Talking Crypto Rules; Angst Over Anti-Money Laundering Plan; Union Unrest Hits FDIC
Capitol Account: Free Weekly Version
Even as much of Washington slipped out of town ahead of the 4th of July, we found plenty to write about. Much of that was due to the FDIC chairman’s demand that workers return to the office three days a week next year. Suffice it to say the employees’ union isn’t happy. We also reported on an effort to combat money laundering — and help banks verify their customers — that has gone off the rails. It’s being spearheaded by Fincen, an arm of the Treasury Department that is seemingly ill-equipped for the task. For our Friday interview, we talked to an in-house lawyer for OTC Markets Group. She has some pretty straightforward ideas about how the SEC can bring crypto trading into the regulatory system.
Thanks for reading our free edition, with abbreviated versions of articles we published throughout the week. Our paid newsletter had many more stories, including an in-depth look at an SEC rule that targets the same trading firms (Citadel Securities and Virtu) that Gensler is going after in his big market structure revamp. Click below to subscribe to our full offering. And have a happy Independence Day.
Friday Q and A: There is a well-known standoff in the cryptocurrency oversight debate. SEC Chair Gary Gensler is demanding that firms comply with the securities laws. The industry says new rules are needed because there’s no way this new technology can be shoehorned into a regulatory system for stocks and bonds set up in the 1930s. But some argue that there may be an easier solution.
OTC Markets Group, which runs the main trading venues for over-the-counter securities, is in that camp. While many think of the market as a sort of Wild West of small-cap stocks, it operates under a long-standing framework of broker-dealer regulation that offers protections for investors. The firm has been pointing out that the SEC could extend those rules to tokens. In fact, OTC Markets recently got approval from Finra for customers to trade digital asset securities on one of its Alternative Trading Systems. We called up Deputy General Counsel Cass Sanford to find out how this all would work.
Sanford is deep in the weeds on regulation and was recently appointed to Finra’s market regulation committee. She also spends a lot of time talking to the SEC and Washington policy makers, advocating for small companies on capital formation issues. Read on to learn more about Sanford’s views on crypto regulation and how to get more companies to go public. Plus, she discusses how making jewelry and Gensler’s demands for token trading platforms like Coinbase are actually pretty similar. What follows is our (lightly edited and condensed) conversation.
Capitol Account: The listings for stocks that trade over the counter were known as the pink sheets, but that’s not a term we hear much anymore. What does OTC Markets do?
Cass Sanford: We operate regulated trading markets for over 12,000 securities. We have three [Alternative Trading Systems] regulated by the SEC that allow broker dealers to be able to quote and trade OTC equity securities. In other words, any equity security traded here in the U.S. that's not otherwise listed on a national stock exchange like Nasdaq or the New York Stock Exchange.
CA: So what kind of stocks are we talking about?
CS: The majority of the volume on our markets is actually in non-U.S. based companies…in the form of American Depositary Receipts and foreign ordinary shares. That allows U.S. investors to trade those instruments here in the U.S., in dollars.
CA: And you have three different levels of markets?
CS: We have the OTCQX market, which is the top-tier market. That’s where you'll see the large international companies like Roche, Adidas, and Heineken. There are no penny stocks on that market. The second tier is the OTCQB market – that's our venture market. That's where you'll see a lot of smaller biotech companies that are just joining the public markets and have heavy capital needs, but are in the R&D growth phase. And then we have the Pink Open Market, which is really designed as a broker market, for brokers to obtain best execution on a wide variety of securities.
CA: OTC Markets has been leaning into crypto, and Finra recently gave the firm some sort of approval to facilitate token trading. How does that work?
CS: We have updated our membership agreement with FINRA to permit our broker-dealer subscribers – firms like Virtu, Citadel and GTS – to trade digital asset securities on our ATS.
CA: So retail investors can’t just go on your platform and buy Dogecoin?
CS: This approval is really just one piece of the larger puzzle of how to fit digital asset securities into the securities law framework. There are other outstanding issues to be solved, around custody and clearing. Perhaps [as more firms get regulatory approvals] we'll be able to start to see more of a regulated ecosystem develop.
CA: How are the over-the-counter markets an example for bringing digital assets under the regulatory umbrella?
CS: We have a very flexible disclosure standard that accommodates different types of companies, whether that's a large ADR …or whether that's a community bank that may not even trade in a single day…We're trying to discuss our market model – and how it works as an alternative to an exchange model.
CA: What’s the difference?
CS: It's unlikely that the vast majority of these instruments will go to a stock exchange, nor should they. A lot of them do not look like blue chip securities. They may need a framework that allows disclosure to get out to investors, allows brokers to be able to achieve best execution and have pricing transparency.
CA: And those are core regulations for trading on OTC Markets?
CS: From an investor protection and market integrity standard, our markets are really serving that function for a wide range of securities – including many digital asset- based instruments already. We have nearly 20 digital asset trusts that trade on our market, Grayscale [Bitcoin Trust] being a big one…Those products have been relying on [SEC rules for over-the-counter markets] to give investors ample disclosure about the risks and opportunities…It's already working as a good framework.
CA: Do you agree with Gensler that the securities laws work fine for digital assets?
CS: I do think that the existing securities law framework covers the types of issues that we see in the crypto market space. That includes disclosure from insiders and affiliates – we need to know who has control over these networks and who are the people that have a large stake or a lot of influence. Their names and identities need to be disclosed, and maybe there's restrictions on trading for those individuals. Disclosure is a big one – consistent disclosure.
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Careful What You Wish For: Back in 2021, the banking industry won a resounding, and rare, legislative victory when Congress passed a new anti-money laundering law. The Corporate Transparency Act was hailed as a major step toward preventing terrorists and other criminals from using shell companies to hide funds. But its centerpiece was the creation of a giant database that banks could use to ease one of their most costly obligations – tracking down customer information.
Now two years later, the directory is already late and nowhere near complete. And there’s a growing sense of caveat emptor in the industry and among the law’s congressional supporters. While there’s a chance everything works out in the end, many are concerned that the project has gone off track, and banks worry that it could make their compliance jobs even harder.
What went wrong? A lot.
There was the legislation itself. It requires small companies to detail their “beneficial owners” – those with at least a 25 percent stake.
Supporters envisioned the database as a one-stop-shop of records, available to help law enforcement bust bad guys and banks verify their customers. But the law demands that the government minimize the burden on businesses and closely safeguard the information they turn over. Achieving this balance – how to protect the data yet make it useful – has been tricky.
Adding to the problems, the tiny government agency that was put in charge of the project is struggling mightily with the task. In fact, Fincen, part of the Treasury department, has vexed just about everybody involved – lawmakers, banks, the small business lobby and anti-money laundering advocates – as it has tried to write the rules for the operation.
A Fincen spokesperson said it is committed "to making this historic beneficial ownership database a highly useful tool for all stakeholders."
Fincen is a vital cog in the U.S. national security apparatus that is charged with investigating illicit finance, enforcing anti-money laundering laws and policing sanctions regimes. But with just 292 full-time employees, it hardly has the resources, or the in-house expertise, to take on such an overwhelming IT and data security project. An estimated 32 million companies are expected to report their information to the directory after it gets up and running.
That is supposed to happen on January 1st. However, the date is almost certain to slip. House Financial Services Chairman Patrick McHenry, who supports the effort, recently bent to that reality and introduced a bill to delay the reporting date until Fincen finalizes the regime. He wasn’t happy about it, according to aides.
McHenry is concerned that Fincen has no plan to protect companies’ data, nor a strategy to educate firms about the new requirements. He especially fears that hackers posing as Fincen could steal sensitive information from businesses, committee staff said.
The criticisms on Capitol Hill go beyond data security. A bipartisan group of lawmakers from the House and Senate complained in April that Fincen flubbed the form it wants companies to use to report their information. The document uses “novel” categories such as “unknown” or “not able to obtain,” that could allow bad actors to opt out of supplying the information, they wrote in a letter to Treasury Secretary Janet Yellen and Fincen’s Acting Head Himamauli Das…(Thursday)
Labor Woes: In the latest return-to-office news roiling Washington’s financial regulators, Martin Gruenberg ordered FDIC employees to come back three days a week – in January. But even with the long grace period, the chairman’s decision wasn’t embraced by workers. In fact, it set up what is likely to be a protracted fight with the agency’s union over telework.
Gruenberg also told employees in a video announcement that he was reopening a broader agreement with the union that allows people to choose if they want to work almost entirely from home. Roughly 80 percent of the staff at FDIC headquarters opted for the arrangement after it was signed in 2022, according to an agency spokesman.
The FDIC chief’s announcement was immediately blasted by the National Treasury Employees Union, which represents the workers. In a statement, President Tony Reardon called the directive “arbitrary and unjustified,” and predicted it would harm morale and prompt employees to leave the agency. He also stressed that it may be difficult to carry out “after years of FDIC downsizing” and the elimination of “dedicated workspace at headquarters and in regional offices.”
Most workers at banks and other financial firms have been back in the office for well over a year. But their regulators haven’t returned to a pre-pandemic mode – a dichotomy that has been a rich source of complaints for many in the industry.
Gruenberg’s push for three days, which applies to the D.C. headquarters and regional offices, is a relatively aggressive stance. Other agencies that oversee Wall Street and also have unions have settled for a lot less face time. SEC Chair Gary Gensler, for example, recently got his people back for two days out of 10. And the CFTC has told supervisors to be in one day a week, but many of the rank-and-file have yet to return at all.
The FDIC’s headquarters building, near the White House, is eerily empty most days. Still, it’s an inopportune time, to say the least, for Gruenberg to get into a war with his workers. The agency has come under fire on Capitol Hill for supervisory lapses in the run up to the collapse of Signature Bank – problems that the regulator in an internal review attributed to “persistent” staffing shortages. Since 2020, the report noted, an average of 40 percent of large-bank examiner jobs in the New York regional office have been vacant or filled by temporary staff….(Monday)
Labor Woes, Part II: Inside the FDIC, the fallout from Gruenberg’s demand that employees get back to the office has been swift. The union is mobilizing. And apoplectic workers are already fighting back – with threats of resignations and plans to use the current bank instability as leverage.
“You can and should tell your manager, and anyone above your manager, if you get the chance, what you think of all this,” Duncan Stevens, an FDIC lawyer and union representative, wrote in an email to its members. “If applicable, you should mention the likelihood that management’s approach to telework will encourage you, or people you know, to leave the FDIC at a time when an exodus of experienced employees harms the FDIC’s mission.”
The unrest is a big headache for Gruenberg, a Democrat appointed by a president who cherishes his good relationship with organized labor. And interestingly, the telework agreement that Gruenberg is now seeking to undo was set under his Republican predecessor, Jelena McWilliams. After it was signed early last year, about 80 percent of headquarters staff decided to work at home full time – though a manager could call them in for reasons critical to the agency’s mission.
In his email, Stevens noted that the FDIC announcement was “perhaps intentionally” confusing because it was based on management’s view that they don’t need to negotiate on telework. The union, he added, “strongly disagrees.” Stevens also said the FDIC’s stance violates the existing collective bargaining agreement.
The message stressed that employees should “be assured’’ that the union will “push back…in all the ways available to it.” (Stevens declined to comment.)
“We believe it is in the long-term interest of the FDIC to achieve better balance between in-office work and telework in order to carry out its critically important mission,” the agency said in a statement. An FDIC spokesperson declined to address the specifics of employees’ complaints…(Tuesday)
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