November 8, 2018

Impact of the 2018 Mid-Term Elections on Financial Services Regulation


Following historical trends, the first mid-term Congressional election in the Trump Administration has concluded with a new Democratic majority in the House of Representatives. In gains that exceed prior "blue wave" elections such as 2006, Democrats have gained 32 seats as of Thursday morning, November 8, bringing the tally to 225 Democrats, 199 Republicans, and 11 seats uncalled. Democrats also made substantial gains in gubernatorial (at least 7 pick-ups) and other state-level races—in a midterm election that will see Republicans lose unified control of Congress.

The "blue wave" was, however, confined to the House and to state races. Across the Capitol, Senate Republicans flipped three seats in Indiana, Missouri and North Dakota to hold their majority with 51 seats while three remain uncalled. As a result, both parties can claim some degree of victory: Democrats will obviously celebrate winning back the House, while Republicans take solace in their increased Senate majority, although they remain far short of the 60 votes typically needed to move legislation in the Senate.

What the results mean in practical terms is a return to divided government, and an emboldened Democratic Party eager to be a check on the Administration.

Divided government often yields gridlock in Washington, but we anticipate an active agenda both in oversight and policy. Both parties will use the 116th Congress to set the stage for the next (presidential) election cycle, crafting both the oversight and policy agendas to support their respective campaign goals of 2020. Moreover, pent-up energy among House Democrats in the minority will translate into an aggressive oversight agenda. With Democrats controlling only one chamber, there will be significant pressure on House leaders to hold oversight hearings as a vehicle for Democrats to draw contrasts with the Trump White House in advance of the 2020 Presidential election. As a general matter, we expect they will use their investigative authorities in some cases to drive changes in private-sector behavior.

Impact on Financial Services

Where financial services policy fits into this political dynamic is another matter altogether. What priority will the sector receive? Where might there be risk or opportunity on the policy front, including legislative wins, in the 116th Congress? And, more bluntly, what are the risks that the appetite for oversight will be focused on the financial services sector?

We start answering those questions with the suggestion that further regulatory reform in the coming two years will most likely be accomplished by agency action: rulemaking, interpretation and enforcement activity (or inactivity). The minimum lead time on rulemaking from initial work through a full notice-and-comment rulemaking to the implementation and compliance phase-in period is generally well over a year. House oversight of agency actions, designed to focus a spotlight on anything likely to be unpopular with voters, will have an impact on that process. As a result, any rulemaking not already underway or commenced within the next few months might not be completed before the 2020 elections. Of course, regulatory actions can be readily undone by a future administration.

At the state level, the Democrats' success in governors' races and in flipping control of state legislatures may increase the movement of financial regulation and enforcement action to the states, particularly consumer financial regulation. Seven Governors' seats (Illinois, Kansas, Maine, Michigan, Nevada, New Mexico, Wisconsin), and full control of six state legislatures (Colorado, Connecticut, Maine, New Hampshire, Washington State) as well as one chamber of the Minnesota legislature (which is now the only state legislature with different parties controlling different chambers of the state legislature), flipped to the Democrats, with Georgia's governor race still contested as of this writing. These state shifts may enhance the role of state consumer regulation in these states. Over the longer term, this shift will impact Congressional redistricting in 2021 after the 2020 census as well as who controls the administration of the 2020 elections in those states. These changes may impact control of the federal government over the next decade.

An interesting aspect of the political dynamics of financial regulation (and the recent swapping of parts of the respective voter bases between the two parties) is that the financial services industry—and the jobs, tax revenues, and economic growth and wealth it creates—is heavily concentrated in "Blue" states in the Mid-Atlantic and Northeast, Great Lakes Region, and West Coast, and to some degree in "Purple" swing states like Florida, Georgia and North Carolina, and in apparently now "Purple-Adjacent" states like Arizona, Kansas and Texas. The same could be said of the places of residence of the bulk of customer base of the financial services industry. This could make for some interesting political alliances between Republican and Democratic Congressional delegations across those states who are looking out for the interests of their constituents.

House Outlook

Rep. Maxine Waters (D-CA) is expected to serve as the chair of the House Financial Services Committee. Rep. Waters is likely to use her new position to exercise vigorous oversight over the federal financial regulators. Rep. Waters, while well-known as a critic of President Trump, is a long-time legislator with a track record as a dealmaker that has flown somewhat below-the-radar.

On the Republican side of the aisle, while there are several members vying to be the new Ranking Member on the Committee, none are likely to be as strictly conservative as retiring Chairman Jeb Hensarling (R-TX). Reps. Patrick McHenry (R-NC), Blaine Luetkemeyer (R-MO), Bill Huizenga (R-MI), and Sean Duffy (R-WI) are seen as the leading contenders for the ranking member position.

Though a small handful of Democratic Committee members will not be returning, most of its senior leadership will be. On the Republican side, however, between 10 and 13 current members will not be returning.

Under its oversight authority, we anticipate that the House Financial Services Committee and its various subcommittees will have frequent hearings on the actions (or inactions) of the banking and securities regulators. This may put pressure on the rulemaking, interpretive and enforcement agenda of the financial regulatory agencies, and potentially slow down or moderate the agencies' deregulatory agendas.

Additionally, the House Financial Services Committee and its subcommittees can be expected to utilize its oversight authority to question financial services industry executives on a range of issues as a means to build policy and public support for legislative issues that the Democrats seek to advance and to draw attention to and raise public opposition to agency actions that the Democrats do not support.

Senate Outlook

The chairmanship of the Senate Banking Committee is essentially down to two people: current Chairman Mike Crapo (R-ID), and Sen. Patrick Toomey (R-PA). The position is Crapo's if he chooses to keep it, but it is possible that Sen. Crapo could choose to take over the Senate Finance Committee if Sen. Chuck Grassley (R-IA)—who is senior to Sen. Crapo on the Finance Committee—opts to remain at the head of the Judiciary Committee. A move by Sen. Crapo to Finance would see the Banking gavel go to Sen. Toomey, a second-term Senator from Pennsylvania who was previously head of the conservative Club for Growth.

Sen. Sherrod Brown (D-OH) is expected to remain the Banking Committee's Ranking Member, and his membership will grow more progressive by virtue of at least two moderate Democrat members of the Committee, Sens. Joe Donnelly (D-IN) and Heidi Heitkamp (D-ND), losing their reelections. Although Sen. Jon Tester (D-MT) won his race, there are few "Red State" Democratic Senators left on the Banking Committee who are up for reelection in 2020 and who have an incentive to work across the aisle on banking reform legislation.

116th Congress Agenda

While divided government is more likely than not going to produce a substantial degree of gridlock, there are issues that present real opportunities for bipartisan dealmaking in the financial services arena. Additionally, we expect greater oversight activities/investigations by the House on financial regulators as well as big banks.

Financial Regulatory Reform: Potential Legislation

In 2017, the Treasury Department published its report and recommendations for regulatory reform for the financial services industry.1 Roughly one-third of the Treasury Department's recommended changes required Congressional action, with the remaining two-thirds requiring administrative rulemaking or other agency action. The Economic Growth, Regulatory Relief, and Consumer Protection Act, which passed with broad bi-partisan support in May 2018, accomplished some, but not all of the Administration's financial services legislative agenda. Any further action on the legislative recommendations is likely to be limited, technical, bi-partisan in appeal, and if it occurs at all, finished and enacted before the next presidential election is in full swing.

Waters and her Republican Senate counterpart could find some common ground on smaller regulatory matters that have previously garnered some level of bipartisan support, such as some of the component parts of the "JOBS Act 3.0" that passed the House earlier in 2018 with broad bipartisan support. Other items that can boast at least some bipartisan support, such as the so-called "Madden fix" proposal (to confirm the "valid when made" doctrine), are also possibilities but probably face longer odds in a Democratic House.

Export-Import Bank

Waters' ascendancy could portend a breakthrough on the dormant effort to reactivate the Export-Import Bank. There remains substantial support for the bank among Republican members of the Financial Services Committee, and with the exit of the Ex-Im Bank's chief critic (Chairman Hensarling), a bipartisan effort to reauthorize the bank is a possibility.

Uncertainty remains, however, as to how the Administration—which has been inconsistent on the bank—will view reauthorization efforts, and what direction the Senate may take.

Terrorism Risk Insurance Act

A clear opportunity for bipartisan cooperation comes in the form of the Terrorism Risk Insurance Act (TRIA), which is set to expire at the end of 2020 and therefore must be considered in the 116th Congress. The program, enacted following 9/11 to provide a federal backstop for insurers covering terrorism losses, has been reauthorized on a bipartisan basis a number of times already. As with the Ex-Im Bank, one of TRIA's chief critics was outgoing Chair Hensarling, and his specific concerns about the program are not necessarily shared by the incoming Republican committee leaders.

Housing Finance Reform

While many members agree that housing finance reform remains an item of unfinished business from the financial crisis, there is little agreement on the right solution, and divided control of Congress does not portend well for the prospects of breaking stalemate.

Nevertheless, Treasury Secretary Mnuchin has indicated his desire to move on GSE reform in 2019. There remains potential opportunity for the Administration to pursue some reforms administratively—but, as noted above, such efforts may be limited due to increased oversight by a Democratic House.


The Democratic takeover in the House could result in increased scrutiny of the OCC's recent blessing of a national FinTech charter. Sens. Brown and Elizabeth Warren (D-MA) are also likely to remain leading voices in opposition to the OCC's FinTech charter (which originated at the OCC during the Obama Administration) while other Democrats, particularly those from California and other tech and financial hubs, may continue to support developments in FinTech. Any legislative effort in this area, however, is likely to prove tricky in a divided Congress, but might make for interesting political alliances between members of both parties.

Cybersecurity/Data Breach

A long-stalled legislative effort to address the current patchwork of state-level data breach notification laws was renewed recently in the form of legislation sponsored by Rep. Blaine Luetkemeyer, who is one of the contenders to be ranking member of the Financial Services Committee. It is not clear that anything has happened to break this logjam in the new Congress, but renewed attention from potentially key members yields at least some potential.

Administrative Agenda

In addition to the rulemakings required to implement the Economic Growth Act of 2018, the federal financial regulators will likely continue to pursue rulemakings and other administrative actions in the following areas:

  • CRA Reform and Modernization, which is being led by OCC Comptroller Otting but will require interagency support;
  • CFPB debt collection and HMDA rule amendments;
  • Small-dollar lending by banks;
  • Further statements and clarifications regarding the role of supervisory guidance versus that of binding rules and regulations of the federal financial agencies;
  • Interagency bank flood insurance rule amendments;
  • Further interagency efforts to simplify and streamline regulatory capital rules and reporting requirements;
  • Eliminating unnecessary regulations and obsolete supervisory letters and guidance;
  • Modernization of cybersecurity and privacy rules and regulations in line with the expectations of the European Union's General Data Protection Regulation;
  • BSA/AML compliance reform for financial institutions and investment advisers, including in connection with and related to real estate closings and cross-border funds transfers;
  • OCC rulemakings, and supervisory guidance and legal interpretations for nondepository FinTech companies seeking national charters;
  • SEC crowdfunding broker-dealer rules;
  • Amendments to the SEC's Guide 3 on bank holding company securities disclosures;
  • Clarifications on the scope and application of SEC, CFTC, and state and federal bank regulatory rules and oversight of coin and token offerings and services;
  • Federal and state money services business/money transmitter regulation of payment and funds transfer applications;
  • Volcker Rule reforms;
  • Remaining open items required under the Dodd-Frank Act of 2010, such as the single counterparty credit limit, swaps margin rules and the interagency Net Stable Funding Ratio rule;
  • FDIC brokered-deposits reforms consistent with the 2011 FDIC study mandated by the Dodd Frank Act; and
  • The SEC's proposed Regulation Best Interest (an enhanced suitability requirement imposed by SEC, rather than SRO rule which has its origins in a study mandated by the Dodd-Frank Act).

Notably, the SEC, CFTC and Federal Reserve are independent agencies that are insulated to some degree from direct command by the Administration; FINRA and the NFA are self-regulatory organization even more removed from direct political control; and the Treasury (and its sub-agencies including the OCC, OFAC, OFR, and FinCen) answer directly to the White House. FSOC, FDIC and FFIEC are something of hybrids with board representation from the different financial regulatory agencies. The interplay among a Democratic House, Republican Senate, Republican Administration and independent or semi-independent agencies over the next two years will be an interesting study in organizational behavior and political dealmaking.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. The four 2017 Treasury Department Reports on financial regulatory reforms cover banks and credit unions, capital markets, asset management and insurance, nonbank financial, fintech and innovation.

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