Thanks for joining us again this month to read about what we’ve been working on in June.
First, I am pleased to announce that Doug Walker has joined us as Director of Communications. Doug brings over 20 years of experience managing advocacy communications and serving as a communications executive in the public sector. He has led communications operations in higher education and the nonprofit/NGO space. He will be working closely with Dennis Kelleher, our Co-founder, President and CEO, and the rest of the Better Markets team.
Since you last heard from us, we applauded the Biden administration’s budget, which requested increases for the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) (read the press release here). Following pointed questions from Sen. Elizabeth Warren about banks collecting overdraft fees during COVID, we saw Ally Bank eliminate all overdraft fees effective immediately (read the press release here).
In addition to calls for comment letters, the SEC has been active this month. The agency removed the Chair of the Public Company Accounting Oversight Board (PCAOB) and announced its plan to replace all the current members, which is a huge victory (read the press release here). The SEC also announced it will be re-examining the rules governing executive stock trading plans and considering a number of possible reforms, including greater transparency. (read the press release here).
There’s a lot going on and much more coming up in the next month so look out for future Newsletters for more exciting developments. In the meantime, be sure to follow us on our social channels: Twitter, Facebook, and LinkedIn.
Thank you again for your interest in and support of Better Markets!
Director of Development, Better Markets
Exposing De-Regulatory Myths in Consumer Financial Protection
Better Markets released a blog post debunking three prominent de-regulatory myths in financial regulation. As new leadership is appointed at the regulatory agencies, now is a good time to reflect on some of the most egregious mistakes of the prior administration in the area of financial regulation—in short, to remember what not to do when it comes to protecting investors and consumers in our financial markets. Part of that exercise is piercing through the myths advanced again and again by the regulated industry and its allies in policymaking positions to justify de-regulation and weak regulation.
That’s what Stephen Hall, Legal Director and Securities Specialist, with research assistance by Michael Hughes, Research and Program Assistant, have done. The blog refutes three fictions that resurged under the Trump administration, particularly at the Consumer Financial Protection Bureau (“CFPB”). In reality, and contrary to some of the financial industry’s favorite talking points, 1) regulation protects consumers without depriving them of access to credit; 2) technology poses serious risks, as well as benefits in finance and it must be accompanied by strong guardrails to ensure that it doesn’t upend markets and harm investors; and 3) state regulation has a vital role to play in consumer protection and it should not be subject to sweeping preemption.
Debunking myths about regulation is not merely an intellectual exercise. Policymakers guided by these theories cause direct, real-world harm to vulnerable consumers by repealing important protections, creating weak new rules that cater to the industry, and undermining enforcement programs. We must therefore constantly expose and oppose these false narratives about the role of financial regulation, and we urge the new leaders at the regulatory agencies to reject them as they revitalize consumer and investor protection.
Activities at the Regulatory Agencies
SEC Needs to Quickly Finalize the “Universal Proxy” Rule
Better Markets filed a comment letter urging the SEC to finalize and adopt a “universal proxy” rule as soon as possible.
Earlier this month, Better Markets filed a supplementary comment letter on a proposal by the SEC to establish a universal proxy requirement for most contested corporate elections. We support the creation of a universal proxy requirement, which would improve corporate governance and accountability, and we urge the SEC to finalize and adopt this proposal as soon as possible.
The SEC initially issued a proposal in 2016 that would have made progress on the universal proxy. While the proposal received support from Better Markets and many other investor advocates, it was never implemented.
Why it matters? The current system is irrational and unfair. It undermines one of the most important mechanisms available to investors for holding management accountable and charting the right course for the companies they own. As more and more investors push for action on ESG issues but often meet with resistance from incumbent management, proxy reform is becoming increasingly important to ensure shareholders have a full and fair opportunity to express their views and influence outcomes in corporate elections.
What we said. Now that the SEC is under new leadership, it has an opportunity to revisit, revise, and implement a “universal proxy” rule to ensure that shareholders that vote by proxy are able to exercise their full voting rights.
Bottom line. Given that the SEC exists to protect investors, not incumbent management, the SEC needs to begin the process of empowering shareholders. We urge the SEC to move quickly to correct this gap in our current corporate governance framework and implement the proposal, with some adjustments, immediately.
Read more in our press release.
Better Markets Responded to SEC Request for Public Input on Climate Disclosures
Earlier this month, Better Markets filed a comment letter in response to an SEC request for public input on climate change-related disclosures. Better Markets applauds the SEC for beginning the process of engaging on this critical issue.
Climate change will have a drastic impact on every aspect of our economy and promises to disrupt the operations of countless businesses. More frequent and less predictable weather events will cause billions in damages, while the process of decarbonization will devalue assets. In order to make sound and informed choices in the face of these urgent challenges, investors must have access to accurate information about companies’ operations and the risks they face. A climate change disclosure regime established by the SEC is essential so that investors can allocate their capital efficiently, in accordance with their values, and with an eye toward motivating the private sector to address climate change more effectively.
Better Markets also joined more than 30 other prominent public interest groups in crafting and submitting an additional comment letter on this issue.
Why it matters? Without robust and standardized disclosures, it will be impossible for investors to assess these risks and take them into account as they choose where to invest their money. The SEC must acknowledge the obvious materiality of climate risks and implement a uniform disclosure regime as soon as possible.
What we said. We’re optimistic, as the SEC’s request clearly signals the intention of the agency to move forward with new climate-related disclosure requirements. However, addressing climate risk disclosures should be the beginning, not the end, of a broader SEC initiative to ensure that investors are provided with meaningful, accurate, and usable disclosures on all ESG issues—those that relate not only to the environment but also to social justice and corporate governance. How companies address all ESG issues affects their bottom line, and this information accordingly would be material to a profit-seeking investor.
Bottom line. We urge the agency to create robust mandatory climate-related disclosures that will allow investors and firms to come to terms with the many risks presented by our rapidly changing climate. To achieve these goals, the disclosures must be accurate, meaningful, comprehensive, comparable, and effective at fully informing investors.
Read more in our press release.
Activity in the Federal Courts
More Delay as Shareholders Seek Justice for Goldman Sach’s Crisis-Era Fraud
On Monday, June 21, the U.S. Supreme Court issued its decision in Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System. A group of Goldman shareholders, including pension funds, are seeking to hold the bank accountable for its fraud through a class action. What’s at stake, in this case, is whether Goldman Sachs and other corporations can lie to investors and avoid accountability to their victims in a class action.
- Goldman Sachs affirmatively stated to investors that it had “extensive procedures and controls in place” to manage conflicts of interest and reassured investors that their clients “always come first.” Those statements were false and misleading as clearly revealed by Goldman’s egregious actions perpetrating one of the most shameless frauds in the history of the 2008 financial crisis. It packaged complex mortgage-backed securities designed to fail and bet against them, even as it touted them to investors as a good deal. But the first challenge for the shareholder plaintiffs is to persuade the court to certify the case as a class action.
- The Court decided on two issues. First, it confirmed that the generic nature of misrepresentation is something a trial court should consider as it decides whether a misrepresentation about a company could have affected the market price of the company’s stock. Second, it correctly held that the burden of persuasion falls on the defendant (Goldman in this case) when it comes to price impact—it is their duty to show, by a preponderance of the evidence if possible, that the misrepresentations did not have a price impact. However, the Court also decided to send the case back to the Second Circuit, since it wasn’t convinced the lower court took the supposedly generic nature of Goldman’s misrepresentations properly into account when it allowed the case to go forward.
- As we argued in our Amicus brief, given Goldman’s history of mishandling its conflicts of interest even prior to the financial crisis, the market would certainly have been influenced and comforted by Goldman’s false assurances that it carefully controlled such conflicts. After all, that presumably was Goldman’s intent in making the statement to investors in the first place. Thus, the issue of price impact should be resolved in the shareholders’ favor. The Second Circuit now has a chance to put this issue to rest and give the shareholders their day in court, where we will again argue for that outcome. If the Second Circuit gets it wrong, then Goldman gets a free pass for its fraud.
Better Markets continues to track a number of important cases involving financial regulation:
A lawsuit (Thomas v. SEC) challenging the SEC’s flawed whistleblower rule changes adopted by the Trump administration, which threaten to reduce incentives for whistleblowers to come forward with critical evidence of securities law violations.
Why it matters? The Dodd-Frank Act required the SEC to establish a strong whistleblower program to encourage people, particularly insiders at financial firms, to come forward with often difficult to obtain evidence of illegal conduct. The program entitles whistleblowers to an award of between 10% and 30% of the monetary sanctions collected in actions brought by the SEC and related actions brought by certain other regulatory and law enforcement authorities.
This program has proven to be an enormous success, enabling the SEC to recover billions of dollars in penalties and hundreds of millions of dollars in disgorgement for the benefit of injured investors. In fact, we called it “A $2 Billion Success Story” in a White Paper. Unfortunately, last year, the SEC weakened the program by issuing a rule that gave the agency broad discretion to limit the size of awards. It also created new hurdles for whistleblowers seeking awards where their evidence helped another agency bring a successful enforcement action, in violation of the law.
That’s why we applauded a whistleblower advocate’s lawsuit to overturn the deeply flawed and legally baseless rule.
A lawsuit (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. Mandatory arbitration takes all that away and forces defrauded investors and other victims into secret, unfair, and biased arbitrations. Those proceedings are generally run by an industry self-regulatory organization (SRO) which, no surprise, is often biased and consistently favors the industry. Investors and consumers are typically forced to take their complaints to those forced arbitrations, but they rarely obtain meaningful recovery.
A 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.
A lawsuit (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 more and bigger fees and higher interest rates, what we call a “debtor’s prison without walls.” Dennis wrote an 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.
June was a busy month for Congressional hearings on various financial issues of importance act to Main Street Americans. Better Markets monitored many of the hearings, submitted suggested questions for consideration, and shared expertise and resources as appropriate. We also provided insight and analysis via social media, letters to appropriate congressional representatives, and fact sheets.
House of Representatives Passes Package of Bills to Address Climate Change, Give Investors More Information About ESG Impacts
On June 17, the House of Representatives voted 215-214 to pass H.R. 1187, the Corporate Governance Improvement and Investor Protection Act. This legislation is a comprehensive package of five individual bills that collectively improve investor protection by requiring publicly traded companies to be more transparent about their activities.
By requiring that companies provide environmental, social, and governance information about their operations, investors are better able to hold companies to account for their environmental, social and governance (ESG) activities.
H.R. 1187, introduced by Rep. Juan Vargas (CA-51), would establish within the SEC a new Sustainable Finance Advisory Committee that would recommend to SEC staff and commissioners policies and best practices to facilitate the flow of capital to environmentally sustainable investments. It would also require publicly traded companies to disclose specific ESG activities to their shareholders.
Incorporated into the final version of H.R. 1187 that passed the House was legislation by Rep. Bill Foster entitled the Shareholder Political Transparency Act, which requires publicly traded companies to report to the SEC details about their political spending, including so-called ‘dark money’ that groups donate to organizations to avoid public scrutiny.
Additionally, the Greater Accountability in Pay Act, introduced by Rep. Nydia Velazquez would help close the racial and gender pay gap by requiring companies to report more information about compensation for corporate executives.
Finally, two additional bills were included in the package: Rep. Cindy Axne’s Disclosure of Tax Heavens and Offshoring Act, which requires companies to share with regulators information about their use of overseas tax havens, and Rep. Sean Casten’s Climate Risk Disclosure Act, which requires companies to disclose more information about how exposed they are to climate-related risks and how increased climate-related disasters may impact their bottom lines. Public companies currently don’t have to reveal any such information and, as a result, investors aren’t able to properly calculate the impact of climate change on their investments.
This legislation follows recent moves by the SEC to strengthen its disclosure rules about climate-related risks; Better Markets recently filed a comment letter with the SEC asking the regulator to establish a new disclosure framework for climate-related risks that companies face.
Better Markets has long advocated for commonsense SEC rules that require companies to be honest with their investors and disclose comprehensive, accurate, and useful information about their operations. That’s why Better Markets led the fight against the Trump Administration’s attacks on ESG disclosures and has worked closely with Biden Administration regulators at the SEC and other agencies to ensure that climate disclosures such as those sought by Rep. Casten go hand-in-hand with a broader set of disclosure requirements that cover information about other social and corporate governance issues, including diversity and compensation.
House Financial Services Committee Considers Legislation Requiring Megabank Disclosures of Important Data
On Wednesday, June 23, 2021, the House Financial Services Committee met to debate legislation that would require the country’s largest banks to disclose new data about their operations.
H.R. 3948, the Greater Supervision in Banking (G-SIB) Act, introduced by Rep. Pressley of Massachusetts, would require U.S. banks that have been designated by the Federal Reserve as “global systemically important bank holding companies” or G-SIBs, to present detailed reports to the Fed each year.
Regulators and the public alike need more information about the operations of the G-SIBs, and Better Markets applauds the House Financial Services Committee and Rep. Pressley for confronting this important issue.
The megabanks would be required to share information about their size, complexity, compensation for bank executives compared to the banks’ average employees, support for Minority Depository Institutions and reach their climate emissions reduction targets and improve the diversity of their boards.
Since they were bailed out by American taxpayers to the tune of trillions of dollars during the 2008 financial crisis, America’s megabanks have only grown larger and more complex. Today, the country’s six largest banks – Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs, Morgan Stanley, and Wells Fargo – each have over $1 trillion in assets. And yet, although they play a significant role in the economic livelihood of every American, these banks are not required to publicly disclose information about the impact of their operations on the society in which they operate.
These six megabanks were in the spotlight in May when their CEOs testified before the House Financial Services Committee and the Senate Banking Committee. As usual, Better Markets provided commentary and analysis of the hearings with links to our resources via Twitter @BetterMarkets, as well as in our May newsletter. Additionally, a Better Markets analysis of the operations of these six Wall Street giants details nearly 400 major legal actions taken by federal regulators against them over the past 20+ years.
In Case You Missed It
Check out these news articles that provide relevant and informative information on topics of interest to Better Markets and its staff.
Please note you may need a paid subscription to view certain articles below.
Stress tests passed, banks are primed to pay shareholders
The New York Times, June 24, 2021
SEC Chair Gensler is taking a deeper look at ESG investing issues0
CNBC, June 23, 2021
OCC, states declare cease-fire in fintech charter case. Will it hold?
American Banker, June 18, 2021
SEC Delays Ruling on Bitcoin ETF in Blow to Crypto Traders
Bloomberg, June 16, 2021