This Week: The House passed a $19.1 billion disaster aid bill, clearing the measure to be signed into law by President Trump on Thursday. The Senate debated the enactment of a federal budget for fiscal year 2020 and approved a number of Trump administration nominations, including a new Social Security commissioner.
Next Week: The House will pass legislation to fund several departments and agencies, including Defense, Labor, and Health and Human Services. The House will also vote on a resolution to hold a former and current Trump administration official in contempt of Congress. The Senate will vote on multiple judicial nominations.
Financial Services Issues
Best Interest Rule. The SEC this week approved (in a 3 to 1 vote) its final rule to establish a new best interest standard for brokers (called Regulation Best Interest or Reg BI). While it will take weeks if not months to digest the full implications of this detailed and voluminous rule, its core feature is a requirement that brokers act in their clients’ best interests when making an investment recommendation. The SEC tries to balance the need to put forward this strong standard, which meaningfully raises the bar from the existing suitability standard, with the need to preserve investors’ access and choice regarding investment advice and products. In that vein, the Commission specifically highlighted the negative impact of the Department of Labor’s (DOL) fiduciary rule, which was invalidated by a federal court last year. Several states have proposed their own fiduciary standards, and SEC Chairman Clayton expressed concern about a patchwork of conflicting state requirements. The rule received quick and sharp criticism from House Financial Services Committee Chairwoman Maxine Waters (D-CA) and others on the left, but there is no viable legislative action that they can take to forestall implementation of the rule, which is set to happen a little over a year from now.
Other Issues in Play
Immigration. It's clear that President Trump is focused on the crisis along the southwest border since he talks or tweets about it every day, but no cavalry seems to be following him from Washington. Lawmakers are incapable of addressing this specific issue despite the urgent need to address the onslaught of asylum requests along the border and the attendant housing, security and legal needs. They want to address other immigration reform provisions that can't be resolved now, such as funding for the wall, the future of the "dreamers," and the legal status of the 11 million people in the US illegally. Paralysis has seemingly set in with most in Congress over anything immigration-related. Senate Judiciary Committee Chairman Lindsey Graham (R-SC) next week will introduce and hold a hearing on new legislation to make fixes to the asylum system. If it can attract a few Democratic supporters, it could advance in the Senate. The Trump administration also will make some proposed changes to the asylum program soon, but none will occur fast enough to address the current crisis. It remains to be seen how bad the problem will need to get before policymakers are forced to come together on a targeted solution.
US-China Negotiations. They are dead in the water as of today. No negotiating sessions are planned. Even behind-the-scenes talks among more junior officials have stalled. Rather, tensions are escalating as the two sides threaten each other and react with new retaliatory actions to give themselves leverage in the ongoing trade spat. The growing list of provocative actions by both sides include China's formation of an "unreliable entities" list (of foreign companies), China's review of its rare earth mineral export policy (the US is reliant on such exports), the US's threats of future tariff increases and Huawei's tenuous legal predicament in the US. Similar threats and actions will continue to be made in the run-up to a possible meeting between the two presidents at the G-20 meetings in Japan on June 28 and 29. No one-on-one meeting has been scheduled yet and it is possible one may not materialize. However, there is pressure on both sides to meet as neither wants to be perceived by the global community as the main culprit for ongoing tensions. The worst case scenario is either no meeting or a bad meeting. The most reasonable best case scenario is a polite meeting with a mutual pledge to continue formal negotiations in the near future.
Tariffs on Mexican Exports. President Trump's threat to impose higher tariffs on Mexican imports (by 5%) beginning June 10 was surprising to us and is very risky. Fighting two big tariff battles on the global stage at the same time is challenging in its own right, but a specific fight with Mexico at a time when the US and Mexico (and Canada) need to show ironclad unity to get the US-Mexico-Canada Trade Agreement passed in the three countries seems counterproductive. We'd be surprised if these threatened tariffs materialize in any significant way. The President faces serious pushback on these tariffs, especially from Republican Senators up for re-election. This is unlike the situation with China, where lawmakers and the public seem more aligned with him. We believe the US and Mexico will come to some form of an agreement any day now that will result in the postponement of the tariff increases for now.
What About that Russian Interference? So, what to do about the Russian hacking and attempts to influence the US presidential election in 2016? This was perhaps the most compelling and detailed part of the Mueller Report that calls out for action. Congress will need to act on several fronts to provide better protection for the aging US electoral system hardware that delivers most votes in the 50 states and territories. States run their own voting systems and claim to lack the money to pay for substantial and needed upgrades. More federal money is a likely first step from Congress. Nearly $400 million was provided to the states last year, but that amount will likely be doubled this year. Most lawmakers want the states to move away from their electronic voting systems to paper-based systems, which are recognized as labor intensive but far less prone to hacking and corruption. One lawmaker involved in this effort has said that 40 states use computer systems that are at least ten years old, while 12 states have no paper ballot back-up systems to use if their computer systems fail. The conversion to paper ballot systems will be the focal point of this debate over the next few months in Congress, though there is not yet a critical mass of bipartisan support for the idea.
Social Media Abuses. The Mueller Report also highlighted social media abuses as part of the foreign effort to influence recent US elections. This problem has been well known to lawmakers for the last few years and is a primary reason why the technology sector has become politically out of favor in Washington. Nonetheless, crafting the right regulation or legislation to dictate how companies police content on their sites is very, very difficult. Congress is not ready for this exercise yet because it doesn't have the expertise needed to identify the right fixes and it doesn't want to stifle technological innovation. Congress will talk about this issue and complain about abuses on social media sites, but it will go very slow in making any changes (certainly not this year).
Big Tech Scrutiny. In a related area, the House Judiciary Committee this week announced a bipartisan effort to scrutinize the competitive impact of the big technology firms. The initiative shows the unease in Congress about the power of the dominant online platforms and the generally limited regulatory oversight of them. It follows a call earlier this year by Senator (and presidential candidate) Elizabeth Warren (D-MA) to break up the big technology firms. The Trump administration also launched a digital economy task force out of the Federal Trade Commission (FTC) earlier this year and is expected to conduct its own anti-trust probes. Within this environment, there will continue to be many concerns raised about big technology companies in oversight hearings and on the presidential campaign trail. However, we don’t expect any meaningful legislation on this issue to emerge this year and any investigations by the FTC and the Department of Justice likely would occur over multiple years. Data privacy is one area where there may be more tangible legislative results in the nearer term. There is continued bipartisan interest in advancing data privacy legislation, but even these efforts face an uphill climb given differences on federal preemption and other issues.
The Final Word
D-Day. D-Day celebrated its 75th anniversary this week. President Trump was in Normandy for the occasion, and House Speaker Nancy Pelosi led a congressional delegation there late this week. They traveled a long way to find something to agree on, but even that didn’t work as the President referred to the Speaker as “Nervous Nancy” and the Speaker reportedly told her trip colleagues that she wanted to see the President in prison. Not even Normandy can bring this pair together. Nancy Pelosi was four years old at the time of D-Day. Donald Trump was born two years after the beach attack began. Neither had a father who was young enough at the time to fight in the war. Neither the House nor the Senate can claim any D-Day participants as members - in fact, there are no longer any World War II veterans left in either chamber. If you want to be awed by something, read a book about D-Day. Great books by Cornelius Ryan, Stephen Ambrose and others come to mind and would make great Father’s Day gifts for many of you. Our hats are off to those American, British and Canadian soldiers (and a smaller number of soldiers from ten other allied countries) who changed the world and made history on June 6, 1944.