House Financial Services Committee Chair Patrick McHenry’s (R-NC) announcement to retire at the end of the 118th Congress on Dec. 5 sent shockwaves throughout the financial services space, setting up a potentially legacy-defining 2024 for the 10-term Republican. Chair McHenry’s departure will embolden his efforts to enact key pieces of his legislative agenda before the end of this term. This client alert will outline legislative possibilities in 2024, along with a look ahead of key regulatory items that are expected to be proposed or finalized.
CONGRESSIONAL PRIORITIES
In early December interviews with Politico and Punchbowl News, Chair McHenry outlined his priorities and views on the financial services landscape in the year ahead. His stated top priorities include passing legislation on digital assets, data privacy and capital formation.
With respect to digital assets, the House Financial Services Committee (HFSC) passed its long-awaited digital assets regulatory framework bill, the Financial Innovation and Technology for the 21st Century Act (H.R. 4763), in July 2023. The 200-page bill would empower the Commodities Futures Trading Commission (CFTC) to conduct oversight over certain types of digital assets. It also requires the Securities and Exchange Commission (SEC) to develop a 30-day certification process to designate crypto firms as decentralized. At the end of July, the HFSC held a markup of the bill, with all Republicans and six Democrats voting to advance the legislation.
The HFSC also passed its stablecoin-focused bill, the Clarity for Payment Stablecoins Act of 2023 (H.R. 4766). This bill would create a regulatory framework for the issuance of stablecoins designed for payment use by allowing both banks and non-banks to issue stablecoins. The legislation would require issuers to maintain reserves of cash, Treasury bills or other assets approved by regulators to back stablecoins on a one-to-one basis. The bill passed out of committee with support from all Republicans and five Democrats. In the interviews, Chair McHenry stated that he is working with House leadership to secure floor time for the two bills in 2024. If both pieces of legislation pass the House, they will face major hurdles in the Senate, namely from Senate Banking Chair Sherrod Brown (D-OH) and Sen. Elizabeth Warren (D-MA), who have long opposed the crypto industry.
However, some members of the Senate are keyed in on anti-money laundering (AML) provisions related to digital assets. A bipartisan group of senators led by Elizabeth Warren (D-MA) and Roger Marshall (R-KS) filed a National Defense Authorization Act (NDAA) amendment that would require the Treasury Department, CFTC and SEC to adopt financial institution examination standards for crypto firms, focusing on preventing money laundering. The amendment would have required the Financial Crimes Enforcement Network (FinCEN) to issue a report on services that exist to anonymize digital asset transactions. The amendment was included in the Senate-passed NDAA but was absent from the House-passed bill and was ultimately left out of the legislation signed by President Joe Biden. The focus on crypto-centric AML in Congress has expanded amid reports that Hamas received financing through crypto in the wake of the Oct. 7 terror attack on Israel.
When asked about a potential bipartisan bicameral compromise on crypto, Chair McHenry stated that “we want to identify workable policies for [Bank Secrecy Act BSA)]-AML as it relates to digital assets. We want to make sure that the regime works and is effective. And I think we need a broader policy effort to make that work.” Chair McHenry’s comments are notable, as this is his first major play, hinting at the possibility of a compromise with the Senate on digital assets.
Chair McHenry’s other priorities likely center around moving the committee-passed Data Privacy Act of 2023 (H.R. 1165), which would update Title V of the Gramm-Leach-Bliley Act (GLBA), commonly known as the Financial Services Modernization Act. During a February 2023 markup, committee Democrats clashed with Republicans on the bill’s preemption of state and local laws and lack of protection for stricter state statutes that are already in effect, and they also offered amendments to require financial institutions to obtain consumers’ written consent before collecting or sharing certain types of data. Democrats’ amendments were voted down, and the bill advanced along party lines. Chair McHenry may try to push for the bill’s consideration on the House floor or attempt to negotiate with committee Democrats on compromise legislation.
In the Politico interview, Chair McHenry also highlighted an early 2024 schedule with the following priorities for the committee:
- “We’re going to start with a focus on rogue regulators from this administration: the capital rule, the Basel Endgame, the climate rulemaking and the regulatory agenda of the Securities and Exchange Commission.”
- “Then we’ll have a keen focus on AML-BSA policies and China’s abuse of the international finance system. So, a lot of focus on OFAC and FinCEN and how we enforce sanctions, how we carry out economic statecraft and how we protect against money laundering at home.”
- “Then we want to pivot into how we enhance our competitiveness. That too entails the Basel Endgame, the rulemaking of the administration and also what we seek to do to make the economy better.”
In addition to these stated priorities, the possibility of generating momentum for bipartisan packages opens the door for other pieces of legislation aligned with the theme of capital formation to be part of the discussion. This could include items such as H.R. 6623 and S. 2068, the Main Street Growth Act, which has bipartisan and bicameral support.
On the Senate side, Chair Brown has not been as vocal as Chair McHenry, but he detailed two key priorities for 2024. Those center on passing the SAFER Banking Act (S. 2860) and the FEND Off Fentanyl Act (S. 1271), both of which passed the committee in 2023. Chair Brown will also likely champion a longer-term extension of the National Flood Insurance Program (NFIP) when its temporary patch expires in February.
AGENCY ACTIONS
On Dec. 6, the White House Office of Information and Regulatory Affairs (OIRA) published its 2023 Fall Regulatory Agenda, which outlines actions agencies are planning to take over the next few months. Agency Statements of Regulatory Priorities within the Fall 2023 Regulatory Agenda can be found here and Brownstein’s summary of the agenda is available here. An agency-by-agency breakdown of some of the most impactful actions is detailed below.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau (CFPB) previewed a busy end of the year, with its Overdraft and NSF Fees proposed rulemaking slated for a December release. The bureau expects the Credit Card Late Fees proposal to also be finalized in December, though it may slip to early 2024.
In September 2023, the CFPB formally started a rulemaking process to remove medical bills from credit reports and change the definitions of data brokers and consumer reporting agencies. The CFPB convened a panel of Small Entity Representatives (SERs) to consider and provide feedback on its proposals in fall 2023, and it expects to release a proposal in December 2023, although it could slip into 2024. Brownstein’s analysis of the Fair Credit Reporting Act (FCRA) and Small Business Regulatory Enforcement Fairness Act (SBREFA) can be found here.
Additionally, the CFPB’s Section 1033 data sharing proposal comment period closes on Dec. 29, with the regulatory agenda providing no timeline for finalization. The CFPB also does not include an estimated finalization date on its large payment applications proposal.
In 2024, industry will also be waiting with bated breath to learn about the fate of the CFPB’s structure from the U.S. Supreme Court, as detailed in a previous Brownstein client alert. Stakeholders believe a late spring or early summer decision is most likely, and if the CFPB’s constitutionality is struck down and questions are sent back to Congress, this will also create another opportunity for Chair McHenry to lead. For more than a decade, Republicans have discussed putting the CFPB under the appropriations process and changing the single-director structure. Depending on how the Supreme Court rules, Chair McHenry may also have the opportunity to work with the Senate on structural reforms for the controversial agency.
Securities and Exchange Commission
The SEC’s highly anticipated climate disclosure rule is expected to be finalized in early 2024. The main sticking point of the rule relates to controversial Scope 3 disclosures. Republicans and moderate Democrats have spoken out against the mandated disclosure of Scope 3 emissions, with Sen. Amy Klobuchar (D-MN) sending a letter in December raising concern about the “possible effect of the ‘value chain’ reporting requirements under ‘Scope 3’ and the impact it will have on small producers.”
The SEC also expects to finalize its equity market structure reforms, conflict of interest in predictive data analytics and safeguarding advisory client assets rule in the first half of 2024.
Federal Banking Regulators
The controversial Basel III Endgame proposal is expected to be finalized in June 2024. The proposal would significantly revise how banks with at least $100 billion in assets account for risk and calculate their capital requirements, resulting in an estimated 16% increase in capital requirements for affected banks. Major opposition across the political spectrum has emerged against the proposal and will only increase as the public comment period is scheduled to end on Jan. 16.
Federal banking regulators’ proposals on long-term debt requirements, resolution plans and risk-based surcharges for large banks are also expected to be finalized in June 2024.
Federal Housing Finance Agency
Following the release of the FHLBank System at 100: Focusing on the Future, the Federal Housing Finance Agency (FHFA) expects to release numerous proposals relating to the Federal Home Loan Banks (FHLBanks). These include proposals on membership asset management tests and changes to the governance structure and responsibilities of the FHLBanks, with both projected to be released in the first half of 2024.
FHFA is also expected to finalize rules relating to Fair Lending, Fair Housing, and Equitable Housing Finance Plans that many stakeholders in the proposed stage worried went beyond the agencies authority. Brownstein has written about the proposed rule here.
Treasury Department
FinCEN is scheduled to begin enforcing the Corporate Transparency Act’s beneficial ownership reporting requirements on Jan. 1, 2024. With just weeks to go before the rules take effect, FinCEN is still behind in issuing the guidance necessary to implement the changes. Most recently, the agency extended the deadline for reporting companies created or registered in 2024 to file beneficial ownership information (BOI) reports, giving them 90 days instead of 30. Reporting companies created or registered before Jan. 1, 2024, will still have until Jan. 1, 2025, to file their initial BOI reports with FinCEN.
Department of Labor
Heading into 2024, the comment periods for both the overtime and fiduciary rules will be concluded, with thousands of comments likely on each proposal. As the agency reviews comments, Congress will also turn its attention to both of these rules, which have had a checkered political past. We expect that there will be several hearings focused on these potential rules.
Federal Trade Commission
Heading into next year, the FTC will wrap up its “junk fees” comment period, on the heels of finalizing the sweeping Combating Auto Retail Scams Trade Regulation (CARS) Rule, which impacts the ability to provide voluntary products for a variety of stakeholders. Brownstein has previously examined the CARS rule here. It is expected that there may be both congressional interest and litigation reviewing the FTC’s agenda in pushing these massive policy shifts forward.
The Public Company Accounting Oversight Board
Industry also awaits potential finalization of the Public Company Accounting Oversight Board (PCAOB) amendments that will change how auditors consider noncompliance with laws and regulations, possibly creating a massive shift in auditor responsibilities. The PCAOB’s efforts are consistent with parallel regulatory efforts to push auditors, lawyers and other service providers to take a more aggressive view of their role as gatekeepers in stopping alleged wrongdoing and to bring enforcement actions in those who shirk their responsibility. As outlined in a previous Brownstein alert, these changes will now require auditors to consider noncompliance with laws and regulations that have both a direct and indirect effect. The HFSC recently held a hearing where these changes were discussed and it is expected they could face additional congressional and legal pushback in the new year.
NEXT STEPS
The pending retirement of Chair McHenry, combined with election year politics, will make 2024 a busy year. This also includes the added compounding factor of Congressional Review Act timeline concerns for federal agencies to get rules out by mid-summer that come with any presidential election year.With all of these considerations in play, it is certain there will be a substantial amount of policymaking in the financial services arena. While not discussed in detail here, artificial intelligence-focused activity is also growing in frequency in both chambers. For Brownstein’s in-depth analysis on this ever-evolving topic, check with a member of our financial services team.
The Brownstein financial services practice group is uniquely equipped to assist any stakeholders looking to interface with federal agencies, relevant policymakers in Congress or in the administration, as well as in preparing comments in response to forthcoming proposals or developments as detailed in this client alert.
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