A Retired Firefighter Talks ESG; Florida `Woke Banking' Law Puts Industry in Political Bind; Investment Advisers Push Back on SEC Rules
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Long simmering issues in financial regulation came to the fore this week. The FDIC held a marathon meeting as its board members worked (once again) to hammer out a plan for overseeing asset managers’ bank stock holdings. In an interesting development, the Republican director who has been pressing the issue declined to sign on. The agency also issued a controversial proposal on “brokered deposits” that fintech firms are eying warily. And we took note of how a law in Florida that aims to keep banks from cutting off customers for political reasons is causing blowback for the industry in Washington.
Earlier this week, Capitol Account held a policy event that focused on what investment advisers have called a deluge of new rules emanating from the SEC. Sponsored by Charles Schwab, the gathering featured a panel discussion with executives and an interview with Commissioner Mark Uyeda. See below for a recap. Lastly, for our Q and A, we sat down with a retired firefighter who is jumping into the ESG wars. His new advocacy group argues state laws blacklisting money managers are harming public pension funds.
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Q and A: While the debate over environmental, social and governance investing gets a lot of attention in Washington, much of the action is happening at the state level. Conservative governors, treasurers, attorneys general and lawmakers are moving to bar “woke” financial firms from managing public funds, particularly pensions. It’s been an especially appealing issue for the politicians because the targets of their ire – giant companies like BlackRock, Vanguard and State Street – have been loath to mount an aggressive counter campaign.
This week, we sat down with a retired firefighter who hopes to change that. Tim Hill is the president of the Alliance for Prosperity and a Secure Retirement, a non-profit that launched in January. Its mission is to take politics out of the fight. Instead, Hill wants to shift the focus to the people who are impacted by the anti-ESG laws – the public employees who rely on pension plans for their retirement savings. The new group’s members are mostly drawn from organized labor and one very prominent financial firm, BlackRock.
The alliance operates as sort of a grassroots rapid-response team, weighing in on ongoing efforts to blacklist money managers in places like Texas, Oklahoma, Indiana, Arkansas and Mississippi. Its public education campaigns includes a lot of social media, op-eds and press releases, making the case that the policies are likely to drive up taxpayer costs and hurt the returns of current and future retirees.
While the bulk of its work has been in red states, Hill says that the alliance is non-partisan and will oppose any similar laws that espouse liberal causes, like restricting investments in energy companies. He’s also looking to expand his membership to other financial companies. Read on to learn why that hasn’t been easy.
What follows is our (lightly edited and condensed) conversation.
Capitol Account: Tell us about your background.
Tim Hill: I spent about 32 years as a fire captain and a paramedic with the Phoenix, Arizona, fire department. During much of that time, I was involved in the firefighters union, either the Phoenix local or the Arizona state association.
CA: That’s how you got involved with pension issues?
TH: I kind of accidentally got extremely enmeshed in the business of running a pension plan, as a stakeholder…Not only dealing with the plan as a whole, but assisting individual members and their families when something happened. At one point, I had 19 of my members killed in one fell swoop, in a major wildfire. [I became] very intimately familiar with the goings-on of funds.
CA: The alliance maintains it wants to keep politics out of pensions. What does that mean?
TH: We're seeing different political forces saying you can only invest this way, you can't invest that way. And it was based on whatever their political, social agenda, grounding was. It could be: Don't invest in Darfur. Don't invest in Israel. Don't buy oil. Buy oil. Whatever side that particular politician was on. There were a lot of red lights flashing for us, because we could see the danger to our pension funds and also to the individual pension fund trustees, who are, for the most part, volunteers.
CA: What’s your broad goal?
TH: We have a very clean purpose and a very clean message. It's not pro-[Diversity, Equity and Inclusion], it's not anti-DEI. It's not pro-oil, anti-oil. It's not pro-ESG, anti-ESG. Our policy point is: We're not the ones that should make that decision. And, to elected officials: Neither are you…Stay out of the business of our pension funds. Let them invest as they see best.
CA: With a membership that is mainly organized labor, and BlackRock, a firm that has been caught in the crosshairs of the ESG wars, is there a risk you are just seen as part of the Democratic establishment? The fights you are taking on seem to be all in Republican-led states.
TH: No, not at all. What we're trying to do…is to keep people out of the fiduciary business of our trustees and funds – and let them do what is best for the funds. Right now, the threat is primarily from red states, but I can give you an example [of the other side]...Somebody had submitted a letter to the editor in, I think it was New Jersey, demanding that that state divest of all oil stocks. We're opposed to that. If the pension fund says we believe it's in the best long-term interest of the fund, its returns, and all of its assets to do that? That's their business. If they think they should go buy a million shares of Exxon tomorrow, they should do that. I'm not the investment expert, and I know state Senator John Doe from so-and-so is not either.
CA: What are potential financial implications for public employees’ retirement income?
TH: On average, when you look at a pension fund, the pensioner gets a check [and] for the most part, 70 percent of that money…was made in the markets. It's not that much money that both the employers and the employees contribute…[If] we start harming [pension funds’] ability to [invest], and to do that long term, then that changes that equation. Especially as a public pension, then you have to go back to the taxpayers and say, `I need you to pony up for my pensions more.’ Because I don’t get Social Security.
CA: Why has ESG investing become such a politically divisive issue?
TH: We all have our suspicions about [how] certain politics sell, and certain industries. [Former Fed Chairman] Alan Greenspan had a great chapter in his book where he talked about creative destruction – one industry comes along and displaces another. This may be one of those points in any economy where one major industry is being at least partially replaced by another. You don’t have very many coopers making barrels anymore, right? These things tend to happen. But, again…that's best left to investment professionals, not politicians trying to take care of their friends or keep a certain industry going.
CA: You’d like more financial companies to join the alliance?
TH: The pension industry is not just about the pension fund and the members – there are everything from investment advisers to investors to banks of record to legal counsel…There's a whole pension industrial mechanism that earns their living off of pension funds. Whenever we would go into these fights for our survival, the industry was nowhere to be found – never contributed a penny. We would have to go to our members sometimes and ask for what's called special assessments in addition to their regular dues.
CA: But the financial firms that pensions rely on have a lot of money.
TH: The discussion some of us started was: how can we go to the industry and get them to help with this fight…to help ourselves and to help them…(Thursday)
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Blowback: Bank executives have been hotly debating how to respond to a new Florida law that threatens to pull them deeper into the political maelstrom over “woke” corporate practices. Now their efforts to fight the measure are reverberating in Washington as well.
The turmoil dates back several weeks, as a group of the biggest lenders, including JPMorgan Chase, Citigroup, Wells Fargo and Bank of America, pushed their trade associations to file a lawsuit to overturn the law. Widely promoted by Gov. Ron DeSantis, it seeks to bar banks from cutting off customers for political, religious, environmental and other reasons. There’s a good argument that the requirements conflict with federal banking laws – and that a court may strike it down.
But as financial companies have learned over the past few years, so-called fair access to banks is a big issue to Republican lawmakers – who aren’t afraid to wield it to publicly blast companies. Not surprisingly, a number of trade association executives – as well as their other members – weren’t too keen to take on an avowed culture warrior like DeSantis. They also worried that the litigation would make the industry a target if Donald Trump were to take back the White House.
The internal debate has roiled the Bank Policy Institute, American Bankers Association, Consumer Bankers Association and Florida Bankers Association. Sources say that each organization looked at the lawsuit as a sort of hot potato and has tried to pass it on. Ultimately, plans for court action have been shelved – at least for the time being.
A big reason for the delay is a ruckus raised by two of Wall Street’s bigger supporters on Capitol Hill – Sens. Thom Tillis and Bill Hagerty. The lawmakers made their case privately, including directly to CEOs, warning them that suing would risk harming relations with congressional Republicans.
The senators, sources say, were miffed that the big banks would mount a challenge to a red state law after some of them more or less acceded to demands on the left that they stop doing business with gun manufacturers or energy companies. It was also noted that there was no big court battle after California, Illinois and other blue states adopted laws the industry didn’t like.
In responding to the lawmakers, executives have pointed out that they are focused on the issue of preemption – that federal law should override the states – and not on access to banking services. Having different, and often conflicting, legal requirements in states, they argue, makes it impossible to run a national bank.
For that reason, litigation isn’t off the table – and some sources say it is probably inevitable. The current plan, some lawyers involved in the effort say, is to wait and see how Florida enforces its new statute. If banks get hit with complaints, investigations or enforcement actions, that could quickly alter the calculus in favor of suing. Another option being considered is for the banking trade associations to go after laws in both red and blue states.
Firm have also been working to enlist the support of Acting Comptroller Michael Hsu. His agency, which oversees national banks, could issue a legal determination that federal law preempts the Florida statute. That could help the industry prevail in court.
Under a law dating to the Civil War era, national banks are free to ignore a state law that “prevents or significantly interferes” with their core banking powers. The large lenders argue the Florida measure does that by interfering with basic decisions like which customers to serve.
The industry has been lobbying Hsu to take a stand, either through a formal determination or informal statement. But the comptroller, the sources say, has been reluctant to get involved…(Wednesday)
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Regulatory Onslaught? Commissioner Uyeda said he is “hopeful” that the decision to revisit two of the SEC’s most controversial rule proposals is a sign that the agency is taking the feedback it receives seriously. The plans – one governing financial advisers’ use of AI and the other on safeguarding client assets – have drawn almost universal pushback from the industry.
“I'm a big proponent of re-proposals, especially when I think a lot of our proposals went out very, very fast – without a lot of engagement with the public.” Uyeda said in an interview at the Capitol Account event. “If we think we need to take a second bite at the apple, I'm all for that. And let's do a better job with the information that we received.”
Held at the Capitol Visitor Center and sponsored by Charles Schwab, the gathering also featured a panel discussion that focused on the real-life affects and consequences of the SEC’s regulatory push under Chair Gary Gensler. Executives emphasized that they are closely following about a dozen rules that could impact their firms.
JJ Burns, CEO of wealth management firm JJ Burns & Company, said the SEC’s custody rule would dramatically raise his costs and make him consider hiring additional compliance staff or not taking on certain clients. “Ultimately the people that end up paying for it, and the domino effect, is the client,” Burns said.
Jon Beatty, head of advisor services for Schwab, noted that the majority of investment advisers it serves have less than $100 million under management. “These are small businesses,” he said. “And so their resources – they need to lean on others.”
Uyeda, a Republican who has been mentioned as a candidate for SEC chairman if Donald Trump wins the White House again, underscored that he takes a longer-term view when it comes to setting policy. That stance, the commissioner acknowledged, “could put me at odds with some of the individuals who served as chairs, because they understand they've got a relatively short period of time” in the top job. He explained:
“I look at regulation like a really long cargo ship that’s probably best not to make rapid moves. You can't be a speedboat, just zigzagging in and out. I don't think that's healthy for the industry. I don't think it's healthy for investors. I think it makes it really difficult for people to try to comply with our rules – today it’s X, tomorrow it’s Y.”
Uyeda pointed out that Trump as president issued an executive order laying out principles “that spelled out a vision of how the pieces would fit together” and that regulators could follow. People “could agree or disagree, but it was very clear under President Trump what the goals were,” Uyeda said.
By contrast, during the Biden administration, “we've just had this deluge of proposals out there, which don't seem to really connect with each other,” Uyeda said. He added: “I've not observed that high level of coordination that there was under the prior administration and President Trump.”
But his praise of the former president only went so far. Asked about Trump’s assertion this weekend at a bitcoin conference that he would fire Gensler on Day One (which drew a standing ovation), Uyeda demurred. “I won’t comment on personnel decisions,” he said, as the crowd burst into laughter…(Tuesday)
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