February 28, 2022

February Month in Review Newsletter

This month we celebrate Black History month with several diverse and historic nominees to the Federal Reserve Board, including economists Lisa Cook and Philip Jefferson. While rarely discussed or acknowledged, discrimination and racism have contributed to deeply entrenched racial inequality in our economic and financial systems. Because financial regulators have a critical role to play in addressing that inequality, much greater diversity among those financial regulators, including at the Fed, is needed and long overdue. (See Better Markets’ work in addressing racial economic inequality here.)

In addition to the historic nominations of Drs. Cook and Jefferson, we also saw the nominations of Sarah Bloom Raskin for the Vice Chair of Supervision and current Fed Governor Lael Brainard for Vice Chair, making this Fed board, if all nominees are confirmed, the most diverse ever!

Unfortunately, this process has been tainted by baseless and divisive attacks against Dr. Cook and Ms. Raskin. Because the nominees are so well-qualified and experienced, indeed, more so than some of the current members of the Fed, opponents have resorted to misrepresentations, distortions and ideological attacks.

These attacks, including from opponents at the Senate Banking Committee hearing earlier this month, hare nothing less than a threat to the Fed’s independence and risk another financial crash. The Fed is required by law to evaluate risks to banks’ safety and soundness and to financial stability and facilitate mitigation of those risks regardless of source or origin. That is supposed to also be done regardless of—indeed, despite— political preferences anyone may have, including very powerful Senators. That’s what it means for the Fed to be independent: it makes decisions on risk, no one else. That is the linchpin to safety and soundness as well as to preventing financial crashes.

As was made clear at the hearing, Senators critical of the nominees want the Fed to create a special exemption for any risks arising from the fossil fuel industry, in effect insisting on a de facto prohibition on the Fed from even looking at risks arising from climate. That is nothing less than those Senators politicizing the Fed by picking winners and losers and carving out special treatment for their special interests.

That not only seriously undermines the Fed’s independence, but it also increases the risk of a financial crash. Politically unregulated risks don’t go away; they get bigger and more dangerous until they explode. That is what happened when politicians in the 1990s prohibited the regulation of derivatives, which then materially contributed to causing, intensifying, and spreading the 2008 financial crash.

No one should be able to tell the Fed what risks to evaluate or not. That’s dangerous, wrong, violates the law, and threatens the American people with another devastating financial crash.

Despite this effort to stop the confirmation of President Biden’s full slate of Fed nominees, they are all well qualified and deserve to be confirmed. Read more in our full fact check memo here.

In other news, the HBO MAX original two-part series Gaming Wall Street will premiere on March 3 featuring Better Markets’ own Dennis Kelleher. Gaming Wall Street looks at the general lack of transparency in the markets, payment for order flow, and Wall Street’s long history of offenses and crimes.

We’re also excited about watching the upcoming March 3 episode of The Problem with Jon Stewart show on Apple TV+ where he discusses how our markets work or, more accurately, don’t work for retail investors and the buy side. He also focuses on conflicts of interest and payment for order flow, amazingly making that complicated subject informative, entertaining and, yes, even funny at times!

There’s lots more going on and much more coming up in the next month so regularly check our website www.bettermarkets.org and look out for future Newsletters. Also, be sure to follow us on our social channels: Twitter, Facebook, and LinkedIn, and feel free to send comments or questions to mabdelmesih@bettermarkets.org.

Thank you again for your interest in and support of Better Markets!

Kindly,

Maryan

Maryan Abdelmesih
Director of Strategic Partnerships and Development, Better Markets

Focus On…

FACT SHEET RELEASE: Financial Risks related to Climate Change Must be Addressed—Republicans, Democrats, Wall Street Banks, Finance Leaders Agree

There is widespread, mainstream, consensus from Washington to Wall Street and beyond that climate change poses serious and dangerous risks to the financial system and the economy. They may have different ideas about how and how fast to address those risks, but they agree on the risks and that they must be addressed. Our new Fact Sheet clearly shows the broad consensus that climate-related financial risks are real and must be addressed. Read More >

Activities at the Regulatory Agencies

Better Markets Applauds Standards for Addressing Climate-Related Financial Risks

As we state above, climate-related financial risks ARE real and must be addressed. This month, Better Markets submitted two Comment Letters, one to the Office of the Comptroller of Currency (OCC), and the other to the Basel Committee on Banking Supervision. Both comment letters are in response to their proposed principles for the effective management and supervision of climate-related financial risks. Read about the OCC letter here. And the Basel Committee letter here.

Better Markets Urges the DOJ to Work with the Banking Regulatory Agencies to Strengthen the Bank Merger Review Guidelines

Better Markets submitted a comment letter to the Antitrust Division of the Department of Justice on their request for comment on enhancing the 1995 Bank Merger Competitive Review Guidelines. An insufficient merger review process has contributed to massive consolidation in the banking industry over the last three and a half decades. Large mergers not only increase financial stability risks, but they can also harm hardworking Americans and small businesses, which can then lead to a reduction or access in consumer banking services, or increase the cost associated with them. Read More >

Action in the Federal Courts

Spotlight on the Supreme Court

Every term, the U.S. Supreme Court decides cases addressing 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 addressing financial regulation, the rights of investors to seek relief in court, and administrative law—a seemingly technical legal topic that can nevertheless 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 the two other cases of particular interest that we’re watching that the Court may decide any day:

American Hospital Assoc. v. Becerra, 967 F.3d 818 (2020) (S. Ct. Docket No. 20-1114) (oral argument held November 30, 2021) – How much deference will the Court afford to an agency’s interpretation of the law?
Badgerow v. Walters, 975 F.3d 469 (5th Cir. 2020) (S. Ct. Docket No. 20-1143) (oral argument held November 2, 2021) – Which courts (state or f

Other Cases of Interest in the Federal Courts

CLEARING THE WAY FOR PREDATORY RENT-A-BANK SCHEMES – Two related decisions issued on February 8, 2022, by the federal district court in the Northern District of California, upholding an OCC rule and a similar FDIC rule that clear the way for rent-a-bank schemes insulating nonbanks from state consumer protection laws (California v. FDIC, 2022 WL 377403 (N.D. Cal. Feb. 8, 2022); see also California v. OCC, No. 4:20cv5200, Order Resolving Cross Motions for Summary Judgment (N.D. Cal. Feb. 8, 2022)).

Why it matters: For years, national banks and federally insured state-chartered banks have been able to override state consumer protection laws that prohibit outrageously high interest rates on consumer loans. Under the doctrine of preemption, as long as a federally regulated bank’s interest rates comply with the laws in their home state, they can charge those same rates to borrowers in every other state regardless of the interest rate limits applicable in those other states. However, in 2015 the Second Circuit ruled that this preemption of state law does not apply to an independent, nonbank debt collector that buys loans from federally regulated banks. Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015). The OCC and the FDIC adopted rules supposedly aimed at eliminating the uncertainty created by the Madden case. Those rules essentially override the Madden decision by flatly providing that interest on a loan that is permissible under federal law shall not be affected by the sale, assignment, or other transfer of the loan.
In two separate actions, various states challenged the rules in federal court, driven by the well-founded concern that non-bank lenders can form sham ‘rent-a-bank’ partnerships with national banks designed to evade state law. Under the rent-a-bank schemes, a third-party nonbank teams up with a federally regulated bank; the bank originates the loan in question but subsequently transfers the loan to the third-party; and the third-party continues to charge the bank’s interest rate, even if that rate exceeds an interest rate cap in the state where the third-party is located.
What we did: Better Markets filed a comment letter arguing that this regulatory approach would help expose millions of consumers to gouging, sky-high interest rates.
Status: Unfortunately, the district court rejected the states’ challenges in both cases. The court held that the rules were not manifestly contrary to the applicable federal statutes—the National Bank Act and the Federal Deposit Insurance Act—and that they were not arbitrary and capricious. The upshot is that nonbank financial firms—ranging from online lenders to payday loan sharks and debt collectors—have a clear path to follow as they pursue their “rent-a-bank” schemes, piggybacking on the charters of federally regulated banks to evade state laws.

SEEKING TO HOLD MARKET MANIPULATORS ACCOUNTABLE – A class-action lawsuit on appeal in the 10th 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 district court in Utah rejected the claims as a matter of law, relying in part 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.

What we did: On February 2, 2022, Better Markets, joined by the Consumer Federal of America, filed an amicus brief explaining not only the legal errors in the district court’s decision but also the more far-reaching harm that the decision threatens unless it is reversed.
In our brief, we showed that the securities laws and rules were written broadly to cover fraud and manipulation as two separate forms of illegal conduct, driving home the point that manipulation schemes distort share prices and inflict harm on investors regardless of whether they were carried out using lies or traditional forms of deceit. We also highlight the damaging impact that the district court’s decision will have unless it is reversed. The plaintiffs will almost certainly be left without any remedy for their losses, and over the long-term, market manipulators will be able to fashion schemes that skirt the law but nevertheless wreak havoc in the markets and inflict untold harm among investors.
Why it matters: Our securities markets are already viewed as unfair and rigged in many ways, and a ruling that immunizes a broad swath of market manipulation schemes is the last thing that investors or the markets really need. That’s why we urged the Tenth Circuit to reverse the district court and allow the claims to be heard.

ATTEMPTING TO FORCE ARBITRATION ON SHAREHOLDERS – 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 that, 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 corporate lawbreaking by limiting the legal rights of shareholders to enjoin it and hold those responsible accountable. Given that shareholders are the owners of public companies, who 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.
Status: 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.

TRYING TO MAKE THE MARKETS LESS RIGGED – 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.

What we did: 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.
Why it matters: 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.
Status: 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.

SEEKING TRANSPARENCY ABOUT DIVERSITY ON CORPORATE BOARDS – 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: 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.
Status: Briefing in the case is 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. Briefing is underway.

ATTEMPTING TO TEAR DOWN EVEN MODEST PROTECTIONS FOR RETIREMENT SAVERS – Two new challenges to the Department of Labor’s December 2020 best interest rule, Federation of Americans for Consumer Choice v. DOL (N.D. Tex. filed Feb. 2, 2022) and American Securities Ass’n v. DOL (M.D. Fla. filed Feb. 9, 2022).

Why it matters: For decades, many financial advisers subject to powerful conflicts of interest have been enriching themselves at the expense of their clients by recommending overpriced, poor-performing, and overly risky investment products. The damage has amounted to tens of billions of dollars a year, a cost that is especially harmful to everyday Americans struggling to save and invest for a decent and dignified retirement. Much of the damage has been done because old Department of Labor rules have long provided that the law protecting investors from conflicted advice doesn’t apply when an adviser tells a client they should roll their entire nest egg out of a 401(k) account and into other investments, such as annuities that reward advisers with huge commissions. For over a decade, the DOL has been trying to develop new rules to close those gaps and provide better protections for retirement savers. In 2016, it issued a set of strong rules but they were struck down by the U.S. Court of Appeals for the Fifth Circuit—the only court, among half a dozen federal courts to hear challenges to the rules, that accepted industry’s arguments.
Under the Trump Administration, in December 2020, the DOL came up with a watered-down set of protections that left major gaps intact. However, those rules at least made clear that “rollovers” could be covered under the law, potentially requiring an adviser to make such recommendations only if they were in the client’s best interest.
Status: Members of the financial services industry, and insurance agents, in particular, have challenged those provisions in federal courts in Texas and Florida. They are fighting desperately to protect an enormous revenue stream by arguing that the DOL lacks the authority to subject rollover recommendations to the “best interest” standard. The cases are just getting underway. Meanwhile, Better Markets and others advocate for strong investor protection hope and expect that this Spring, the DOL will issue new rules that finally close huge loopholes in the fiduciary standard that should apply to all advisers providing advice to retirement savers, as Congress intended under ERISA.

Hill Update

February Congressional Activity is Slow, Focused on Appropriations

The House and the Senate both spent some of February in recess, with Members of Congress back in their home states for the week of President’s Day. Both the House and the Senate will next be back in session on Monday, February 28th.

The main focus of Congressional activity during the month was the passage of appropriations legislation to keep the government funded – the current continuing resolution will expire in mid-March, at which point Congress will need to act again to keep the government open. The Senate also passed symbolic, non-binding legislation to rebuke Russia for its aggression against Ukraine.

Senate Banking Committee Hearing for Federal Reserve Nominees

On February 3, the Senate Banking Committee held a hearing to consider the nominations of Sarah Bloom Raskin to be Vice Chairman for Supervision at the Federal Reserve, Dr. Lisa Cook to be a Member of the Board of Governors of the Federal Reserve, and Dr. Philip Jefferson to be a Member of the Board of Governors of the Federal Reserve. These three individuals are well-qualified for their positions and Better Markets is enthusiastic about their nominations.

Much of the debate at the hearing focused on Republican criticism of Sarah Bloom Raskin’s past statements on climate change. Ranking Member Pat Toomey (R-PA) said that he believed Raskin would force the Federal Reserve to pick winners and losers among industries and allocate capital away from the fossil fuel sector. Raskin said she did not believe it was the role of the Federal Reserve to make such or to pick winners and losers in the economy.

Ranking Member Toomey also criticized Dr. Cook’s past comments on inflation, suggesting that her views on how the Federal Reserve should fight inflation are unclear. Dr. Cook responded that she would be guided by the economic data when considering inflation challenges.

Republicans Block Consideration of Critical Nominees

In a shameful move, Republican members of the Senate Banking Committee boycotted a scheduled vote on nominees to the Federal Reserve Board and the Federal Housing Finance Agency, forcing the Committee to postpone its vote due to the lack of a quorum.

Five nominees to the Federal Reserve – including the current Chairman, Jerome Powell—and one nominee for the FHFA were scheduled to be voted on at the Senate Banking Committee hearing on February 15. Under the current Senate rules, Committees cannot hold votes on nominees without a quorum present; Ranking Member Toomey said that Republicans would not support moving forward with a vote until they receive additional answers from Fed nominee Sarah Bloom Raskin.

Senate Banking Committee Chairman Sherrod Brown (D-OH) led the Committee’s Democratic members in holding an unofficial vote of 12-0 in support of advancing all six nominees, although Senator Warren (D-MA) noted her opposition to Jerome Powell’s renomination to serve as Federal Reserve Board Chairman.

Senate Banking Committee Hearing on Stablecoins

On February 15, the Senate Banking Committee held a hearing on stablecoins, at which Chairman Brown (D-OH) said there is a need for a regulatory framework to address the risks posed by these cryptocurrencies, which are pegged to a national currency like the U.S. dollar. The U.S. Treasury Department’s Under Secretary for Domestic Finance, Nellie Liang testified on a recent report issued by the President’s Working Group on Financial Markets about stablecoins.

Chairman Brown cited recent ads during the Super Bowl viewed by hundreds of millions of Americans trying to promote cryptocurrencies and suggested that retail investors will be at risk of scams, fraud and thefts if they plunge into the confusing and fast-moving crypto markets without proper oversight by Federal regulators.