From: Thorn Run Partners Date: June 23, 2014 Subject: Financial Services Report ______

OUR TAKE On Tuesday the voters in Mississippi will have the privilege of helping to determine whether the ascending trajectory the pundits placed back on the Tea Party following Majority Leader Cantor’s primary defeat maintains momentum or loses steam. While the media often focuses on the extremes of both parties, it is important to remember that the work gets done in the middle and as a recent report by the group Third Way, shows, it appears that there is fertile ground there to move forward on a lot of the big issues facing our country. Government shouldn’t make good television, and if you’ve ever watched C-SPAN you know why, but we need to find a way past the noise of the talking heads to address the major fiscal and economic issues facing our country. We will find out on Tuesday which direction we are heading.

LOOKING AHEAD

NEAR TERM  On Monday the House is scheduled to consider legislation to reauthorize the CFTC. Late last week the White House announced that it strongly opposes the measure, but is worth noting that it but did not issue a veto threat on the bill. The Financial Services Committee has a full week, and leads off with Treasury Secretary Lew testifying on Tuesday morning about the FSOC.  On Wednesday, Chairman Hensarling will ramp up his attacks against the Export Import Bank. Now that he has the support of the new Majority Leader, we should anticipate some real fireworks at this hearing.  There was a report late on Friday that Leader Reid may try to bring the Senate’s version of TRIA up this week.  A busy week for Treasury Secretary Jack Lew vis-à-vis his FSOC duties. In addition to testifying before the House on Tuesday and the Senate on Wednesday, the FSOC will host closed meeting on Tuesday, where among other things the Council will discuss recent developments in the markets and receive an update on short term wholesale funding markets.

THE PAST WEEK LEGISLATIVE BRANCH

HOUSE Once Again Cordray Hearing Gets Chippy On Tuesday, CFPB Director Richard Cordray was before the Financial Services Committee to discuss the Bureau’s most recent semi-annual report. While the hearing was mostly the standard fare of Republicans attacking the CFPB, this time for cost overruns associated with construction of their headquarters, and Democrats defending the Bureau there were a couple of notable elements beyond the back and forth between Cordray and panel members where he invited them to view first-hand the “dump” that is the CFPB building. First, Director Cordray indicated that the Department of Defense was close to issuing new rules to implement the Military Lending Act, though he didn’t provide further details on timing. Second, Mr. Cordray noted that he expected the CFPB to issue its own rules for the short term lending industry within the next six months, though he added that it wasn’t the CFPB’s intention to “wipe out” the industry. Also, in response to continued bipartisan criticism about the CFPB’s handling of its auto lending guidance, Cordray disclosed that the CFPB was preparing to release a white paper on its methodology later this summer. He also indicated that the CFPB was having difficulty grappling with how to require adequate disclosure obligations on prepaid cards.

Committee Passes TRIA and FSOC Bills Over the course of two days, the Financial Services Committee debated and approved its version of a TRIA bill as well as a measure to two measures aimed at reforming the Financial Stability Oversight Council (FSOC). Despite bipartisan support for TRIA and for the concept behind one of the FSOC bills, all three were passed on straight party-line votes, with Ranking Member Waters making a spirited speech in opposition to the proposals.

While there are many differences between the House bill and the one that was recently passed by the Senate Banking Committee, such as the fact that the House bill extends the program for five years while the Senate extends it for seven, one of the main points of contention with the House bill is that it bifurcates the existing federal backstop, only allowing it to proceed for nuclear, biological, chemical or radiological weapons leaving insurers exposed for a greater share of losses caused by conventional terrorism activities. Following the mark-up Chairman Hensarling indicated that he would be willing to offer a clean six-month extension of TRIA if this bill, H.R. 4871, fails on the House floor. Late on Friday, Leader Reid indicated that he may try to bring the Senate’s version up for a vote this week.

The first of the two FSOC measures would require the FSOC to adhere to federal sunshine-in- government laws, as well as allow congressmen to attend and give member agencies an expanded say in FSOC matters. The bill, authored by Rep. Scott Garrett (R-NJ) appeared to address some of the concerns expressed by Republican SEC Commissioner Mike Piwowar earlier in the year. The other bill, as amended would suspend the FSOC’s ability to make systemically important financial institution (SIFI) designations for six months.

Appropriations Committee Approves Financial Services Spending Measure

On Tuesday the Financial Services and General Government Appropriations Subcommittee approved its FY15 spending bill. Total funding in the legislation is $566 million below FY14 enacted levels and $2.3 billion dollars below President Obama’s request. Among relevant allocations for readers are that the SEC is funded at $1.4 billion, a figure that is $50 million above last year’s funding but $300 million less than the Administration requested. Unlike the SEC, the IRS’s funding was cut $341 million dollars from last year, as the Subcommittee allocated tax collectors $10.95 billion, a sum $1.5 billion below what the Administration had requested. Additionally, the bill includes a provision to modify the CFPB’s funding source away from its Federal Reserve source and to the congressional appropriations starting in FY16. The full appropriations committee is scheduled to mark up the bill on June 25th.

McHenry Threaten SEC that House is Prepared to take up Proxy Advisory Reform Speaking at an AEI event on Wednesday, Patrick McHenry (R-NC) indicated that the leadership of the House Financial Services Committee was prepared to take action if the SEC does not act on the issue of implementing reforms to the proxy advisory industry. McHenry suggested that the best course of action for the Commission would be to revoke the 2004 “no action” letters granting two firms special privileges. The Congressman didn’t indicate what form Congressional action would look like in the event the SEC’s response is unsatisfactory.

SENATE Committees Examine High Frequency Trading First on Tuesday, then on Wednesday the Permanent Subcommittee on Investigations (PSI) and then the Banking Committee held hearings on High Frequency Trading (HFT). With HFT accounting for about half of all stock trades in US markets, and the recent attention on the industry caused by the Michael Lewis’ book Flash Boys, these hearings did not come as a surprise. Witnesses at the PSI hearing told the panel that rebate fees and payments to brokers for orders should face regulatory scrutiny. In addition, there was a discussion about what the SEC could do, with most of it focused around amending rule NMS, with the possibility of the Commission conducting a pilot program at eliminating “maker taker” for certain stocks. In terms of next steps, PSI Chairman Carl Levin (D-MI) noted that there “may be a role for Congress” to address conflict of interest issues in the industry. Though it is unclear whether there would be Republican support for making any of these changes, during the hearing Ranking Republican John McCain (R-AZ) questioned witnesses about the public’s perception of HFT and its impact on confidence in the markets.

On Wednesday, it was the Banking Committee’s turn, and its hearing was more hostile to the industry, as witnesses floated proposals such as imposing liability on exchanges for the losses caused by market disruptions and Senator Warren compared HFT to the scam in the movie Office Space though perhaps other, more antiquated references would have been relevant. Regardless, Warren strongly encouraged the SEC or Congress to act in this industry to “level” the playing field for average investors. Additionally, Senator Mark Warner chastised the SEC for delays in implementing a consolidated audit trail noting that it needed to be implemented “ASAP” and that he hoped the SEC was “listening”.

Brown Urges CFPB to Issue Comprehensive Payday Lending Rules On Monday, Senator Sherrod Brown wrote the CFPB urging the Bureau to ensure that its forthcoming small dollar lending rules are written to cover all types of loan products. In his letter, which was

3 written in part to a recent decision by the Ohio Supreme Court, Brown suggested that the CFPB’s rules include payday, auto-title, and installment loan providers.

SELECT HIGHLIGHTS FROM THE ADMINISTRATION

FEDERAL RESERVE BOARD Fed Keeps Foot on the Taper Pedal While Cutting GDP Projections On Wednesday the Federal Reserve Board Open Markets Committee (FOMC) announced it was continuing to cut its monthly purchases of asset purchases. As expected, this reduction of $10 billion will result in the monthly size of the Fed’s QE program being reduced to $35 billion dollars in the month of July. In addition, the FOMC announced that it was revising downward its estimation of the country’s gross domestic product to between 2.1 and 2.3 percent from its original prediction of 2.8 – 3.0 percent. Although at first glance this may seem like the Fed lacks confidence in the economy, it is actually the opposite, because based on the lower than expected first quarter GDP numbers, the economy must really take off for the remaining three quarters in order to his these revised expectations.

FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) Hoeing Puts Banks on Notice that FDIC will not be Rubber Stamp for Living Wills On Thursday, while speaking before the National Economists Club in Washington, DC FDIC Vice Chairman Thomas Hoenig laid down a warning to banks about how he envisioned his agency’s review of their wind-down plans (a/k/a living wills) noting that he hoped the FDIC would make formal rejections of plans that were not seen as credible approaches to safely put failing banks through bankruptcy. Hoenig’s remarks come weeks before the July 1st deadline for the biggest banks to file their third annual plan.

SECURITIES AND EXCHANGE COMMISSION (SEC) Money Market Rules to be Released Soon On Friday while speaking before the New York Economic Club, SEC Chair Mary Jo White said that the SEC is working to issue final money market rules and that the Commission is very focused on making changes in market structure in the “next year or two.” The comments follow on a statement made last month where Chair White said the SEC intends to move on these rules in the “relative near term” but appear to contradict reports that the Commission is divided on the issue.

SEC Eliminates Too Big To Fail Concerns from Waiver Policy On Tuesday, Reuter’s reported that the SEC, at the request of Commissioner Piwowar, had recently removed language from an agency policy that explicitly called for the Commission to consider a company’s significance and its connectedness to other market participants when considering whether to grant a regulatory waiver. According to the article, Commissioner Piwowar, the policy implied that the SEC was considering some companies as 'too big to fail' if the SEC granted the waiver and so he threatened to vote against approving a waiver for the Royal Bank of Scotland back in April, but as a result the policy was changed.

CONSUMER FINANCIAL PROTECTION BUREAU (CFPB) CFPB Releases Guide For Senior Living Facilities

On Thursday the CFPB released a guide for assisted living facilities and nursing homes intended to help these institutions better protect senior citizens from financial abuse. The guide explains how staff can recognize, record and report financial abuse of the seniors in their care as well as offers examples of frauds most likely to perpetrated against senior citizens.

CFPB Orders Synchrony Bank to Pay $225 Million for Deceptive and Discriminatory Practices On Thursday the CFPB announced it was ordering Synchrony Bank (formerly GE Capital Retail Bank), to provide $225 million in remediation to 746,000 consumers. The Bureau charged Synchrony with deceptive marketing and discrimination against Hispanic consumers, alleging that the bank excluded these customers from debt relief offers and perpetrated deceptive marketing practices back in 2012.

NEXT WEEK’S SCHEDULE On Tuesday at 10:00 AM the House Financial Services Committee will hold a hearing entitled “The Annual Report of the Financial Stability Oversight Council.”

On Tuesday at 10:00 AM, the Senate Committee on Finance will hold a hearing entitled “Less Student Debt from the Start: What Role Should the Tax System Play?”

On Tuesday at 11:00 AM the Senate Committee on Appropriations’ Subcommittee on Financial Services and General Government will hold a markup of the Fiscal Year 2015 Financial Services and General Government Appropriations bill.

On Wednesday at 10:00 AM the House Financial Services Committee will hold a hearing entitled, “Examining Reauthorization of the Export-Import Bank: Corporate Necessity or Corporate Welfare?”

On Wednesday, at 10:00 AM the House Committee on Appropriations will hold a markup of the FY 2015 Financial Services and General Government Appropriations Bill.

On Wednesday at 10:00 AM the Senate Committee on Banking, Housing, and Urban Affairs will vote on the nomination of Julian Castro to become HUD Secretary before holding a hearing entitled “The Financial Stability Oversight Council Annual Report to Congress.”

On Wednesday at 2:30 PM the Senate Committee on Banking, Housing, and Urban Affairs will hold a hearing entitled “Dreams Deferred: Young Workers and Recent Graduates in the U.S. Economy.”

On Thursday at 9:15 AM the House Financial Services Capital Markets and Government Sponsored Enterprises Subcommittee will hold a hearing entitled, “Oversight of the SEC's Division of Trading and Markets.”