Ever since SEC Chair Gary Gensler sheepishly acknowledged to Rep. Matt Cartwright (D-PA) early this month that former House Majority Leader (and current House Appropriations FSGG Ranking Member) Steny Hoyer (D-MD) is his godfather, we’ve had the iconic 1972 film playing on repeat in the LXR Group Auditorium. While far from the first or best policy or political professionals to find inspiration in the film, we aspired to become the first (and the best) to apply its themes to financial regulatory policy. We didn’t have to wait long!
On Wednesday, April 26, 2023, at 10:00 a.m. the House Financial Services Committee (HFSC) convened in Room 2128 of the Rayburn House Office Building for its second markup of 2023.
In one of the most remarkable and just-below-the-radar displays of political jujitsu we’ve seen in the 118th Congress, Rep. Maxine Waters (D-CA) – the 84-year former Chairwoman and current Ranking Member of the HFSC – seized on the markup to remind those to her left, her right – and above all, those in her front row – what happened to Moe Greene when he tried to seize control gambling and entertainment in Vegas. We also saw Chair McHenry (R-NC) forced mediate his first big Committee fracas; cajoling members through an eleven and a half-hour proceeding and “act[ing] as a priest in my church” for purposes of recognizing and consecrating his first formal colloquy as HFSC Chair.
Here are some of the key takeaways from last week’s markup.
- What Exactly Went Down at the Markup
Last week’s HFSC markup saw the Committee vote overwhelmingly to advance fifteen pre-negotiated bipartisan bills that collectively make modest adjustments to securities laws. The HFSC also unsuccessfully attempted to address legislation providing for default e-delivery to consumers of disclosures mandated by the federal securities laws, but ultimately was forced to set aside the question in the face of strong opposition from AARP, consumer advocates and state securities regulators. Finally, the markup saw the Committee advance a laundry list of “Republican Only” bills making changes to the securities laws in order to spur “capital formation.” Those measure, more than twenty in total, were packaged into a single Amendment in the Nature of a Substitute (“ANS”) that was voted out 28-21 as the Expanding Access to Capital Act of 2023, as amended.
From McHenry’s standpoint, the Committee’s successful negotiation of a bipartisan legislative package was the central theme of the markup.
“We provide legislative solutions. And that’s exactly what we’re doing with the 15 bills before us today. The vast majority represent years of work to strengthen and expand access to our capital markets. I stated last year that this was a priority for Committee Republicans and today we are one step closer to making good on that commitment. Over the last three months, Capital Markets Subcommittee Chair Ann Wagner held four hearings and considered more than 30 bills. We’ve heard from experts across the ideological spectrum. More importantly, we accomplished something that very few Committees on the hill have done this year; we agreed on a lot! Many of the bills we’ll consider today are bipartisan and I look forward to moving those to the floor immediately.”
At various points during the markup, McHenry and other Republicans expressed hope that some of the bills that we included in the Republican Only package might eventually attract bipartisan support.
“I would encourage Members to look at the remaining bills. They contain commonsense policies that will encourage everyday investors and small entrepreneurs to access our capital markets. These are bills that would strengthen our crowdfunding rules to encourage greater use. These are bills that support micro-offerings and the gig economy. They would expand angel investing and the accredited investor definition to help more Americans build wealth. In other words, these bills can make a difference in the life of someone in every single one of our communities.”
The bipartisan package of bills is expected to proceed almost immediately to the House Floor under special rules that allow for expedited consideration of bipartisan measures with broad support. The fate of the remaining bills – the so called “Republican Only” package – remains undetermined.
A detailed chart showing each of the bills and substitutes considered, as well as descriptions of nine Democratic amendments that were defeated, is available to clients and paid subscribers upon request.
- Ranking Member Waters Puts Progressives on Notice, Goes to Bat for Seniors and the CFPB, and Makes E-Delivery Proponents from both Parties an Offer They Can’t Refuse.
In October 2009, we watched slack-jawed as Maxine Waters slammed the breaks on then-HFSC Chair Barney Frank’s (D-MA) White House-backed effort to rewrite the financial regulatory rulebook just as the Committee was preparing to favorably report key titles in order to draw attention to homelessness.
Since that day we have held the view that Maxine Waters is probably the single most important Democrat on the HFSC and someone you just don’t cross. We hold firmly to that view today.
From a position of relative weakness, Waters managed a feat that – at least to our already Godfather addled brains – recalled the strategy if not the techniques that Michael Corleone used to restore order in the family at the end of the first flick. Indeed, the Ranking Democrat seized on the markup and the temporary leverage it presented to inflict stinging defeats on Republicans, industry-friendly moderates, and Wall Street lobbyists. In knocking back an industry-backed e-delivery bill that seemed certain to sail through but ended up being put into a deep freeze due to opposition from AARP and consumer advocate organizations, the Ranking Member seemed almost to be channeling Michael’s timeless retort to U.S. Senator Pat Geary: “Senator, you can have my answer now, if you like. My final offer is this: nothing.”
At the same time, by cutting a deal with Chairman McHenry to negotiate and pass a package of 15 generally modest bipartisan securities and CFPB related bills, Waters reminded her colleagues of why, despite her reputation as a fighter, her office has more than its fair share of redlines on the wall.
Further, while her move to negotiate bipartisan concessions puts consumer advocates on notice that she is not above cutting deals at their expense, her forceful opposition to other GOP measures – particularly in defense of seniors and the CFPB – reinforced our impression of her as someone who seeks out opportunities to compromise when the stakes are low. As the stakes rise, Maxine Waters herself grows larger, acts tougher, becomes downright fearsome – and we saw that in spades at the markup last week.
It’s easy to talk about Sam Rayburn. What Rep. Waters did from the dais last week was hard – even heroic – and it would have made the shy and legendary Speaker from Bonham, TX, proud.
- SIFMA Led its Allies into a Ditch of its own Digging.
One of the most influential trade associations active in financial services policy is the bipartisan Securities Industry and Financial Markets Association (SIFMA). A favorite SIFMA tactic is to aggressively court freshman Democrats on HFSC in the months immediately following each election in the hope of persuading these members – with their coveted seats of the panel oversees Wall Steet – to sponsor questionable legislation very early during their tenure.
The campaign contributions SIFMA and its members bring to the table, the imperative need for these “front line” HFSC members to raise cash in anticipation of competitive reelection bids, and the relatively dry and seemingly innocuous policy issues that are SIFMA’s main concern create a predictable and symbiotic relationship between SIFMA and freshly elected moderates assigned to the HFSC.
Implicit in this bargain is that SIFMA will not expose the moderates politically, or push them too hard, such that a particular deregulatory push could be hung around their necks or blow up in their lap.
In short, they rely on SIFMA to warn them away from political risks and missteps.
SIFMA let down its HFSC Democratic allies this week when in its zeal for a coveted policy win on e-delivery it encouraged them to lean in hard on a bill, H.R. 1807, that AARP, major consumer organizations, and ultimately senior Democrats opposed. If SIFMA wants Democratic moderates to continue to follow its lead, it can’t continue to lead them over the cliff.
- McHenry, Prioritizing Bipartisanship, Continues to Play the Legislative long Game.
Former House Financial Services Chair Jeb Hensarling (R-TX) was absolutely notorious for not passing bills. More specifically, his MO was to feverishly attempt to pass bills that sank under their own weight. Very often, his bills were unable even to make it out of Committee on party lines on party lines. When they did, they almost never advanced through the full House – even amidst large Republican majorities.
This may have suited Jeb fine, but – as we have pointed out before – McHenry is a very different, and much more potent, legislator. It was revealing that rather than simply steamroll Democrats on the way to the Floor, McHenry strategically withdrew not just on H.R. 1807, but in regard to several “capital formation” measures that were removed from the markup just hours before the vote (discussed below). The removal of these bills suggests these bills will be held in reserve while the Chairman pursues Democratic cosponsors. This is a smart move that suggests a long view.
- Most of the bills the HFSC approved to expand the definition of “accredited investor” are highly unlikely to become law.
The bipartisan package includes several modest expansions to the accredited investor definition that we think have a relatively good chance to become law or find their way into an SEC rule (if they haven’t already). By contrast, the more aggressive accredited investor bills that were relegated to the partisan package seem very unlikely to become law. Examples of such comparatively aggressive bills include one proposal providing that individuals receiving individualized investment advice or individualized investment recommendations with respect to a private offering from a professional who qualifies as an accredited investor shall be treated as accredit, and a second proposal to require the SEC to establish a new exam to license accredited investors. In the absence of strong and bipartisan backing from Congress, we believe both of these ideas remain DOA at the SEC.
- The path to the House Floor for the bipartisan package is wide open. The route to the President’s desk is less straightforward but it exists.
The Senate outlook remains unclear, as usual. If nothing else, Banking Committee Chair Sherrod Brown (D-OH) is in a tough reelection race and has used his perch atop the committee sparingly, perhaps indicating that he sees it more as a hindrance than help. What is clear is that McHenry has a pipe-line to the the House Floor, and once he has a package through 400+ votes, he will attempt to engage the White House directly, appealing to the National Economic Council (NEC) for support. As we have previously detailed for subscribers, for any number of reasons, Rep. McHenry is significantly closer to the current House leadership than has traditionally been the case the HFSC chairs, and McHenry will have a voice in negotiations between the Biden White House and the House GOP on matters large and small. Readers should also recall that House Republican outreach to the NEC is what helped get the JOBS Act across the finish line in 2012.
- Keep a close eye on the several bills that did not make an appearance Wednesday.
At least three bills that were noticed for the markup and initially included in the version of Chairman McHenry’s massive “Expanding Access to Capital Act” posted to the HFSC’s website were quietly removed from the package without explanation on Monday. The bills in question are:
- H.R. 1553, the Helping Angels Lead Our Startups Act of 2023” or the “HALOS Act of 2023, sponsored by Rep. Michael Lawler (R-NY) and Josh Gottheimer (D-NJ);
- H.R. 2622, a bill to amend the Investment Advisers Act of 1940 to codify certain Securities and Exchange Commission no-action letters that exclude brokers and dealers compensated for certain research services from the definition of investment adviser, and for other purposes, sponsored by Reps. Pete Sessions (R-TX) and Ann Wagner (R-MO);
- Discussion draft legislation to permit a registered investment company to omit certain fees from the calculation of Acquired Fund Fees and Expense, and for other purposes, sponsored by Rep. Brad Sherman (D-CA).
The decision to remove these three bills from the markup reflected a desire to avoid the political fallout of a party-line vote. We expect all of these bills to eventually reemerge and likely pass the House with bipartisan votes. We also note that because each of the bills has already been formally subjected to a hearing as required by the Committee rules, they would not need to receive a committee markup, and are eligible to be placed directly on the House Suspension Calendar, if they have the necessary support.
- Is that why you slap my brother around in public?
Last week saw Chairman McHenry preside over his first nasty partisan scuffle as Chair and walk away standing, with his apparent sway over his caucus seemingly intact – and even enhanced. The blowup, which occurred when Rep. Sylvia Garcia (D-TX) moved to “take down the words” of a Republican colleague for what she characterized as a racist rant tested McHenry’s control over the Committee, made it seem for a brief moment as the train was about to careen off the tracks, but cooler heads –guided by top notch staff work on both sides of the aisle – ultimately prevailed.
We don’t presume to tell members of Congress what they should or shouldn’t debate. But the breakdown in Committee decorum late Wednesday evening was odd and unfortunate, and we hope that the Chairman and Ranking Member can find a way to keep gratuitous political toxicity out of the HFSC.
We fundamentally share the Chairman’s view that HFSC is policymaking committee – its role being to sift and sort policy ideas, test political compromise, examine policy options, and shift the Overton window on financial regulatory policy matters large and small. That can’t happen when members are screaming at each other as if preening for Fox News. And plus – the Judiciary Committee is right down the Hall.
And don’t even get us started on Overton windows.