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Senate Banking Committee Nominations Hearing

Senate Banking Committee

“Nominations Hearing”

Wednesday, June 5, 2019

Key Topics & Takeaways

  • Inter-Affiliate Initial Margin: Bowman said she is “very” aware of the issue and that the Federal Reserve is actively reviewing the applications of  inter-affiliate initial margin requirements.
  • Federal Reserve Payments Proposal: Bowman said that the issue has been active since 2014 at the Federal Reserve, which historically has had a strong rule in place for payments and has engaged in a comment period to receive public feedback on appropriate structure reforms.
  • CFIUS: Feddo said that CFIUS can and does look at joint venture investments, when a U.S. company is involved in interstate commerce, as well as to look back at consummated transactions not initially reviewed in the CFIUS process, or “non-notified.” He said that for joint ventures that do not contribute to U.S. business, they are more appropriately tackled through the U.S. export controls process. Feddo said he is absolutely committed to implementing the foreign investment declaration provision, which is important with respect to state owned entities. He said the challenge of beneficial ownership will be that a team will have to review non-notified transactions and apply beneficial ownership rules and regulations where appropriate.
  • Community Banks: Bowman said the Federal Reserve works to understand risks community banks pose to the financial system in order to regulate and target rules based on their size, complexity and risks they pose to the system. Bowman said it is a priority to implement S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, and under her chairmanship of the smaller regional banks and community bank subcommittee she will continue to work to finalize the community bank leverage ratio to address capital requirements. Bowman added that she plans to address the burden of call reports, as well as provide guidance on the Bank Secrecy Act (BSA) and anti-money laundering (AML) examination procedures.

Witnesses

  • Thomas Peter Feddo, to be Assistant Secretary, the Treasury for Investment Security
  • Nazak Nikakhtar, to be Under Secretary, Commerce for Industry and Security
  • Ian Paul Steff, to be Assistant Secretary of Commerce and Director General, the U.S. and Foreign Commercial Service
  • Michelle Bowman, to be a Member, the Board of Governors of the Federal Reserve System
  • Paul Shmotolokha, to be the First VP, the Export-Import Bank of the U.S.
  • Allison Herren Lee, to be a Member, the Securities and Exchange Commission

Opening Statements

Chairman Mike Crapo (R-Idaho), Senate Banking Committee

Crapo welcomed the nominees, noting their extensive experience in their respective fields. Crapo declined to give a full opening statement, but welcomed the Ranking Member to give opening remarks.

Ranking Member Sherrod Brown (D-Ohio), Senate Banking Committee

In his opening statement, Brown expressed his desire for Feddo to implement and carry out technical and structural changes passed under the Foreign Investment Risk Review Modernization Act (FIRRMA) and to promote the national security efforts of the Committee on Foreign Investment in the United States (CFIUS) in order to to address emerging foreign investment threats. He stated the responsibility of Nikakhtar, if confirmed, would be to address key multilateral treaty requirements. Brown said that Steff would be responsible for advancing business overseas, in trade roles, in order to strengthen U.S. competitiveness. He expressed concerns over Bowman being a “rubber stamp” for Wall Street and rolling back safeguards, adding that he hopes all consumers in the financial system are protected. Brown said he is counting on Shmotolokha to push back against crippling the Export-Import Bank (Ex-Im bank). He expressed the importance of Lee’s return to the Securities and Exchange Commission (SEC), and is counting on her to alleviate concerns about the administration’s bias towards the most “privileged” in the U.S.

Testimony

Thomas Peter Feddo, to be Assistant Secretary, the Treasury for Investment Security

In his testimony, Feddo commented on the need for accountable and dedicated leadership to address critical national security investments in the U.S. He expressed confidence in his ability, given his experience, to lead CFIUS and implement FIRRMA. Feddo mentioned his service as counsel to the House Commerce Committee, a Marine, an attorney at the Pentagon, and as a Deputy Assistant Secretary at the Treasury. He said his private sector experience as a patent and trademark litigator and  with a trade group, mixed with his 20 years of work in national security, qualify him for the position. Feddo said he will protect the nation’s “vital engine” of intellectual property (IP), as well as foreign investment in the U.S. economy. Feddo added that he will work to faithfully implement FIRRMA, serve with humility to enact the CFIUS mission, and ensure national security is protected.

Nazak Nikakhtar, to be Under Secretary, Commerce for Industry and Security

In her testimony, Nikakhtar said she began her career at the Commerce Department for the Bureau of Industry and Security, and subsequently at the International Trade Administration. She said that national security is dependent on economic strength and technological leadership, with challenges more complex than ever before due to the interconnectedness of economies. Nikakhtar said that today, foreign nations work to undermine U.S. national security, such as through IP theft, to stifle competition and innovation. She said she will work to promote economic interests through forward leaning multilateral agreements, better use of intelligence analytics, robust enforcement of laws, and a tightly coordinated government approach that includes engaging the Department of Commerce. Nikakhtar said the challenge is to modernize policies in order to stay ahead of threats and her priority is to seek industry input to advance technological and economic leadership.

Ian Paul Steff, to be Assistant Secretary of Commerce and Director General, the U.S. and Foreign Commercial Service

In his testimony, Steff said he would aim to counsel medium and small businesses on export practices, identify new foreign markets for their products and services, advocate on behalf of U.S. companies, attract foreign direct investment, and reduce foreign trade barriers that impede market access for U.S. goods in a free, fair and reciprocal fashion. Steff added that he has seen the challenges of unfair foreign trade measures and massive market distortion practices that have crippled companies looking to compete internationally, and will work alongside Congress to ensure global competitiveness is maintained.

Michelle Bowman, to be a Member, the Board of Governors of the Federal Reserve System

In her testimony, Bowman said she served as the first Governor on the Federal Reserve Board (Fed) to fill the role designated by Congress for someone with community banking experience. She said that hearing from community bankers, community leaders, consumers, small business owners, farmers, workers and business leaders has helped her represent these diverse voices in discussing monetary and regulatory policies. Bowman said she has drawn on her experience as a community banker and regulator to ensure the practical realities of bankers are served as regulatory changes continue to impact community financial institutions. She said her priority is to appropriately tailor regulation to address the size, complexity, capacity and risks posed at the community bank level. Bowman explained that she has implemented a working group of experts at the Fed to launch a comprehensive review of the supervisory work for small regional and community banks. She said that as the Bank Commissioner of Kansas, she was committed to treating every consumer and institution fairly and respectfully and fostering open communication. She said she applies these principles in her current role at the Fed in order to optimize supervision and regulation, and to ensure adaptation to the evolving industry and changing consumer expectations while maintaining the safety and soundness of the banking system. Bowman said her priorities are to support local business and consumers, to foster maximum employment and stabilize prices.

Paul Shmotolokha, to be the First VP, the Export-Import Bank of the U.S.

In his testimony, Shmotolokha said he has spent the last 16 years at the “front lines” of global trade. He said that it is not simple for any manufacturer to export, as they must overcome political risks, economic hazards and many non-tariff barriers, as well as obtain financial support. Shmotolokha stated he has experienced firsthand the circumstances that require an export credit agency (ECA) like the Ex-Im bank to finance deals in a timely and relevant fashion when the private sector cannot. Shmotolokha said that from his time on previous boards in various capacities, he understands proper corporate governance, the need for transparency, and how good strategic guidance and positive leadership can enable organizations to realize their full productive potential. Shmotolokha said he will ensure American companies have full access to programs authorized by Congress to maximize global reach and competitiveness.

Allison Herren Lee, to be a Member, the Securities and Exchange Commission

In her testimony, Lee stated she believes “deeply” in the mission and staff of the SEC, where she has spent the majority of her legal career to support the economic well being of businesses and individuals. She said that the reciprocal relationship between businesses and individuals must be nourished and protected by both sides of the aisle and the SEC, as we are a nation of both retail and institutional investors. Lee added that this is especially important now, as there is a shift from employer pensions to individual retirement savings plans. Lee said the SEC must work to inform investors in order to instill confidence, increase capital formation and help investors avoid poorly structured and opaque markets. Lee added that the SEC ensures that businesses of all sizes can access capital to grow their business, which creates opportunities to fulfill investor wants and needs. She said policies and regulations should be thoroughly researched to ensure they are well-tailored and clear for businesses. She said her experiences have helped her understand the interdependence of investors and business, which she will bring to the role in order to represent all constituencies and to further the SEC mission.

Question & Answer

Mergers

Brown asked Bowman if she will support the merger of BB&T and SunTrust. Bowman said that her decision will depend on the outcome of the review of the application and if statutory factors are met, she would consider the merger.

Hemp

Sen. Jon Tester (D-Mont.) asked about the Fed’s involvement with banking for the hemp industry. Bowman said the Fed instructs businesses to follow the Bank Secrecy Act (BSA) and anti-money laundering (AML) guidance to ensure they know the risks, but the Fed does not discourage such businesses from banking.

Inter-Affiliate Initial Margin

Sen Thom Tillis (R-N.C.) asked about an exemption for inter-affiliate initial margin. Bowman said she is “very” aware of the issue and that the Fed is actively reviewing the applications of  inter-affiliate initial margin requirements.

Federal Reserve Payments Proposal

Sens. Chris Van Hollen (D-Md.) and Tillis asked about the Fed payments proposal. Bowman said that it is an issue that has been active since 2014 in the Fed, which historically has had a strong rule in place for payments and has engaged in a comment period to receive public feedback for appropriate structure reform. She said that at this point no decision has been made but she is happy to submit a further response for the record.

CFIUS

Sen. Doug Jones (D-Ala.) asked about CFIUS authority in reviewing joint ventures and their ability to look back at previous agreements. Feddo said that CFIUS can and does look at joint venture investments, when a U.S. company is involved in interstate commerce, as well as to look back at consummated transactions not initially reviewed in the CFIUS process, or “non-notified.” He said that for joint ventures that do not contribute to U.S. business, they are more appropriately tackled through U.S. export controls process.

Sen. Bob Menendez (D-N.J.) asked about the CFIUS evaluation process for foreign government control and the foreign investment declaration provision in FIRRMA. Feddo said he is absolutely committed to implementing this provision, which is important with respect to state owned entities. He said the challenge of beneficial ownership will be that a team will have to review non-notified transactions and apply beneficial ownership rules and regulations where appropriate.

Community Banks

Brown also asked about the impacts of consolidation on community banks. Bowman said the focus is more that investment is properly allocated across local communities rather than located where the bank charter is held. She said that as branches are acquired in rural communities, community investment tends to dissipate. Bowman said the Fed works to understand the risks community banks pose to the financial system in order to regulate and target rules based on their size, complexity and risks.

Sen. Martha McSally (R-Ariz.) asked about the Fed tailoring regulations for community banks. Bowman said it is a priority to implement S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, and under her chairmanship of the smaller regional banks and community bank subcommittee she will continue to work to finalize the community bank leverage ratio to address capital requirements. Further, she said that the subcommittee will engage community bank supervisors for their comments and recommendations. Bowman added that she plans to address the burden of call reports, as well as provide guidance on the BSA and AML examination procedures.

Penalties

Menendez asked Lee if tough penalties are enough to deter future lawbreakers. Lee said she thinks compliance is the overall goal of enforcement and the best way is through deterrence. She said this includes tough penalties where appropriate, with case by case analysis.

For more information on this hearing, please click here.