Talking About a Bitcoin ETF Lawsuit; SEC Plan on Green Funds Worries BlackRock; the Looming Fight on Credit Card Late Fees; Progressives Push for Private Market Reforms
Capitol Account: Free Weekly Version
With the important legal battle over Bitcoin exchange traded funds heading toward a court date next month, we sat down for a discussion this week with the chief legal officer of Grayscale Investments. He’s helping lead the firm’s lawsuit against the SEC, which last year denied its application to turn Grayscale Bitcoin Trust into an ETF. Meanwhile, BlackRock has some issues with the SEC’s plan to ensure that funds that are marketed as green truly are. The regulation could cause problems with two of the company’s biggest environmental, social and governance ETFs. Also, the CFPB issued a proposed rule to severely reduce credit card late fees; banks aren’t happy. And we looked at a renewed campaign by progressive Democrats to get the SEC to enact investor protections in the private markets — and puts some curbs on private equity firms.
Thanks for subscribing to our free edition, with a selection of abbreviated stories we wrote this week. Capitol Account is published daily and has a lot more coverage of the agencies and lawmakers driving financial regulatory policy in Washington. If you like what you see, please subscribe to our paid newsletter. Just click the button below.
Friday Q and A: The policy debates over digital currencies are raging on Capitol Hill, at regulatory agencies and in the courts. This week we spoke with Craig Salm, who in his five years at Grayscale Investments has been playing in all three of those realms – and especially the legal arena. As the chief legal officer of the world’s largest crypto asset manager, he’s helped spearhead the firm’s lawsuit against the SEC for its refusal to allow Grayscale Bitcoin Trust to become an exchange traded fund. The case, filed in June, has been slowly winding its way toward oral arguments, now set for March 7 in the D.C. Circuit. The final briefs were due Friday.
That made the timing fortuitous to sit down with Salm, who outlined the firm’s legal arguments and talked about its contention that Bitcoin investors would be better protected in an exchange traded fund. He also told us how an associate at a prestigious New York firm decided to make the jump to a riskier – but clearly more fun – job at the forefront of cryptocurrency law. Here’s our (lightly edited and condensed) conversation:
Capitol Account: So how does a young lawyer get into crypto?
Craig Salm: I'd always been very interested in technology and science. I think I was sitting in class my second year [of law school] reading Wired magazine about Silk Road, which was one of the early applications that was using Bitcoin. It was basically being powered in terms of payments through Bitcoin, which was this new digital currency. That led me down a path of learning about how it worked and how people were using it. And given that I was a lawyer, I wanted to learn about the legal and regulatory implications, and how policy was going to be crafted around it.
CA: This is a little more technical, though, than, say, contract law.
CS: I taught myself computer science, because I wanted to understand the very barebones fundamentals of blockchain data structures and the algorithms, how the mining network worked – all of that.
CA: But then you ended up taking a more traditional career path?
CS: I got a job at Paul Weiss. It was a job I had to take…I was a capital markets attorney, doing things like representing companies in their IPOs or just their ongoing reporting, helping out with equity offerings, debt offerings.
CA: Still after a few years, you made a move to Grayscale.
CS: That was a little over five years ago. I was the first lawyer at Grayscale…Now legal and compliance is three lawyers, a paralegal and three compliance people.
CA: So what did your parents think when you told them you were leaving a white shoe law firm and going to work for a crypto company?
CS: Good question. It was a big risk, but my parents were always supportive.
CA: We tend to think of crypto law as being on the cutting edge, but it sounds like you do a lot of the same legal work one would do at any finance firm.
CS: In terms of the product offerings, it's very similar to a traditional asset manager. The way that Vanguard and iShares and State Street have these investing vehicles that hold assets, we do the same thing. It's just that the asset is not a stock or a bond. It's a crypto commodity.
CA: Still, much of the law of crypto is unsettled. Or it seems that way to us.
CS: Questions like what assets should be classified as securities or commodities or something else – those are the very challenging questions. There will eventually be more regulatory clarity. But that's where a lot of the real complex questions lie.
CA: You argue, however, it shouldn’t have been a tough call by the SEC to allow Grayscale’s Bitcoin Trust to become an ETF.
CS: To us that's a very simple and straightforward thing. We are talking about Bitcoin, the most well understood cryptocurrency, with an ETF, which is a very well understood product structure – just combined…It's something that the SEC really ought to be allowing, because it would only make the asset class more protected, for more investors.
CA: Grayscale, more than many crypto companies, has traditionally taken a cooperative posture with the SEC. The firm spent a long time negotiating with the staff so the Bitcoin fund could become an “SEC reporting company.” Now it is registered with the agency and makes regular public filings. So there was some surprise when you sued the commission. How did things go off the rails?
CS: I wouldn't say it's off the rails. This particular issue we disagree on…We got to a place where we thought they should’ve been ready to approve it. They disagreed.
CA: What made you hopeful the SEC would sign off on your ETF?
CS: Once they approved the first Bitcoin futures ETF in October 2021…That to us signified, you're ok with one ETF, then how could you not be ok with the other?
CA: Still, few companies want to sue their regulator.
CS: It's definitely not something that we take lightly. If the commission hadn’t approved the Bitcoin futures ETFs, I think we’d be in a different state…. (Friday)
A Big Fund Company’s SEC Problem (on ESG): BlackRock has been taking a lot of heat lately from Republicans who accuse the firm of using its clout as the world’s biggest asset manager to push a leftist agenda on corporate America. Much of that centers on ESG — environmental, social and governance — investing. While that is sort of a buzzword that nobody can really define, using the ESG moniker has also become a popular, and profitable, way to market investment funds. And that’s caught the attention of Gary Gensler and the SEC, a crew that may not be as bombastic as Republican politicians, but in the long run may be more of a threat to BlackRock. Or at least to its ESG business.
Underscoring that point is a recent comment letter that BlackRock sent to the SEC on the agency’s proposed update to a regulation that calls for a sort of truth in advertising in how firms title and sell their funds. It requires that a fund hold at least 80 percent of its assets in investments that reflect what it’s called. The SEC revision would apply the name test to ESG products.
BlackRock, however, told the SEC that the changes would likely pose problems for two of its largest ESG exchange-traded funds, the iShares ESG Aware MSCI USA ETF and the iShares ESG Aware MSCI EAFE ETF. And it’s not a small issue for the firm: combined, the funds manage just shy of $30 billion.
Gensler’s goal is to crack down on greenwashing – the practice of mislabeling funds as climate friendly and socially conscious for marketing purposes. Critics have long contended that with no clear definition of ESG, asset managers have been free to issue lots of products with squishy names that make it hard to decipher what exactly the funds are meant to do – or if they really are, say, environmentally friendly. To some, BlackRock’s “ESG Aware” products might be a good example of this.
The SEC chief is looking to finalize the changes to the names rule in the coming months. He also wants to wrap up a separate regulation that would make funds’ ESG disclosures more consistent across the industry – so investors can better compare products. The asset management industry has mostly opposed these measures, arguing in comment letters that were due in August that greenwashing can be addressed under existing policies. Somewhat surprisingly, BlackRock’s letter on the names proposal was sent on Dec. 16 – long after the deadline.
The two funds referenced in BlackRock’s letter rely on what’s known as an “uplift” strategy. This means the managers invest in a wide array of companies, but try to overweight firms that score higher on ESG metrics. At the same time, businesses with lower ratings are underweighted. The goal is to give investors broad market exposure – akin to investing in an index like the S&P 500 – while still obtaining “meaningful exposure to ESG,” as Blackrock describes it.
But, as the asset manager laid out in the comment letter, the names plan would seem to make it impossible to follow the uplift strategy – or at least call it an ESG play. That’s because 80 percent of its holdings aren’t purely ESG focused... (Thursday)
A Coming Credit Card Battle: You’ve got to hand it to Rohit Chopra and the Biden administration for getting their rollout of the CFPB plan to slice credit card late fees to the widest audience, in the best possible light. We especially took note of the glowing initial press coverage – which largely was the handiwork of the White House press corps (apparently briefed on the rule proposal ahead of time). They aren’t known for being too savvy about the details of financial policy. So Americans can be forgiven if they assume the fee caps are a fait accompli. That included, by the way, plenty of investors: shares of card companies tanked when the market opened Wednesday.
But like almost everything in the regulatory sphere, the reality is much more complicated. The aggressive proposal offered up at a presidential event may have grabbed the public’s attention, but it also touched off what promises to be a big battle with the banking industry. Executives told us that the plan was much tougher than many firms expected. So a commensurate response is in the works.
The biggest overall shock, as BTIG analyst Isaac Boltansky pointed out, is that the bureau set the fee limit at $8. “The structure of the change is more aggressive than anyone expected and it seems it was crafted more for a press event than surviving the almost certain legal challenges that will come,” he said
Bank trade groups spent the morning issuing strong statements that warned of lawsuits. And they predicted a lot of bad outcomes for consumers if late charges are capped so low – such as a surge in overdue card payments that would wreak havoc on people’s credit scores.
To many of his industry opponents, the effort (and how it was announced) is classic Chopra. The CFPB chief’s bank and Republican opponents largely view him as a political operator who’s more than willing to stretch the limits of the law to accomplish big policy goals. Chopra has been railing against “junk” fees for months, much to the displeasure of banks. This is a signature issue for him, and people note, he’s likely to embrace the battle…(Wednesday)
Private Markets: The common wisdom is that Gensler‘s crowded regulatory agenda at the SEC has pleased Democrats to no end. But that’s not exactly the case. There’s actually a growing frustration among a number of his progressive allies about what they see as his failure to take on one of their top priorities – setting stricter rules for the private markets and reining in the private equity firms and hedge funds that invest in them. In a sign of the discontent, Democratic SEC Commissioner Caroline Crenshaw used a high-profile speech to weigh in on the topic yesterday, a move some see as a warning shot and an attempt to put some public pressure on the chair to get moving.
The remarks, at a securities conference in California, are being much discussed (and lauded) in progressive circles. Crenshaw, who’s strongly argued for private market reforms since joining the commission, pointedly raised the specter of failed “unicorns” such as FTX and Theranos to make her point. Those firms, she noted, were able to raise huge amounts of money while making extremely limited disclosures to investors – and they did it in markets that offer scant protections for shareholders who were attracted by ridiculously high valuations.
Crenshaw added that the markets also aren’t transparent for regulators, and she concluded her remarks by calling for the SEC to enact several rule changes. “Through decades of legal, regulatory and market developments, private companies now have access to increasing amounts of private capital, inflating their sizes and significance to investors and our economy, and all without the concomitant safeguards built into the public markets,” she said.
This is all music to the ears of progressives, who told us they’ve privately had lots of conversations with Crenshaw and other SEC officials about tightening regulations in these markets. Behind the scenes, the commissioner has regularly expressed annoyance that the SEC hasn’t already proposed a slate of investor protection rules, the people said. (Crenshaw’s office declined to comment.)
Among those who’ve been most involved in the lobbying campaign are labor unions, the people said. One of their goals is to diminish the clout of private equity firms, hedge funds and other big investors, which benefit the most when companies don’t need to hold an IPO to raise cash. The labor movement’s hostility towards PE, in particular, is well known. Unions argue that when the firms buy businesses, they primarily enrich themselves while often turning the acquired companies into a shell of what they were – a process that plays out very badly for rank-and-file workers.
“Private equity could not exist without the private market loopholes that exist today,’’ says Todd Phillips, a former FDIC lawyer who now runs his own consulting firm. “Lots of people are concerned about how private equity firms treat workers.”
A number of congressional Democrats, including Sen. Elizabeth Warren, have also advocated for the SEC to set more oversight for the private markets. But jumping into the fight presents obvious perils for Gensler. For one thing, he’s already got a number of highly contentious rules on his to-do list that are facing industry resistance and likely legal challenges. That includes huge undertakings on overhauling the plumbing of the stock market and forcing public companies to disclose their carbon emissions. So he may not have much time (or bandwidth) to start another battle, especially considering that he might not be leading the commission past 2024.
Nor would PE firms and the new Republican majority on the House Financial Services keep quiet – in fact a SEC regulatory push in the area may set up an epic clash. Giving investors and companies more access to private deals is a top goal of Chairman Patrick McHenry. Republicans see the problem oppositely: that small investors are losing ground to the rich because they often cannot invest in private firms. They also contend that the plethora of SEC regulations that companies are forced to follow has made it harder and harder for firms to go public – and that hurts both investors and entrepreneurs…(Tuesday)
We think that our daily newsletter is well worth paying for. If you follow these issues as closely as we do, we promise it is worth the investment.