeyer)
H.R. 2706 seeks to prohibit financial regulatory agencies from directing a depository institution to terminate an account “without material reason.” Critics say the bill would make it more difficult for federal regulators to warn financial institutions in the event their clients are engaging in fraudulent activity. The bill has strong bipartisan support in the House, clearing Committee by 59-1. Again, watch for a companion bill in the Senate.
• H.R. 3072: The CFPB Examination and Reporting Threshold Act (Rep. Clay)
H.R. 3072 would amend Dodd-Frank, raising the supervisory threshold of banks under CFPB jurisdiction from $10 billion to $50 billion. This would reduce the number of depository institutions examined by the CFPB from 119 to 42. Critics claim the bill would undercut consumer protections only to serve the nation’s largest banks that do not need special attention. Despite these criticisms, this legislation has bipartisan support and a good chance of becoming law. The bill was introduced in the House by Democrat Lacy Clay and has a companion bill in the Senate sponsored by Sen and Toomey (S. 1499). The bill passed Committee 39-21.
• H.R. 3299: The Protecting Consumers Access to Credit Act (Rep. McHenry)
H.R. 3299 would effectively eliminate state usury laws by overriding the Second Court’s Madden v. Midland decision. Critics argue this will make it far easier for predatory lenders to charge exorbitantly high interest rates. As with H.R. 3072, this legislation appears to be an area of bipartisan accord. The Senate companion bill in the Senate S. 1642, is sponsored by Democratic Sen. Warner, co-sponsored by Sen. Toomey, a Republican. Give H.R. 3299 a decent chance of becoming law.
• H.R. 3758: The Senior Safe Act (Rep. McHenry)
The Senior Safe Act, a bipartisan bill introduced by Representatives Sinema and Poliquin, is aimed at protecting employees of financial institutions who identify and report the financial exploitation of senior citizens. Expect H.R. 3758 to make it. While a Senate companion bill is yet to emerge, the House legislation is supported by AARP, lacks critics, and passed committee unanimously.
• H.R. 3857: The PASS Act (Rep. Wagner)
The PASS Act would repeal the Department of Labor Fiduciary Rule and replaces it with conflict of interest disclosure requirements. Some maintain the PASS Act would reinstate loopholes in retirement savings protections and permit financial advisors to take advantage of unsophisticated investors. Moving H.R. 3857 will likely be difficult. Senate Republicans have not yet and may not introduce a companion bill.
• H.R. 3971: The Community Institution Mortgage Relief Act (Rep. Tenney)
H.R. 3971 would exempt all but the largest American banks from certain CFPB escrow or impound requirements tied to mortgages. Despite this, the bill has a Democratic cosponsor (Rep. Sherman) and cleared Committee with support from 19 Democrats. Keep an eye on the Senate hopper.
•. H.R. 3972: The Family Office Technical Correction Act (Rep. Maloney)
The bill seeks to establish that family offices and family clients are accredited investors for the purposes of SEC Reg. D. Do not expect anything on this in the Senate unless volume subsides drastically.
What to Watch
While much of this activity is anti-government, anti-regulation messaging, the legislative process may make some of it law. Some of the 22 bills approved by House Financial Services today will move to the House floor, fewer will make it to the President’s desk. Some won a fair number of Democratic votes in today’s markup, others none. Look to Senate Banking, where companion legislation in a number of cases will be taken up. In the background is the question: which of these bills might make it … into a hypothetical Crapo-Brown DFA “reform” package?