Budget proposes doubling budgets for SEC, CFTC over five years; blueprint also details new cybersecurity strategy

President Obama's $4.1 trillion fiscal 2017 budget, released February 9, 2016, includes a number of proposals that would affect the financial services industry. Among them:

'Bank tax'

The budget once again calls for imposing a fee on the largest financial institutions, both banks and non-banks, which would serve to defray costs of the 2008 financial crisis while discouraging risk-taking, according to the administration's budget documents. "Specifically, the budget would raise $111 billion over 10 years by imposing a 7 basis-point fee on the liabilities of large U.S. financial firms — the roughly 100 firms with assets over $50 billion," the budget says. "By attaching a direct cost to leverage for large firms, this fee will reduce the incentive for large financial institutions to use excess leverage, complementing other administration policies aimed at preventing future financial crises and making the economy more resilient."

The budget's Analytical Perspectives document further elaborates that the fee would apply to "banks, both U.S. and foreign, and would also apply to bank holding companies and non-banks such as insurance companies, savings and loan holding companies, exchanges, asset managers, broker-dealers, specialty finance corporations and financial affiliates with assets in excess of $50 billion. Firms with worldwide consolidated assets of less than $50 billion would not be subject to the fee for the period when their assets are below this threshold. U.S. subsidiaries of international firms that fall into these categories with assets in excess of $50 billion would also be covered. The fee base is assets less equity (also known as liabilities) for banks and non-banks based on audited financial statements, with a deduction for separate account (primarily for insurance companies). The fee rate would be 7 basis points and would be effective on January 1, 2017."

SEC and CFTC budgets

The budget notably calls for doubling the budgets for the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) by 2021. For the coming fiscal year, the budget specifically proposes raising the SEC's budget by 11% (to $1.8 billion) and raising the CFTC's budget by 32% (to $330 million). For the SEC, the budget seeks the largest boost for the Commission's examination division, which inspects brokers, asset managers and investment advisers. The budget also asks for additional $50 million for the SEC's special technology fund.

The budget also seeks to allow the CFTC to assess transaction fees, and proposes that the SEC be allowed to increase its own user fees in order to better oversee the securities market.

"Without adequate staffing, the SEC is not able to examine investment advisors as frequently as it should, introducing significant risk to investors and the economy," the budget document says, while "resource constraints have forced the CFTC to delay and even cut back on its examination of clearinghouses, critical points of systemic risk in our financial system." The budget says that allowing the CFTC to charge fees "would shift the costs of regulatory services provided by the CFTC from the general taxpayer to the primary beneficiaries of the CFTC's oversight, and fee rates would be designed in a way that supports market access, liquidity, and the efficiency of the nation's futures, options on futures, and swaps markets. Increasing the transaction fees that currently fund the SEC would particularly fall on high-frequency trading."

The December budget agreement raised the SEC's budget to $1.6 billion, while keeping CFTC's budget flat at $250 million. Congressional Republicans have not agreed to a funding increase for the CFTC since 2014.

Senate Agriculture Committee Chairman Pat Roberts (R-KS) today said he could not support the administration's request for $330 million for the CFTC. "The Commission has participated in some questionable accounting and has overstepped its regulatory authority," Roberts said, according to Dow Jones News Service. A GAO report last week said the CFTC broke federal accounting rules in the way it tracked the cost of multi-year leases for its offices.

GSEs (Fannie Mae and Freddie Mac)

The budget estimates that under the continuing federal conservatorship of Fannie Mae and Freddie Mac, the two housing government-sponsored enterprises (GSEs) will send an additional $151.5 billion to the Treasury over the next 10 years. The budget also estimates that Fannie and Freddie will provide an additional $136 million to a trust fund devoted to affordable housing. The companies have already sent a combined $241.2 billion to the Treasury since being taken over by the government in 2008 at a cost to taxpayers of $187.5 billion. The budget also once again calls upon Congress to enact reforms to the nation's housing finance system that would permanently wind down Fannie and Freddie in favor a new platform.

"As part of the 2016 Omnibus, the Congress included a provision that limits the ability to return to the dysfunctional system in effect prior to conservatorship, and reinforces the need to enact comprehensive reform," the budget document says. "A bipartisan bill developed in the Senate in the previous session includes many of the Administration's key housing finance reform principles, including ensuring that private capital is at the center of the housing finance system ... The President stands ready to work with Members of Congress in both parties to enact common-sense housing finance legislation that embodies these core principles."

FHA

The budget once again proposes allowing the Federal Housing Administration (FHA) to impose a new fee for mortgage lenders on the loans insured by FHA. The proceeds from the fee, $30 million, would partly be used to upgrade the agency's computer systems. The budget estimates that the FHA will insure $204 billion in forward mortgages for this fiscal year, an increase from the $173.6 billion the administration had previously predicted for fiscal 2016.

Cybersecurity

The budget includes a long section detailing a new cybersecurity strategy and seeking a 35% increase in funding (to $19 billion) for this effort, which would shore up both government and private computer security systems and allow for the creation of a new Chief Information Security Officer position. Broadly, the "Cybersecurity National Action Plan" outlined in the budget would also:

— Make a $3.1 billion "down payment" on the Information Modernization Fund, to update and replace outdated networks, systems and infrastructure.

— Encourage the public and others to rely less on a single password as a source of account authentication, adding a second source such as a text-messaged code or a fingerprint.

— Double the number of cybersecurity advisers at the Department of Homeland Security assigned to the private sector, and partner with industry to develop Cybersecurity Assurance Program to certify technology used in the "Internet of Things." The administration also plans to release a "national cyber incident coordination policy" later this spring to provide guidelines for when agencies are hit with data breaches.

— The President signed an executive order today creating a permanent Federal Privacy Council to reform the government's privacy guidelines as new data-mining technologies evolve.