Discover more from Capitol Account
Talking `Impact' Litigation; SEC Officials on Hotseat in House; Stepping up Merger Scrutiny; Banks Bash SEC Custody Plan
Capitol Account: Free Weekly Version
It was a jam-packed week on the financial regulatory front, dominated by Congress. The House Financial Services Committee hauled up several top SEC officials to get more details on Chair Gary Gensler’s agenda. Lawmakers didn’t get a lot of answers, but it was great theater. The Fed chairman also testified on both sides of the Capitol. And the Senate Banking Committee overwhelmingly passed a bipartisan bill that would claw back pay from executives at failed banks. Though we don’t often write about the Justice Department, we did cover the head of the antitrust division’s much-anticipated speech on bank mergers. His remarks were lawyerly, but all signs point to much greater scrutiny of deals. For our Friday interview, we spoke to the chief legal officer at the DeFi Education Fund. She’s ready to file some lawsuits.
Thanks for reading our free edition, with abbreviated versions of articles we published throughout the week. Our paid newsletter had many more, including in-depth coverage of the SEC’s new analysis of its controversial swaps disclosure proposal and Jerome Powell’s comments on regulation. Click below to subscribe to our full offering.
Friday Q and A: Crypto regulation is, at best, a work in progress. Congress has been dithering on legislation for a while, but nothing has come to fruition. And the regulators, led by the SEC and the CFTC, have primarily chosen to sue firms rather than write comprehensive rules.
Amanda Tuminelli, who is the new chief legal officer at the DeFi Education Fund, thinks there is probably a better way to get answers – in court. Her role at the decentralized finance advocacy group is to spearhead “impact litigation” designed to bring more clarity about the rules digital assets need to follow. And even though she’s only been on the job since March, Tuminelli already has a few targets in mind. (SEC Chair Gary Gensler may want to watch out.)
Formerly at the Kobre & Kim law firm in New York, Tuminelli specialized in white collar criminal defense and securities law. But a case involving a Bitcoin mining company sparked her interest in cryptocurrencies and led her to focus more of her practice on digital assets. Read on to learn why she decided to jump even further into the space with the DEF. Plus, Tuminelli weighs in on the regulation by enforcement debate and explains the (nerdy lawyer) name of her canine companion. What follows is our (lightly edited and condensed) discussion.
Capitol Account: DeFi Education Fund is a pretty lean organization, why do you need a lawyer?
Amanda Tuminelli: The intention in hiring a chief legal officer was to start thinking about our proactive litigation efforts. I do work on some policy...but we also are very actively considering bringing impact litigation in the near future. That's what we're really excited about.
CA: What do you mean by ‘impact litigation?’ That sounds ominous – at least for one particular agency.
AT: We as an industry have been sitting ducks for a long time, just waiting for the SEC to enforce against whatever industry participant they want to enforce against. The industry has long called for clearer guidance. One way to get clearer guidance is to go ask for it from a court, to bring an [Administrative Procedure Act] challenge, or an enforcement challenge. Tee up the question – for a judge to decide, instead of doing what the industry has been doing.
CA: You mean just waiting for Congress or the SEC to come up with rules?
AT: It was right to call for more clarity, but I just think that you have another choice. You don't have to just sit back and wait. You can also appeal to the court system.
CA: There are already a few big cases out there, including Ripple’s battle with the SEC, that may provide a lot of answers to the regulatory debate. Are more needed?
AT: Those litigations are framed by the SEC's complaints. So [the commission] tees up the fact pattern and the issues as it sees them. Maybe we will get some great guidance from a court as a result…But there is an advantage in presenting as close to a perfect fact pattern as you can. Impact litigation is always bit-by-bit. You never get the whole thing.
CA: What do you mean?
AT: You're not [likely] to just take down Howey as a test [the Supreme Court decision that lays out how to determine what is a security]. A better approach is to say, `let's talk about one prong of the Howey test’…You make it a very narrow issue for the court to decide. And in theory, you do this many times. Or as long as it takes to get to a higher court. Maybe even the Supreme Court at some point, which could take years. But you're playing the long game.
CA: It’s not like Congress is moving fast anyway.
AT: It's like waiting for rain in a drought. You just don't know who's going to move first…We would love for Congress to act in a decisive and clear way tomorrow, but that's not likely to happen. Even if it happens next year – because I think that's what we're talking about at this point, next year at the earliest – there are so many industry participants that can be sued between now and then. Or can have their businesses completely decimated by a subpoena.
CA: Is it helpful for a trade group to bring a case, instead of a company?
AT: We are not market participants. We don't have to worry about retaliation…We see it as our mission to be able to do this on behalf of the industry, along with entities like the Blockchain Association.
CA: So what’s ripe for a lawsuit? Is the SEC’s proposal that requires more regulation of alternative trading systems a target? That seems directed at crypto, and decentralized finance in particular.
AT: Yes. If they were to finalize the ATS rule, that would definitely trigger a lawsuit. We're prepared for that. I can't get too far into this, but we are actively talking to companies that might want to be the declarant and actually be the named plaintiff. We would support their efforts whatever way we could…(Friday)
Follow us on Twitter @CapitolAccount and on LinkedIn by clicking here. We’re always looking for stories, so if you have any suggestions on what we should cover (or comments about Capitol Account), shoot us a note. Jesse can be reached at: email@example.com, Rob at: firstname.lastname@example.org and Jessica at: email@example.com. If somebody forwarded this to you and you’d like to subscribe, hit the button below. Please email for our special rates for government employees and academics, and group discounts for businesses: firstname.lastname@example.org.
Getting an Earful: It was a rough outing, to say the least, for Jessica Wachter and Haoxiang Zhu. Hauled up for an oversight hearing before the House Financial Services Committee’s capital markets panel, the two SEC division directors barely had time to parry one caustic question before the next was fired off from the dais. Much of the lambasting came from Republicans upset about the agency’s prodigious regulatory agenda. Democrats were a bit more polite, but several also raised concerns about pending rule proposals.
Wachter, the chief economist, and Zhu, the director of trading and markets, are more subject matter experts than political types. But they were convenient stand-ins for their boss, Gensler, whose efforts were really the topic du jour. Wachter is responsible for the cost-benefit reviews of the agency’s rules. Zhu’s unit crafted the overhaul of stock market plumbing that has sent financial firms into a frenzy. (And many of them apparently planted detailed questions with the lawmakers.)
Tempers flared almost from the start. Ann Wagner labeled Wachter’s analysis of the market structure plan “significantly flawed and deficient” and said the economist seemed to just “cut and paste” it into the separate proposals that make up the overhaul.
“Chairman, thank you for your interest in our economic analysis,” Wachter replied. “I’m asking about the copy and paste,” Wagner interjected. Wachter said that some of the “baseline” assumptions were the same. The Missouri Republican wasn’t satisfied: “I don’t know what this baseline is, but we are going to move on.” She urged the witnesses to answer “expeditiously” and in a “clear fashion.”
Bill Huizenga was especially irate at what he saw as stalling tactics. “Don’t start your answers by saying: ‘Thank you for asking me this great question,’” he instructed. “I know it's a great question.” But after hammering Wachter and Zhu about the economic justification for the agency's controversial swaps disclosure plan, the Michigan Republican was even more unhappy. “This is ridiculous, this is absolutely ridiculous,” he loudly remarked. “Whether we have to do investigations and closed questioning, we have got to get to the bottom of these answers.”
There were plenty of substantive attacks on regulations as well. Republicans, in particular, criticized the Consolidated Audit Trail, both for its cost and for its collection of investors’ personal information. They also knocked the SEC’s plan to require large traders of Treasury bonds to register as “dealers,” which would subject them to much more oversight.
Market structure was also a frequent topic. “Instead of starting with one surgical proposal…Chair Gensler and Director Zhu have taken a wrecking ball to every corner of our current equity market structure in one fell swoop,” Wagner said.
Democrat Wiley Nickel noted that small biotech firms in his North Carolina district were worried that a provision requiring retail stock orders to go to auctions would harm the companies’ ability to tap the capital markets. Nickel also said he was “especially concerned about reports that commission-free trading could cease to exist.” Wachter said the agency did consider potential costs for smaller investors.
Not used to being under such a spotlight, Wachter and Zhu remained deferential throughout, and tried valiantly to explain their work without directly responding to the most bombastic questions. Still, it was a two-and-a-half hour endurance test that they probably don’t want to do again soon – or ever.
“Over and over and over today, all I’ve heard members do is seemingly say that you’re out of touch – that’s almost every person who has spoken,” Republican Pete Sessions told the officials. “It's not just a frustration, that’s a reality.”
Maxine Waters, the committee’s senior Democrat, said she regretted the Republicans’ treatment of the two. “You guys have been taking a beating from the colleagues on the opposite side of the aisle,” she concluded. “I do not want you to be intimidated at all by unreasonable requests and questions.”…(Thursday)
M&A: The Justice Department’s antitrust chief had the bully pulpit Tuesday morning, but the message he delivered on competition in the banking industry was a bit murky – or at least buried in legalese. Still, many saw Jonathan Kanter’s speech as a sign that the Biden administration will take a much more skeptical approach to reviewing bank mergers.
Liberals in particular seized on Kanter’s remarks that the department is “reorienting the antitrust division’s role to focus on providing our advisory opinion as required by the statute and not remedies agreements with parties, as has become custom over the last many years.” (See what we mean about talking like a lawyer.) In layperson’s terms, some noted, that seems to indicate a greater willingness by DOJ to assert its authority, including by possibly challenging deals that have already been approved by the Fed and other agencies.
“Justice has long been deferential to banking regulators, who have been too deferential to big banks,” says Alexa Philo, senior policy analyst at Americans for Financial Reform. “That is now changing.”
Philo also notes that the timing of the speech was an important signal. It came on the 60th anniversary of a landmark Supreme Court case, U.S. v. Philadelphia National Bank, which upheld DOJ’s authority to block mergers that have been given the green light by the banking agencies. Kanter stressed that the decision “looms large and its impact on antitrust merger law is enduring and undeniable.”
Banking advocates, however, weren’t so sure that Kanter was heralding a sea change in antitrust enforcement. While the major trade groups were largely quiet after the remarks, sources said that Kanter didn’t provide enough details for the industry to come to any firm conclusions about the department’s intentions. But they note that Kanter has made no secret of his distaste for corporate consolidation – a view that is largely shared by the Biden administration and Democratic lawmakers.
Gregg Rozansky, a senior vice president at the Bank Policy Institute, said the speech raises more questions than answers, but also suggests a departure from long standing DOJ practice in reviewing mergers.
"Bank customers, employees and investors will all suffer if today’s step means more opaqueness, uncertainty and process delays around bank M&A,” he noted.
The latest bank turmoil has also complicated the policy discussions. Acquisitions, like JPMorgan Chase’s purchase of First Republic, are often the cheapest and easiest way to aid a failing lender. Some officials, including Treasury Secretary Janet Yellen and acting Comptroller Michael Hsu, have made comments recently suggesting they are more open to such deals.
Kanter is currently working with bank regulators on updating bank merger guidance, a response to a Biden administration directive. In his speech, the antitrust chief gave some hints about where the guidelines (last revised in 1995) are heading. He emphasized that the new policy would take into account far more elements, reflecting the complexity of the modern banking system. And the broader scope, he said, will move beyond the traditional factors like the impact on local depositors and branches. Going forward, the DOJ may also look at fees, interest rates, branch locations and product variety, Kanter said…(Tuesday)
Custody Rule Pushback Intensifies: Banks, caught off guard by an SEC proposal that seeks to add new protections for how investment firms safeguard customer assets, are stepping up their attacks on the plan. The American Bankers Association is out with a new bombastic blog post labeling the agency’s effort a misguided – and dangerous – attempt to rein in token trading.
“When faced with capturing the crypto mouse in the house, the solution is to capture the mouse, not bulldoze the house,” wrote Alison Touhey, the group’s senior vice president for bank funding policy. “While we share the SEC’s goal of protecting investors, this proposal would inflict tremendous damage to the financial markets and cause significant and lasting harm to banks, their customers and the investing public.”
As we noted in a story last month, when the custody proposal was issued in February it immediately drew fire from the crypto industry, which saw it as another backdoor attempt by SEC Chair Gary Gensler to regulate digital assets. However, traditional finance firms like banks, hedge funds and others began to see real problems weeks later when they dug into the rule. They argue it could have a negative impact on vast swaths of the markets – derivatives trading, securities lending, repo transactions and even gold purchases.
Among the critics’ biggest issues with the proposal is a provision that calls for investors’ cash to be kept in segregated accounts that would be protected in the event of a bankruptcy. Banks say that not only is this unworkable, it would also drive up the costs of custody services and disrupt the funding of short-term trades. There is also a question about whether the SEC is stepping onto other regulators’ turf. The OCC, for example, regulates custody banks – another point the ABA made in its post…(Tuesday)
Good stuff? Subscribe.