Talking Progressive Regulators; FDIC Backs off Asset Managers; Ungagging the SEC Gag Rule?
Capitol Account: Free Weekly Edition
Another week, another set of moves by Biden administration officials keenly aware of the dwindling days before election season grinds Washington to a halt. Capitol Account subscribers got the inside information as the FDIC board members engaged in fast-developing, closed-door negotiations about the agency’s oversight of BlackRock, Vanguard and other large money managers. Ultimately, proposals from both Democratic and Republican directors were tabled at a meeting punctuated by laughs and awkward pauses. Our analysis: Watch this space, because the FDIC isn’t done yet.
We closely covered the FTC’s move to ban non-compete clauses and the lawsuits that were immediately rushed to the federal courthouse in Texas, of course. We also reported on how critics of the SEC’s enforcement tactics — particularly the gag orders it imposes on defendants who settle cases — are eyeing a congressional forum that would finally allow those people to speak freely (paging Elon Musk). And our Friday interview featured a former senior Treasury official who gave a candid assessment about unfinished progress on progressive goals and told us about the banking industry’s “capital derangement syndrome.”
Here’s a free digest of articles published this week. The daily newsletter had more stories you won’t read anywhere else. If you like what you see, click the button below to sign up for the full offering.
Friday Q and A: With a mantra of personnel is policy, progressive Democrats have worked to seed the financial agencies with appointees who share their suspicions of Wall Street – and want to do something about it. By many accounts, the campaign has been a success. Just ask the industry about Rohit Chopra or Gary Gensler or Martin Gruenberg.
But with an election looming, there is still a lot outstanding on the liberals’ agenda. Perhaps more importantly, many of the major regulations that have been adopted – from the SEC’s climate rule to the credit card late fee cap imposed by the CFPB to the Community Reinvestment Act revamp – are now at the mercy of a federal judiciary that is increasingly hostile to the administrative state.
To get an assessment, we sat down this week with Graham Steele. A noted progressive, he played a key role in the Biden administration’s oversight push as the Treasury Department’s assistant secretary for financial institutions from November 2021 until this January.
The job sits between the independent agencies and the White House, meaning Steele wasn’t drafting rules or making the final call on policies. Instead, he did a lot of coordinating (and encouraging and prodding) to make sure the efforts were moving ahead. The position has a broad portfolio, touching issues involving banks, credit unions, insurance companies, consumer protection, climate, financial inclusion and cybersecurity. Steele also helped marshal the government’s response to last year’s regional banking crisis.
Now back living in the Bay Area, Steele has taken a fellowship with the Roosevelt Institute and is contemplating his next move. Read on for his candid assessments of the political dynamics influencing financial regulation, the bank lobby’s well-worn talking points and the major questions doctrine. What follows is our (lightly edited and condensed) conversation.
Capitol Account: What's your outlook for the Basel endgame getting done this year?
Graham Steele: There’s a pretty clear path to getting the rule done. Most of the objections that the industry has raised — to the credit market, operational risk frameworks — are pretty clear and known at this point. I can see a way those could all be addressed and the agencies still end up with something like a high-single, low-double digit increase in capital that makes some of the more hawkish regulators satisfied. To my mind, the big issue here is not the substance necessarily, it's more, is there the political will to do it?
CA: Big banks have fought this pretty hard. Are they succeeding?
GS: We've seen them get traction in Congress. We've seen some bipartisan pushback, unfortunately. Anytime the rules get seen as controversial, unless there's a concerted effort on the side of the administration to really put all their full weight behind it, these things can kind of get bogged down … My question is whether some of the principals at some of the agencies just feel like it's more trouble than it's worth to finalize it. There's a finite window here to get this done. It'll be a real significant missed opportunity not to do it.
CA: Are you talking about Fed Chairman Jerome Powell?
GS: Not him specifically. He is certainly one who has expressed doubts, but there are other members of the Federal Reserve Board that have expressed doubts. Also…some of the progressive members, for example, of the FDIC – how far are they willing to go to compromise? A question for a number of the agencies [is] whether getting a decent deal is better than getting no deal at all.
CA: We’ve seen anti-Basel ads during football games and at bus stops in Washington. What do you think of the lobbying effort?
GS: I'm not surprised, but I do find it a bit unfortunate. I feel like the industry has a case of what I will call capital derangement syndrome…Anything involving capital tends to elicit a very visceral and disproportionate response. The level of vitriol has really been excessive compared to the nature of the proposed changes.
CA: If you listen to the banks, this is a huge issue for small businesses.
GS: Some of the arguments and tactics in fighting the rules haven't really changed over the last decade. It's the same stuff about using the banks’ customers and other sympathetic constituencies, arguing banks will never make loans, that the rules are un-American etc.. These are all talking points that we saw debunked.
CA: It’s not much of an exaggeration to say that the regulators are getting sued over every major rule they issue. Is that making them more cautious and slowing things down?
GS: Legal risk is very real – it was a thing that we thought a lot about at Treasury…At the same time, it's important not to use that as a way of unilateral disarmament. It's been disappointing sometimes when it's felt like agencies are conflating issues like the political risk of a rule with the legal risk of that rule – and then using potential legal challenges as an excuse not to act. I understand the desire not to have their wings clipped, but there's also a point at which you can become so timid that the outcome is functionally the same. If you're not going to use an authority, why do you have it?
CA: What do you think of the Supreme Court’s major questions doctrine?
GS: It's a completely made up legal concept. But it's also, within the banking space specifically, antithetical to the history of financial regulation…(Friday)
Thanks for reading. Follow us on X @CapitolAccount and on LinkedIn by clicking here. We’re always looking for stories, so if you have any suggestions on what we should cover (or comments about Capitol Account), shoot us a note. Rob can be reached at: rschmidt@capitolaccountdc.com, Ryan at rtracy@capitolaccountdc.com and Jessica at: jholzer@capitolaccountdc.com. If somebody forwarded this to you and you’d like to subscribe, click on the button below. Please email for information on our special rates for government employees, academics and groups: subscriptions@capitolaccountdc.com
More to Come: In some ways, Thursday’s highly anticipated FDIC board meeting was anticlimactic: nothing got done. But it was clear from the healthy discussion that the contentious issue of how to deal with asset managers’ stakes in large banks isn’t going away any time soon. Nor is the regulator going to drop its quest to set some parameters.
That’s probably not great news for the fund industry, which lobbied furiously against both of the plans on the agenda. CFPB chief Chopra’s proposed rule would have given the FDIC a broad role in scrutinizing firms’ investments. Republican Director Jonathan McKernan’s resolution was more modest, calling for what he described as “very basic” monitoring of “two or maybe three” large index fund providers.
While there were signs this week that neither option could win majority support, few expected what happened. Both were pulled at the meeting, shortly after Acting Comptroller Michael Hsu announced he would oppose them. Chopra then took the opening to politely nudge McKernan to stand down.
“I want to see what really takes shape as we sharpen our thinking, and I hope that we also get some public input – including on rule changes,” Chopra said.
McKernan promptly agreed, though he emphasized that he would continue pressing ahead. Chopra then followed suit, tabling his own proposal.
The development seemed to come as a surprise to the FDIC staff gathered in the room – and perhaps even to Gruenberg himself. McKernan publicly demanded a vote on his plan, and was pressuring the chairman for weeks behind the scenes to make it happen. In one telling moment, Chopra mentioned that he was grateful that the meeting had gone ahead. Gruenberg, looking a little stunned, paused a beat before saying, “Thanks.” The room erupted in laughter.
Despite the stalemate, the board members’ comments seemed to underscore the broad interest – across party lines – in stepping up the regulator’s oversight of BlackRock, Vanguard and other large money managers. The right has been pounding them for using the clout that comes with having trillions of dollars under management to promote liberal social policies. And the left is highly suspicious of such concentration of economic power. While the FDIC’s concerns are more narrow, they reflect that debate.
The agency has a hook into the firms through their bank stock holdings. Under the law, investors that exercise “direct or indirect control” over a lender need to become a bank holding company – a designation that triggers much stricter oversight, including capital requirements. A handful of large fund managers have gotten around that designation by signing “passivity agreements” that call for them to stay out of management decisions.
Those pacts, however, haven’t gotten a lot of attention – until McKernan began raising the issue earlier this year. He homed in on asset managers’ campaigns to get companies to set climate goals, arguing it could violate the agreements. Ultimately, both Chopra and Gruenberg jumped in – with different concerns. And they wanted to take a bigger regulatory step than their GOP colleague.
“It makes sense for the FDIC to review the substance of its own passivity framework and take a more active role to determine whether these agreements are being adhered to,” Chopra said at the meeting, stressing that the accords can’t be “fake paperwork exercises.” … (Thursday)
Calling on Congress: The SEC’s so-called gag rule, which prevents defendants who settle enforcement actions from disputing the agency’s allegations, is being challenged in a growing number of lawsuits – including from high-profile executives like Elon Musk, who would love to publicly air their feelings about the agency’s tactics.
It turns out there may be an easier way for them to tell their stories: at a congressional hearing. And there’s now a movement afoot to get lawmakers to pay some attention to the issue.
When Cassandra Toroian, a former financial adviser turned author and podcaster, resolved fraud charges brought by the SEC last year, she signed the standard agreement not to dispute the facts of her case. But she’s not happy about it and is now part of a suit filed last month by the New Civil Liberties Alliance that seeks to overturn the policy. (The group, which advocates to curb the administrative state, has been trying to get rid of the settlement requirement for years.)
Speaking at an event hosted by the organization Wednesday, Toroian said she is determined to lobby lawmakers to dig into the SEC process, which she stressed forces defendants to give up their First Amendment rights. And she implied that they would learn a lot about “serious structural issues with the way that agency operates.”
“We’ve got Congressman Jim Jordan doing investigations into government weaponization,” Toroian said, referring to the House Judiciary chair. “I think this would qualify.”
(Another potential venue, of course, would be the House Financial Services Committee. Its Republican leadership has held numerous SEC oversight hearings, and has a seemingly endless resolve to rein in the agency.)
Interestingly, Peggy Little, a senior counsel at NCLA, pointed out that Congress may be the best place for Toroian, or others who’ve been muzzled, to detail their experiences. The gag order doesn’t apply to a person under oath, Little said. So those who’ve settled with the commission could actually say what they really think if they are sworn in before a committee.
In a follow-up interview, Kara Rollins, a litigation counsel at NCLA who is also working on the group’s lawsuit against the settlement policy, said a congressional hearing would help pierce a veil of secrecy that the SEC has relied on since 1972 to avoid scrutiny of its heavy-handed enforcement tactics.
“It’s Congress’ job to do oversight, and for 50 years there has been asymmetrical information about the SEC and how they conduct their affairs,” Rollins said. “Every American should care that there’s an agency that thinks it can just silence people.”
If you made it this far: