As the pieces of a new administration under President-elect Biden continue to fall into place, Democratic control of the Senate looks unlikely, and the progressive wing looks to exert strong pressure on the center, Mayer Brown partners have been analyzing how these political forces might play out for financial services regulation and enforcement.
In a presentation on November 12, Andrew Olmem, Michael Levy, and Larry Platt discussed predictions for how a focus on environmental issues will affect financial services, what more aggressive enforcement of financial crimes will look like, and how an emphasis on reducing racial equality and increasing minority homeownership might make progress, among other topics.
No blue wave. At the outset, Olmem noted that the analysis focuses on regulation rather than legislation. If the Democrats do retake the Senate as a result of the two runoff elections in Georgia on January 5, he would expect to see a "very aggressive" legislative agenda that would include financial services. But at the moment, it appears that Republicans will retain at least one of the Georgia seats.
Agency leadership. If the Biden Administration does pursue its agenda mainly through regulation, this will slow forward motion in some areas due to the timing of openings, said Olmem. On the one hand, he does expect the administration to be able to take control of the SEC quickly, as Chair Jay Clayton is slated to leave by the end of the administration. He also expects the administration to be able to install a new director at the CFPB by sometime next year, though the choice will be tempered by a Republican Senate.
But other key regulatory terms do not coincide with presidential terms, Olmem pointed out. For example, Fed governors are appointed for 14-year terms, and those will cycle off over the next couple of years. Similarly, Randy Quarles’s four-year term as Vice Chair for Supervision at the Fed does not end until October 2021.
Strong focus on environmental issues. Olmem believes the Biden Administration will pursue stronger environmental regulation as a number one goal. Environmental policy is an area that unifies the Democrats, from progressives to moderate suburban districts. Therefore, he expects this to be at the forefront.
Olmem sees this affecting financial services regulation in two ways:
- The SEC is expected to consider requiring public companies to make environmental disclosures. Specifically, Olmem foresees the SEC imposing mandates within the next two years for companies to beef up disclosures relating to carbon footprint, including their support for carbon energies and what their expectations are about reducing their carbon footprint.
- Olmem "fully expects" financial regulators to impose new capital charges or other supervisory requirements on lending by financial services companies to companies that have high reliance on carbon energy, particularly energy companies. This might come in the form of strict and transparent capital charges, and also possibly in the form of supervisory guidance in informal instruction from bank supervisors. What exact form this will take will depend largely on who is appointed at the banking regulators, not only at the Fed but also at the Comptroller of the Currency and FDIC, said Olmem.
- Non-bank lending, especially mortgage lending and servicers. Quarles and Clayton recently analyzed the impact of the COVID-19 pandemic on the financial system and both analyses found that non-banks underperformed or were not resilient enough. Olmem "fully expects" the Biden Administration to use the Financial Stability Oversight Council (FSOC) to examine where non-banks need to have stronger supervision. As in the Obama Administration, which designated several companies including several large insurers as systemically important institutions requiring enhanced supervision, he expects the Biden Administration to look to designate companies again, once it has sufficient votes from FSOC members.
- Treasury market reform. Systems testing also showed that the Treasury market underperformed and needs some structural changes to make it more resilient. Olmem expects a review of the regulation of broker-dealers, as well as discussion of whether there should be central clearing for Treasury securities and reexamination of the role of primary dealers.
- GSE reform. Led by Treasury Secretary Mnuchin and FHFA Director Mark Calabria, the Trump Administration has been working to end the decades-long conservatorship of Ginnie Mae and Freddie Mac. The Biden Administration may continue that course or may pause and take it in a different direction. Olmem "fully expects" to get some guidance in the next two or three months because there is a Supreme Court case pending on the validity of Treasury support for the GSE. The Supreme Court may invalidate it, forcing Treasury and FHFA to come up with a new regulatory regime. So GSE reform is likely an area that the Biden Administration is going to have to tackle pretty quickly, said Olmem.
- CFPB and consumer lending. Olmem noted that the administration indicated it would support the creation of a public credit ratings bureau, whose ratings would be eligible to use at any federal lending program, as a way to replace the current private system. Even if that does not come into existence, he foresees a lot of CFPB attention on credit bureaus. In addition, Olmem "fully expects" that the financial regulators will finalize a new Community Reinvestment Act rule in the coming year. Olmem also thinks a new Biden-appointed CFPB director will make the agency "much more aggressive" on enforcement.
- Infrastructure. Olmem foresees an infrastructure bill coming in the next year.
Levy also predicts a strong focus on accounting fraud that has not been seen since the days of Enron and WorldCom. In recent weeks, there have been press reports of two large U.S. companies facing large-scale accounting fraud investigations by the SEC.
"I think, in a nutshell, Wall Street will be in the crosshairs of a new SEC," said Levy.
In the short term, Levy thinks the emphasis on pandemic-related fraud will continue, especially involving PPP and other stimulus programs. In the longer term, Levy thinks there will be a stronger DOJ focus on money laundering and BSA sanctions matters, as well as corruption generally.
Levy also foresees a stronger emphasis on areas where there is a perception of an unfair playing field, for example tax evasion, insider trading, and market manipulation like spoofing. Levy also expects a renewed focus on the FCPA, for which President Trump expressed strong dislike, as international cooperation and engagement is likely to accelerate under the Biden Administration. In addition, Levy thinks there will be stronger antitrust and environmental enforcement.
Levy said new scandals might also arise in areas we are not able to predict now, just as nobody foresaw scandals involving Enron, WorldCom, or credit default swaps. The unanticipated nature of future scandals highlights the importance of maintaining and improving compliance efforts, because it’s easier to stop a problem from happening than it is to extricate oneself from a government investigation sometime in the next four years, said Levy.
DOJ: hammers and nails. Levy explained that, perhaps contrary to popular perception, white collar enforcement is actually often more active and aggressive under Republican administrations than under Democratic administrations. For one thing, Republicans need to prove they’re tough on white collar crime, while Democrats need to prove they’re tough on street crime. Also, Democrats tend to address white collar issues through regulation and legislation, while the Republican perspective is that more regulation isn’t needed, you just need to lock up the bad apples.
However, the current administration has disrupted that paradigm with a decline in white collar enforcement, said Levy. And the Biden Administration may disrupt the pattern as well. If it cannot address issues through regulation or legislation, it is likely to come under pressure from the progressive wing to step up enforcement, said Levy.
Consequently, Levy foresees a lot of resources being devoted to white collar investigations. With more resources, there will be more investigations, because when you’re a hammer, everything is a nail. He also predicts a "much more aggressive" approach to penalties, with individual negotiations being much tougher, and the DOJ seeking "significantly larger" dollar amounts. He also thinks there will be a return to "regulation through enforcement," using DPAs, NPAs, and post resolution monitors.
Further, particularly if Sally Yates becomes Attorney General, Levy expects a greater focus on individual accountability, with companies being pushed hard to provide information about individual employees in order to receive cooperation credit. However, he does not think the administration will roll back policies designed to prevent "piling on," where you get multiple agencies and jurisdictions investigating, resulting in double and triple penalties.
CFPB enforcement. Levy expects CFPB enforcement to be very active, with Senator Elizabeth Warren pushing very hard around consumer protection and access to capital. Especially if the Democrats do not retake the Senate, they are going to have to satisfy the progressive wing that they are acting against systemic racism. A focus on investigating and enforcing in the private sector and particularly in financial services is likely to be very high on that list, said Levy.
CFTC enforcement. Touching briefly on the CFTC, Levy said that it has actually been one of the only agencies that has become more active and aggressive in the past four years. It has asserted jurisdiction under the FCPA for the first time in the statute’s more than 40-year history. And like the DOJ, they have aggressively pursued spoofing cases.
Housing. Speaking on housing issues, Platt thinks fair lending to pricing will be "huge," and redlining and disparate impact cases will return. He foresees a strong focus on access to credit and access to capital. A recent Harvard Joint Center for Housing study shows that over the next 15 years, over 70 percent of new household formation will be people of color.
But when talking about access to credit, it’s about more than just enforcing the law, said Platt. It’s about trying to address the underlying issues that lead to persons of color having materially lower homeownership rates. One issue is going to be requirements for ability to repay. He thinks the new administration will continue with a CFPB proposal that would loosen standards and make price a more important factor than debt to income ratio or prescribed underwriting requirements. Platt also expects a big emphasis on alternative income verification, with a look at how to provide credit scores for unbanked borrowers.
Platt also foresees more efforts to enable persons of color, who typically have less family generational wealth, to access the home lending market, through down payment assistance or other means. In addition, he expects a new focus on building housing stock, which could even lead to some deregulation of construction. Finally, he thinks there will be more efforts made in the area of home retention, particularly with the moratorium on evictions expiring at the end of the year and $70 billion in unpaid rents that will come due.
As the administration transition continues to unfold, Wolters Kluwer invites practitioners to stay informed via Securities Regulation Daily and the WK Securities team on Twitter at @WK_Securities.