September 30, 2021

September 2021 Month in Review Newsletter

Dear Friends,

As we discussed last month, the Federal Reserve is the Supreme Court of economic and financial policymaking. Its actions impact the standard of living and the quality of life of every American, from the price of cereal, bread, and gas for the car to the affordability of housing (whether you own or rent), not to mention overall wage levels and the buying power of paychecks and savings accounts. That’s why the Fed must hold itself to the highest standards. Unfortunately, we have learned this month that the Fed’s so-called “leaders” hold themselves to unacceptably low standards.

That’s why we have devoted an enormous amount of time and effort to exposing and detailing the misconduct and leadership failures at the Fed, which egregiously violate the public’s trust. Most importantly, we have demanded full transparency and accountability, which has resulted, so far, in the resignations of two regional Fed Presidents, but much more must be done. That’s why we are a government watchdog as well as a Wall Street watchdog – violate the public trust, fail to do your job, or act against the public interest, and we’re going to expose you and demand change!

The Fed trading scandal started just after Labor Day when Michael Derby of the Wall Street Journal broke a story that Robert Kaplan, president of the Dallas Federal Reserve Bank, made multiple multimillion-dollar stock trades during the middle of the pandemic in 2020. Shortly afterward, more stories broke about 2020 trading by other Fed leaders, including the Boston Fed President who traded real estate securities and Fed Chair Powell who owned muni bonds and traded other securities during 2020.

This was shocking news. These Fed leaders were trading for their own profit (1) while hundreds of thousands of Americans were dying; (2) while tens of millions of Americans were being thrown out of work and not knowing how they were going to feed their families; and (3) at the same time the Fed was injecting trillions of dollars into the financial system in an unprecedented effort to prevent the collapse of the economy and the financial system due to the shutdown caused by the pandemic. Those Fed actions impacted the prices of virtually all financial assets, products, markets, and activities, including important stocks and real estate.

Given those massive and ongoing interventions, these Fed leaders had to be doing this trading while in possession of a wide range of material, nonpublic information, which would likely have given them significant trading advantages. This trading activity was, at best, pandemic profiteering that violated the Fed’s own standards and, at worst, illegal insider trading. Either way, this conduct threatens to further erode the public’s trust and confidence in the ethics, integrity, judgment, and priorities of the Fed and its leaders.

That’s why I have pushed the Fed and Chair Powell to take the following actions: (1) condemn the pandemic trading and failures of leadership and judgment; (2) insist that the most active traders (the Dallas and Boston regional Fed presidents) resign or be fired; (3) fully disclose the details of all Fed officials and staff who traded while in possession of material nonpublic information during the pandemic; (4) request the Department of Justice, the Securities and Exchange Commission, and the Fed’s Inspector General conduct comprehensive independent investigations to determine if any laws were broken by any of this trading, and (5) engage in a thorough review of the Fed’s guidelines and Code of Conduct, making any necessary changes.

The good news is that two regional Fed Presidents have resigned, as we called for, and the Fed has announced it is conducting an internal review of its ethics and trading policies. The bad news is that the Fed otherwise appears to be in full damage control mode, looking like the three “see no evil; hear no evil; speak no evil” monkeys. Worse, what started as a serious failure of leadership is increasingly looking like a cover-up of the undisclosed extent of the pandemic trading for self-enrichment by who-knows-how-many Fed personnel. Without full disclosure and accountability, the Fed doesn’t deserve the trust of the American people.

If you want to know the details of our actions, you can find my first letter to Chair Powell here; my second letter to Chair Powell, which called for the Presidents resignations, here; our proposed questions for Chair Powell at the FOMC press conference (where three reporters asked questions on the trading) here; my statement on Chair Powell’s inadequate answers and actions at the FOMC press conference here; my statement that the resignation of one Fed President was “too little too late” here; and my Twitter thread following the resignation of the second Fed President here. Unfortunately, there will likely be lots more to come on this scandal.

While those Fed-related activities were extensive, that’s not all we’ve been up to. For example, we released our Annual Report for 2020, which was a challenging year. We are fortunate to have an outstanding Board and dedicated and determined staff who have continued working remotely to fight to prioritize Main Street economic and financial issues through policymaking, rulemaking, and litigation across Washington, D.C. I hope you will read the 2020 Annual Report and let us know what you think.

I’m also excited to announce that on October 5^th we are going to launch a new website and switch from BetterMarkets.com over to BetterMarkets.org. Not to worry the .com address will still work, but we will be changing our official URL and email addresses. Be sure to check out the new site once it’s up.

There’s a lot going on and much more coming up in the next month so check out our website www.bettermarkets.com 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…

Better Markets Securities Specialist Addresses SEC Panel on “Gamification” Protections

Better Markets educates the public and drives the conversation on the economy and financial system by providing expert congressional testimony and staging conferences, webinars, and press briefings to amplify key issues, positions, and messages. We host events highlighting important issues, and our leadership and subject matter experts are sought after speakers for gatherings of policymakers, academics, and industry observers to share information, insight, and strategies.

For example, on September 9, Legal Director and Securities Specialist Steve Hall – one of our leading experts who has been with us since 2011 – was invited by the SEC to participate on a panel of its Investor Advisory Committee entitled “Reimagining Investor Protection in a Digital World: the Behavioral Design of Online Trading Platforms.” Watch it Here

ACTIVITIES AT THE REGULATORY AGENCIES

Agenda for the Next Fed Vice Chair for Supervision

With the term of the current Vice Chair for Supervision (VC Supervision) – Randal Quarles – expiring on October 13, Better Markets laid out an agenda for the next VC Supervision in a recent report to undo the deregulation of the Trump-Powell-Quarles era, strengthen some existing regulations to go even further than initially implemented, and consider supervision and regulation (S&R) of emerging risks. Unfortunately, the too-big-to-fail problem is not only alive and well, but it has also grown even larger, more dangerous, and harder to address. Climate change must be taken seriously, and S&R needs to work in concert with monetary policy in achieving racial equity. Additionally, FinTech poses new and emerging risks as well as consumer protection issues. Read the Report

Fed Falls Down on Sanctioning Wells Fargo

After the OCC’s additional enforcement actions and fines against Wells Fargo earlier this month, Better Markets released a blog post asking “where is the Fed?” Far more consequential actions are clearly needed and warranted when the largest banks demonstrate the kind of systemic – and repeated – deficiencies evident at Wells Fargo. The Fed, in addition to rigorously applying the asset cap, needs to restrict all dividends and share buybacks until Wells Fargo fully and completely fixes its many systems and leadership failures. Wells Fargo has already had years to fix these serious problems and, if it fails to fix them in a relatively short time, the Fed must take action to break up the organization over time.

Better Markets Urges Enhanced Protections in Fed Instant Payment Program

Better Markets joined efforts led by the National Consumer Law Center to ensure the Fed more fully considers consumer and small business protections in its proposed regulations that would govern its FedNow instan

t payments service. Maintaining a safe and secure instant payments system through the FedNow service will benefit millions of American households. Faster payments can provide greatly increased convenience, competition to traditional payment methods, and access to financial services, but the speed of funds transfer could lead to more opportunities for fraudulent activities.

Why it matters. Faster payments can provide greatly increased convenience, competition to traditional payment methods, and access to financial services, but the speed of funds transfer could lead to more opportunities for fraudulent activities.

What was said. “The system must protect consumers and small businesses from fraud and mistakes. Scams and errors can be devastating and have a particularly harsh and targeted impact on low-income families and communities of color.”

Bottom line. Maintaining a safe and secure instant payments system through the FedNow service will benefit millions of American households and small businesses and enable them to enhance their financial wellbeing.

Actions in the Federal Courts

Better Markets continues to watch for decisions in several important pending cases as well as track key issues in the courts.

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.

Status. In a positive development on June 30, 2021, 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 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.

Status. 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 and we await the court’s decision on the threshold standing issue.

A lawsuit (Hughes v. Northwestern University) seeking to hold retirement plan administrators accountable in court for allowing clearly inferior investment options to remain on a retirement plan menu.

Why it matters. The U.S. Supreme Court has 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. That’s what’s at stake in the Hughes case, which the Court will decide this coming term. 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 once they reach retirement.

Hughes and the other plaintiffs allege that they suffered losses because their retirement plan administrators failed to remove 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. The district court and the Seventh Circuit tossed the plaintiffs 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 some 200 available choices. That holding is doubly flawed. It not only conflicts with precedent but also ignores the practical challenges that most workers face when trying to choose among a vast collection of investment options offered by their retirement plan.

We joined AARP and other organizations in an amicus brief urging the Supreme Court to reverse the lower court’s decision, restore the plaintiffs’ claims, and give them a chance to prove their case at trial. As we argued, the decision below misinterprets the duty to monitor investments and applies an unfair and overly stringent pleading standard. It also undermines Congress’s core objective in the applicable statute, ERISA, which was to protect retirement plan participants from abuses by plan fiduciaries. Unless the Supreme Court reverses the Seventh Circuit, private enforcement of the law will suffer a major blow, weakening deterrence and exposing retirement savers to a heightened risk of unrecoverable loss when plan administrators fail to discharge their responsibilities.

The case is now fully briefed and oral argument is set for December 6, 2021.

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.

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.

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.

Status. The case is set for oral argument before the D.C. Circuit on October 25, 2021.

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 yet shrouded in mystery, as 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 brining minorities into the economic mainstream.

Status. Briefing in the case is just getting underway so the basis for the petitioner’s legal challenge is not yet clear. Based on the Alliance’s comment letter on the rule previously submitted to the SEC, they apparently will contend that the rule exceeds the SEC’s authority, violates the Constitutional prohibitions against compelled speech and discrimination based on race and gender, and conflicts with evidence supposedly showing that stock returns suffer when firms are pressured to diversify their boards—a claim that runs counter to studies that actually correlate improved corporate performance with diverse boards.

HILL UPDATE

Congress Back in Session After Work-Shortened Recesses

The House and the Senate returned to work in September after their August recess was cut short by debates over the bipartisan infrastructure bill and the proposed $3.5 trillion (over ten years) budget reconciliation package.
Congress returned to a full to-do list, with must-pass items including a measure to keep the government funded and operating after the end of the fiscal year on September 30, the annual defense authorization bill, the need to hold off the encroaching deadline of the federal debt limit, and the infrastructure and reconciliation bills mentioned above.

SEC Chair at the Senate Banking Committee

On September 13, SEC Chair Gary Gensler testified before the Senate Banking Committee, where he discussed cryptocurrencies, capital markets, and new rules the Commission is developing in the wake of the collapse of Archegos Capital Management.
The SEC Chair said that his staff is working on new rules to require public companies to disclose more about their climate risks, as well as new regulations for Chinese companies listing on U.S. stock exchanges.
Much of the news coverage of Gensler’s testimony focused on his calls for an aggressive new approach to regulating cryptocurrencies. The SEC Chair said that the vast majority of digital assets traded over crypto exchanges should be required to register with the SEC so investors can be better protected against scams by fly-by-night crypto operators.
A number of Republicans on the Committee attacked his call for stricter cryptocurrency regulation, saying that the SEC needs to do more to publicly clarify its position on what makes a cryptocurrency a security that may be regulated by the agency.

House Financial Services Committee Investigates “Lending in a Crisis,” and Federal Pandemic Response

On Thursday, September 23, the House Financial Services Committee’s Subcommittee on National Security, International Development and Monetary Policy held a hearing entitled “Lending in a Crisis: Reviewing the Federal Reserve’s Emergency Lending Powers During the Pandemic and Examining Proposals to Address Future Economic Crises.”
At the hearing, the subcommittee heard from several witnesses, including the Connecticut State Treasurer, the Roosevelt Institute’s Mike Konczal, and others who discussed the Federal Reserve’s emergency lending efforts to provide credit to borrowers in the private and public sectors. Several Members of Congress at the hearing questioned the effectiveness of the Fed’s emergency lending programs in preventing the devastating layoffs and business closures that many workers experienced; others noted that the Fed seemed to provide more generous help to large corporations and banks than it did to municipal governments and smaller companies that needed the help more.