December 3, 2021

November 2021 Month in Review Newsletter

Dear Friends,

Longstanding discrimination, mistreatment, and predatory practices by the financial services sector—propagated and perpetuated by racist beliefs, narratives, laws, regulations, policies, and practices—have contributed—and continue to contribute—to deeply entrenched structural inequities that profoundly undermine the economic status of people of color. This will not be easily undone, even if the federal financial regulatory agencies and the financial firms that they supervise and regulate commit to more meaningful engagement and actions. Nonetheless, such a concerted commitment is badly needed and long overdue.

Because of its critical role in the availability of cash, capital, and credit via savings and checking accounts, credit and debit cards, and loans of all types (auto, mortgages, small business, personal, student, payday, commercial and industrial, etc.), the financial industry impacts the economic opportunity, quality of life, and standard of living of virtually every American. The policies, practices, and decisions to discriminate in providing those services and products have deprived generations of communities of color of opportunities made available to other Americans. As a result, Black Americans, Hispanic Americans, and other Americans of color are less likely to have fair and equitable access to cash, capital, and credit on commercially reasonable and competitive terms. Therefore, they are more likely to be underbanked or unbanked, less likely to have significant savings and wealth, less likely to own a home or a small business, and more likely to be targeted and victimized by predatory financial products practices.

This indefensible discrimination and resulting racial economic inequality have not only limited economic opportunities for many people of color and undermined their quality of life, it has also put in place a structurally regressive financial and economic system. That perpetuates tremendous and growing economic inequality in the United States, which has, among other deleterious consequences, deprived the country of achieving its maximum economic potential. The wealth gap between white and Black and Hispanic households, which is substantial and has been growing for decades, is the clearest evidence of that.

Better Markets has released the first of two reports that begin to address these intolerable disparities. The first, Addressing Racial Economic Inequality Through the Banking System, identifies steps the Federal Reserve and other federal banking regulatory agencies must take to begin to level the playing field and address economic inequality and discrimination in the banking sector. The report also discusses the many self-described efforts and “commitments” being made by Wall Street’s biggest banks to address and promote racial equity and inclusion. The second report, due out next week, will explore actions the Securities and Exchange Commission should undertake to address similar race-based inequalities in the capital markets.

Achieving our vision of Better Banks, Better Businesses, Better Jobs, Better Economic Growth, Better Lives, and Better Communities requires fighting for more and better attention to racial economic disparities by the SEC, the federal banking regulators, as well as the markets and banks themselves.

We don’t alone undertake the fight for a stronger, more equitable, more inclusive financial system that supports Main Street families, workers, investors, consumers, small businesses, and community banks. Many thanks to those of you who showed up for our nonprofit organization on Giving Tuesday earlier this week and throughout the year. In addition to being a government watchdog, making sure the financial regulatory agencies put the public interest first, we are a counterweight to Wall Street’s army of lobbyists and allies who seek to put their profits first above the public interest.

We couldn’t do that without our supporters. We’re grateful and encouraged that you showed up for Main Street businesses and banks and added your voice to our fight for jobs, broad-based growth and prosperity, and racial justice and serious attention to climate change in the financial system.

There’s a lot going on and much more coming up in the next month, so check out our new website www.bettermarkets.org regularly 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 Maryan Abdelmesih at mabdelmesih@bettermarkets.com.

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

Best, Dennis

Dennis Kelleher

Co-founder, President, and CEO, Better Markets

FOCUS ON…

President Biden’s Nominations for the Federal Reserve

As followers of Better Markets know, we talk about the Fed a lot and have for years. That’s because we view the Fed as the Supreme Court of financial and economic policymaking and its Chair as equivalent to the Chief Justice (although, arguably, more powerful). Its importance to the financial and economic well-being of the country and virtually every American cannot be overstated. Moreover, that role has been greatly amplified due to the Fed’s actions in 2020 in response to the pandemic-caused economic shutdown and near-financial collapse. However, too few people understand the Fed, why it’s so important, or the impact it has on the country.

That’s why we issued a lengthy and detailed report in August entitled “Should Fed Chair Powell Be Reappointed?” (and why we issued two reports in 2020 on the Fed’s deregulation, available here and here). We wanted more people to know about the Fed and its Chair, which is also why we advocated for a comprehensive, thorough, and substantive evaluation of the candidates for Chair, including the current Chair. While many focused on the Fed for the first time in 2021 in connection with the Chair position, we have been focused on the Fed since Better Markets was founded. Indeed, one of the very first rulemaking meetings we had was with the Fed in October 2010.

On November 22, President Biden announced that he was reappointing Jay Powell as Fed Chair for another four year term and was elevating Fed Governor Lael Brainard to the position of Vice Chair (which Richard Clarida is vacating in January). 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 U.S. and the world. Given the importance of the Fed, the current precarious economic situation, and the likely coming monetary policy pivots, we hope those nominations will be announced soon and that the Senate quickly conducts the confirmation process for all the nominees, which are critical to the path of monetary policy and the supervision and regulation of the banking system in the U.S.

Better Markets Report: Climate Change and the Banking System

The reality of climate change is indisputable. Average global temperatures are rising, droughts are occurring in more locations and lasting longer, and tropical storms are becoming more severe, all causing increased economic and personal damage. Without meaningful action, this is just the beginning. The fallout could be catastrophic to the economy and people’s lives and livelihoods.

To date, banks have not been doing enough to manage and account for the risks of climate change or to support the transition towards a more sustainable economy. The Federal Reserve (the Fed) is best suited to meaningfully address climate change-related risks but has been woefully slow in doing so. The Fed must lead efforts related to banking supervision and regulation to address climate-related risks along with the Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC).

Action is needed now to ensure the resiliency of our banking system and stability of the financial system as a whole in the face of climate change. The climate crisis materially threatens to impact every aspect of the economy and financial system, which means addressing climate risk is within the Fed’s mandate. The Fed—along with the other regulatory agencies and FSOC—has to start taking those threats seriously and acting accordingly and fast. Better Markets’ ongoing work addressing climate change in finance is featured on a new web page. Read the full Climate Change and the Banking System report here

ACTIVITIES AT THE REGULATORY AGENCIES

Joint Letter Requests Review of Harms of CME Group Inc.’s Potential Merger with Cboe and a Study on Existing Concentration Problems

Better Markets and the Open Markets Institute jointly sent a letter to federal antitrust and financial regulators raising serious concerns about the CME Group’s near-monopoly in derivatives markets and the recently reported potential merger between the CME Group and Cboe Global Markets. The joint letter asks the Justice Department Antitrust Division, Federal Trade Commission, Securities and Exchange Commission, and Commodities Futures Trading Commission to assess the potential anti-competitive burdens that might be associated with such a merger. The letter also asks the agencies to examine the existing level of concentration at derivatives exchanges and the adverse impact of fifteen years of consolidation. Read more >>

Better Markets Urges CFTC to Remedy Deficient Position Limits Rulemaking

Better Markets Legal Director and Securities Specialist Stephen Hall sent a letter to Acting Commodities Futures Trading Commission Chair Rostin Behnam urging the agency to revisit and repair its rule on position limits. The CFTC’s position limits rule, issued earlier this year, was far too weak and the agency must move quickly to shore it up. If the rule isn’t strengthened, businesses and consumers will continue to suffer, in effect paying a ‘speculation tax’ on essential goods, from groceries to gas. Read more >>

Better Markets Urges SEC to Adopt Strong Clawback Rule to Force Executives to Return Undeserved Compensation

This important reform not only serves to limit systemic risk by curbing the impulse among executives to pursue short-sighted business strategies or manipulative accounting approaches for personal gain, it also vindicates the basic principle that it is wrong for corporate leaders to retain compensation—especially performance-based compensation—that they do not deserve. Read more >>

Actions in the Federal Courts

Spotlight on the Supreme Court

On Monday, December 6, 2021, the U.S. Supreme Court will hear oral argument in an important case titled Hughes v. Northwestern University (S. Ct. Docket No. 19-1401). The case provides the Court with an opportunity to improve the lives of countless retirement savers by giving them a chance to hold those who administer retirement plans accountable when they breach their fiduciary duties. It’s all the more important as the retirement crisis in this country intensifies and Americans increasingly rely on prudent administration of their 401(k)’s to close the gap between their savings and what they’ll need to live in retirement.

Hughes and the other plaintiffs allege that they suffered losses because their retirement plan administrators failed to cull investment options with bloated fees and poor performance. That was a breach of the administrator’s duty to monitor plan investments and remove the imprudent ones. However, the federal district court and the Seventh Circuit tossed them out of court, holding in part that the plan fiduciaries were absolved because the plan included at least some prudent investment options among the bewildering array of 200 available choices.

Better Markets profiled the case in its recent Supreme Court report. We also joined in an amicus brief led by AARP in which we urged the Supreme Court to reverse the lower court’s decision, restore the plaintiffs’ claims, and give them a chance to prove their case. As we said in the brief, the decision below misinterprets the duty to monitor investments and applies an unfair and overly stringent pleading standard. A retirement plan administrator does not satisfy the high fiduciary duty by simply offering up a huge variety of options and leaving it to the participants (who will almost always lack the financial sophistication and expertise of the financial professionals who administer ERISA plans) to fend for themselves as they try to avoid the expensive and poorly performing choices. The Seventh Circuit’s reasoning essentially introduces an element of caveat emptor to ERISA plans that Congress specifically intended to eliminate.

The data shows that such overpriced investments, even with seemingly modest fee rates, can dramatically reduce retirement savings over the long term. The evidence also shows that private lawsuits, expressly authorized under ERISA, have proven to be an effective means of curbing such fiduciary breaches and bringing fees down across the industry.

If the Supreme Court affirms dismissal of the plaintiffs’ complaint in this case, those victims of fiduciary misconduct will suffer irreparable harm. More broadly, other retirement plan participants sustaining similar forms of injury in the future will face higher hurdles to obtain relief. The upshot would be doubly damaging: It would relax the incentives that are necessary to ensure compliance with the high fiduciary standard embodied in ERISA, and it would thwart Congress’s goal of affording victims of abuse under ERISA ready access to the federal courts to seek relief.

We’ll be listening with interest as the Court hears argument on December 6, and we’ll be watching for the Court’s decision on merits down the road.

Other Cases of Interest in the Federal Courts

We continue to track a number of cases pending in the federal courts that involve key issues in the areas of financial regulation, administrative law, and standing, all of which will affect the financial lives of anyone with a wallet, bank account, credit card, mortgage, car loan, or student loan.

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. 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 in June 30, 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, which is expected to decide the matter soon.

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 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 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 motion to dismiss, and we await the court’s decision on the threshold standing issue.

An industry challenge (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 (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

OCC Nominee Confirmation hearing

President Biden’s nominee to be Comptroller of the Currency, the top banking supervisor in the country, had a rough reception before the Senate Banking Committee, which included outrageous red-baiting attacks from one Republican Senator. That was not a surprise given the many baseless statements made after her nomination was announced on September 23rd and in light of the quick opposition by the Chamber of Commerce and other allies/front groups for Wall Street’s biggest banks.

The nominee, Saule Omarova, is a law professor from Cornell University, and a highly regarded expert on banking issues. But Louisiana Republican Senator John Kennedy wasn’t interested in any of that. Instead, he questioned the Kazakhstan-born Omarova on her childhood membership in a communist youth organization and outrageously said “I don’t know if I should call you ‘professor’ or ‘comrade.'” Thankfully, Senator Kennedy was alone is such explicit attacks, but not in the many implicit, baseless attacks having nothing to do with her actual qualifications for the job.

This is doubly unfortunate. First, it detracts from a serious substantive discussion of the important mission of the OCC in regulating thousands of the country’s banks, including the largest banks in the country. Second, such irrelevant, personal, and venomous attacks will inevitably discourage good, high-quality people—Democrats and Republicans alike—from seeking or accepting senior government positions. That is a grave disserve to and loss for the country.

The next step in the process is for the Senate Banking Committee to hold a vote on Omarova’s nomination, but a date for that has not yet been set.

CFPB Director Congressional hearing

The Director of the Consumer Financial Protection Bureau, Rohit Chopra, recently testified before the House Financial Services Committee in his first hearing as the country’s top regulator of financial products. While he addressed many specific topics, the overall message was that the financial consumer cop—the CFPB—was back on the Wall Street beat fearlessly protecting hardworking Main Street Americans from financial predators and scams.

At his hearing, Chopra said he planned to deploy the resources of the CFPB against the “the largest firms that are engaged in nationwide harm,” because “[f]ocusing on larger participants in the market is one of the best ways we can accomplish our mission.” He also testified about the progress the agency is making in evaluating the “ability-to-repay” rule for mortgages, a controversial initiative begun by the Trump administration.

CFPB Director Chopra was also asked by the Committee’s Chairwoman, Maxine Waters, if he would strengthen the agency’s rules cracking down on payday lenders; Chopra said he and his staff would continue to monitor the payday lending industry closely, but he did not commit to additional regulation.

SPAC mark up

On Tuesday, November 16, the House Financial Services Committee passed two bills that will create new protections for investors in special purpose acquisition companies. SPACs are shell companies that allow private companies to be listed on public stock exchanges without fulfilling the investor protection requirements—and regulatory oversight—of a traditional initial public offering (IPO). This alternative route to the public markets is growing in popularity, with many high-profile investors and celebrities lending their names to newly formed SPACs in exchange for lucrative fees.

However, while SPACs are very lucrative for their sponsors and other Wall Street insiders, the lack of investor protections and other regulatory guardrails are not working out so well for investors. A screaming red flag confirming that is a “growing mountain of evidence” that SPACs have “significantly underperform[ed]” IPOs. That’s why legislation approved by the Committee this week is so important: it eliminates what some have called a “loophole” that supposedly allows SPACs to make “forward-looking statements” about the company’s profitability and prospects without repercussions even if the statements are later proven false. The bill’s supporters say this change would begin to level the playing field for SPACs and companies going public via a traditional IPO.

The other bill approved by the Committee requires SPAC sponsors to disclose how much the deal’s key investors stand to make in fees if the deal goes through. This is another way to protect retail investors who might see their shares in the company suffer due to excessive fee-taking by insiders.

While the fate of these bills is unclear, the next step in the process would be for a vote to be scheduled by the full House of Representatives.

Our fact sheet lays out some of the key points that anyone should be thinking about when it comes to SPACs. Read it here

“Buy Now, Pay Later” (BNPL) hearing

In early November, the House Financial Services Task Force on Financial Technology held a hearing on the growing use of “buy now, pay later” (BNPL) payment plans for consumers. The hearing was entitled “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products.”

During the hearing, Dr. Kristen Broady, a fellow at The Brookings Institution, said that BNPL programs had a role to pay to help under-banked communities avoid excessive overdraft fees that often plague low-income earners. Lauren Saunders of the National Consumer Law Center warned, however, that some financial technology products like BNPL “appear primarily to be designed to evade consumer protection laws,” a position that was supported by

Marisabel Torres of the California Policy Center for Responsible Lending, who said that BNPL loans may fall outside of existing consumer protection rules and put consumers at risk of abuse.

This is yet another reminder that so-called “innovations” in the financial industry must be carefully scrutinized to ensure that consumers are protected and that such “innovations” are not just another creative predatory mechanism to rip people off.