On Tuesday, Fed Vice Chair for Supervision Randal Quarles presented his semiannual testimony on the supervision and regulation of the financial system to the Senate Banking Committee. Areas covered by his testimony and subsequent questioning from Senators included:
One day after Quarles’ hearing, the Senate Banking Committee heard testimony from the CEOs of the six biggest US banks. In their testimonies, the CEOs generally highlighted their banks’ handling of issues related to the pandemic, lending to disadvantaged communities, expansion of diversity and inclusion (D&I) initiatives and development of environmental, social and governance (ESG) policies. Some testimonies also included statements around taking a risk-based approach to deciding whether to use or support technologies such as artificial intelligence (AI), digital ledger technology and cryptocurrencies.
Democrats generally urged the CEOs to do more regarding supporting vulnerable communities, D&I and ESG. Some Democrats, such as Sen. Elizabeth Warren (D-MA), brought up consumer protection issues such as banks’ charging overdraft fees. In contrast, many Republican Senators urged the banks to avoid making decisions based on “politically-motivated” issues such as gun manufacturing, public statements on voting laws, and climate change, which they explained could result in misallocation of finances. There was some bipartisan agreement, however, as Sens. Mark Warner (D-VA) and Bill Hagerty (R-TN) both expressed their support for addressing risks related to both cybersecurity and cryptocurrency.
The big bank CEOs, perhaps recognizing the new Administration’s focus on ESG and public attention to social issues, came prepared to show that they are for the first time leading the way on issues such as climate change, D&I, and even taking a stand on voting rights. While Republican Senators attacked both the banks and regulators for focusing on “politically-motivated” issues, the bank CEOs defended taking political stances as promoting responsible investments that address issues material to their shareholders. With this push from the banks on social issues and the Democrats’ control of the White House and Congress, the direction ahead appears to be a continued focus from both the private and public sector on ESG issues. Expect the Democrats to continue holding banks accountable on these issues, including calling out a lack of progress on D&I initiatives and pushing for stronger consumer protections. While we could see Sen. Warren continue her push for additional guardrails on overdraft fees, it remains to be seen whether the regulators will follow suit.
Meanwhile, Quarles’ acknowledgment that the agencies are currently working together on issues such as cryptocurrency regulation and CRA reform could mean that the joint regulatory approach that OCC Acting Comptroller Michael Hsu called for in his testimony last week could produce results sooner than expected. For cryptocurrency, the agencies will likely release some form of discussion paper or proposal focusing on outstanding issues such as capital treatment. With regard to CRA reform, we expect to eventually see a unified rule with the OCC moving closer to the Fed’s proposal. Momentum is also building for cybersecurity, which is another area that could see movement in the near future considering President Biden’s recent Executive Order, bipartisan Congressional support, the banking agencies recently releasing a joint cyber reporting proposal, and the recent high-profile Colonial Pipeline hack.
These issues, in addition to the other priorities outlined in his testimony such as MMF reform, operational resilience, AI, Basel III finalization and the LIBOR transition, leaves Quarles with a very full slate ahead of him with less than five months remaining in his term as Vice Chair for Supervision. While it remains unclear how far these issues can be addressed during this period, these issues will undoubtedly be continued by his successor and will likely be approached carefully in conjunction with international regulators.
Yesterday, SEC Chair Gary Gensler testified before the House Appropriations Committee. His remarks focused on the need for more funding for the agency, observing that the number of broker-dealers and individual investors have grown over the past four years while agency staff has declined by four percent. He also highlighted the increasing complexity of issues that the SEC requires resources to focus on, including:
In what was essentially a request for additional funding for the SEC, Chair Gensler revealed a number of policy areas that we expect to be his primary focus for the early part of his term. Abundantly clear is that new requirements around ESG disclosures are coming, with Gensler’s remarks all but confirming that a rule on the issue is not a matter of if, but when. Echoing comments from his previous testimony on market volatility related to GameStop and Archegos, Gensler showed that he is taking these incidents seriously, and new guidance - or potentially requirements - around issues such as gamification of trading and disclosure of short positions could become a reality. Other issues such as cryptocurrency and responsible use of data analytics are also clear priorities, especially considering Gensler’s focus on them in his previous role in academia, but given the relatively nascent nature of regulating these activities we expect lengthy study periods and outreach to stakeholders before seeing any new rulemakings.
Regarding Regulation Best Interest, Gensler’s comments imply that he will be watching carefully to see whether the rule is adequately protecting investors or whether additional protections are needed. This could include expanding upon the rule, which requires broker-dealers to recommend “suitable” investments and provide adequate disclosures, to a more stringent obligation to only recommend products in the “best interest” of the client as recommended in dissents from Democratic Commissioners Kara Stein and Robert Jackson. However, as most firms have long adjusted their business models in preparation for the now-defunct Department of Labor Best Interest rule, it remains to be seen whether a stronger standard will be needed. Going forward, we expect to see more concrete details around Gensler’s near-term priorities upon publication of the SEC’s Regulatory Flexibility Agenda, which we expect to come in the next several weeks. Stay tuned.