Financial Reform Watch

Capital Formation Legislation - What will the Senate Do?

Blank Rome Government Relations — Tue, 13 Mar 2012 16:53:59 -0500

In rare burst of bipartisanship last week, the House of Representatives passed a capital formation bill – H.R. 3606, the “Jumpstart Our Business Startups Act” (JOBS Act) – by a vote of 390 to 23. Even the White House issued a Statement of Administration Policy in support of the bill, which would ease regulatory burdens on business start-ups. With the Senate expected to complete votes on the highway bill today, Senate Republicans are pressuring the majority to move next to the JOBS Act.

In a letter to Senate Banking Committee Chairman Johnson (D-SD), who is reported to be working with Majority Leader Harry Reid (D-NV) on developing a new, Senate version of the JOBS Act, Banking Committee Ranking Member Shelby (R-AL) raised objections with their drafting a new bill “without any input from Senate Republicans.” Shelby wrote that he “nevertheless” stands “ready to work with you to craft bipartisan legislation” and recommended that Johnson consider capital formation legislation introduced by Senators Scott Brown (S. 1791); Hutchison (S. 556); Thune (S. 1831); and Toomey (S. 1544, S. 1824, and S. 1933). All but two of the six bills Shelby listed have bipartisan sponsors.

Meanwhile, on the Senate floor this morning, Minority Leader Mitch McConnell (R-KY) emphatically urged the Majority Leader to “immediately take up the bipartisan jobs bill the House sent over last Thursday” once the Senate finishes the highway bill. McConnell went on to say, “The House-passed Jobs bill isn’t just important for what it does, but for what it represents. It’s a rare and welcome signal that lawmakers in Washington still value the risk-takers and the entrepreneurs who’ve always been so vital to our nation’s greatness...This is precisely the kind of thing we should be doing in Washington.”

At the end of his statement, McConnell asked for consent that the Senate take up the House JOBS bill and his Democratic colleagues objected. McConnell is expected to continue attempting to bring up the JOBS bill without much success, because Reid reportedly wants to scale back aspects of the House bill as well as add additional issues such as the reauthorization of the Export-Import Bank and an increase in the debt the Small Business Administration can guarantee for small business investment companies to $4 billion. Reid has said the Senate will next move to judicial nominations and has not offered a timeframe for the capital formation legislation.

Letter from Senator Shelby to Senate Banking Committee Chairman Johnson (PDF)

Senate and House Pass Bill Banning Insider Trading by Members of Congress

Blank Rome Government Relations — Fri, 02 Mar 2012 08:38:16 -0500

This article was originally published in the February 2012 edition of Current Developments in Securities Laws by Michael E. Plunkett, Partner, Blank Rome LLP.

On February 2, 2012, and February 9, 2012, the Senate and House of Representatives, respectively, passed separate versions of the “Stop Trading on Congressional Knowledge Act” (STOCK Act) which addresses, among other matters, insider trading among certain members and employees of the federal government and the political intelligence community.1

Insider trading occurs when a person trades stocks or other securities on the basis of material, nonpublic information about the security or the issuer of the security in breach of a duty of trust or confidence, such as a duty to keep the information confidential. With respect to information that a member of the federal government gains in the course of his or her official duties, it has been difficult to show that the member has a duty to keep that information confidential or other duty of trust or confidence that would preclude trading on the basis of the confidential information. The STOCK Act provides a framework for prohibiting specified members and employees of the federal government from trading on the basis of material, nonpublic information acquired in the course of their official duties. Under both the Senate and House bills, if enacted, the new law would:

affirm that specified members and employees of the federal government are not exempt from insider trading prohibitions;
require that various ethics committees and offices issue rules clarifying that specified members and employees of the federal government may not use nonpublic information derived from their positions with the federal government as a means of making a profit;
provide that specified members and employees of the federal government owe an affirmative duty of trust and confidence to U.S. citizens, among others, regarding material, nonpublic information derived from the performance of their official responsibilities;
require members and employees of Congress, as well as certain members and employees of the executive branch, including the President and Vice-President, to report to the appropriate ethics office the purchase, sale, or exchange of any stocks, bonds, commodities futures or other securities within 30 days after the transaction in the Senate bill, and within 30 days after learning of the transaction but in no case more than 45 days after the transaction in the House bill. The reporting requirements do not apply to transactions involving “widely held investment funds,” such as mutual funds;
require the creation of publicly accessible, searchable online systems for disclosed financial reports; and
require the Comptroller General to submit a report within one year on the sale of political intelligence (i.e. information derived from certain executive or legislative branch officials for use in analyzing securities or commodities markets).

The Senate bill includes additional provisions addressing political intelligence consultants, requiring organizations dealing in political intelligence to:

register with the federal government upon making one or more political intelligence contacts. The provision is more stringent than similar provisions in the Lobbying Disclosure Act which require registration only if an employee makes more than one federal lobbying contact for a client and devotes 20% or more of his or her time to federal lobbying activities for the client in a 3-month period; and
submit semiannual reports identifying their clients and the issues for which they engaged in political intelligence activities.

The bills will be sent to conference for reconciliation. If enacted, the STOCK Act should affirmatively establish the basis for prohibiting members of Congress and other high level federal employees from profiting based on material, nonpublic information during the course of their official duties under generally applicable securities laws. In addition, it should lead to enhanced disclosure of the activities of the political intelligence community.

To see the full February 2012 newsletter, please click here.

1. See S. 2038, 112th Cong. (as passed by Senate, Feb. 2, 2012), available at http://www.gpo.gov/fdsys/pkg/BILLS-112s2038es/pdf/BILLS-112s2038es.pdf; S. 2038, 112th Cong. (as amended and passed by the House of Representatives, Feb. 9, 2012), available at http://www.gpo.gov/fdsys/pkg/BILLS-112s2038eah/pdf/BILLS-112s2038eah.pdf.
2. See 17 C.F.R. §240.10b5-2(b)(1). The insider trading laws can also be breached in other ways, such as by providing confidential information to another so that person may trade on the basis of the information.
3. Political intelligence is defined by the Act as information derived by a person from direct communication with an executive branch employee, a member of Congress, or an employee of Congress and provided in exchange for financial compensation to a client who intends, and who is known to intend, to use the information to inform investment decisions.

Analysis: Government's Moneyball Moment

Blank Rome Government Relations — Thu, 09 Feb 2012 13:10:48 -0500

The recent movie Moneyball, based on Michael Lewis’ book, describes the cash-strapped 2002 Oakland Athletics’ efforts to build a competitive team with limited resources. Oakland General Manager Billy Beane relied on sophisticated, seldom-used metrics to analyze players, leading him to make the right investments -- even when they defied conventional wisdom. With a meager $41 million budget, Beane turned the A’s into a powerhouse that gave the $125 million New York Yankees a run for their money.

The story is analogous to the situation government faces today. Given an ever-growing deficit, government needs to find ways to do more with less. And better intelligence and data analytics can go a long way toward making this possible.

When Vivek Kundra was federal chief information officer he launched an IT Dashboard in 2009 to shine light on $80 billion in information technology investments across government. Almost immediately, IT projects worth $27 billion were identified as over budget and behind schedule. After reviewing 38 of the highest-priority projects, 12 were accelerated, four were terminated, and 11 were reduced in scope, saving an estimated $3 billion. Kundra also announced the administration’s 25-point IT reform plan, which includes increased use of analytics to track progress and identify areas in need of improvement.

In other ways, government is identifying ways to do more with less by leveraging technology to sort through and understand massive amounts of information in just about every aspect of citizens’ lives from banking and health care to education.

Financial Services

Following enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, financial regulators increased data collection and analysis to improve their understanding of the financial system. Despite the reach of multiple agencies overseeing the financial markets, they lacked the tools, data and analytical capacity to recognize the stirrings of a crisis, let alone prevent one.

Dodd-Frank established the Office of Financial Research in the Treasury Department to improve the quality of financial data and facilitate sophisticated analysis. The new office aggregates data from financial regulators and industry to help the Financial Stability Oversight Council anticipate and prevent crises. With oversight responsibility for all financial institutions and more than $50 billion in assets, the council will collect, analyze and share data among agencies, and report to Congress on a regular basis.

Health Care

The 2010 Patient Protection and Affordable Care Act similarly recognized the need for improved data collection and analytics to control health care costs. This intelligence can aid in identifying the best providers, the best practices and the best systems—and in reducing reduce waste, fraud and abuse. It also can identify health care models that states can tailor to specific markets and their unique needs.

A June 2011 the Medicaid Advisory Committee report to Congress called for increased use of analytics at the Health and Human Services Department to “consolidate or simplify the collection of Medicaid and Children’s Health Insurance Program administrative data from states to both reduce administrative burdens and improve data quality.”

A number of federal offices are conducting ongoing, evidence-based analysis of existing health care models and to develop recommendations for reform. The Patient-Centered Outcomes Research Institute, for example, conducts research to find the best available evidence to help patients and their health care providers make informed decisions. Likewise, the National Prevention, Health Promotion and Public Health Council is taking a holistic approach to patient health by analyzing every piece of the puzzle, from food, housing, education and transportation to workplace and environmental conditions.

Analytics cannot solve the nation’s health care challenges, but it can go a long way to address the billions in wasteful spending.

Education

As Congress continues to debate improvements in elementary and secondary education, many lawmakers have called for more data collection and analysis of performance evaluation models in school districts. Amid heated discussions, there is consensus that the problem is not the amount of education spending, but rather the failure to maximize the effectiveness of those dollars. The solution will require several levels of analysis from measuring student performance and relating it to teacher and principal performance to assessing the efficiency of spending.

A better understanding of how education funds are being spent, as well as analysis of performance and outcomes, could lead to models that could be emulated in school districts nationwide.

All states have built digital warehouses and filled them with academic data for every public school student, collecting enrollment, demographic and curriculum data, as well as high school graduation rates and college readiness test results. Federal officials envision data systems that can track student performance from pre-kindergarten through college. The idea is fairly simple: If analyzed correctly, student test data can tell educators what works in the classroom and what needs to change. It can tell administrators where to invest resources and which educators are effective. And it can help parents better understand how their children are learning.

Doing More With Less

As part of its Campaign to Cut Waste, the Obama administration announced the Government Accountability and Transparency Board in 2011 to make federal spending more accessible and transparent to the American people. Recovery.gov already provides easy access to Recovery Act spending data and enables reporting of waste, fraud and abuse.

In these challenging economic times, government must make better use of limited resources, and intelligence and analytics are absolutely critical. When Billy Beane’s efforts began to pay off, it wasn’t long before sabermetric analysts began cropping up throughout the Major Leagues. Many agencies are already actively engaged in these efforts, and as their programs demonstrate success it won’t be long before the entire government is playing moneyball.

Could the CFPB Change the Rules on Arbitration Clauses?

Blank Rome Government Relations — Tue, 07 Feb 2012 09:09:51 -0500

Of the 87 studies required by the Dodd Frank Act, one may get a bump up the priority list thanks to the recent U.S. Supreme Court decision in CompuCredit v. Greenwood, which upheld the rights of companies to include mandatory arbitration clauses in their user agreements. Several consumer groups disagreed with the court’s ruling and are calling on the new Consumer Financial Protection Bureau (CFPB) to get involved sooner rather than later. Section 1028 of Dodd Frank directs the CFPB to conduct a study and report to Congress on restricting mandatory pre-dispute arbitration, however, Congress set no deadline for completing the study. Once the CFPB does complete the study, the bureau has the authority to “prohibit or impose conditions or limitations” (via regulation) on arbitration agreements. The bureau’s rules must be consistent with the study.

The National Consumer Law Center (NCLC) recently issued a release protesting the court’s decision and pressing the CFPB to get started on the study. “The Supreme Court decision makes it all the more urgent for the Consumer Financial Protection Bureau to stop companies from using forced arbitration clauses to hide from the law,” said the group’s managing attorney Lauren Saunders. Saunders added, “Forced arbitration puts a thumb on the scales of justice in favor of predatory lenders...”

There are also bills in Congress that would amend the Federal Arbitration Act so that pre-dispute arbitration agreements would be invalid and unenforceable if they concern disputes related to employment, consumers, or civil rights. The Arbitration Fairness Act of 2011 (S. 987), sponsored by Sen. Al Franken (D-MN), asserts that mandatory arbitration clauses were “intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power,” not consumers. Rep. Hank Johnson (D-GA) is sponsoring companion legislation (HR 1873) in the House. Both bills are sitting in their respective judiciary committees and not expected to move any time soon in this contentious election year. FRW is watching the CFPB for the next move.

Cordray Controversy Continues

Blank Rome Government Relations — Tue, 17 Jan 2012 09:26:29 -0500

Following President Obama’s January 4th announcement that he would install former Ohio Attorney General Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB) using a recess appointment, a hailstorm of controversy has ensued, as lawyers, legislators and industry question the legitimacy of the move – and look for ways to undermine it.

Lawyers:

Following the appointment, the Office of Legal Counsel stated that Congress can only prevent the president from making such appointments “by remaining continuously in session and available to receive and act on nominations,” not by holding pro forma sessions.

Senate Republicans, led by Sen. Chuck Grassley, Ranking Member of the Senate Judiciary Committee, accused the president of ignoring more than 90 years of legal precedent in making the recess appointments while the Senate remained in pro forma session. “The Justice Department and the White House owe it to the American people to provide a clear understanding of the process that transpired and the rationale it used to circumvent the checks and balances promised by the Constitution,” Grassley said. “Overturning 90 years of historical precedent is a major shift in policy that should not be done in a legal opinion made behind closed doors hidden from public scrutiny.” The letter was signed by Senate Judiciary Committee members Grassley, Sen. Orrin Hatch (R-UT), Sen. Jon Kyl (R-AZ), Sen. Jeff Sessions (R-AL), Sen. Lindsey Graham (R-SC), Sen. John Cornyn (R-TX), Sen. Mike Lee (R-UT), and Sen. Tom Coburn (R-OK).

On January 12, the Department of Justice issued a memo arguing that pro forma sessions held every third day in the Senate do not constitute a functioning body that can render advice and consent on the president’s nominees. It said the president acted consistently under the law by making the appointments. “Although the Senate will have held pro forma sessions regularly from January 3 to January 23, in our judgment, those sessions do not interrupt the intrasession recess in a manner that would preclude the president from determining that the Senate remains unavailable throughout to ‘receive communications from the president or participate as a body in making appointments,’” Virginia Seitz, assistant attorney general for the Office of Legal Counsel, wrote in the memo dated Jan. 6.

Legislators:

On the legislative front, there are two issues: the legislation that created Dodd-Frank, and the countless bills that will soon be introduced in response to the president’s recess appointment.

The conventional wisdom in both industry and government circles has been that the CFPB’s authority will be limited until it has a director, and that once it has a director, it will assume its full powers. Not quite. As Dodd-Frank was drafted, Section 1066 reserves many of the bureau’s powers for the Secretary of the Treasury “until the Director of the Bureau is confirmed by the Senate.” As Cordray was appointed through a recess appointment, rather than the Senate confirmation process, he will still have certain constraints on his authority. Specifically, the section transfers consumer financial protection functions of several other federal agencies to the CFPB Director.

In the absence of a Senate-confirmed director, those powers, which include the authority to regulate non-banks, should, according to statute, remain with the Secretary of the Treasury. Despite this, the CFPB has announced that it has launched its non-bank supervision program. Should that supervision become enforcement, it remains to be seen whether enforcement actions could withstand a court challenge.

Where the current legislation has raised questions, two freshman House Republicans are making moves to answer them.

On January 10, Rep. Diane Black (R-TN) introduced a House resolution “Disapproving of the President's appointment of four officers or employees of the United States during a period when no recess of the Congress for a period of more than three days was authorized by concurrent resolution and expressing the sense of the House of Representatives that those appointments were made in violation of the Constitution.” The resolution has 70 Republican co-sponsors.

On January 13, Rep. Jeff Landry (R-LA) introduced the Executive Appointment Reform Act (EARA), which would eliminate loopholes in the U.S. Code that allow for the payment of certain recess appointed individuals and also place limitations on an appointee’s ability to provide voluntary or gratuitous service. Additionally, the legislation would prevent all regulations hailing from the CFPB from becoming final until the director has been confirmed by the Senate. The bill has 22 Republican co-sponsors.

Industry:

While few expected industry to enter the fray, a few major players have spoken out.
Citigroup said that it does not view the move as a recess appointment and said it expects a court challenge. The U.S. Chamber of Commerce, a vocal critic of the bureau, has not ruled out a lawsuit, but said Friday, “We are not going to sue today.”

Cordray has said that he is working closely with industry leaders and lobbyists to ensure that their concerns are heard. “What I want to say to business is: They should embrace the bureau,” he said. “Not only are we going to protect consumers, but we are going to support the honest and responsible businesses in the financial marketplace” who were undercut by companies that did not “adhere to the same standards.”

The White House has held firm that the move was constitutional. “The Senate has effectively been in recess for weeks, and is expected to remain in recess for weeks,” White House spokesman Eric Schultz said in a statement. “Gimmicks do not override the president’s constitutional authority to make appointments to keep the government running,” he said.

What to Expect in 2012: Derivatives

Blank Rome Government Relations — Fri, 13 Jan 2012 11:42:24 -0500

In the 17 months since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), implementation has progressed slowly. Financial regulators have finalized 74 of the 243 rules required by the Act and have conducted 39 of the 87 required studies.

The regulatory process is significantly behind schedule. Regulators have proposed an additional 128 rules but have failed to finalize them by their statutory deadlines. The regulators have yet to propose 26 rules that were set to be finalized by the end of 2011. Heading into 2012, regulators will have some catching up to do, though many regulators, namely Securities and Exchange Commission (SEC) Chair Mary Schapiro and Commodity Futures Trading Commission Chair Gary Gensler, have repeatedly emphasized that they are more focused on “getting the rules right” than they are on meeting deadlines. Coupled with House Republicans’ ongoing attempts to stall regulations by cutting funding to regulators, the regulatory process will likely extend far longer than originally intended.

Title VII of Dodd-Frank, which deals with the regulation of the over-the-counter swaps markets, is one area to watch in 2012. Dodd-Frank brings the over-the-counter derivatives market under significant government regulation for the first time. Many types of derivatives will now have to be traded on exchanges and routed through clearinghouses, with regulators examining trades before they are cleared. Derivatives are jointly regulated by the CFTC and the SEC, and both regulators are significantly behind schedule.

Thus far, regulators have missed 71 Title VII rulemaking deadlines. The first quarter of 2012 is set to be the busiest time for regulators, with 25 new regulations due by March 30; 14 of which have yet to be proposed. There are an additional 16 new regulations due in the third quarter of 2012, as well as the 152 rulemakings that remain behind schedule. The upcoming year also calls for an additional 28 studies. The bulk of these studies (11) are to be conducted by the Government Accountability Office (GAO), though the SEC and the bank regulators will likely see a significant burden as well, in addition to their rulemaking responsibilities.

There have been many legislative attempts to stall, scale back, defund or otherwise prevent the implementation of Title VII. Republicans, namely Senate Majority Leader Mitch McConnell (R-KY), have said that “anything we can do to slow down, deter, or impede” the regulators’ agenda would be “good for our country.” While Republicans will likely continue to fight most of the regulations, many in industry view the rules as inevitable and have encouraged regulators to finalize them as soon as possible to give companies sufficient time to prepare for implementation.

Key Dates in 2012:

January 17, 2012: The CFTC's interim final rule regarding position limits for futures and swaps required under Title VII for the Dodd-Frank Act is effective.
April 16, 2012: Extension for rule that exempted the central counterparties from the requirement to register as clearing agencies under Section 17A of the Exchange Act 6 solely to perform the functions of a clearing agency for certain credit default swap (‘‘CDS’’) transactions. Extension expires at the earlier of a new rule or April 16, 2012.
July 16, 2012: Temporary relief from certain provisions of the Commodity Exchange Act (CEA) for some swaps. Expires the earlier of July 16 or the effective date of the final rules amending the CEA.
July 21, 2012: Prohibition of federal assistance to swaps Entities; Removal of statutory references to and use of credit ratings; National bank lending limits will be revised to include any credit exposure to a person arising from a derivative transaction, a repurchase agreement, a reverse repurchase agreement, or a securities borrowing or lending transaction as extensions of credit subject to the lending limits.

Despite Dissent, CFTC Moves Forward With Volcker Rule

Blank Rome Government Relations — Thu, 12 Jan 2012 14:55:58 -0500

Yesterday the Commodity Futures Trading Commission (CFTC) unveiled the latest iteration of regulations required under Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, known as the “Volcker Rule.” Named for former Federal Reserve Chairman Paul Volcker, the rule restricts banking entities from engaging in short-term proprietary trading for their own accounts and from sponsorship of hedge or private equity funds.

Under the proposed rule, banks would be required to establish internal compliance programs designed to monitor compliance with Section 619 and the accompanying regulations. Firms will also be required to report “certain quantitative measurements” to regulators to assist them in distinguishing prohibited proprietary trading from permitted activities.

The rule is almost identical to the Joint Volcker Rule proposed by the Federal Reserve, the Office of the Comptroller of the Currency, Treasury, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission in October 2011. Those rules have come under fire even by Volcker himself, in recent months for their length and complexity. "It's much more complicated than I would like to see," Volcker said in November.

The CFTC voted for the proposed rules 3-2. The two dissenting Commissioners, Jill Sommers and Scott O’Malia, had harsh words for the Commission, calling the proposed rules “unworkable.”
"Unfortunately, we are proposing rules that are virtually identical to the other agencies' proposed rules well after they have been widely criticized and after many have called for those agencies to start over, including Paul Volcker," Sommers said. "It seems as if we have put ourselves on a separate track, which I fear will needlessly complicate an already convoluted and likely unworkable set of rules," she added.

O’Malia echoed her concerns saying, "I do not support the commission's version of the Volcker rule. It is an unworkable solution that is entirely too complex and provides the commission with little or no means to enforce or to deter violations of this rule. Obviously we have to comply with the statute and do so in a responsible way, [but] my concern with this fatally flawed rule [is that] this rule does not do that."

One of the more controversial proposals included in Dodd-Frank, the Volcker Rule was first proposed in January 2010, when the financial regulatory overhaul was in its infancy. Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) introduced the original Volcker Rule as an amendment to the Senate version of Dodd-Frank, but Sen. Richard Shelby (R-AL), blocked the amendment from ever coming to a vote.

Although the language eventually made its way into the bill, Sen. Scott Brown (R-MA) used his position as the swing vote to insist that the proprietary trading ban be changed to allow banks to invest in hedge and private equity funds. The final, watered-down rule allows banks to invest up to three percent of their Tier 1 capital in private equity and hedge funds but bars banks from owning more than a three percent stake in any private equity group or hedge funds. Since then, there have been several legislative attempts to scale back or delay the rules, but none has been successful.

The proposed rules are open for public comment for the next 60 days. While the rules have yet to be finalized, many large banks are actively divesting their proprietary trading desks to prepare for the July 21, 2012 implementation date.

Despite Republican Objections, Obama Installs Cordray as CFPB Director

Blank Rome Government Relations — Wed, 04 Jan 2012 16:22:27 -0500

President Obama announced this afternoon that he will install Former Ohio Attorney General Richard as director of the Consumer Financial Protection Bureau by “recess appointment.” The recess appointment comes despite the fact that the Senate is not officially in recess. The appointment will almost certainly be challenged in court.

Speaking in Shaker Heights, Ohio, the president said “Today I’m appointing Richard as America’s consumer watchdog. That means he’ll be in charge of one thing: looking out for the best interests of American consumers. His job will be to protect families like yours from the abuses of the financial industry.” The president went on to criticize Senate Republicans for blocking Cordray’s confirmation. “The only reason Republicans in the Senate have blocked Richard is because they don’t agree with the law setting up the consumer watchdog. They want to weaken it. Well that makes no sense at all.”

Now that the bureau has a director, it will assume its full authority under Dodd-Frank, which includes oversight authority over non-bank financial institutions. In the five-and-a-half months since the bureau opened its doors, mortgage servicers, debt collectors, and payday lenders have been outside of its purview. Now, these and other non-banks will likely be subject to regulatory and enforcement actions by the CFPB.

While many Democrats are claiming victory, all signs suggest that the battle is just beginning for Cordray. Many Republicans are already threatening court challenges, and Rep. Patrick McHenry, Chairman of the House Financial Services Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs wrote to Cordray today, requesting that he testify before the Subcommittee on January 24th.

This will not be the first time a presidential recess appointment has ended up in a courtroom. In 1921, the attorney general, at the request of the president, held that recess appointments could be made during an almost month-long recess, but noted that recess appointments during short recesses are unconstitutional finding that “ the term ‘recess’ must be given a ‘practical construction.’”

According to a report released by the Congressional Research Service last month, no recess appointments have been made in recent history during recesses lasting fewer than 10 days. During the Clinton Administration, the Department of Justice argued that any recess longer than three days meets the Constitutional standard for recess appointments. The DOJ did not claim that a recess appointment made in a recess of three days or less is unconstitutional, rather, only that it would present a “closer question.” It remains to be seen who will bring the suit, though there are undoubtedly a number of third parties that have a vested interest in the issues.

Senate Democrats were vocal opponents of recess appointments during the George W. Bush Administration. When President Bush recess appointed John Bolton as Ambassador to the United Nations, then-Senator Barack Obama (D-IL) said that a recess appointment was “the wrong thing to do,” and added that a recess appointee is “damaged goods… somebody who couldn't get through a nomination in the Senate. And I think that that means that we will have less credibility...” Also during the Bush Administration, Senate Majority Leader Harry Reid called recess appointments “mischievous” and “an end run around the Senate and the Constitution.” Now that the tables have turned, Senate Republicans have several of their Democrat colleagues on the record making similar comments.

The Senate failed to confirm Cordray on December 8, 2011, when it voted 53-45 to end the filibuster and proceed with the confirmation, falling short of the 60 votes needed to proceed. All but two Republicans voted to sustain the filibuster. Sen. Scott Brown (R-MA) is the only Republican Senator to publicly support Cordray, likely because he finds himself in a tight Senate race against CFPB architect Elizabeth Warren. Sen. Olympia Snowe (R-ME), who was one of only three Republicans to vote for Dodd-Frank, voted “present.”

Forty-Five Republican Senators signed onto a letter vowing to oppose any nominee for director until the CFPB is restructured. Specific reforms suggested in the letter were: (1) the establishment of a board of directors; (2) the requirement that the CFPB submit a budget request and go through the appropriations process just like the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Trade Commission; and (3) the oversight of CFPB regulations by Federal bank regulators to ensure that such regulations do not needlessly cause bank failures.

Members on both sides of the aisle issued strongly-worded statements on the president’s move:

Senate Minority Leader Mitch McConnell (R-KY), who has led the Republican effort to block the confirmation, blasted President Obama’s decision, accusing him of “arrogantly circumventing the American people with an unprecedented ‘recess appointment’ of an unaccountable czar.” McConnell described the historical precedent of limiting recess appointments to recesses lasting ten days or more and said “breaking from this precedent lands this appointee in uncertain legal territory, threatens the confirmation process and fundamentally endangers the Congress’s role in providing a check on the excesses of the executive branch.”

Senate Majority Leader Harry Reid (D-NV) said, “I support President Obama’s decision to make sure that in these tough economic times, middle-class families in Nevada and across the country will have the advocate they deserve to fight on their behalf against the reckless practices that denied so many their economic security… I hope that moving forward, Republicans will work with Democrats to address the concerns of middle-class Americans, instead of turning every issue into a partisan fight.”

House Speaker John Boehner (R-OH) issued a statement calling the move “an extraordinary and entirely unprecedented power grab by President Obama that defies centuries of practice and the legal advice of his own Justice Department," Boehner said. “This action goes beyond the President’s authority, and I expect the courts will find the appointment to be illegitimate.”

Senate Banking Committee Chairman Tim Johnson (D-SD) said, “With Richard Cordray leading the Consumer Financial Protection Bureau, Americans will finally get the consumer protections they deserve. Mr. Cordray is eminently qualified for the job, as even my Senate Republican colleagues have acknowledged…It’s disappointing that Senate Republicans denied him an up-or-down vote, especially when it’s clear he had the support of a majority of the Senate.”

House Financial Services Committee Chairman Spencer Bachus (R-AL) said, “The President’s unprecedented decision to attempt to circumvent the Constitution and ignore the law he himself signed is the clearest indication yet that he has abandoned any effort to work in a bipartisan manner to strengthen accountability and oversight of this new government bureaucracy… In doing so, President Obama has delegitimized the CFPB and has opened the agency up to legitimate legal challenges that will cripple it for years. The greatest threat to our economy right now is uncertainty, and the President just guaranteed there will be even more uncertainty.”

Now What? - Senate Fails to Stop Cordray Filibuster

Blank Rome Government Relations — Thu, 08 Dec 2011 17:07:50 -0500

This morning, Senate Republicans made good on their promise to block former Ohio Attorney General Richard Cordray’s nomination as director of the Consumer Financial Protection Bureau.

The Senate voted 53-45 to proceed with the confirmation, falling short of the 60 votes needed to prevent a filibuster. All but two Republicans voted to sustain the filibuster. Sen. Scott Brown (R-MA) is the only Republican Senator to publicly support Cordray, likely because he finds himself in a tight Senate race against CFPB architect Elizabeth Warren. Sen. Olympia Snowe (R-ME), who was one of only three Republicans to vote for Dodd-Frank, voted present.

So what comes next? The general consensus is: Nothing.

The House has taken steps over the last several months to prevent a recess appointment, and will likely continue to do so. The Obama Administration has not shown any sign of willingness to back down and change the bureau’s structure, nor is nominating another potential director likely to do any good. Republicans have made it clear that their hesitation has nothing to do with any individual candidate (though many believe Cordray was chosen in part because he is far less controversial than Warren); and no Senator on either side is likely to flip-flop on this issue going into an election year. In all likelihood, both sides will use it as a talking point throughout the 2012 election, with Democrats blaming Republicans for handicapping an agency aimed at protecting consumers and Republicans blaming Democrats for creating a regulatory agency without sufficient mechanisms to limit the director’s authority.

The Obama Administration has fought to rally support around Cordray in recent months. The CFPB has been operating without a director since it opened its doors on July 21, 2011, meaning that its authority is limited to banks and does not extend to non-banking financial institutions, including debt collectors, payday lenders and mortgage servicers. In May, 44 Republicans Senators sent a letter to President Obama vowing to block any nominee for director until the Bureau is restructured, namely by replacing its single director with a 5-person board. Senate Republican leaders have said that they are still waiting for a response to their letter.

Frank's Farewell and His Potential Successors

Blank Rome Government Relations — Tue, 29 Nov 2011 10:29:13 -0500

Rep. Barney Frank (D-MA), Ranking Member of the House Financial Services Committee, Father of Financial Regulatory Reform, and 16-term Congressman announced today that he will not be seeking re-election in 2012. Regardless of politics, few can deny that Rep. Frank has been a giant in the U.S. Congress, particularly in the financial sector, and that he will leave enormous shoes to fill. Within hours of the announcement, rumors began to circulate as to which Democrat will assume his prized seat on the financial services committee. Here are the top contenders:

Rep. Maxine Waters (D-CA):

Rep. Waters, the second most senior Democrat on the committee, is believed by many to be the top choice, and sources say she wasted no time this afternoon before lobbying Members for support. Now in her 11th term in Congress, Waters is the Ranking Member of the powerful Subcommittee on Capital Markets and Government-Sponsored Enterprises and has chaired the Congressional Black Caucus. While Waters is the heir apparent, there may be obstacles in her way. She is currently under investigation by the House ethics committee for three alleged violations. The investigation will certainly continue into 2012. If the committee finds she violated House rules and/or refers her case to the Justice Department, her chances for committee leadership may diminish.

Rep. Carolyn Maloney (D-NY):

Rep. Maloney is next in line after Waters and will certainly rise in influence following Rep. Frank’s departure. Elected in 1993, Maloney has a long history as an active, comparatively moderate member of the committee, and also has ties to the home of the nation’s financial sector. Rep. Maloney has chaired the Joint Economic Committee as well as the House Financial Services Subcommittee on Financial Institutions and Consumer Credit. She was also the author of the Credit Card Accountability, Responsibility and Disclosure Act, also known as the “Credit Card Bill of Rights,” and has been called “the best friend a credit card user ever had.” Given the controversy surrounding Waters and industry’s potential preference for a more moderate voice, some speculate that Maloney could surpass Waters and take the top spot.

The speculation will certainly continue throughout the coming year, but no definitive answer will come until the 113th Congress is sworn in in 2013.

So Long, Supercommittee

Blank Rome Government Relations — Tue, 22 Nov 2011 11:56:07 -0500

Well, at least they didn’t drag it out over Thanksgiving.

Shortly before 5 p.m. on November 21, 2011, Supercommittee Co-Chairs Sen. Patty Murray (D-WA) and Rep. Jeb Hensarling (R-TX) released a joint statement telling the world what it already knew: it was all over. While many had hoped for the sort last-minute compromise we have come to expect from this Congress, this time it just wasn’t in the cards. While the blame game is sure to continue for months (likely all 12 months between now and Election 2012), we turn our attention to what could happen next.

Option 1: Sequestration

It was supposed to be a deterrent, a fate so unthinkable it would force the Supercommittee into action. Now, it may become reality. Under the terms of the debt ceiling agreement, across-the-board spending cuts will be automatically triggered that will equal the $1.2 trillion in savings the Supercommittee failed to create. The first automatic cuts are split equally between security and non-security spending and are set to take effect on January 2, 2013. Security funding includes the Department of Dense, the Department of Energy nuclear-weapons related activities and the National Nuclear Security Administration, among other agencies. Security spending would be capped at $546 billion in FY 2013 and at $556 billion in FY 2014. All other non-security funding—including military construction, Veterans Affairs and Homeland Security funding—would be capped at $501 billion in fiscal 2013 and $510 billion in fiscal 2014. Under sequestration, Medicare will face limited cuts, but Social Security, Medicaid, veterans and civil and military pay, funding for the wars in Iraq and Afghanistan and overseas contingency operations will be excluded entirely.

Option 2: New Supers Save the Day?

We saw the Supercommittee and even heard whispers of a Super-duper committee for a while, but after a long and unsuccessful history of Domenici-Rivlins, Simpson-Bowleses, and now Murray-Hensarlings, it begs the question – Is anyone really going to be willing to take up this losing battle anytime soon? Senate Majority Whip Dick Durbin (D-IL) thinks so. Sen. Durbin suggested this morning that any bipartisan group of 12 senators could produce a “super” deficit reduction plan and bring it to the Senate floor for a vote. “It’s time to move to the committee of the whole. Let’s start moving beyond these special committees and let’s do something pretty basic and maybe radical,” said Durbin.

Option 3: Back to the Beginning

Before the Supercommittee even had a chance to fail yesterday, Republicans launched an assault against sequestration. Both Sen. John McCain (R-AZ) and former Massachusetts Gov. Mitt Romney went on the offensive against defense cuts. In a statement released yesterday, “We are now working on a plan to minimize the impact of sequestration on the Department of Defense and to ensure that any cuts do not leave us with a hollow military,” said Sens. McCain and Lindsey Graham (R-S.C.). “The first responsibility of any government is to provide for the common defense; we will pursue all options to make certain that we continue to fulfill that solemn commitment.” Romney echoed their sentiment, calling for the $600 billion in proposed defense cuts to be shifted to other parts of the federal budget. President Obama has vowed to veto any effort to prevent sequestration.

Reporting Thresholds under New Form PF for Registered Investment Advisers Managing Hedge Funds, CLOs and CDOs

Blank Rome Government Relations — Mon, 21 Nov 2011 10:43:09 -0500

CDO and CLO Managers are assessing reporting requirements under Form PF, jointly promulgated by the SEC and the CFTC as required under the Dodd-Frank Act.¹ One recent issue raised by some managers who are registered investment advisers is whether assets held in CDOs and CLOs must be included for purposes of determining Form PF reporting thresholds for "private funds," "hedge funds" and "private equity funds."

On October 31st, the Commodity Futures Trading Commission (the "CFTC") and the Securities and Exchange Commission (the "SEC") jointly announced final rules relating to new reporting requirements for advisers of certain private funds, commodity pool operators and commodity trading advisors.² The new rule will require filing of Form PF (for "private fund") by investment advisers registered with the SEC that advise private funds having at least $150 million in assets under management. Most registered investment advisers are expected to make annual filings; however, certain large fund advisers, including those with at least $1.5 billion in assets under management attributable to hedge funds, will be required to file more detailed information on a quarterly basis. These new reporting requirements are primarily intended to provide the Financial Stability Oversight Committee, the SEC and the CFTC with important information about systemic risk in the private fund industry.

The primary threshold for filing Form PF is any investment adviser that (i) is registered or required to register with the SEC, (ii) advises one or more private funds (see seven types of private funds below) and (iii) had at least $150 million in regulatory assets under management attributable to private funds at the end of its most recently completed fiscal year. For purposes of determining assets under management, the key phrase is assets "attributable to private funds." This clause is broad as it encompasses any issuer that would be an investment company but for Section 3(c)(1) or 3(c)(7) of the Investment Company Act. Collateralized debt obligation ("CDO") and collateralized loan obligation ("CLO") issuers typically rely on one of these exemptions from registration under the Investment Company Act; therefore, registered investment advisers who manage investments for CDO or CLO issuers would need to include the assets of those issuers in determining whether they meet the basic filing threshold.

An adviser meeting that initial threshold will be required to complete section 1 of Form PF, including certain basic information regarding the private funds (see seven types below) advised and information about the assets under management, fund performance and use of leverage.

Large private fund advisers will be subject to more extensive quarterly reporting requirements. These reporting requirements will apply to, among others, advisers who have at least $1.5 billion in assets under management attributable to hedge funds. Unlike the initial threshold, with reference to assets attributable to "private funds," the higher reporting obligation will attach based on assets attributable to "hedge funds." The final rules identify seven types of private funds: (i) hedge funds, (ii) liquidity funds, (iii) private equity funds, (iv) real estate funds, (v) securitized asset funds, (vi) venture capital funds and (vii) other private funds. The definition of hedge funds expressly excludes securitized asset funds. The definition of private equity funds includes private funds that are not hedge funds, liquidity funds, real estate funds, securitized asset funds or venture capital funds.

As defined in the final rule, securitized asset funds encompass any private fund "whose primary purpose is to issue asset backed securities and whose investors are primarily debt-holders." CLOs and CDOs would appear to fit within that definition. The adopting release does not provide any greater details of how an adviser should determine whether a private fund is a securitized asset fund. The determination may be significant as the determination that a CDO or CLO is a securitized asset fund (and thereby excluding it as a hedge fund or private equity fund) will exclude the related assets in determining whether the adviser is subject to the increased quarterly reporting obligations.<

In the proposed rule, securitized asset funds would have been defined as any private fund that is not a hedge fund and that issues asset backed securities and whose investors are primarily debt-holders.³ One commenter requested that the SEC clarify that hedge funds do not include securitized asset funds.⁴ In adopting the final rules, the SEC and the CFTC have expressly excluded securitized asset funds from the definition of hedge funds and private equity funds.

The same commenter suggested that there was a risk that CDOs could be classified as private equity funds under the proposed rule, even though the definition in the proposed rules expressly excluded securitized asset funds. While the SEC declined to adopt the proposed revisions offered by this commenter, it left open the issue of whether CDOs might properly be classified as private equity funds on the basis that CDOs often invest in asset backed securities. As CDOs and CLOs are primarily used to issue asset backed securities (similar to other types of securitizations) and whose investors are primarily debt-holders, the better reading is that CDOs and CLOs are securitized asset funds and should be excluded from hedge funds and private equity funds when determining whether the registered investment adviser is subject to the higher reporting standards of a large private fund adviser.

The deadlines for initial filings of Form PF will vary among advisers. The first annual filings for smaller advisers will be within 120 days of the fiscal years ending on or after December 15, 2012 (or April 30, 2013 for advisers with a December 31st yearend). Larger advisers subject to quarterly reporting may need to file initial reports as early as August 29, 2012. Later filing deadlines may apply to newly registered advisers. Advisers should confirm the applicable deadlines based on their particular circumstances.

1. See Section 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010).

2. Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Investment Advisers Act Release No. IA-3308 (Oct. 31, 2011).

3. See Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Investment Advisers Release No. IA-3145 (Jan. 26, 2011), 76 FR 8,068 (Feb. 11, 2011).

4. Comment letter of TCW Group, Inc. (Apr. 12, 2011), available at http://www.sec.gov/comments/s7-05-11/s70511.shtml.

Keep the Volcker Rule Brief, Let the Regulators Referee

Blank Rome Government Relations — Mon, 07 Nov 2011 13:17:33 -0500

Regulations to implement the Volcker Rule have hit the street. Now a new phase of the battle to reign-in proprietary trading by banks is at hand. If past is prologue, a tough and divisive battle looms. Meanwhile, the industry, regulators and customers will be dealing with the uncertainty that has bedeviled all concerned since Dodd-Frank was enacted.

How did we get here? How did a ten-page provision in legislative language end up being a 298 page proposed rule? When the industry, its lobbyists, its supporters on Capitol Hill and regulators all do what they do best, a complicated, lengthy and unwieldy set of rules is the result.
From the beginning, the banking industry has been openly opposed to the Volcker Rule. The effort to sidetrack it was unsuccessful, but the legislation did provide for exceptions to the rule to be developed by regulators.

That created the opening, and ever since enactment of the bill, industry representatives have been working to ensure the proposed regulations define, as generously as possible, the types of exceptions under which banks may trade through their own accounts. Regulators made an attempt to deal with all these issues. The resulting rules regarding market making trades, trades with and for international customers and others will allow limited proprietary trading to take place.

Now the rule is under attack by some for being too weak and others for being too cumbersome and unwieldy. Congressional hearings and proposals to repeal the Volcker Rule can be expected. A classic Washington stand-off is unfolding.

All of this will extend the uncertainty hanging over this process. The industry and its supporters may well harbor hopes that a Republican victory in the 2012 election would result in both Houses of Congress and the White House being in the hands of those supporting Volcker Rule repeal. So it may well be deep into 2013 before anyone can confidently assert the Volcker Rule process is complete.

Isn’t there a better way to write and enforce rules like this? Since we’re in the midst of football season, it occurs to this writer that we need look no farther than the regulation of play in the National Football league to know that the answer is "yes!"

As the Volcker Rule is one of many, many rules regulating the playing field in the banking industry, let's isolate one of the many rules governing play in professional American football and see if it offers us any guidance. Here is how the Digest of NFL Rules (as cited on NFL.com) describes the rule against roughing the passer:

"No defensive player may run into a passer of a legal forward pass after the ball has left his hand (15 yards). The Referee must determine whether opponent had a reasonable chance to stop his momentum during an attempt to block the pass or tackle the passer while he still had the ball."

There, in fifty-one words, some very complicated concepts are laid out. One can only imagine if a rule like that were published today and subjected to the process we now see unfolding in the Volcker Rule debate. The representatives of defenders would hire lobbyists to explore the potential that terms such as "momentum," "reasonable chance" and "run into" provided an opening for exceptions to be granted. The resulting interpretation of the rule would most likely resemble something a lot like what we see proposed in Federal Register now on proprietary trading.

But that's not what happened in the NFL. What happened is a very simple rule was promulgated and well trained referees have been deployed to enforce it. They watch the game closely with a knowledge of previous interpretations of the rule, the history of the players and the exigencies of the current situation. Making a determination of whether a defender had a "reasonable chance" to avoid contact requires him to consider all of these factors and make a decision that allows the game to be played for the benefit of the customer (i.e. fans) while protecting the health of the players and the integrity of the game.

Is it too late to roll-back the proposed rule, revert to a much simpler restatement of the Volcker legislative language and then actually put in place a sufficient number of savvy regulators to watch over the proprietary trading practices of the industry? Maybe, but it wouldn’t be a bad way to cut through all the uncertainty surrounding this issue and just get down to business.

Peter A. Peyser is a managing principal at Blank Rome Government Relations LLC.

As Clock Ticks, the Super Committee Hears from Predecessors

Blank Rome Government Relations — Wed, 02 Nov 2011 09:51:16 -0500

On Tuesday, November 1, 2011, the Joint Select Committee on Deficit Reduction held a hearing entitled “Overview of Previous Debt Proposals.” Former Clinton Chief of Staff Erskine Bowles and former Senator Alan Simpson (R-WY), co-chairs of the National Commission on Fiscal Responsibility and Reform, as well as former Senator Pete Domenici (R-NM) and former Congressional Budget Office Director Dr. Alice Rivlin, co-chairs of the Bipartisan Policy Center Debt Reduction Task Force. From the day the Super Committee was formed, its members have said they would draw on previous deficit reduction proposals, specifically naming these two commissions.

During his opening remarks committee co-chair Jeb Hensarling (R-TX) commented that America faces a legitimate fiscal crisis and that structural reforms to entitlements, especially healthcare, are needed if the committee is going to fulfill its statutory responsibility to reduce the growth of the deficit by $1.5 trillion over the next ten years. He said he is especially concerned about the rising rate of Medicare spending and noted that it is not possible for the U.S. federal government to “tax away” its problems. Democratic co-chair Patty Murray (D-WA) reiterated the importance of striking a balanced and bipartisan deal that does not unduly burden the middle class and more vulnerable Americans. She reproached her Republican colleagues, saying that Democrats would be willing to make painful concessions if Republicans would do the same. She went on to say, “It’s not enough for either side to simply say they want to reduce the deficit – now is the time when everyone needs to be putting some real skin in the game and offering serious compromises.”

Simpson and Bowles testified before the committee on the findings of the National Commission on Fiscal Responsibility and Reform. They both urged the committee to take action on a comprehensive fiscal plan that will reduce the deficit. Mr. Bowles stated that the so-call “Simpson-Bowles” plan was based on six guiding principles – ensuring the plan would not disrupt a fragile economic recovery; protecting the truly disadvantaged; doing nothing to jeopardize the safety and security of the country; investing appropriately in education, infrastructure, and research; reforming the tax code; and cutting discretionary spending where appropriate. Simpson commented that he does not believe the committee’s mandate to find $1.5 trillion in deficit reduction is enough and that the Simpson-Bowles recommendation of reducing the deficit by $4 trillion is the minimum amount needed to restore the United States’ fiscal stability, stabilize U.S. debt, and begin to reduce the growing debt-to-GDP ratio. Both Simpson and Bowles warned the committee about the necessity of acting quickly, saying that while they acknowledged that it may not be possible for the committee to have the reforms drafted into legislative language and scored by the CBO by the November 23 reporting deadline, it is crucial that committee agree on an overall framework.

Domenici noted that the United States faces two major challenges. First, it must accelerate growth and job creation; and second, it must reduce future deficits so that the U.S. debt will no longer grow faster than the economy. He argued that these objectives reinforce one another, saying that faster growth will reduce deficits, and stabilizing the debt will cut future interest rates and reduce uncertainty, spurring growth. In order to achieve these goals, Domenici contended that the committee will have to go well beyond the charge of identifying at least $1.5 trillion in savings over the next ten years, because even savings of this magnitude would still leave the debt rising faster than economic growth. Domenici suggested that they should work on a bargain involving structural entitlement and tax reforms, which would save at leave $4 trillion over ten years. He went on to say that the committee should take advantage of the full scope of its authority by compelling authorizing committees to produce fundamental tax and entitlement reforms and provide for “fast-track” consideration of those reforms.

Dr. Rivlin focused her testimony on the Bipartisan Policy Center Debt Reduction Task Force’s recommendation for reforming Medicare and the federal tax code. She argued that there can be no lasting solution to the U.S. debt crisis without structural changes in the Medicare program to slow its cost growth. She recommended transitioning Medicare to a “defined support” plan that would keep traditional Medicare but give seniors the opportunity to choose among competing private plans that could save them money. Dr. Rivlin also suggested a number of reforms the tax code in order to raise revenue and increase fairness, including a two-bracket income tax with rate of 15 percent and 28 percent; setting the corporate tax rate at 28 percent; and taxing capital gains and dividends as ordinary income.

Busy Without a Boss - CFPB Gets Cranking

Blank Rome Government Relations — Thu, 27 Oct 2011 13:10:03 -0500

The Consumer Financial Protection Bureau (CFPB) may not have a director, but that hasn’t stopped if from getting straight to work. Although its powers are limited until the Senate confirms a director, the CFPB recently kicked off two major efforts that prove it isn’t letting Senate Republicans slow it down.

Today, the CFPB and the Department of Education announced that they are working together to simplify financial aid offers for college students. The “thought starter,” (CFPB officials were careful to emphasize that this was not a formal proposal), would require all financial aid providers to supply students with a one-page “shopping sheet” containing basic information including the total cost of attendance, total debt at graduation and monthly debt payments thereafter. It also requires clear distinctions between scholarships, which do not have to be repaid, and loans. The new disclosure aims to make the costs and risks of student loans easier to understand and comes as part of the CFPB’s broader “Know Before You Owe” initiative; aimed at simplifying the paperwork borrowers receive when applying for loans.

Earlier this month, the CFPB issued the “CFPB Supervision and Examination Manual,” describing the supervision and examination process, outlining specific examination procedures and presenting templates for documentation. The CFPB has stated that these procedures will be used to examine “supervised entities.” This perhaps purposely vague characterization may reflect the bureau’s hope that it will soon enjoy its full authority, rather than being limited to bank oversight. In this vein, the CFPB included examination procedures related to compliance with a number of statutes, which, while applicable to banks, could have broad applications to a number of non-bank institutions.

Meanwhile, the CFPB awaits a director. The Obama Administration has pulled out all the stops to rally support around former Ohio Attorney General Richard Cordray, who was nominated by President Obama on July 17, 2011 and approved by the Senate Banking Committee on October 6, 2011. The Obama 2012 campaign website includes a tool enabling supporters to send one of four prewritten messages to the 44 GOP Senators who have vowed to block Cordray’s confirmation until the CFPB is restructured. Last week, The National Association of Attorneys General sent a letter to Senate leaders supporting Cordray’s nomination. Thirty-seven state attorneys general signed the letter, which they said was intended to put pressure on Senate Republicans to explain “why they aren’t acting.”

Ranking Member of the Senate Banking Committee Sen. Richard Shelby (R-AL) countered saying that he and his Republican colleagues sent the president a letter in May and never received a response. Said Shelby, “We haven’t heard from the president. Maybe he’s off campaigning,”

Time is Running Out, CBO Director Cautions Supercommittee

Blank Rome Government Relations — Wed, 26 Oct 2011 16:07:35 -0500

On Wednesday, October 26, 2011, the Joint Select Committee on Deficit Reduction held its fourth public hearing, entitled “Discretionary Outlays, Security and Non-Security.” The committee heard testimony from Congressional Budget Office (CBO) Director Douglas Elmendorf for the second time since it was empanelled in August.

Dr. Elmendorf offered multiple projections of discretionary spending over the next ten years, projecting what the deficit impact will be if the Super Committee meets its goal of creating at least $1.5 trillion in deficit reduction, as well as if the committee fails, triggering automatic across-the-board cuts. Dr. Elmendorf emphasized that while discretionary spending is certainly an important piece of the conversation, it is mandatory spending that is “overwhelming” GDP. He went on to say that without reforms to Medicare, Medicaid and Social Security, it will be difficult to achieve the needed savings.

Super Committee Co-Chair Sen. Patty Murray (D-WA) said that the Super Committee “is not there yet,” but emphasized that progress is being made and said she is “hopeful” that the committee will be able to meet its November 23, 2011 deadline. Murray also reminded her colleagues that non-defense discretionary spending constitutes less than one-fifth of all federal spending and that the debt-ceiling deal that established the Super Committee already cut $800 billion from the deficit. She asked Dr. Elmendorf what the impact of additional discretionary cuts will be, and he responded that Americans will see a decrease in all services, ranging from national security to police and fire departments to highways.

Super Committee Co-Chair Rep. Jeb Hensarling (R-TX) emphasized the need for the Super Committee to tackle Medicare, Medicaid and Social Security. He listed a number of discretionary programs that have continued to increase their spending, even as the overall economy and family incomes have shrunk.

Sen. John Kerry (D-MA) was the only Super Committee member to speak in terms of specific proposals, questioning Dr. Elmendorf about the potential impact of a $3-$4 trillion deficit reduction, rather than the $1.2-1.5 trillion required by the Budget Control Act. Sen. Kerry said that if the Super Committee only achieves the minimum required, it will be forced to reconvene in a year or two to address the same problems. He said that a meaningful solution requires at least $3 trillion in deficit reduction based on a three-to-one or two-to-one cuts-to-revenue model. During the hearing, several news outlets began reporting that the Super Committee Democrats are expected to produce a plan creating $2.5 to $3 trillion in deficit reduction over the next ten years.

Other Democrats on the committee focused their questions on the impact of increased revenues and the need to reduce defense spending. Dr. Elmendorf emphasized that while increased revenues could have a positive impact on the overall budgetary picture, it would very much depend on what policies were instituted to generate such an increase. Sen. Max Baucus (D-MT) asked about the current levels of defense spending, saying it currently exceeds every other period in history, with the exception of World War II, and questioning whether the Appropriations Committee is misusing designated “war funding” for other purposes. Dr. Elmendorf said Sen. Baucus was correct about the current level of spending and said that sometimes it is difficult to draw clear lines between what constitutes war spending and what does not. Rep. Chris Van Hollen (D-MD) also emphasized that if Congress were to repeal the automatic, across-the-board cuts to defense spending, the deficit would increase.

Republicans challenged Dr. Elmendorf on the CBO’s election to include the Obama Administration’s announcement that it would not implement the CLASS Act into its projections but not the Administration’s announcement that it will be reducing the U.S. role in Iraq and Afghanistan. Sen. John Kyl (R-AZ) said that CBO was “drawing a distinction without a difference.” Dr. Elmendorf countered that the CBO treats mandatory spending (including the CLASS Act), differently than discretionary spending (including defense spending). Sen. Rob Portman (R-OH) also asked about the role of uncertainty in hindering economic growth, and Dr. Elmendorf said that it is certainly impacting every sector of the economy.

Dr. Elmendorf said that in order for the CBO to conduct a full analysis of the Super Committee’s proposals, it will need to receive them by early November. The Super Committee has until November 23, 2011 to present its proposals to Congress, and Congress has until December 23, 2011 to pass the proposals or automatically trigger across-the-board cuts. If the cuts are triggered, the process, known as sequestration, would begin in January 2013.

The Super Committee will hold its next public hearing on Tuesday, November 1. The Committee will receive an overview of previous deficit reduction proposals, hearing testimony from Erskine Bowles and former Sen. Alan Simpson (R-WY), co-chairs of the National Commission on Fiscal Responsibility and Reform and authors of the “Simpson-Bowles plan,” as well as Alice Rivlin and former Sen. Pete Domenici (R-NM), co-chairs of the Debt Reduction Task Force and authors of the “Rivlin-Domenici plan.”

House Republicans Gear Up for Volcker Rule Fight

Blank Rome Government Relations — Wed, 12 Oct 2011 16:50:59 -0500

After the Federal Deposit Insurance Corporation released its proposed “Volcker Rule,” Republicans on the House Financial Services Committee were quick to announce hearings on the proposed regulations.

It’s a Dodd-Frank paradigm that we have come to know all too well: regulators continue to make slow progress to implement the many rulemakings required under the financial reform law, and with each new regulation, Republicans haven’t been far behind, working to repeal, scale back or defund every move the regulators have made. The hotly-contested Volcker Rule has proven to be no exception.

A House Financial Services Committee spokesman said the hearing will look at the economic impact and competitiveness of the proposed rule. The hearing will likely take place in early November.

The draft rule, which was formally released by the FDIC on October 11th and was approved by the Securities and Exchange Commission this morning, is 205 pages and seeks to ban banks or institutions that own banks from engaging in proprietary trading that isn’t at the behest of their clients and from owning or investing in hedge funds or private equity funds. The rule would also limit the liabilities the largest banks could hold and preclude those banks from gaining from or hedging against short-term price movements in the securities and derivatives markets. The proposal includes exceptions for market making for customers and for hedging against risky trades made on customers’ behalf.

Proponents say that the rule will eliminate the need for future bailouts, though some are already making the case that the rule doesn’t go far enough, and it defined proprietary trading too narrowly. Major financial firms, including Goldman Sachs, JPMorgan Chase and Bank of America have already closed their proprietary trading desks in anticipation of the rule, though firms continue to argue that the rule is unnecessary, difficult to implement, and will harm their ability to compete in the global market. The GAO released a report this past summer on the Volcker Rule, noting the difficulty in detecting proprietary trading and calling it “cumbersome” and “difficult to enforce.”
The rule will be open for comment until January 2012 and would take effect on July 21, 2012 – the second anniversary of Dodd-Frank; though some say certain banks would have until 2017 to fully comply.

The Volcker Rule is a proposal by former Federal Reserve Chairman Paul Volcker to restrict U.S. banks from making certain kinds of speculative investments that do not benefit their customers. Volcker argued that this kind of proprietary trading, where deposits are used to trade on the bank’s personal accounts, played a key role in the 2008 financial crisis.

The Commodity Futures Trading Commission has said that it may put forth its own version of the Volcker rule. Scott O’Malia, a Republican commissioner at the CFTC, said he spoke to CFTC Chairman Gary Gensler on Friday and quoted the chairman as saying, "We might, if it's the will of the commission, put forward ... a virtually identical proposal with the other regulators, or we could go it alone." O’Malia continued, "He's not committing either way."

Rep. Barney Frank (D-MA), for whom Dodd-Frank is named, as well as Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI), who first introduced the Volcker rule during the Dodd-Frank debate last summer, have yet to publicly comment on the proposed rule.

Senate Banking Committee Approves Cordray Nomination

Blank Rome Government Relations — Thu, 06 Oct 2011 10:22:19 -0500

The Senate Committee on Banking, Housing and Urban Development voted this morning to confirm former Ohio Attorney General Richard Cordray as director of the Consumer Financial Protection Bureau. The committee approved the nomination by a party-line vote of 12 to 10, with all Republican members voting against, as they have repeatedly vowed to do until the CFPB is restructured. The nomination must now come to a vote before the full Senate to complete Mr. Cordray’s confirmation. However, Minority Leader Mitch McConnell has united the Republican caucus to block the nomination (until the bureau is restructured), and it is unclear when the Senate will actually take up the nomination. The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act and officially opened its doors on July 21, 2011, but its powers are limited until it has a Senate-confirmed director.

The Senate Committee also unanimously approved the nominations of Alan B. Krueger to be a Member of the Council of Economic Advisers; David A. Montoya to be Inspector General, U.S. Department of Housing and Urban Development; Cyrus Amir-Mokri to be an Assistant Secretary of the Treasury, U.S. Department of the Treasury; Patricia M. Loui to be a Member of the Board of Directors, Export-Import Bank of the United States; and Larry W. Walther to be a Member of the Board of Directors, Export-Import Bank of the United States.

House Republicans Blast Schapiro on...Fracking?

Blank Rome Government Relations — Fri, 16 Sep 2011 16:34:01 -0500

In the year since the passage of Dodd-Frank, House Republicans have launched a number of attacks against the Securities and Exchange Commission (SEC), calling it wasteful, inefficient, and incompetent and blaming it for problems ranging from the Madoff Ponzi scheme to the 2008 financial crisis. The SEC has been called anti-free market, anti-business and anti-Main Street, but during yesterday’s day-long House Financial Services Committee hearing on SEC Oversight, Rep. Bill Posey (R-FL) came up with a new one; saying, “The SEC is fracking crazy!”

SEC Chairman Mary Schapiro has plenty of experience being on the defensive, but yesterday even she appeared stunned as legislators asked her why the SEC is overstepping the EPA’s authority and regulating hydraulic fracturing, or fracking, a process used to access underground reserves of natural gas and oil. Shapiro insisted that the SEC’s questions about fracking have been strictly limited to assessing the actual value of oil and gas reserves as printed in investor disclosure documents. However, several reports now claim that the SEC has asked for specific information regarding the chemicals being used as well as companies’ efforts to minimize environmental impacts, asserting that those inquiries cannot reasonably relate to valuing the assets. Further, many companies are now alleging that the SEC is requiring them to disclose proprietary information which could harm their ability to compete.

Rep. Steve Pearce (R-NM) asked Ms. Schapiro about the sources of payments to defrauded Madoff investors as well as the details of several bankruptcy cases where millions of dollars of state and federal funds were lost in bankruptcy. When Ms. Schapiro said that she was not familiar with those cases, Rep. Pearce responded that he was confused as to why the SEC is focusing its energies on regulating fracking while complaining that it lacks the resources to perform its basic duties.

While the true details of the SEC’s interest in fracking may never come to light, House Republicans are conducting vigorous SEC oversight and holding the agency to a standard that it has never in its very mixed history proven it is able to meet. Members continue to argue that the SEC will not receive more funding until it becomes more effective, and the SEC continues to insist that it cannot become more effective until it receives more funding. It’s a Catch-22 without an obvious solution.

Sections 913 & 914: Winners and Losers

Blank Rome Government Relations — Wed, 14 Sep 2011 12:58:39 -0500

For one of the first times in the Dodd-Frank debate, House Democrats and financial services industry leaders find themselves on the same side of the debate over harmonization of fiduciary standards for investment advisers and broker-dealers. Meanwhile, as the SEC opens the door for the designation of self-regulatory organizations, House Republicans appear to be at a turning point.

Fourteen months ago, banks were railing against the idea of adopting a single fiduciary standard for both investment advisers and broker-dealers, saying that it paints two very different services with the same brush and harms U.S. firms’ ability to compete worldwide. But in a hearing yesterday, stakeholders appear to have reached a compromise, following the publication of the SEC study, mandated under Section 913 of Dodd-Frank, which called for the development of a fiduciary standard for broker-dealers. The SEC staff recommended harmonizing regulation of investment advisers and broker-dealers and establishing a fiduciary duty for both, but does not subject them both to the Investment Advisers Act of 1940 (“the ’40 Act”), as industry feared. The study also suggests three possible approaches to regulatory reform, including designating self-regulatory organizations (SROs) to oversee broker-dealers.

Winners:

Banks, for their part, got most of what they wanted. The SEC report failed to show any empirical evidence demonstrating a need for the change, and it concluded that subjecting broker dealers to the ’40 Act would be inappropriate, as banks have maintained from the offset.
House Democrats appeared pleased with the proposals, which will increase regulation of financial professionals and could open the door for additional funding for the cash-strapped SEC. Further, industry called for any regulatory actions to be performed with strict Congressional oversight, preserving a strong government role in the financial sector for the foreseeable future.

Losers:

The SEC’s report has been criticized by stakeholders on both sides of the debate for failing to include enough empirical evidence of a problem, opening the door for many to criticize regulators for, once again, regulating for regulation’s sake. Further, the commission was lambasted throughout the hearing for its demonstrated inability to carry out its many new responsibilities under Dodd-Frank. When faced with a choice between ceding some authority to FINRA or being tasked with additional regulatory responsibilities it cannot afford, it is tough to see an upside for the agency.
The Department of Labor’s proposal to broaden the definition of fiduciary standard to more financial professionals, including those who oversee IRAs, drew criticism from all sides as being ill-conceived and damaging to those who are already struggling to save for retirement in a volatile economic climate.

TBD:

FINRA’s request to be designated as an SRO has the support of House Republicans as well as industry and could be an opportunity to scale back, even slightly, the growing government role in the financial sector and demonstrate that self-regulation can work. On the other hand, as House Democrats appear determined to paint the organization as “the ones that missed Madoff,” regulation could end up in the hands of the SEC.
House Republicans maintain that there has not been a demonstrated need for reform and are using the Department of Labor’s proposal as evidence of the Obama Administration’s desire to over-regulate and expand the size of government. However, the reforms seem to be moving forward regardless of the criticisms. The House GOP could score a big win if Financial Services Committee Chairman Spencer Bachus’s (R-AL) proposal to designate FINRA as an SRO becomes law and the private sector is able to regain some autonomy. If not, the SEC’s role will continue to grow and Republicans will face renewed pressure to increase its funding.

The SEC has yet to propose rules related to its study, and Rep. Bachus has not said when his legislation, still in draft form, will be introduced.