The playbook for how Washington will be either reshaped or trapped in a lame-duck vortex until 2020 remains unclear in the immediate aftermath of recent mid-term elections, especially amid ongoing recounts and vote challenges. What is a certainty, however, is that companies cannot afford to place their bets on the Trump-era status quo of deregulation and economic nationalism.
In Tuesday night’s elections, Democrats recaptured the House of Representatives and Republicans held onto the Senate. The question now is how this parity among the chambers will affect governance.
In the immediate aftermath of the election, stock prices surged on the apparent belief that a divided Congress would mean a legislative stalemate and far fewer new rules and regulations to fret about. A counter argument, however, is that forcing the “kids to play together” could reawaken, at least to some degree, a spirit of bipartisanship on broadly popular initiatives. History offers a case in point: In the 1990s, Bill Clinton floundered as president until Republican victories forced compromises that benefitted nearly all involved (at least until impeachment hearings began).
Big changes for financial institutions?
Changes in the regulatory climate for financial institutions will likely remain a bit of a coin flip for weeks and months to come as party politics sort themselves out.
Life without Sessions
The elections not only served as a halfway mark for the Trump administration, but also an opportunity to do some “housecleaning.”
Notably, as he has threatened to do for many months, the President finally got rid of Attorney General Jeff Sessions (a dead-man-walking from early on in his tenure for recusing himself from the ongoing Mueller/Russia investigation), replacing him with Matthew Whitaker, Sessions’ chief of staff, as acting AG.
It is far too early to tell how Whitaker or his future successor will align or diverge from current Department’s protocols and policies. Many in the corporate world, however, will be paying close attention to enforcement of the Foreign Corrupt Practices Act.
Sessions had pledged his unwavering support of the FCPA, even as enforcement numbers declined. “Under my leadership, the Department of Justice remains committed to enforcing all the laws,” Sessions said during an April speech. “That includes laws regarding corporate misconduct, fraud, foreign corruption and other types of white-collar crime. One area where this is critical is enforcement of the FCPA.”
Revised guidance to establish standards, policies, and procedures for the selection of corporate monitors, announced in October, could also come back into play.
Under that policy, Criminal Division attorneys must consider a number factors, including the type of misconduct—such as whether it involved the manipulation of books and records or the exploitation of inadequate internal controls and compliance programs. Attorneys also will assess the pervasiveness of the conduct and whether it involved senior management.
In terms of whether a monitor is necessary, the policy directs staff to also consider both the financial costs to a company, as well as unnecessary burdens to the business’s operations.
There is already evidence of that policy in action. In September, Telia Company AB, a multinational telecommunications company headquartered in Sweden, whose securities traded publicly in New York from 2002 until 2007, and its Uzbek subsidiary, Coscom, were charged with conspiring to violate the FCPA by paying more than $331 million in bribes to a government official in Uzbekistan. Under the terms of that settlement, no corporate monitor was required.
Sessions’ departure had one immediate effect: driving up the stock price of companies in the new and burgeoning marijuana industry. The former AG was known for his vociferous objection to legalization efforts and pledged to maintain federal laws regarding the drug regardless of what state legislatures (often directed by ballot initiatives, as was the case regarding recreational marijuana in Michigan on Election Day) might do.
After Tuesday’s midterm elections, Michigan became the 10th state—and the District of Columbia—to vote to legalize marijuana. Missouri and Utah voters supported legalization for medicinal use.
State legalization could be yet another factor in the federal government easing up restrictions on banks that seek to do businesses in the marijuana industry, a potential bonanza for all involved as sales grow.
Supporters affectionately call her “Auntie Maxine.” President Trump infamously called her “crazy” and an “extraordinarily low IQ person.” Now, Maxine Waters (D-Calif.) will be one of the most important legislators in the House as the new chairman of the House Financial Services Committee. Rep. Patrick McHenry (N.C.) and Rep. Blaine Luetkemeyer (Mo.) are favorites to serve as the Republican ranking member of the committee.
Waters outlined her post-election, pre-appointment agenda.
“I will prioritize protecting consumers and investors from abusive financial practices, making sure that there are strong safeguards in place to prevent another financial crisis … encouraging responsible innovation in financial technology, promoting diversity and inclusion in the financial services sector, and ensuring that hardworking Americans and small businesses have fair access to the financial system and opportunities to thrive,” she wrote in a statement.
Waters, in recent months, has increasingly been thorn in the side for both the Trump administration and big Wall Street banks.
In September, as ranking member of the committee she is now all but assured to chair, she urged the Federal Reserve to maintain strong capital requirements for Global Systemically Important Banks.
“Strong capital requirements are the cornerstone of an effective regulatory regime that promotes financial stability while supporting stable economic growth,” she and her colleagues wrote, urging the Federal Reserve “to maintain the appropriately tough capital requirements on G-SIBs.”
The letter responded to a Republican request to Randal Quarles, the Fed’s vice chair for supervision, to weaken capital requirements due to concerns of “unwarranted capital burdens.”
The Fed’s board of governors did ultimately agree to that plan, citing the need to more specifically tailor Dodd-Frank Act rules regarding liquidity, surcharges, and loss-absorbing capital buffers to the size and complexity of financial institutions. A similar push is afoot, with a measure of support from pro-business Democrats, to ease perceived compliance and operational burdens caused by the Volcker rule and Dodd-Frank’s derivatives rules.
As for community banks and those with more modest assets, the Independent Community Bankers of America, the primary trade group for small U.S. banks, focused on how Democrats might deploy their House majority in its post-election analysis.
“Control of the House will provide the Democrats with a formidable bully pulpit,” it wrote. “Each party will try to drive a message to help them capture the White House and add Congressional seats in 2020. Both parties will have to balance appeals to centrist voters with appeals to their base.”
“The House will likely pass a series of ‘message’ bills with no expectation that they will be taken up by the Republican-controlled Senate,” it added.
That prognostication meshes with what is expected from the Waters-led House committee. It is all but a given that top bank executives, and the regulators who oversee them, will be marched in to defend themselves.
More targeted efforts that are likely to rank high on the committee’s agenda will be Bank Secrecy Act reform, FinTech policy, data security, the SAFE Act (cannabis banking), the Community Reinvestment Act, housing, and GSE reform, ICBA predicts.
Perhaps most concerning to big banks as Waters takes charge is her reactionary calls to break them apart.
On Oct. 4, Waters announced the Megabank Accountability and Consequences Act. The legislation would demand that federal banking regulators review systemically important banks with more than $250 billion in assets for patterns of illegal activity or consumer abuses. Failing that assessment, repeated legal violations may lead to proceedings to either break up or wind down the institution.
Waters was asked whether Wells Fargo should be shut down if her bill is passed. “Oh absolutely,” she said. “I think that Wells Fargo has demonstrated patterns and practices that are so obvious they certainly qualify for being shut down.”
While Waters is expected to frequently yield her Committee’s subpoena powers (Deutsche Bank’s financial relationship with Trump means it is all but assured to be on her agenda), a party split among the House and Senate likely robs her of the Congressional Review Act, a tool that allows both chambers a vote to undo recent legislation and a process used frequently during the Republican-controlled Congress.
The news isn’t all bad for Republicans on the Financial Services Committee. Even hyper-partisan Rep. Jeb Hensarling (R-Texas) has conceded, as he steps down as chairman of the Committee, that Waters does occasionally exhibit a bipartisan streak.
For example, Waters and Hensarling worked together for the still-pending capital-formation legislation known as the JOBS and Investor Confidence Act of 2018 (also called JOBS Act 3.0). It consists of 32 individual pieces of legislation.
Hensarling, however, isn’t entirely conciliatory.
“The question is, will the House Financial Services Committee continue to be a beehive of legislative activity, or will the Committee basically be turned into a Spanish Inquisition or Star Chamber to harass the administration,” he said during a recent CNBC interview.
One thing is certain, Hensarling’s Financial CHOICE Act, a sweeping slate of regulatory reforms, is now all but dead. Its demise can be blamed on both the change in party leadership and his refusal to move forward with either bills cherrypicked for their odds of passage or changes needed to assure Senate passage.
Over in the Senate, Sen. Mike Crapo (R-Idaho) is likely to remain Chairman of the Banking Committee. If he accepts a different assignment, Sen. Pat Toomey (R-Pa.) could get the nod.
The Bureau of Perpetual Controversy
It is worth noting that former Consumer Financial Protection Bureau Director Richard Cordray was defeated in his run for governor in Ohio. Could that imply, despite all the hand-wringing by Democrats that its work is crucial for consumers, that the message fails to resonate?
Nevertheless, a priority for Waters, and likely many of her party peers, will be protecting the Bureau from Republican and Trump administration efforts to weaken it.
Waters, for example, sees a role for the agency in her bill to break up big banks with poor compliance track records. Compliance with consumer protection laws would be assessed using parameters developed by the CFPB under the proposed law.
In October, she also introduced the Consumers First Act, “a bill to block the Trump Administration’s anti-consumer agenda and reverse their efforts, led by Mick Mulvaney, Director of the Office of Management and Budget, to dismantle the CFPB.”
This legislation was co-sponsored by several Democrats on the Financial Services Committee.
The bill would limit the number of political appointees that may be hired and codifies the commonly used name of the Consumer Financial Protection Bureau amid Mulvaney’s efforts to rebrand it as the Bureau of Consumer Financial Protection. The bill also seeks to undo efforts to weaken fair lending enforcement, eliminate coordination with other agencies, back away from rules and enforcement to rein in payday lenders, eliminate routine supervisory exams for compliance with the Military Lending Act, and effectively terminate its Consumer Advisory Board of outside experts.
The future of the Bureau, and Democrats’ protection of it, may also depend on the still-unresolved Senate confirmation of Kathy Kraninger as the next director of the agency.
What about trade?
Democrats may be less energetic in efforts to interfere with the Trump administration’s trade policies, especially those that relate to national security (under an expanded CFIUS) or regarding China, aside from preserving U.S. corporate interests when it comes to technology transfer requirements and intellectual property protections.
A post-election PwC analysis offers perspective. “Democrats will likely push for new spending on reskilling of trade-affected workers and try to prevent the unwinding of Obama-era environmental protections and healthcare rules in U.S.-Mexico-Canada trade legislation,” it wrote.
Democrats will also be likely to push back against tariffs and restrictive trade policies affecting the European Union, and any U.S. effort to weaken participation with the World Trade Organization.
Until these moving parts click into some certainty, PwC says that “companies must take immediate action to preserve operating margins and maintain regulatory compliance.”
“Now is the time make ‘no regrets’ scenario plans and review pricing, sourcing, hedging, cash planning and manufacturing footprint decisions,” its analysis says. “Companies need to frame a broader strategic response to the new trade environment. What does it mean for corporate structures and manufacturing footprints and supply chain networks?”
As for climate and clean energy champions, the elections are positioned as a bearer of good news.
Proponents now headed to Congress, statehouses and governors’ mansions across the country mean that investors and companies “must ramp up their efforts to accelerate the transition to a low-carbon economy,” says Anne Kelly, senior director of policy at the sustainability nonprofit organization Ceres, said. “States will once again continue to lead the way. Candidates on both sides included clean energy in their policy platforms, showing us that bipartisan support for building a clean energy economy is growing.”
While state ballot initiatives for carbon pricing and renewable energy were defeated in Washington state and Arizona, voters embraced proposals to increase renewable energy standards in Nevada, ban offshore drilling in Florida, and fought off efforts to defeat a gas tax increase in California.
On the federal level, “even if Democrats will be hamstrung in their ability to tighten rules for financial institutions, the new House leadership will likely be able to block any further deregulatory initiatives and intensify criticism in oversight hearings of both the big banks and federal agencies attempting to draft administrative reforms,” Kelly said.
High tech, high stakes
The technology sector was among the industries facing uncertainty both before and after the mid-term election. Most of the news coming out of Washington, in fact, may be downright scary for tech executives.
President Trump remains unrelenting with his anti-trust talk regarding Silicon Valley giants, notably Amazon. There is also the sticky wicket of hammering out national data privacy legislation and whether it will complement or preempt state laws.
Among the developments to watch is the successful reelection of Rep. Ro Khanna (D-Calif.). Working with Tim Berners-Lee, the creator of the World Wide Web, Khanna has unveiled an “Internet Bill of Rights,” with 10 different assurances citizens should have when it comes to consenting to the collection and dissemination of their personal data. What makes his legislation all the more newsworthy is that he drafted the list at the request of Nancy Pelosi (D-Calif.) the once and (probably) future Speaker of the House.
Among the proposed rights: opt-in consent to the collection of personal data; by any party and to the sharing of personal data with a third party; obtaining, correcting, or deleting personal data controlled by any company and its third parties; and not to be unfairly discriminated against or exploited based on personal data.
Democrats may also try to undo the Federal Communication Commission’s roll back of Obama administration “net neutrality” rules, which prohibited broadband providers from impeding online traffic or charging for faster bandwidth.