Senator Introduces Draft Bill Expanding the Community Reinvestment Act

Senator Elizabeth Warren (D-MA) introduced legislation intended to increase the supply of lower- and middle-income housing, incentivize communities to revise their zoning laws to facilitate housing construction, and provide substantial grants to first time home buyers with an emphasis on loans in formerly segregated neighborhoods. The bill would materially expand the scope of the Community Reinvestment Act of 1977 (the “CRA”). The CRA requires depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations.

Senator Warren’s bill, titled the American Housing and Economic Mobility Act, would among other things:

  • Expand the Scope of Covered Institutions – The CRA currently applies to insured banks and thrifts. Under the bill, the scope of the CRA would be broadened to include U.S. non-bank mortgage originators, bank holding companies, savings and loan holding companies, and credit unions.
  • Revise the “Assessment Area” – Currently, a bank’s CRA performance is assessed on activities that occur in or that serve the institution’s assessment areas. An assessment area is generally limited to the area or areas surrounding a bank’s main office, branches and deposit-taking ATMs. Under the bill, the term “assessment area” would be expanded to include each community, including a state, metropolitan area and urban or rural county in which the institution: (i) maintains deposit-taking branches, ATMs or retail offices; (ii) is represented by an agent; (iii) issues a significant number of loans or other products relative to the total number of loans or other products made by the institution; (iv) has issued not less than 75% of the loans of the institution; or (v) has conducted not less than 75% of the business of the institution.
  • Require the Submission of “Community Benefits Plans” – The CRA does not currently require an applicant to a merger or other expansionary proposal to submit a community benefits plan, nor is such a plan required by the Federal Reserve under the Bank Holding Company Act or by any of the federal banking agencies under the Bank Merger Act. However, the CRA would, if amended by Ms. Warren’s bill, explicitly require the adoption of a community benefits plan and consultation with “community-based organizations and other community stakeholders” in developing such a plan.
  • Significantly Alter Procedures Applicable to Financial Holding Companies – The bill would amend notification procedures under Section 4(k)(6) of the Bank Holding Company Act to require prior notice filings and opportunities for public comment on certain acquisitions. In reviewing any prior notice filing, the Federal Reserve would be required to consider, among other things, the overall CRA rating of the financial holding company and any improvement plans.

Lofchie Comment: In her latest bill, Senator Warren takes aim at restrictive zoning policies that diminish the housing supply. (See Section 101(b).) San Francisco is commonly pointed to as a paradigm for such policies. The bill also provides for housing grants in areas where there is a shortage of housing and where rents have risen particularly fast over the last three years. (See Section 102(e) of the bill.) So what zoning policies should San Francisco adopt to be awarded some of the benefits provided for under the proposal? The bill could reward San Francisco by directing subsidies to ameliorate problems that – according to the bill – were created in the first place by the San Francisco zoning laws.

SEC Commissioner Criticizes Morality-Based Regulation of Corporations

SEC Commissioner Hester Peirce criticized recent legislation attempting to enforce moral beliefs onto the daily operations of corporations. In remarks before the 17th Annual SEC “Hot Topics” Conference, Ms. Peirce argued that forcing a company to “cater” to interests beyond those of its shareholders may compromise shareholders’ interests as well as the public interest.

In her remarks, Ms. Peirce referenced a bill recently passed in California that would regulate the gender composition of corporate boards. The California bill would require companies to put women on their boards, citing evidence that companies with women board members perform better. Ms. Peirce stated that if companies with women on their boards perform better than companies without, then shareholders already have strong economic incentives to elect women as corporate directors.

SEC Staff Comment on Suspension of Trading of Virtual Currency Tracking Certificates

The SEC Division of Trading and Markets and Division of Corporation Finance (the “Divisions”) commented on the SEC’s September 9th Order temporarily suspending trading of certain bitcoin and ether tracking certificates. The Divisions asserted that the lack of accurate and consistent information pertaining to Bitcoin Tracker One and Ether Tracker One (together, the “certificates”) led to confusion amongst market participants. The Divisions cautioned market participants that seek to quote, trade, or facilitate transactions in the certificates to examine the legal and regulatory implications of doing so. The SEC staff is currently working with the CFTC staff in connection with the regulatory considerations relevant to the certificates under the Commodity Exchange Act.

President Trump to Nominate Member of the Board of Governors of the Federal Reserve System

President Donald J. Trump intends to nominate Jean Nellie Liang as a Member of the Board of Governors of the Federal Reserve System (“FRB”). Ms. Liang is a Senior Fellow in Economic Studies at the Brookings Institution and a Visiting Scholar at the International Monetary Fund’s Monetary and Capital Markets Department.

Ms. Liang previously worked at the FRB as Director of the Division of Financial Stability. Prior to joining the FRB, Ms. Liang was a member of the Congressional Budget Office’s Panel of Economic Advisors and a lecturer at the Yale School of Management.

SEC Commissioner Peirce Calls on SEC to Embrace Innovation and Allow Cryptocurrency Risk-Taking

SEC Commissioner Hester M. Peirce urged the SEC to embrace FinTech innovation and permit more risk-taking by investors in cryptocurrencies.

In remarks before the Cato Institute’s FinTech Unbound Conference, Ms. Peirce elaborated on her dissent from the SEC’s rejection of an exchange-traded product (“ETP”) that was designed to give investors exposure to bitcoin. Ms. Peirce explained her disagreement with the SEC’s decision to deny an exchange’s bid to list shares of the Winklevoss Bitcoin Trust (see previous coverage), asserting that “it seemed to turn on the Commission’s assessment of bitcoin rather than on the exchange’s plans for trading the [ETP].” She went on to state:

“The focus on the lack of regulation of cryptocurrencies particularly troubled me. What authority do we have to require that assets underlying securities be regulated as if they were securities? Even if we had this authority, private markets can and do regulate themselves.”

Ms. Peirce urged the SEC to:

  • avoid the temptation to replace the market’s product testing with the agency’s own and allow investors to determine the value of these innovations for themselves;
  • create a space for innovation to occur in SEC-regulated markets or accept that investors will seek out innovations in less regulated markets;
  • establish an environment in which investors can openly communicate with the SEC and its staff; and
  • reaffirm the agency’s commitment to expanding investor access, including through innovative technologies.

Lofchie Comment: Ms. Peirce’s speech is witty and thoughtful.

CFS Monetary Measures for August 2018

Today we release CFS monetary and financial measures for August 2018. CFS Divisia M4, which is the broadest and most important measure of money, grew by 4.6% in August 2018 on a year-over-year basis versus 4.8% in July.

For Monetary and Financial Data Release Report:

For more information about the CFS Divisia indices and the data in Excel:

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

3) {ECST} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) {ECST S US MONEY SUPPLY} –> From source list on left, select ‘Center for Financial Stability’

SEC Commissioner Criticizes Recent SEC Actions Relating to Proxy Advisors

SEC Commissioner Robert J. Jackson Jr. urged the SEC to preserve the current role of proxy advisors in shareholder voting. He asserted that the SEC should focus on the low rate of proxy votes by retail investors and the need for improved technology around proxy voting.

In a public statement, Mr. Jackson criticized the SEC’s recent decision to withdraw two no-action letters providing protection to investment advisers that receive or use proxy advice (see previous coverage). Mr. Jackson contended that there is “little proof” that proxy advisors hold “too much power,” which has been a frequent argument for reform of proxy advisor regulation. The decline of retail investor participation in corporate elections over the last decade is far more worrisome, he said, and should be addressed.

Lofchie Comment: Commissioner Jackson’s statement on proxy advisors raises many questions, particularly when compared to his position on proposed Regulation Best Interest.

In the context of arguing that proposed Regulation Best Interest was insufficiently tough, Mr. Jackson asks: “Will investors understand the implications of what they [read?] . . . To what degree will investors actually use that information when making the crucial decision as to who to trust with their money?”

These concerns seem absent from the Commissioner’s statement on proxy advisors.

If retail investors are essentially not capable of making investment decisions based on recommendations from full-service broker-dealers, as Commissioner Jackson implies, why would these same investors be capable of making informed and significant votes in proxy contests? Put more bluntly, why does it matter whether retail investors vote in proxy contests given their very limited ability to make investment decisions?

As to proxy advisors, Commissioner Jackson says the following: “It’s hard to imagine . . . that investors receiving too much advice about how to vote their shares—advice they are free to, and often do, disregard—should be at the top of our [worries] list.” If the provision of too much proxy advisor advice is not a problem, and investors are readily capable of disregarding it, then why would recommendations provided by full service brokers be problematic?

If full-service broker-dealers are not capable of providing useful recommendations due to their conflicts of interest, why would proxy advisors who may have conflicts of interests be capable of giving impartial investment advice? What conflicts of interest are acceptable for proxy advisors?

Some clarification may be needed to address these apparent inconsistencies.

President Signs Executive Order to Impose Sanctions in the Event of Foreign Interference in U.S. Elections

President Donald J. Trump signed an Executive Order (“E.O.”), dated September 12, 2018, directing intelligence and law enforcement agencies to assess foreign interference in U.S. elections, and authorizing sanctions against foreign persons found to have engaged in, assisted or otherwise supported such activity.

In Section 1 of the E.O., President Trump established a multi-step process for assessing and evaluating the involvement of a “foreign government, or any person acting as an agent of or on behalf of a foreign government” in actual or attempted interference in a U.S. election. The initial assessment, to be conducted by the Director of National Intelligence in consultation with other agencies, is to be done within 45 days after the conclusion of an election. During the subsequent 45-day period, the Attorney General and the Secretary of Homeland Security, in consultation with others, are to deliver to the President, the Secretary of State, the Secretary of the Treasury and the Secretary of Defense a report evaluating (i) the extent to which foreign interference materially affected election infrastructure, vote tabulation or the timely transmission of results, and (ii) the extent to which such interference materially affected the security or integrity of infrastructure related to political candidates, campaigns, and other political organizations.

Section 2 of the E.O. authorizes the imposition of blocking sanctions against foreign persons determined (i) to have directly or indirectly engaged in, sponsored, concealed or otherwise been complicit in foreign interference in a U.S. election; (ii) to have materially assisted, sponsored or otherwise supported such interference, or to have supported any person sanctioned in connection with such interference; or (iii) to be owned or controlled by, or to have acted or to have purported to act for or on behalf of, any person sanctioned under the E.O. Section 2 also notes that two Obama-era E.O.s remain in effect, which provide additional authorities for sanctions in connection with election-related and certain other “malicious cyber-related activities.”

Section 3 of the E.O. directs the Secretary of the Treasury, in consultation with others, to recommend to the President a range of potential sanctions – from complete blocking, to restrictions on the extension of credit, to a prohibition on dealings in equity or debt – against “the largest business entities licensed or domiciled in a country whose government authorized, directed, sponsored, or supported election interference,” including at least one entity from each of the finance, defense, energy, technology and transportation sectors.

CFTC Opens Registration for First FinTech Conference

Registration for the upcoming CFTC Conference: “FinTech Forward 2018: Innovation, Regulation and Education” is now open. The conference, which is scheduled to take place from October 2, 2018 to October 4, 2018, will feature CFTC Chair Christopher J. Giancarlo and U.S. Representative Austin Scott (R-GA), among others.

The conference will focus on significant tech-driven developments in the financial markets. Participants will discuss (i) the impact that new technologies may have on markets and customers, and (ii) what regulators ought to do to help identify emerging opportunities, challenges and risks, as well as to better educate market participants.

CFTC Chair Touts Cross-Border Regulatory Deference as Best Alternative

CFTC Chair J. Christopher Giancarlo called on European Union (“EU”) regulators to “commit to an equivalence determination process that focuses on achieving comparable regulatory outcomes and not rule-by-rule exactitude.” In a speech at the Eurofi Financial Forum, Mr. Giancarlo highlighted the importance of U.S. deference toward non-U.S. regulators as to their control over markets and market participants within their jurisdiction; he called on EU policymakers and regulators to adopt a similarly deferential approach to the cross-border application of European swaps regulation to U.S. markets and market participants.

Mr. Giancarlo previewed a forthcoming white paper that will offer recommendations on the application of the agency’s swap rules to cross-border activities. He criticized current EU legislative proposals that raise doubts with respect to the continuance of the policy of cross-border deference and cautioned that failing to adopt an approach of cross-border deference would “turn [global regulation] down that very different path of overlapping and confounding cross-border regulation with its high regulatory cost and constraints on economic growth.”

Lofchie Comment: When he was the CFTC’s Chair, Mr. Gensler asserted that the United States would adopt rules governing the global derivatives markets and market participants, and that Europe would just have to accept that reality. Europe didn’t. Asia didn’t. Joint Cautionary Letter from the EU, France, Japan and the UK to the CFTC on U.S. Cross-Border Swaps Regulation (with Lofchie Comment). Mr. Gensler was being very aggressive. The hand he played was not helped by the fact that the CFTC’s regulations were not so great. The rest of the world responded with a collective no thanks.

Current CFTC Chair Giancarlo is reversing course. It does not make sense for the CFTC to attempt to regulate European and Asian markets. But how will Europe react? Chair Giancarlo suggests that, however Europe acts, the United States will respond in kind.