January 6, 2022

December 2021 Month In Review Newsletter

Hard to believe, but 2022 is here! We ended 2021 with a bang and are looking forward to the challenges of 2022 and we hope you are too.

First, thank you to everyone who financially supported Better Markets in 2021. As a 501c3 nonprofit, we only exist and can only fight for Main Street families, consumers, investors, small businesses, community banks and the productive economy more broadly if we have that support. I’m also pleased to report that again in 2021 we increased both our number of supporters and amount of support, which includes numerous, vitally important small dollar donations as well as extremely generous 7-figure multi-year gifts! As a result, we are growing and are looking to hire a number of experienced, highly qualified, and motivated lawyers and securities or derivatives experts. If you know of any candidates, please direct them to the position descriptions on our website here. With so much happening at the financial regulatory agencies over the next three years, this will enable us to have much more impact.

Second, we were busy at the end of the year. In December, we published a new Report on the many ways the Securities and Exchange Commission can address racial economic inequality in the securities markets. We know that corporate policies on racial justice have a direct impact on – and are very important to — shareholders. We also know that companies with greater ethnic and cultural diversity outperform less diverse firms. And, of course, racism impoverishes the whole economy. You can also read our earlier Report on what the banking regulators and banks can do to address racial economic inequality here, and view our dedicated webpage about the key actions that Better Markets has taken to push for equality in the financial system here.

Third, if you weren’t tracking financial regulation developments on New Year’s Eve—and really, who was? —Trump-appointed FDIC Chair Jelena McWilliams announced she would step down effective February 4, 2022. She had stated her intention to remain in place until her full term expired in mid-2023. That became untenable, however, after she announced that she had unilateral power as Chair to control the FDIC’s agenda and activities even if the other three FDIC Directors disagreed. One of those directors publicly released a detailed legal analysis showing that her position was unsupported by the FDIC statute, the FDIC’s own bylaws, and its history and practice. While the Chair claimed the FDIC General Counsel provided her with a legal opinion supporting her claim, she refused to publicly release it. Instead, she published an inflammatory Op Ed in the Wall Street Journal attacking the other members of the FDIC Board. Presumably in recognition of the legally indefensible position, the Chair announced her resignation shortly thereafter. We look forward to the FDIC getting back to properly supervising and regulating the nations’ banks rather than the pro-Wall Street, “kinder, gentler treatment” of the Trump years.

In 2022, we will continue to focus on investor protections—especially against predatory gamification and retail exploitation, fragmented markets, high frequency trading abuses, SPACs and private markets expansion, and breaches of fiduciary duties in retirement programs—digital and crypto currencies, the ongoing too-big-to-fail/too-big-to-jail/too-big-to-manage/too-big-to-regulate problems, executive compensation and misaligned incentives, protecting consumers against abusive debt collection practices, and of course, climate change and racial economic inequality.

We are grateful for your continued support of our work to bring transparency, oversight and accountability to our markets, banking, and financial systems, as well as the federal regulatory agencies. In 2022, we will persist in our fight for laws, rules, regulations, and policies that promote the economic security, opportunity, and prosperity of all Americans. Thank you for partnering with us.

Happy New Year.

Best, Dennis

Dennis Kelleher

Co-founder, President, and CEO, Better Markets

ACTIVITIES AT THE REGULATORY AGENCIES

Better Markets Files Comment Letter Supporting ESG Factors in Retirement Plan Management

Better Markets filed a comment letter with the Department of Labor supporting the agency’s proposal to remove barriers instituted during the previous Administration that limited plan fiduciaries’ ability to consider climate change and other environmental, social, and governance factors when they select investments and exercise shareholder rights.

Under the Trump administration, DOL sought to unnecessarily and materially curtail a plan fiduciary’s consideration of these ESG factors in selecting retirement plan investment options. Read more >>

Better Markets Letter Supports Disclosure of Proxy Voting by Registered Investment Companies

Better Markets filed a comment letter with the U.S. Securities and Exchange Commission supporting the SEC’s proposal to enhance the disclosures by registered investment companies (i.e., mutual funds) of how they vote their proxies. It would also implement Section 14A(d) of the Securities Exchange Act of 1934 (“Exchange Act”), which was added by Section 951 of the Dodd-Frank Act. Section 14A(d) requires that institutional investment managers disclose how they vote proxies related to executive compensation matters. Read more >>

Better Markets Urges SEC To Rescind Trump-Era Provisions That Make It Harder for Investors to Receive Independent Advice on Proxy Votes

In a Comment Letter to the Securities and Exchange Commission, Better Markets supported the proposal to repeal the most objectionable aspects of the final rule regarding proxy advisory firms promulgated in 2020. Specifically, the proposal would remove conditions for reliance on important exemptions, conditions which require that 1) proxy advisory firms provide copies of their advice to registrants who are the subjects of that advice at the time the advice is disseminated to clients, and 2) that proxy advisory firms provide clients with the registrants’ written responses to their advice, if any. Read more >>

ACTIONS IN THE FEDERAL COURTS

Spotlight on the Supreme Court

Every term, the U.S. Supreme Court decides cases influencing not just major social policies such as abortion and gun control but also financial and economic issues that can profoundly affect the lives of virtually all Americans—anyone with a bank account, credit card, mortgage loan, or retirement fund. We regularly issue reports highlighting these critically important economic and financial cases. Read our preview of the current term here, and our recap of the last term here.

This term, the Court’s docket includes a number of cases that will address major legal questions in the areas of arbitration and the fiduciary duties owed to retirement savers. The Court will also consider matters of administrative law, a seemingly technical area of law that can profoundly affect the ability of regulatory agencies to carry out their mission of protecting the public from financial frauds and other threats to public health, safety, and welfare.

Below are three of the cases we’re watching, all of which have been argued to the Justices. As the weeks and months pass, we’ll be looking for the Court’s decisions on the merits and highlighting the outcomes. In addition, we’ll continue to monitor the Court’s list of petitions for certiorari—requests by parties that the Court accept a case for review—with an eye on those cases that matter to the financial and economic well-being of everyday savers and investors.

ERISA LIABILITY FOR MISMANAGEMENT OF DEFINED CONTRIBUTION PLANS – Hughes v Northwestern University, 953 F.3d 980 (2020) (S. Ct. Docket No. 19-1401) (oral argument set for December 6, 2021) – Will retirement savers be able to move forward with their claims that retirement plan fiduciaries breached their fiduciary duties by offering a confusing array of overpriced and underperforming investment options? (We profiled this case in more detail in our November newsletter.)
CHEVRON DEFERENCE – American Hospital Assoc. v. Becerra, 967 F.3d 818 (2020) (S. Ct. Docket No. 20-1114) (oral argument set for November 30, 2021) – How much deference will the Court afford to an agency’s interpretation of the law?
SUBJECT MATTER JURISDICTION FOR CONFIRMATION OF ARBITRATION AWARDS – Badgerow v. Walters, 975 F.3d 469 (5^th Cir. 2020) (S. Ct. Docket No. 20-1143) (oral argument set for November 2, 2021) – Which courts (state or federal) have jurisdiction when parties seek to vacate or confirm an arbitration award?

Other Cases of Interest in the Federal Courts

We continue to track a number of other cases pending in the federal courts that involve key issues in the areas of financial regulation, administrative law, and standing, all of which affect the Americans’ financial health. Here are some of the key cases on our list:

A class action lawsuit on appeal in the 10^th Circuit (In re: Overstock Securities, et al.) in which investors seek to recover damages for a brazen market manipulation scheme allegedly perpetrated by Overstock’s CEO, Patrick Byrne, and others. The plaintiffs have alleged, among other frauds, that Byrne artificially inflated the stock price of Overstock by orchestrating what’s known as a “short squeeze,” a series of actions that forced short sellers to buy stock to cover their positions, thus driving up the price of the stock. They allege that Byrne succeeded; cashed in his own shares at inflated prices, reaping tens of millions of dollars; and essentially admitted the manipulation. But the lower court in Utah rejected the claims as a matter of law, in part based on the argument that an essential element of market manipulation is deception, something the court deemed was absent in this case given the overt nature of the defendants’ conduct.

Why it matters? Class action lawsuits are an indispensable complement to SEC enforcement of the securities laws. They are often the only realistic way in which a large number of investors can recover damages when they’ve been defrauded by culpable actors in the securities markets. If this case cannot get back on track through the appeal process, then the injured investors will have little or no recourse.
In addition, this case presents an important issue of law that will affect not only this case but innumerable future cases: whether harmed investors will be prevented from recovering for market manipulation simply because those perpetrating the misconduct didn’t attempt to conceal their behavior, even though their conduct clearly appears to have caused a stock price to fluctuate artificially to the detriment of countless investors.
The case is in its early stages, with the plaintiffs’/appellants’ opening brief due on January 26, 2022. Better Markets is planning to weigh in on their side with an amicus brief addressing some of the legal and policy issues presented.

A lawsuit in New Jersey federal district court (The Doris Behr Irrevocable Trust v. Johnson & Johnson) attempting to force public company shareholders into mandatory arbitration, a biased, secretive, and anti-consumer forum.

Why it matters? Mandatory or forced arbitration takes away the rights of consumers and investors to seek relief in open court before unbiased judges when they are ripped off by banks and corporations. These typically fine-print clauses force defrauded investors and other victims into secret, unfair, and biased arbitrations. Those proceedings are generally run by an industry self-regulatory organization which, no surprise, consistently favors the industry. Investors and consumers rarely obtain meaningful recovery.
In this case, a federal court will decide if a public company can be forced to impose mandatory arbitration not just on its customers but also on any shareholders with claims against the company for fraud, mismanagement, or other breaches of duty. If the court gets this wrong and allows this dramatic—and dramatically bad—legal development, then the toxic effects of mandatory arbitration will be further broadened, incentivizing lawbreaking by limiting the legal rights of investors to stop it.
Given that shareholders are the owners of public companies, and they rely on legal actions as one important way to protect their investments and police management, such a decision could have a significant and adverse impact on capital formation and allocation.
In a positive development this summer, the court granted defendant Johnson & Johnson’s motion to dismiss. However, it also granted the plaintiff “one final opportunity to file an amended complaint.” The third amended complaint and Johnson & Johnson’s motion to dismiss it are now before the court, and we hope to see a decision from the court soon.

A lawsuit in the D.C. federal district court (National Association for Latino Community Builders v. CFPB) challenging the CFPB’s harmful rule that rescinded the underwriting requirements for payday lenders, a commonsense provision that required those lenders to determine whether borrowers could afford to repay their short-term loans. That’s right: the rule merely required lenders to determine at the time a loan was issued that the borrower could afford to repay it. It’s a basic, commonsense, and relatively simple process—unless, of course, the predatory financial firm doesn’t want to make loans that are repaid but instead seeks the legal right to trap desperate borrowers in a never-ending cycle of debt with exorbitant fees and sky-high interest rates, what we call a “debtor’s prison without walls.” (See Dennis’s op-ed on this issue for The Hill).

Why it matters? Under the Obama administration, after years of substantive and robust analysis, the CFPB crafted important protections for consumers who need short-term or “payday” loans. Among them was the requirement that payday lenders determine a borrower’s ability to repay a loan before extending credit. The purpose was to prevent those lenders from deliberately trapping desperate borrowers in endless cycles of unaffordable debt that saddle them with huge interest payments and fees.
Under the Trump administration, the CFPB nullified those underwriting requirements in a deplorable example of baseless rulemaking plainly designed to accommodate the payday lending industry and in response to relentless industry lobbying (and, reportedly, campaign contributions). Now a court will have the opportunity to nullify the Trump rule and restore the underwriting requirements for the benefit of millions of vulnerable borrowers living on the economic edge.
Earlier this year, the CFPB (and the industry intervenor) moved to dismiss the action based on the claim that the plaintiff, a nonprofit membership association of organizations that serve Latino communities, has no “standing.” The agency is arguing that neither the plaintiff nor its member organizations face the type of concrete injury from the rule that would entitle them to bring their case in federal court. The doctrine of standing once again figures prominently in an important case, potentially preventing the plaintiff’s claims from being heard on the merits. Briefing is complete on the motions to dismiss, and we await the court’s decision on the threshold standing issue.

An industry challenge in the D.C. Circuit (Citadel Securities LLC v. SEC) to the SEC’s approval of a new type of trading order that helps protect investors from predatory trading activity by sophisticated high frequency trading firms.

The outcome of this case will have a huge impact on the ability of everyday investors to protect their money from being siphoned away by high frequency trading (HFT) firms like Citadel. That’s why we weighed in to help defend a new order type developed by IEX, an investor-friendly exchange that has earned our praise since it was founded in 2016. The SEC rightly approved that order type late last year, but Citadel is fighting to protect its ability to generate near-certain profits—to print money in effect—through privileged data access and sophisticated trading technology. It has asked the D.C. Circuit to invalidate the SEC’s approval of the IEX order.
HFTs spend enormous sums of money to get a sneak peek at trading activity on the exchanges before the public sees it, and they buy high-speed computer programs capable of acting on that information in microseconds. As retail investors and millions of Americans planning for retirement place their orders, HFT firms can snap them up and skim off near-certain profits because they know where the market is about to head—up or down.
It’s not just fundamentally unfair, it’s also a plague on our markets. This sort of HFT activity not only bleeds investors, it but also drives away large institutional investors. They are the life blood of our markets, yet because of HFTs’ predatory behavior, they are increasingly turning to alternative trading venues that are safer for them but much less transparent and less regulated than the exchanges. That means less liquidity, transparency, and price discovery on the exchanges, which in turn hurts the market in the long term.
In our brief, we explained the advantages HFTs enjoy and the harm they inflict on investors. We also showed how the D-Limit Order, which automatically resets its price when HFTs are about to strike, helps neutralize the HFTs’ unfair advantage. Fortunately for investors, the SEC’s mission is to protect investors and the integrity of the markets, not Citadel’s coveted business model, so it approved the IEX order type in accordance with the securities laws and all the requirements surrounding rulemaking. We urged the Court to affirm the SEC’s decision.
The case was argued before the D.C. Circuit on October 25, 2021, and we’re watching for the Court’s decision on the merits.

A challenge in the 5^th Circuit (Alliance for Fair Board Recruitment v. SEC) to the SEC’s approval of a new rule issued by the NASDAQ that would help advance the cause of racial justice.

Why it matters. Huge societal challenges such as climate change and racial injustice are rightly receiving increasing attention among policymakers, major media outlets, and members of the public. Those engaged in the financial services industry, including the financial market regulators like the SEC and members of the industry like NASDAQ, have key roles to play in solving those problems. Often the first step toward meaningful change on such challenges is public transparency.
The NASDAQ, a major national stock exchange that lists over 3,000 company stocks, recently took a major step forward on the racial injustice front by issuing a new rule that would require each company listed on the exchange to publicly disclose the self-identified gender, racial, and LGBTQ+ status of each member of the company’s board of directors. The rule also requires each listed company to have, or explain why it does not have, at least two members of its board who are diverse, including at least one director who self-identifies as female and at least one director who self-identifies as an underrepresented minority or LGBTQ+.
The SEC approved the rule in August and the petitioner, the “Alliance for Fair Board Recruitment,” promptly challenged it in the U.S. Court of Appeals for the Fifth Circuit. The Alliance is based in Texas and its website simply declares that its mission is to “promote the recruitment of corporate board members without regard to race, ethnicity, sex and sexual identity” and further that “The identities of our members are confidential.” Their decision to seek review of the NASDAQ diversity disclosure rule in the Fifth Circuit was clearly a strategic choice because that federal appellate court is widely regarded as ideologically conservative and pro-business. A victory in the case by the Alliance will invalidate an important measure that provides key insights into the composition of thousands of boards of directors, information that would undoubtedly and ultimately lead to greater diversity in America’s board rooms and progress toward bringing minorities into the economic mainstream.
Briefing in the case is just getting underway. The Alliance is arguing that the rule violates the petitioners’ right to equal protection under the Fifth Amendment to the U.S. Constitution, that it also violates the First Amendment by requiring disclosure of controversial information, and that the SEC lacked authority under the securities laws to approve the rule. We’ll be tracking the case closely.

HILL UPDATE

2021: Biden Administration Staffs Up the Agencies

One of the most important ways that an incoming President can shape public policy is through the appointments of regulators to important positions in Washington.

In January, Rohit Chopra was nominated as the head of the Consumer Financial Protection Bureau. The Senate finally confirmed him to this position in September, and he has already made great strides in restoring the CFPB to its role as an effective regulator on behalf of Americans who are preyed upon by unscrupulous actors in the financial industry.

In April, Gary Gensler was confirmed to head the U.S. Securities and Exchange Commission, and he has assembled an impressive staff of leaders who are in the middle of a substantial rulemaking process that will protect investors, expand markets, and facilitate capital formation.

In November, President Biden announced he intends to reappoint Jerome Powell as Chair of the Federal Reserve and elevate Fed Governor Lael Brainard to Vice Chair. The President still has to nominate three additional Governors for the Fed and designate one to the critically important job of Vice Chair for Supervision, one of the most powerful banking regulators in the world.

In December, Saule Omarova, President Biden’s nominee to be Comptroller of the Currency, the top banking supervisor in the country, withdrew from consideration after enduring outrageous attacks on her character from Senate Republicans.

Also in December, Rostin Behnam was confirmed by the Senate to serve as Chairman of the Commodity Futures Trading Commission, a key federal regulator that oversees the country’s derivative markets.

Review of 2021 Congressional Activities Related to the Economy and Financial Regulation

In February, the House Financial Services Committee held the first of three planned hearings on Robinhood, GameStop, and the meme stock frenzy that captivated stock market observers. In March, Better Markets’ CEO Dennis Kelleher testified at the second of the hearings in March.

President Biden signed the American Rescue Plan in March. The $1.9 trillion COVID relief bill provided aid to state and local governments, as well as providing stimulus payments to Americans and help for struggling small businesses.

In May, both the Senate Banking Committee and the House Financial Services Committee held hearings into the conduct and activities of Wall Street’s MegaBanks. For two days, CEOs like Jamie Dimon of JP Morgan Chase testified about their lending, rates of pay for frontline employees, and other issues.

In October, Sen. Elizabeth Warren called on the Securities and Exchange Commission to investigate a pattern of suspicious trades from top Federal Reserve officials to determine whether federal rules against insider trading were broken. Reinforcing its own calls for action, Better Markets supported calls by Senator Warren and others to investigate a suspicious pattern of trades by Fed officials, violated the public trust if not Fed policy and the law.

And, in December, after a prolonged dispute that threatened to disrupt the financial markets, Congress passed an extension of the debt limit, ensuring the U.S. Government will continue to make good on its obligations, and averted a government shut down by providing funding for the government until February , 2022.