SEC Targeted by Fifth-Circuit Extremism
What happens when you bring together an agency designed to protect capital markets investors, a pair of litigious hedge funds accused of committing fraud, and a Fifth Circuit stacked by Trump-appointed legal extremists hellbent on crippling regulatory oversight? SEC v. Jarkesy, a case heard before SCOTUS on Wednesday that could end in “weaponizing our government in favor of the ultra-rich and powerful by preventing it from delivering for everyday Americans,” per United for Democracy’s Stasha Rhodes.
Some background: The SEC found that two hedge funds created by George Jarkesy, a conservative talk show host, committed securities fraud against investors. The agency fined him and related parties $300,000, with a required disgorgement of $685,000 in illicit gains, and banned Jarkesy from the industry. The ensuing countersuit landed in the Fifth Circuit Court of Appeals. That’s the very same court that declared CFPB’s funding mechanism unconstitutional, a ruling lambasted by countless consumer advocates and constitutional experts as radical and unprecedented. The Fifth Circuit reversed the SEC’s decision with yet another extreme ruling: Invoking the “nondelegation” doctrine, the justices suggested that the Constitution forbids Congress from giving the Commission power to hear and rule on cases like Jarkesy’s.
The hedge fund manager’s case has attracted the support of billionaires like Elon Musk and Mark Cuban. Consumer advocate groups, meanwhile, warn about the consequences of ruling against the SEC.
The oral arguments before SCOTUS treaded much narrower ground than the appeals court: whether defendants in SEC administrative enforcement proceedings are entitled to a trial by jury. Some justices questioned why the government could make such determinations without a neutral third party, Politico reports.
The SEC uses administrative law judges (ALJs), which are different from the President-appointed Article III judges that fill out the federal district courts. The latter, part of the judicial branch, would offer a jury trial. Even so, a ruling by administrative courts isn’t divorced from the judiciary, as they can still be appealed in the federal judicial system.
A sour ruling, writes Forbes, could “upend” how administrative law judges function and affect people’s disputes over Social Security benefits, labor disputes before the NLRB, and workplace safety disputes with OSHA, to name a few. They’d be kicked over to federal courts, which work more slowly and have less-specialized judges. It’d make it easier, in the SEC’s case in particular, for bad actors in the stock market to commit fraud, writes NYU Prof. Noah Rosenblum, as it “would almost certainly lead to fewer prosecutions for federal securities fraud.”
FINANCIAL STABILITY: Capital Requirements – Regulation is Cool – Upholding Dodd-Frank – FDIC Workplace Misconduct – Cyberattacks – Wells Fargo Union – Wells Fargo Fraud – JPMorgan, IIF and Oil
CONSUMER: The CFPB on the Hill – Junk Fees – Credit Card Rules – Medical Debt – Enforcement Actions
CAPITAL MARKETS: Conflicts of Interest
PRIVATE MARKETS: Financial Engineering – Taylor Swift, Kendrick Lamar, and Private Equity – Antitrust – Diversity – Other Private Markets News
CRYPTO: Binance – Fairshake – Enforcement Actions
HOUSING: RealPage – Title Insurance Failure – Veteran Homes
CLIMATE AND FINANCE: Washing and Hushing
Feedback? Reach us at afrnews@ourfinancialsecurity.org
FINANCIAL STABILITY
Capital Requirements.
There’s no shortage of bank lobbyist nonsense about the Basel III “endgame” floating around, as the Bank Policy Institute, Financial Services Forum and others continue their fearmongering campaign about higher requirements. While they bemoan the rules for their supposed potential to hamper the economy and harm businesses, high capital levels have historically been good for lending, and their warnings, wrong:
“The Wall Street lobby always predicts doom – especially less access to credit – whenever regulators want to toughen capital rules. Those terrible consequences seldom, if ever, come to pass.”
AFR also tackles some of the major myths: That “capital” is money locked away and can’t flow through the economy, that high capital levels will lead to lower lending, and that higher capital will reduce affordable housing in communities of color. It isn’t, it doesn’t, and it won’t.
Regulation is Cool.
A bipartisan poll commissioned by AFR and the Center for Responsible Lending reveals that voters on all sides of the aisle strongly support tough regulation of Wall Street, are alarmed at its incursion into healthcare, and look with general disdain on crypto.
A majority of voters believe that the financial industry has too much sway over the economy. Most believe it wields too much influence over Washington too, with 60% more unlikely to vote for a candidate who accepts Wall Street money.
Eighty percent of all voters are concerned about Wall Street firms purchasing healthcare companies to maximize short-term profit at the cost of quality care. A majority also believe that crypto needs to be regulated. Most voters are more inclined to say that crypto’s an “unstable market filled with scams…and needs regulation to protect people from financial disaster.”
Upholding Dodd-Frank.
Sen. Fetterman, with Sen. Smith and Senate Banking Chair Brown, expressed concern about the CFTC’s proposed Seeded Funds and Money Market Funds rule, which decrease collateral requirements for some swaps, slash initial margin requirements for some swap market participants and create a “divergence” among bank regulators. The 2008 financial crisis proved that swaps are dangerous to financial stability, they write, urging the agency to “[uphold] its Dodd-Frank mandate.”
FDIC Workplace Misconduct.
After WSJ surfaced that sexual harassment and misogyny was rampant at the FDIC and driving female examiners away from the boys’ club environment, its Board of Directors created a special committee to oversee a third-party review of workplace culture conducted by BakerHostetler. One week later, the FDIC inspector general announced plans to “report on the leadership climate at the FDIC with regard to all forms of harassment and inappropriate behavior.”
Cyberattacks.
The Treasury is interested in creating a federal insurance program to respond to cybersecurity risks, according to Assistant Secretary for Financial Institutions Graham Steele. In a speech at NYU, he outlines a few of the Federal Insurance Office’s priorities in the space:
Cyber-resilience, as the Treasury collaborates with state, federal and international partners to improve the strength of insurers’ cyber-defenses.
Terrorism Risk Insurance Program. The agency is considering whether and how a cyberattack could be classed as an act of terrorism, such that it would qualify for the federal Terrorism Risk Insurance Program.
IFTRIP, or the International Forum of Terrorism Risk (Re)Insurance Pools. The Treasury is part of an organization of 15 international terrorism risk insurance pools. Currently, the FIO is the group’s Vice Chair, and the Treasury intends to take more leadership.
Data Collection. In service of their other priorities, the agency will “continue to monitor and collect data on cyber insurance market developments.” Between 2021 and ‘22, direct premiums for cyber insurance grew 50%, to $7.2bn last year.
He raises the increasing threat of cybersecurity incidents from both state and non-state actors, ranging from crippling DDoS attacks (Direct Denial of Service attacks, when a target like a server or other infrastructure is intentionally overwhelmed with a ton of fake packets of data with intent to crash or otherwise cripple it) to hacktivism (issue- or protest-driven hacks), and beyond.
Wells Fargo Union.
Workers at two Wells Fargo branches in New Mexico and Alaska notified the National Labor Relations Board that they plan to vote on whether to unionize. If successful, they’d form “the first union at a major bank in decades,” per WSJ. They’re working with the Communications Workers of America, who took Wells Fargo to task last year over the megabank’s managerial efforts to punish and silence workers’ organizing efforts. “The main four issues to summarize that we see at Wells Fargo are transparency as it relates to pay, safety as it relates to our physical safety or COVID based safety, equal application and adherence to policies and procedures, and then finally, the diversity and inclusion issues that we’ve heard so much about recently in the press,” said one Wells Fargo employee, Jesse McCool, last year.
Wells Fargo Fraud.
At the same time the megabank faces a lawsuit alleging it allowed a $490mn Ponzi scheme to operate, regulators “have issued the bank formal orders to be better at catching criminals who may be using its accounts or products,” reports WSJ.
JP Morgan, IIF and Oil.
Discovering JPMorgan’s connection to a devastating oil spill is like playing hide-and-seek with Matryoshka dolls. In September, the Federal Energy Regulatory Commission ruled that the megabank owns the private equity firm IIF, which owns oil & gas company Third Coast, which owns the Main Pass Oil Gathering Company LLC, which spilled more than one million gallons of oil into the Gulf of Mexico and produced an oil slick three to four miles wide. Public Citizen calls on the Fed to enforce the Bank Holding Company Act to prevent Wall Street from continuing to control energy infrastructure.
CONSUMER
The CFPB on the Hill.
Director Chopra of the CFPB appeared on the Hill yesterday and today to deliver his agency’s semi-annual report (SAR) to the House and the Senate, respectively. AFR captures the positive sentiment of several lawmakers on House Financial in a Twitter thread (Don’t ask us to call it X, please.) Rep. Waters lauded the small business data collection rule, currently under attack in federal courts, for its promotion of much-needed “market transparency.” Rep. Foster and Rep. Velazquez cited the $19bn in relief collected for consumers and the numerous actions the agency has taken to root out discrimination, including an action that addressed Citibank’s discrimination against Armenian Americans.
Rep. Barr, however, used the opportunity to insist that Congress reclaim the “power of the purse,” referring to a desire to see the CFPB brought under Congressional oversight in light of the CFPB v. CFSA SCOTUS case.
Sen. Brown likewise highlighted how the CFPB “levels the playing field” for “honest people,” while his fellow senators described the beneficial actions the agency has taken on servicemembers, junk fees, medical debt and fintech services. Chopra doubled down on his concerns about AI, fearing that if firms use the same foundational AI models dominated by Big Tech, it would present a risk to financial stability. That’s the argument the SEC’s Gensler has made, too.
Junk Fees.
Corporations continue to fight the Biden administration’s work to get rid of junk fees, the excessive and often hidden fees tacked onto transactions that cost consumers at least $64bn a year. Accountable.US reports several Republican lawmakers have accepted millions of dollars of these companies’ money over the last year. House Financial’s McHenry, for example, received over $1.1mn from banking trade groups against the CFPB’s credit card late fee rule, before joining the industry in opposition to the agency. Reps. Luetkemeyer and Barr, who have previously said that junk fees “don’t exist,” rallied to defend the fees; they’ve accepted a combined $401,500 from trade groups that stand against the Biden administration’s initiatives.
Also: The National Consumer Law Center highlights the importance of state-level caps on interest rates and junk fees to protect consumers from predatory lending. NCLC recommends “an airtight 36% APR cap for small loans and lower limits for larger loans.”
Credit Card Rules.
Politico reports a band of bank lobbyists and industry trade groups have called on the CFPB to slow its action on overhauling Regulation V, to do with the Fair Credit Reporting Act (FCRA). The rule would prevent data brokers from misusing and abusing sensitive data by classifying personally identifiable information as a consumer report, allowing it to fall under FCRA protections.
Related to credit cards: AFR and other consumer, civil rights and economic justice groups called on the White House to finalize a CFPB proposal to protect borrowers from excessive credit card late fees, by capping them at $8. Says AFR’s Amanda Jackson:
“As big banks continue to restrict credit access in low-income communities and communities of color, this proposal would protect consumers from the double impact of limited access and predatory fees. Industry would have consumers believe that this effort by the CFPB would hurt communities but the opposite is true.”
Medical Debt.
In their Fair Debt Collection Practices Act (FDCPA) annual report released earlier this month, the CFPB examined the challenges consumers face when debt collectors come after their allegedly unpaid medical debt. The agency received 8,500 complaints related to medical debt collection in 2022 alone, among them servicemembers and older adults who typically have insurance and free or reduced-cost care. Collectors were found to have pursued nonexistent or misreported debts. The CFPB supports state-level action on debt collection laws, since the FDCPA allows states to enforce such laws, with limited preemption.
Enforcement Actions.
Bank of America. The CFPB has ordered the megabank to pay $12mn for “submitting false mortgage lending information” over a period of four years. Loan officers failed to ask applicants demographic questions, then said they chose not to respond.
Prehired. The self-styled “workforce accelerator,” which offered 12-week online training programs to prepare students for six-figure jobs, has been ordered to pay $30mn in relief by the CFPB and eleven states. Prehired made false promises about job placements, trapped students in illegal “income share loans” and deployed abusive debt collection practices when they couldn’t pay.
Toyota Motor Credit. Toyota’s lending arm will pay $60mn in redress and penalties after the CFPB charged it with the operation of an “illegal scheme to prevent borrowers from canceling product bundles that increased their monthly car loan payments,” affecting their credit reports.
CAPITAL MARKETS
Conflicts of Interest.
Wall Street firms will no longer be allowed to bet against the asset-backed securities they offer to their clients after a 4-1 vote by the SEC. These “conflicted transactions” would be banned for one year after the securities are sold.
PRIVATE MARKETS
Financial Engineering.
“NAV [net-asset value] loans can buy time but cannot stop the inevitable if businesses have not improved,” writes Holden Spaht, managing partner at PE firm Thoma Bravo, for FT. More firms have looked to NAV borrowing, which leverages the “collective valuation of a firm’s portfolio companies as collateral,” for quick and risky capital as debt becomes more expensive, M&A activity has decreased (PE firms are hanging onto companies for longer now) and investors demand more liquidity. While Spaht uses the opportunity to insist his own firm doesn’t do it and tiptoes around the danger of this brand of financial engineering, he acknowledges that “those pricey loans will eventually come due… [and] the portfolio as a whole – and its investors – will be left holding the bag.”
Taylor Swift, Kendrick Lamar, and Private Equity.
Just before the Thanksgiving holiday, the PE firm New Mountain Capital agreed to acquire the music licensing agency BMI, which represents hundreds of thousands of starstudded songwriters such as Taylor Swift, Kendrick Lamar and Lady Gaga. The deal is expected to close Q1 2024. CapitalG, a fund affiliated with Google’s parent company, will acquire a minority stake. BMI collected $1.57bn in FY2022.
Antitrust.
Watch out, private equity: FTC Commissioner Lina Khan is coming after roll-ups. Remember, when a PE firm rolls up another company, they use one of their portfolio companies to buy it in a smaller deal. Do that enough times in a local or state market, and you’ve effectively got a monopoly on your hands. The agency now “appears to be looking further afield, to PE roll-ups outside of healthcare and potentially across a variety of industries,” reports Bloomberg. It’s also on the lookout for monopsonies, wherein limited competition prevents worker choice in labor markets.
Sens. Warren and Blumenthal sent a letter to USAP’s chief requesting information about the company’s strategies and actions in service to its monopoly.
Diversity.
A one-of-a-kind California law signed by Governor Newsom would require venture capital and private equity firms with ties to California to report the demographics of the “founding team members” of the companies in which they invest. Called the New Diversity Reporting Law, it targets the over 5,700 VC firms that have offices in California, hoping to address inequities of funding directed toward women- and minority-owned businesses.
Other Private Markets News.
Family Offices. “Family offices now have more of their money invested in private markets than the public stock market…[and] are showing increasing interest in alternative assets,” CNBC reports.
Execs. Ninety-one percent of Chief Financial Officers worry about job security after private equity takes over their company. Though, execs may have less to worry about than the average worker, paid less and more at-risk. When KKR bought out Toys ‘R’ Us, they laid off 33,000 workers.
Norwegian Wealth. Norway’s central bank recommended that its sovereign wealth fund, the largest in the world, allocate up to $70bn in private equity. The country’s Parliament has previously opted not to, as it would be too costly and too difficult to judge performance.
CRYPTO
Binance.
Binance.US, the crypto exchange sued by the SEC in June for various securities laws violations including the unlawful sale of unregistered securities and the misrepresentation of trading controls on their platform, has separately agreed to settlements totaling more than $4bn with the Department of Justice for money laundering charges. ISIS, North Korea, occupied Crimea – it’s all there. The two penalties, the lion’s share of $3.4bn going to the Financial Crimes Enforcement Network and the remainder to the Office of Foreign Assets Control, are their “largest settlements in history.” Binance CEO Changpeng Zhao stepped down on Tuesday, one week after pleading guilty to money laundering charges. He now awaits sentencing in the United States, having been disallowed from returning to his home in the United Arab Emirates after posting a $175mn bond.
Fairshake.
Over the past two months, a new super PAC called Fairshake, backed in part by the CEO of the crypto exchange Coinbase, has spent over $1.2mn on TV ads to praise thirteen incumbent lawmakers from House Financial and House Agriculture, two committees that pushed out crypto-friendly legislation that would harm consumers, investors and critical regulators alike. The largest beneficiaries so far: House Financial Chair McHenry, Rep. Johnson and Rep. Gottheimer. The ads don’t explicitly name crypto as an issue area, but do mention how the lawmakers have supposedly worked to “attract the jobs of the future” and build “the next generation of the internet.”
Enforcement Actions.
Kraken. The SEC sued Kraken, one of the world’s largest crypto exchanges, for failing to register with the Commission and, consequently, illegally trading securities.
HOUSING
RealPage.
RealPage bills itself as a property management software company, but it proves to be other things too. Like, as the Revolving Door Project pointed out earlier this year, one of the “primary perpetrators” of the rental housing crisis. After a ProPublica report exposed the company’s proprietary Yieldstar algorithmic rent-setting software for allowing a group of corporate landlords to systematically and exorbitantly hike rents over two decades, a class-action lawsuit coalesced representing students and other burdened renters. The suit takes aim at the massive landlords – the likes of Greystar and Crow Holdings – that it alleges colluded with RealPage to anticompetitively fix prices and overcharge rents. One of the tool’s developers said that leasing agents had “too much empathy” compared to their algorithmic counterparts.
Now, the Department of Justice will back the plaintiffs. Federal prosecutors say, “RealPage allegedly replaces independent competitive decisionmaking on prices, which often leads to lower prices for tenants, with a price-fixing combination that violates [antitrust law].” While it isn’t a party in the suit, it will take part in a hearing mid-December where RealPage and other associated parties will try to throw out the case.
Title Insurance Failure.
Earlier this year, Fannie Mae was working to finalize a title insurance pilot program, wherein it would cover the cost of lenders’ title insurance on a small number of mortgage refinancings from a select group of lenders. Eventually, it would expand to cover more lenders and mortgages, with the intent to promote access to homeownership. Typically, this insurance costs the borrower about 0.5% of their loan. But pushback from the title and settlement agency and House lawmakers torpedoed the plan.
Veteran Homes.
After an NPR investigation uncovered thousands of veterans at risk of losing their homes because of a faulty COVID mortgage forbearance program, the Department of Veterans Affairs has announced it would pause foreclosures targeting veterans and servicemembers who have VA loans for six months.
In a previous letter to VA Secretary Denis McDonough, Sens. Tester, Reed, Kaine and Senate Banking’s Brown wrote: “[Tens] of thousands of veterans and servicemembers are left with no viable options to get back on track with payments and save their homes…Without this pause, thousands of veterans and servicemembers could needlessly lose their homes.”
CLIMATE and FINANCE
Washing and Hushing.
You’ve probably heard of greenwashing, when a corporation makes itself appear more environmentally friendly than it actually is. Now, Politico reports on greenhushing, where companies simply refuse to publish their sustainability credentials. Some on Wall Street say it’s a result of ESG-related backlash, as Republicans on the Hill and in state governance have angled to prevent money managers from listening to their investors’ wishes and invest in environmental, social and governance-related companies. One in five companies surveyed by Ernst & Young declined to publicize their sustainability goals this year, a threefold increase from last year; the study also found an increasing gap between “pacesetter” companies taking the most action and “observer” companies taking the least.