The campaign to rein in the regulators

From: POLITICO's Morning Money - Thursday Apr 27,2023 12:00 pm

Apr 27, 2023

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There was a collective groan across Wall Street when the Financial Stability Oversight Council moved to reverse Trump-era rules that made it harder to beef up oversight of big nonbanks. Now they’re gearing up for a fight.

Global industry groups like the Investment Company Institute, which represents mutual funds, and the Managed Funds Association, which counts hedge funds and private credit firms as members, have started to press lawmakers to revive a 2018 bill that would have made it harder for FSOC to slap the dreaded “systemically important financial institution” label on nonbanks, sources told your MM host.

“This was something that we’d been talking to members of Congress even before we even knew FSOC was going to have its meeting,” Investment Company Institute President and CEO Eric Pan, whose Washington-based group represents the mutual fund industry, said Wednesday. “We still think this is good legislation and we will continue to express support for this legislation.”

The aims of the 2017 bill, which passed a Republican-led House by almost a 3-1 margin, were made somewhat moot after then-Treasury Secretary Steven Mnuchin overhauled FSOC’s mission to focus on systemically risky activities rather than individual companies. Still, Rep. Bill Foster (D-Ill.) and Sen. Mike Rounds (R-S.D.) introduced similar legislation in recent years.

Mnuchin’s reforms have been roundly criticized by Biden officials, led by Treasury Secretary Janet Yellen, who on Friday kicked off a process that would give FSOC more flexibility to identify vulnerabilities at individual insurance companies, mutual funds and hedge funds, as well as mutual funds and money market funds.

While it’s unclear if regulators had any specific institutions in mind during Friday’s FSOC meeting, Yellen again cited her concerns about risks posed by open-ended mutual funds and money market funds in an opening statement. Similarly, SEC Chair Gary Gensler name-checked the challenges that arose after the hedge fund Long-Term Capital Management collapsed in 1998.

Any attempt to tag institutions within those fields as SIFIs — which aren’t subject to the same level of oversight as banks (who, incidentally, applauded Friday’s decision) — is bound to raise hackles on Wall Street. Asset managers and insurance companies spent years lobbying to curb FSOC’s ability to subject nonbanks to Federal Reserve supervision.

Expect the incoming comment letters to reflect those frustrations.

“My preliminary view on the [FSOC’s] analytic framework is that it's not very analytically rigorous,” Pan said. “It's such a high, broad framework, that it sort of just says everybody is potentially subject to designation.”

IT’S THURSDAY — What are you hearing on First Republic? We want to know. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving The Day

First-quarter GDP estimates are out at 8:30 a.m. Despite the banking sector turmoil, the median forecast calls for 2 percent growth … Senate Banking has an oversight hearing for credit reporting agencies at 10 a.m. … House Financial Services has a crypto market hearing at 2 p.m. … House Agriculture is holding a separate crypto market hearing at 2 p.m. … House Financial Services has a Financial Crimes Enforcement Network oversight hearing at 2 p.m. … House Appropriations has an FTC FY2024 budget hearing at 2 p.m. …

Menendez leaves an opening — Our Victoria Guida: “Sen. Bob Menendez (D-N.J.), a central player in the White House’s search for a new Federal Reserve vice chair, isn’t backing down from his push to see a Latino candidate nominated to the Fed board. But Menendez — a senior member of the Senate Banking Committee, which would have to vet a nominee — said that person doesn’t have to be elevated to the central bank’s No. 2 position.”

Ball’s in your court — Our Jordain Carney: “House Republicans passed their sweeping debt-limit and spending-cuts plan after a tumultuous 24 hours. Now, they have to see if it will bring President Joe Biden to the negotiating table.”

— “It’s unclear that the fractious House GOP conference can maintain even that level of unity through the next stage of the fight — dealmaking with Democrats,” our Sarah Ferris, Olivia Beavers and Burgess Everett report.

— Debt ceiling dents voter confidence: Voters are feeling dismal about the U.S.’s finances, according to the Peterson Foundation’s monthly fiscal confidence index. The index, which is measured on a scale of 0 to 200, with 100 being neutral, tied a record low of 37 in April, according to survey results that were provided exclusively to MM. “Voters are concerned about the urgent debt ceiling deadline, as well as the more fundamental underlying issue of the growing national debt,” said CEO Michael Peterson.

M&A has fallen amid antitrust scrutiny. Biden officials think that’s a good thing — ICYMI from me and Josh Sisco: “Wall Street dealmakers have dialed up their complaints to the White House over the last year as the administration's top antitrust enforcers — FTC Chair Lina Khan and DOJ antitrust head Jonathan Kanter — knuckle down on merger activity they say would damage the economy, according to Biden officials and financial industry executives.”

Crypto

Big scoops — In welcome news for the crypto industry, our Eleanor Mueller reports that House Financial Services and House Agriculture will hold a joint subcommittee hearing on cryptocurrency next month, leadership said in a joint statement.

"Our Committees are embarking on an unprecedented joint effort to pass and sign into law clear rules of the road for the digital asset ecosystem," Financial Services Chair Patrick McHenry, Agriculture Chair G.T. Thompson, and digital assets subcommittee chairs French Hill and Dusty Johnson said. "We must strike the appropriate balance to protect consumers without stifling responsible innovation."

Eleanor also scooped that McHenry and Thompson are working together on a crypto market structure bill. Their panels' digital assets subcommittees will hold separate hearings on crypto later today.

In the markets

BIG — Bloomberg’s Katanga Johnson: “US bank regulators are weighing the prospect of downgrading their private assessments of First Republic Bank— a move that may curb the troubled firm’s access to Federal Reserve lending facilities.”

— CNBC’s Jesse Pound: “First Republic ’s stock sank again on Wednesday as investors kept an eye on a potential rescue deal for the troubled regional bank … Advisors to First Republic are trying to convince [larger] banks to provide further support by buying some of First Republic’s assets at above-market rates, CNBC has learned.”

— Financial Services Forum President and CEO Kevin Fromer has a new blog post urging banking regulators against raising big bank capital requirements in the aftermath of recent banking failures. With big banks having largely been spared from the crisis, “the onus should be on regulators to prove an increase in capital is necessary or wise for the largest U.S. banks, given the inevitable negative impact on the costs of lending and the real economy.”

DISNEYLAND — Our Anna Wilder: “The yearlong battle between Gov. Ron DeSantis and Disney will be fought in federal court. The California-based entertainment giant filed a lawsuit in federal court Wednesday alleging that DeSantis and his hand-picked board retaliated against the company and violated Disney’s First Amendment rights,”

— The FT: “Bob Iger calls Ron DeSantis ‘anti-business’ in fight over Disney district”

SEC nears final rules on buyback, private fund disclosures — The SEC will vote next Wednesday on final versions of the agency’s plans to boost disclosures around stock buybacks and private funds, according to a meeting notice. Cheered by progressive groups and investor advocates, the proposals have generated fierce backlash from the U.S. Chamber of Commerce and the Managed Funds Association. — Declan Harty

Jobs Report

Jeffrey Himstreet has joined the Managed Funds Association as vice president and senior counsel, regulatory affairs. He was previously a vice president and corporate counsel at PGIM Fixed Income and a partner at the law firm Bingham McCutchen.

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