Blog
How the Stock-Trading App Robinhood Remains Resilient
By: Bailey Meideros, RBFL Student Editor
In recent years, stock-trading apps have become increasingly popular among young investors. In particular, the stock-trading app, Robinhood, has become the topic of various financial news outlets thanks to its unique features catered to young traders. Robinhood, founded in 2013 by Stanford University graduates Baiju Bhatt and Vladimir Tenev, is a FINRA regulated broker-dealer known for being user-friendly. Not only does the platform have no fees and no minimum requirement, but it also has a game-like interface that makes trading on the app similar to that of playing a game. New members are given a free stock which requires users to scratch off images that look like a lottery ticket. Once the stock is revealed, confetti falls from the top of the screen. These features help to explain why Robinhood’s typical customer is just 31 years old on average. While the platform allows for ease of trading in a fun process, the company has been criticized for luring inexperienced investors, which at times has led to devastating results.
Robinhood’s criticisms don’t end with the concern of its game-like interface. Rather, the stock-trading app has also had technological problems in recent years. In 2018, the platform’s software accidentally reversed direction of option trades, resulting in customers receiving the opposite outcome from what they anticipated. The following year, the app mistakenly allowed people to borrow infinite money to multiply their bets which led to enormous gains and losses. This year, despite the opportunity to learn from history, Robinhood once again faced technological troubles as the platform’s trading system repeatedly crashed resulting in a class action suit against the company. According to the August 24th Amended Complaint regarding the class action, the system underwent 47 outages since March, rendering its customers unable to access their accounts or make any trades.
However, these struggles merely reflect the price paid in aiming to create unprecedented service and access to markets. At the end of the day, these outages will not directly affect Robinhood’s success. Even after Robinhood underwent multiple outages in March, user growth never took a hit. In fact, in late-April, Robinhood continued to have over 50% of the market share of new brokerage accounts. Although the company is criticized for its ease of use, the company is successful for the very reason that it is so easy to use. This allows Robinhood to serve a previously under-served segment of the market—the younger generation. Even among these vocalized criticisms, consumers are continuously willing to assume the risk of using the platform.
Sources:
Amended Complaint, In re Robinhood Outage Litigation, No. 3:20-cv-01626-JD (N.D. Cal. Aug. 21, 2020)
John Divine, How Robinhood Changed an Industry, U.S. News & World Report (Oct. 17, 2019, 3:33 PM), https://money.usnews.com/investing/investing-101/articles/how-robinhood-changed-an-industry.
Nathaniel Popper, Robinhood Has Lured Young Traders, Sometimes With Devastating Results, The New York Times (July 8, 2020), https://www.nytimes.com/2020/07/08/technology/robinhood-risky-trading.html (noting that the app advertises options with the tagline “quick, straightforward, & free”).
Rob Walker, How Robinhood Convinced Millennials to Trade Their Way Through a Pandemic, Marker Medium (June 1, 2020), https://marker.medium.com/how-robinhood-convinced-millennials-to-trade-their-way-through-a-pandemic-1a1db97c7e08.
Payment apps…and more? How Fintech Threatens Traditional Banking Industry
By Beyond Bi, RBFL Student Editor
Financial technology (“Fintech”) covers technologies that seek to “improve and automate the delivery and use of financial services,” including common peer-to-peer (“P2P”) mobile payment applications such as Paypal and Apple pay and cryptocurrencies such as bitcoin.[1] The global growth of non-cash transactions, blooming adoption of digital wallets, and the success of many fintech apps make e-commerce the new focus of many industry players. In many countries, non-cash exchanges have become the primary method of payment, which not only increases the usage of debit cards and credit cards, but also in the prominence of P2P payment platforms such as Apple pay and Paypal in the States, and Wechatpay and Alipay in China.[2] The banking industry and technology have become more and more intertwined as digital wallets, and mobile banking apps offer innovative solutions to conduct business more efficiently. Statistics show that a great majority of banks in the United States provide mobile banking services that allow their customers to check balances, transfer funds between accounts in the same bank, view statements, pay bills, etc.[3] The number of active users of digital wallets such as Paypal and Apple pay also experienced steady growth from 2010 to 2020 worldwide.[4] This trend of development was even more prominent overseas as China and India took aggressive leaps toward building a non-cash society over digital wallets.
The rapid development of P2P posed a great threat to traditional banking industries. Many government entities, especially that of developing countries, are playing catch-up in promoting mobile payment apps in order to strengthen their financial infrastructure.[5] Banks face pressure from Fintech companies in conducting their core business, such as savings and paying. In countries where financial institutions were scarce, many customers turn to digital wallets such as M-Pesa that offers financial services to users who do not possess a bank account.[6] Successful P2P platforms are not only more popular than banks with customers but also with merchants. Alipay and Wechatpay’s success is not only attributed to their lower transaction fee compared to credit cards but also to lower implementation costs—while credit and debit cards rely on NFC or point-of-sale (“POS”) machines, Alipay and Wechatpay only require a QR code and a phone.[7] Low implementation costs allowed many rural merchants to expand their services; thus, P2P payment apps can potentially be the solution to help the unbanked population in many places in the world, and this could potentially change the picture for the traditional banking industry. In China, where most banks are state-owned, traditional banks still had to take measures to ensure their businesses and fight back against Alipay and Wechatpay’s wild takeover of the P2P payment market.[8]
Moreover, owners of P2P payment apps are making aggressive decisions to step into areas dominated by traditional banks. They are undertaking many roles of the bank, such as offering advisory services, selling financial products, giving out small loans, offering saving incentives, etc.[9] Many payment apps developed their credit lines, and they usually have a lower credit score requirement than conventional credit card companies and a lower limit.[10] Alipay, a mobile payment app in China, attracted more than 300 million users to their credit line, Ant Credit Pay, by offering a flexible credit limit as low as $7 to those users with little to no credit history.[11] Additionally, as fintech companies are at an advantage in utilizing big data to analyze and accommodate consumers’ needs, they may outcompete banks in both the amount and the quality of services provided. The traditional banking industry may need to come up with more innovative solutions and services to suit the markets’ needs in order to retain new customers, and this, indeed, would bring positive energy to the financial market and potentially present more diverse products to consumers.
[1] Julia Kagan, Financial Technology – Fintech, Investopedia (Aug. 28, 2020), https://www.investopedia.com/terms/f/fintech.asp.
[2] Capgemini Research Inst., World Payments Report 30 (2019).
[3] M. Szmigiera, Share of Banks Offering Selected Mobile Banking Functions in the U.S. 2018, Statista (Nov. 27, 2018), https://www.statista.com/statistics/945464/banks-mobile-banking-functions-usa/.
[4] J. Clement, PayPal: Active Registered User Accounts 2010-2020, Statista (Aug. 13, 2020), https://www.statista.com/statistics/218493/paypals-total-active-registered-accounts-from-2010/; J. Clement, Number of Apple Pay Users Worldwide 2016-2019, Statista (Oct. 1, 2020), https://www.statista.com/statistics/911914/number-apple-pay-users/.
[5] Angaj Bhandari, India's Fintech Revolution: Why and What's Next?, The Paypers (Apr. 30, 2020), https://thepaypers.com/expert-opinion/indias-fintech-revolution-why-and-whats-next--1242049.
[6] Christian Haddad & Lars Hornuf, The Emergence of the Global Fintech Market: Economic and Technological Determinants, 53 Small Bus. Econ. 81, 84 (2019).
[7] Ian Goss, Kristofer “Kriffy” Perez, & Bee-Lian Quah, Why Hasn’t Apple Pay Replicated Alipay’s Success?, Harv. Bus. Rev. (Sep. 14, 2020), https://hbr.org/2020/09/why-hasnt-apple-pay-replicated-alipays-success.
[8] Qianzhan.com, Wu Da Hang Quxiao Zhuanzhang Shouxufei (五大行取消转账手续费) [The “Big Five” Banks in China Cancelled Cross-bank Service Fee Charges], Sohu.com (Mar. 18, 2016), https://www.sohu.com/a/64110908_114835.
[9] Paypal.com, Products and Services, https://www.paypal.com/us/smarthelp/topic/PRODUCTS_AND_SERVICES (last visited Oct. 11, 2020).
[10] Shannon Vissers, What Is PayPal Credit & How Does It Work?, Merchant Maverick (May 11, 2020), https://www.merchantmaverick.com/paypal-credit-how-it-works/
[11] Stella Yifan Xie, A $7 Credit Limit: Jack Ma’s Ant Lures Hundreds of Millions of Borrowers, Wall Street J. (Dec. 8, 2019), https://www.wsj.com/articles/a-7-credit-limit-jack-mas-ant-lures-hundreds-of-millions-of-borrowers-11575811989
The Fed’s Emergency Response to Covid-19: The Blurry Line Between Lending and Spending
By John Suggs, RBFL Student Editor
Jerome Powell, Chair of the Federal Reserve’s Board of Governors, has previously said that “the Fed has lending powers, not spending powers.” Yet, this contrast between monetary and fiscal policy has become much less stark in the face of the Fed’s emergency lending programs under section 13(3) of the Federal Reserve Act. Recently, COVID-19 has caused economic crisis on a scale not seen since 2008, prompting quick action by both Congress and the Federal Reserve to ease the resulting woes. However, the CARES Act and a myriad of ad hoc lending facilities established under section 13(3) authority have led the Federal Reserve into a brand of lending which looks very similar to fiscal policy, raising potential questions about constitutionality.
The CARES Act, passed in March 2020, appropriated Treasury funds to back potential losses which the Fed might face in employing emergency lending to stimulate the economy. This “investment” of $454 billion into Fed lending, places Treasury funds at the peril of first loss, allowing the Federal Reserve to worry less about insulating taxpayers from losses as Dodd-Frank revisions to the Federal Reserve Act require. As such, the Fed has been encouraged to engage in riskier and more broad-based lending, backed by Treasury money. Given the congressional go-ahead, the Fed established, among other programs, the Municipal Liquidity Facility to lend to states and municipalities, Main Street Loan Facilities to lend to medium sized businesses, and Market Corporate Credit Facilities to lend to large businesses, all backed by billions in Treasury funds.
These facilities and the backing of the Treasury place the Fed in a territory which, to some, feels uncomfortably close to fiscal policy. Generally, the Fed is limited in its operations to either lend money or invest in assets. When the Fed begins to be able to make unilateral decisions about risky lending with likely losses being covered by the Treasury, the line between spending and lending seems lost. This is especially true as risky lending is made available directly to states, a mode of dissemination traditionally left to congressional spending. While there is little that court precedent can tell us about the legal difference between spending and lending, if these actions are rightly considered “spending,” potential constitutional issues ensue.
As the Federal Reserve is an arm of the executive, and as spending is granted expressly and exclusively to the legislature, the Separation of Powers and Nondelegation Doctrines would apply to grants of spending to the Federal Reserve. Thus, the legality of Fed spending would depend on the presence of an “intelligible principle” which limits it. When looking to limiting principles, either in the CARES Act or section 13(3) of the Federal Reserve Act, there is very little guidance to govern the Fed’s decisions. Riskier lending programs, and loans within these programs, are made according to the Fed’s discretion, limited potentially only by its Treasury investment, post hoc congressional oversight, and the general aim of providing liquidity to financial markets. This seems unlikely to meet even the relatively lax standards of the Nondelegation Doctrine, and could potentially be considered an unconstitutional grant of legislative power.
Emergencies like COVID-19, while they rightly lead to a call for compassion and pragmatism, cannot be a cause for ignoring important constitutional principles like the Separation of Powers. While it is unclear whether the Fed’s current actions are truly fiscal in nature, an inquiry into its legitimacy is vital for preventing a larger existential crisis in the rush to cure the ails of COVID-19 and its ilk. Prior to the popularization of section 13(3) emergency lending in recent decades, it was feared that this authority might be a “ticking time bomb of political chicanery.” However, if it is allowed to threaten the delicate balance of power in American government, the result could be far worse.
The Federal Reserve’s Ability to Lend to the Economy under Section 13(3) of the Federal Reserve Act Amid its Response to the Coronavirus Pandemic
By Michael Murphy, RBFL Student Editor
The Coronavirus pandemic has thrust the world into the worst financial crisis since the Great Depression. To stymie the devastating effects of business shutdowns, mass layoffs, and supply chain disruptions that shocked the United States economy instantaneously in March 2020, the Federal Reserve activated its lending powers under Section 13(3) of the Federal Reserve Act for the first time since the 2008 Financial Crisis.
Section 13(3) authorizes the Fed to lend to non-bank institutions under “unusual and exigent circumstances.” It was under section 13(3) that the Fed engineered its rescue of the financial system in 2008 by backstopping liquidity markets and, somewhat infamously, providing bailouts to “too big to fail” financial firms. The Fed’s use of 13(3) was politically unpopular and resulted in amendments to 13(3) as part of the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act. The amendments ostensibly limit the Fed’s ability to lend as freely as it did in 2008. Congress’ intended to preserve the Fed’s ability to provide broad-based lending to the economy while simultaneously preventing future bailouts of individual firms.
Many commentators feared that the Fed’s circumscribed 13(3) power under Dodd Frank spelled doom for the economy in future financial crises. Particularly concerning to some were the requirements for broad-based eligibility, heightened collateral standards, and Treasury approval prior to establishing a new lending facility under 13(3). These detractors of Dodd-Frank maintained that the Fed needed unfettered power to provide credit to the economy to stave off economic devastation in financial crises.
Until the Coronavirus induced mass turmoil in the American economy, there had not been a chance to evaluate the practical effects of the Dodd-Frank amendments on the Fed’s ability to lend under 13(3). The Fed reacted swiftly and dramatically to abate the effects of the Coronavirus and so far has deployed its 13(3) lending powers to an unprecedented scope. Specifically, it has resurrected lending facilities first established in 2008 designed to provide liquidity to the financial system. It has also created a range of new lending facilities that are designed to provide lending to the real economy — nonfinancial businesses, states, and municipalities. The latter category of lending facilities might not be valid exercises of the Fed’s newly limited 13(3) power. At the very least, they appear to strain the new Dodd-Frank restrictions on 13(3) even if the statutory requirements are technically satisfied.
For example, the Fed would struggle to meet the Dodd-Frank collateral requirements for its loans in this environment where the risk of default is high, and there has been no effort to determine that it has. Congress resolved this issue with the passage of the CARES Act, affording up to $454 billion to backstop Fed loans against losses.
Moreover, under the amended 13(3), the Fed may not lend to insolvent firms. But it still may do so indirectly by purchasing loans from eligible banks that themselves are solvent. The recipient of the bank loan may be a firm in, or on the verge of insolvency.
Finally, Dodd-Frank amended 13(3) to impose the requirement that lending be for the purpose of providing liquidity to the financial system. The Fed’s response so far has involved significant lending to the non-financial economy. But this has been authorized, once again, by the CARES Act which instructs the Fed to provide lending to sectors of the real economy.
Whether the Dodd-Frank amendments are being interpreted loosely, or outright ignored, it seems impossible to conclude that the Fed’s ability to lend under 13(3) is significantly impaired. Perhaps this is an unsurprising conclusion in the current environment as the impetus behind the Dodd-Frank Amendments was to prevent future bailouts of individual firms rather than broad-based lending, which is exactly what the Coronavirus response demanded. In that sense, it should be caveated that the full impact of the Dodd-Frank amendments will not be clear until the economy is threatened by the impending failure of a “too big to fail” firm and the Fed finds itself unable to provide a tailored bailout to that firm.
Sources:
Marc Labonte, Cong. Research Serv., R44185, Federal Reserve: Emergency Lending (2020).
Peter Conti-Brown, Explaining the New Fed-Treasury Emergency Fund, Brookings Inst., (Apr. 3, 2020), https://www.brookings.edu/research/explaining-the-new-fed-treasury-emergency-fund/ [https://perma.cc/R9FQ-29LS].
March Labonte, Cong. Research Serv., R46411, The Federal Reserve’s Response to COVID-19: Policy Issues 22 (2020).
Lev Menand, Fed to the Rescue: Unprecedented Scope, Stretched Authority, Colum. Law Sch.: The CLS Blue Sky Blog (Apr. 27, 2020), https://clsbluesky.law.columbia.edu/2020/04/27/fed-to-the-rescue-unprecedented-scope-stretched-authority/#_edn2 [https://perma.cc/TLV5-L2UQ].
Christian A. Johnson, From Fire Hose to Garden Hose: Section 13(3) of the Federal Reserve Act, 50 Loy. U. Chi. L. J. 715 (2019).
John L. Walker, Emergency Tools to Contain a Financial Crisis, 35 Bos. U. Rev. Banking & Fin. L. 672 (2016)
Hal Scott, Dodd-Frank Worsens Covid’s Risk, Wall St. J (March 11, 2020, 7:01 PM), https://www.wsj.com/articles/dodd-frank-worsens-covids-risk-11583961933.
Jefferey Cheng et al., What’s the Fed Doing in Response to the COVID-19 Crisis? What More More Could it do?, Brookings Inst. (Jul. 17, 2020), https://www.brookings.edu/research/fed-response-to-covid19/ [https://perma.cc/5MAZ-589M].
Rosalind Wiggins, CARES Act $454 Billion Emergency Fund Could Add up to Much More for Businesses, States, and Municipalities, Yale School of Management: Program on Financial Stability (April 1, 2020), https://som.yale.edu/blog/cares-act-454-billion-emergency-fund-could-add-up-to-much-more-for-businesses-states-and-municipalities [https://perma.cc/Y9LD-LNDA]
Marc Jarsulic & Greg Gelzinis, Making the Fed Rescue Serve Everyone in the Aftermath of the Coronavirus Pandemic, Ctr. for Am. Progress (May 14, 2020), https://www.americanprogress.org/issues/economy/news/2020/05/14/484951/making-fed-rescue-serve-everyone-aftermath-coronavirus-pandemic/ [https://perma.cc/7L9F-RFLQ]
CFTC Cuts Back Registration Requirements for Cross-Border Derivatives
By Jake Schanne, RBFL Student Editor
The Commodities Future Trading Commissions (CFTC) issued a Final Ruling on July 23, 2020 removing registration requirements for swap dealers and major swap participants. The Ruling replaced a 2013 Guidance that had technically been unenforceable, but was largely followed. The decision was issued 3-2 in a partisan split with Republican-appointed commissioners voting for and Democrat-appointed commissioners voting against.
The affirming commissioners argued that the majority of CFTC registration requirements were redundant of equivalent foreign regulations, particularly following a majority of G20 countries’ adoption of the Pittsburgh Accords. Further, they believed that the Ruling covered exceptions to any entity attempting to circumvent U.S. regulations by (1) requiring the foreign regulations to be comparable; (2) maintaining Dodd-Frank regulations on swap dealers and attendant dealers when the swap of a non-U.S. person is “guaranteed” by a U.S. person; (3) and creating a “significant risk subsidiary” (SRS) category that attempts to extend Dodd-Frank regulations on US affiliated-subsidiaries in foreign countries. Several U.S. financial institutions lauded the rule for eliminating redundant bureaucratic costs.
However, the two dissenting commissioners criticized the rule for increasing risk to the U.S. financial system with only minimal gain. They contended the Ruling left open several loopholes including (1) an overly narrow definition of “guaranteed” swaps requiring rights of recourse against grantors, and (2) three major exceptions that the SRS category would not cover: (i) foreign-affiliated subsidiaries that are small relative to the US parent company, (ii) foreign subsidiaries of a US parent company with global consolidated assets worth less than $50 billion, and (iii) subsidiaries that are prudentially regulated by the Federal Reserve or foreign regulations in line with the Basel Committee’s capital standards and has comparable margin requirements for uncleared swaps. These exceptions limit the SRS category, by the affirming commissioners’ own admission, to capture “few, if any” entities. U.S. entities can even try to create two of their own foreign subsidiaries not captured by the SRS category, like being small in size relative to their parent, and conduct swaps between the two subsidiaries without any U.S. regulations being imposed, despite both entities using U.S. money and keeping all the financial risk in the U.S.
Aside from policy considerations, the Ruling was furthered justified on legal principles of international comity and the written intention of Congress by passing Section 2(i) of the Commodity Exchange Act (CEA). Many commentators suggest that the Commission misinterpreted principles of international comity that bar certain U.S. regulations on foreign entities only if the respective foreign regulations are expressly incompatible with the US regulations. However, many commentators agreed with the CFTC’s interpretation of Section 2(i) of the CEA given the law’s recommendation for the CFTC to limit its regulations over foreign swaps. Critics rebut the CEA’s purpose was not only for increased prudence, but also to impose market regulations onto swap traders which the Final Ruling lacks.
Overall, the Final Ruling represents a controversial rollback of U.S. regulations and exchanges increased U.S. financial risk for reduced bureaucratic costs on international financial institutions.
Sources:
Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45292 (July 26, 2013).
Patrick Pearson, Comments of the European Commission in respect of CFTC Staff Advisory No. 13-69 regarding the applicability of certain CFTC regulations to the activity in the United States of swap dealers and major swap participants established in jurisdictions other than the United States (Mar. 10, 2014), https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59781&SearchText=.
EvangelosBenos et al., Centralized trading, transparency and interest rate swap market liquidity: evidence from the implementation of the Dodd-Frank Act (Bank of Eng. Staff Working Paper No. 580 May 2018), https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2018/centralized-trading-transparency-and-interest-rate-swap-market-liquidity-update.
Heath P. Tarbert, Statement of Chairman Heath P. Tarbert in Support of Final Cross-Border Swap Rule (July 23, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement072320b?utm_source=govdelivery.
Heath P. Tarbert, Statement of Chairman Heath P. Tarbert in Support of Final Swap Dealer Capital Rule(July 22, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/tarbertstatement072220?utm_source=govdelivery
Dan M. Berkovitz, Dissenting Statement of Commissioner Dan M. Berkovtiz on the Final Rule for Cross-Border Swap Activity of Swap Dealers and Major Swap Participants(July 23, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/berkovitzstatement072320?utm_source=govdelivery
Press Release, “CFTC Approves Final Cross-Border Swaps Rule and an Exempt SEF Amendment Order at July 23 Open Meeting,” CFTC (July 23, 2020), https://www.cftc.gov/PressRoom/PressReleases/8211-20.
Joseph Vebman et al., CFTC Finalizes Cross-Border Swaps Rule (August 12, 2020), https://www.skadden.com/insights/publications/2020/08/cftc-finalizes-cross-border-swaps-rule.
Commodity Futures Trading Comm’n, Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants (to be codified at 17 C.F.R. pt. 23).
Minn-Chem, Inc. v. Agraium, Inc, 683 F.3d 845, 858(7th Cir. 2012) (holding that for US antitrust laws to apply to a foreign potash cartel, the cartel must have intended to produce and actually have produced a substantial effect in the United States because it contained the word “foreseeable”).
Hartford Fire Ins. Co. v. California, 509 U.S. 764, 796 (1993) (holding that for US anti-trust laws to apply to foreign companies the companies have a direct enough relationship with the US and meet threshold effects).
Hartford Fire, 509 U.S. at 798-99 (holding that conflicts of international comity only arise where a person subject to regulation by both states cannot comply with both jurisdiction’s laws).
Republic of Arg. v. Weltover, Inc., 504 U.S. 607, 619-20 (1992) (interpreting a U.S. statute to not require intent of substantial effect as the word “foreseeable” was not included in the statute nor implied by the words “direct”).
7 U.S.C § 2(i)
7 U.S.C § 15(a)
Dodd-Frank Act of 2010, H.R. 4173, 111th Cong. § 722(a) (mandating the CFTC to “consult and coordinate” with the SEC before enacting any “order regarding swaps” for “consistency and comparability, to the extent possible”)
Dodd-Frank Act of 2010, H.R. 4173, 111th Cong. § 762 (barring the SEC from rulemaking regarding swaps that is not empowered by the Dodd-Frank Act)
The Commodity Exchange Act & Regulations¸ Commodity Futures Trading Commission, https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
COVID: The Exclamation Point on a Sentence Already Written… SPACs are back!
By Laura Stavisky, RFBL Student Editor
In recent years, more companies are going public through an unconventional model. Rather than endure the IPO process, companies are opting to merge with a Special Purpose Acquisition Company (SPAC) instead. A SPAC is a company which is created for the sole purpose to acquire a private company which would then become a public after the merger. A SPAC raises funds through an IPO; the company has no commercial operations, so the disclosure process for its initial IPO is significantly easier. Shareholders buy shares in the SPAC, essentially betting on the management team. The management team then has typically two years to find a target company to acquire. Upon selection, SPAC shareholders have a choice to keep their money in the SPAC or pull their investment and walk away. After the merger, SPAC shares are converted into shares in the acquired company, now public.
Why do target companies go public this way? For one, IPOs are a long process with many disclosures. As some have argued, “[t]he market is not structured to quickly turn well-hyped businesses into public companies.”[1] The timeline between identifying a target company and the merger is typically 12-18 weeks. Additionally, the only disclosures required by the target company are those requested by the SPAC; however, the acquisition of the target company will go through the SEC’s process (and provide the required disclosures) but only for the evaluation of the merger. The deals are done directly between the two companies, which allows for a quick process and less risk to investors. An IPO provides no guarantees as to the payout for the private company’s investors. A SPAC merger comes with a price upfront.
Before the pandemic, SPACs were on the rise. One cited reason is that a bull market is better for SPAC growth because “it’s an easy way for people to deploy their capital.” Despite some stocks of companies which went public through a SPAC underperforming as compared to companies who chose to go the traditional IPO route, many private enterprises are still considering this route at high rates. While there were only seven SPAC IPOs in 2010 (with an average size of $71.8 million), there were fifty-nine in 2019 (averaging $230.5 million). However, 2020 has seen a steep incline, with ninety-seven SPAC IPOs thus far and an average size of $390.7 million. COVID and the market instability that has followed has not created the ideal environment for IPOs. The long process is deterring companies who may have planned to go public this year. Instead, companies are opting for quick, behind-the-scenes negotiations rather than leaving their pay day up to today’s highly unpredictable market. While it is difficult to predict nearly anything with regards to the market today, the prevalence of SPAC mergers is likely something here to stay.
Sources
https://www.nytimes.com/2020/08/25/business/dealbook/spac-ipo-boom.html
https://techcrunch.com/2020/08/21/almost-everything-you-need-to-know-about-spacs/
https://marker.medium.com/why-spacs-are-the-new-ipo-dcefe54b4bdd
[1] https://marker.medium.com/why-spacs-are-the-new-ipo-dcefe54b4bdd
Student Blog: The CFTC’s Expanded Authority to Regulate Fraud After CFTC v. Monex
by Douglas Plume, RBFL Student Editor
Since its founding in 1974, the Commodity Futures Trading Commission has had authority to regulate conduct in the markets for futures contracts of all sorts of commodities. Congress greatly expanded the CFTC’s authority and power in a number of ways with the passage of the Dodd-Frank Act in 2010, in the wake of the 2008 financial crisis. Dodd-Frank gave the CFTC power to regulate financial derivatives, as well as futures and options contracts for physical commodities. (A “derivative” is a financial instrument that derivesits value from the performance some underlying asset or index; a “futures contract” is a tradable, standard-form agreement to buy or sell a commodity at a certain fixed price, to be paid for and delivered later; an “option contract” is an agreement allowing the holder of the option to buy a commodity at a certain fixed price before a certain expiration date.)
The Dodd-Frank Act also expanded the CFTC’s anti-fraud authority in two important ways: (1) by allowing the Commission to bring an enforcement action whenever it could allege conduct by a regulated entity that was deceptive, even if that conduct did not result in market manipulation; and (2) broadening the CFTC’s anti-fraud authority to cover “a contract of sale of any commodity in interstate commerce.” 7 U.S.C. § 9(1) (2018). The CFTC in July 2011 issued a Final Rule delineating the type of deceptive and manipulative conduct it would prohibit. The Commission indicated in its preamble to the Rule that it intended to interpret its scope broadly, in harmony with the statutory text.
This development went little noticed by commentators, probably because until very recently the CFTC’s anti-fraud enforcement actions had been confined to cases of alleged market manipulation or transactions involving futures contracts that were traditionally within the CFTC’s scope.
In September 2017, the CFTC brought an enforcement action against Monex, the operator of an unregistered online platform that allowed individual investors to buy and sell positions in precious metals on margin. The CFTC alleged that Monex had engaged in deceptive conduct in violation of the anti-fraud statute, 7 U.S.C. § 9(1), because it had made deceptive statements to customers about the value and security of their investments. Approximately 90 percent of the Monex account with leveraged positions in precious metals lost money between 2011 and 2017, despite statements from Monex representatives to the effect that customers’ precious metal investments “will always have value.”
The district court dismissed the action, finding that the CFTC’s anti-fraud provision allowed it only to regulate conduct that was both deceptive andmanipulative. The CFTC appealed, and the Court of Appeals for the Ninth Circuit reversed the district court in an opinion handed down in July.
The Ninth Circuit concluded that the Dodd-Frank Act’s purpose was to give the CFTC broad remedial powers to ferret out and prohibit conduct that was deceptive and harmed consumers, even when that conduct did not result in market manipulation. Monex also argued that it shouldn’t be subject to the CFTC’s jurisdiction because it was not selling futures, but was instead allowing consumers to buy actual metals on margin. The Ninth Circuit noted that 7 U.S.C. § 9(1) was broadly written, to cover commodities sold on margin, as well as “a contract of sale of any commodity in interstate commerce,” the court did not address whether the CFTC could regulate all sorts of deceptive conduct in “spot” transactions, where customers paid cash and the commodity was delivered “on the spot.”
The ultimate outcome of the CFTC’s enforcement action against Monex remains uncertain, but it seems likely that the Commission could use this case as a test case for future enforcement actions against, for example, cryptocurrency changes. The CFTC has declared that cryptocurrencies are a commodity subject to its jurisdiction, and so far, a few federal district courts have agreed. The Monexdecision will be another arrow in the CFTC’s quiver, allowing it to prohibit and fine conduct that falls well short of common-law fraud.
The Trump Administration has taken a fairly laissez faireattitude toward financial regulation, but the CFTC’s anti-fraud statute and its accompanying regulations have few guardrails that cabin the Commission’s enforcement power. A future Administration could use the CFTC’s anti-fraud power to fine and to punish all sorts of sellers engaging in arguably deceptive or harmful conduct. The CFTC’s anti-fraud provision does not require that the allegedly deceptive statements be made with any specific intent to defraud consumers, so any companies that sell products that are poorly understood by consumers and that engage in advertising to lure in new buyers could potentially be subject to sweeping enforcement actions by the CFTC.
Sources:
Commodity Exchange Act, 7 U.S.C. §§ 1-27f (2018).
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Pub. L. No. 111-203, 124 Stat. 1376 (codified as amended in 15 U.S.C. and other titles).
CFTC v. Monex Credit Co., 931 F.3d 966 (9th Cir. 2019).
CFTC v. Zelener, 373 F.3d 861, 866–67 (7th Cir. 2004).
Chicago Board of Trade v. SEC, 187 F.3d 713, 715 (7th Cir. 1999).
CFTC v. My Big Coin Pay, Inc., 334 F. Supp. 3d 492 (D. Mass. 2018).
CFTC v. McDonnell, 287 F. Supp. 3d 213 (E.D.N.Y. 2018).
CFTC v. Monex Credit Co., 311 F. Supp. 3d 1173 (C.D. Cal. 2018).
In reCoinflip, Inc., CFTC No. 15–29, 2015 WL 5535736 (Sept. 17, 2015).
Prohibition on the Employment, or Attempted Employment, of Manipulative and Deceptive Devices and Prohibition on Price Manipulation, 76 Fed. Reg. 41,398 (Jul. 14, 2011) (codified at 17 C.F.R. pt. 180).
Tyce Walters, Regulatory Lies and Section 6(c)(2): The Promise and Pitfalls of the CFTC’s New False Statement Authority, 32 Yale L & Pol’y Rev. 335, 335–36 (2013).
- Holland West & Matthew K. Kerfoot, The Impact of Dodd-Frank on Derivatives, 18 Fordham J. Corp. & Fin. L. 269, 272–75 (2013).
Allen Kogan, Comment, Not All Virtual Currencies Are Created Equal: Regulatory Guidance in the Aftermath of CFTC v. McDonnell, 8 Am. U. Bus. L. Rev. 199, 211–15 (2019).
Leida Slater, Note, The Commodities Game Has a New Referee, 52 Chi.-Kent L. Rev. 438, 440 (1975).
Theodore M. Kneller, Jonathan Marcus, Daniel O’Connell, & Mark D. Young, Skadden, Arps, Slate, Meagher & Flom llp, Ninth Circuit Holds CFTC Dodd-Frank Enforcement Authority Allows Fraud-Only Claims, JD Supra (Jul. 31, 2019), https://www.jdsupra.com/legalnews/ninth-circuit-holds-cftc-dodd-frank-30420/ [https://perma.cc/25CL-9GLM].
Student Blog: Financial Data Protection
by Zachary Zehner, RBFL Student Editor
If I were a betting man, I would guess that the average reader has a bank account, a credit card, and maybe some even have an investment portfolio. With juggling all of these accounts and attempting to stick to one’s financial budget, many consumers opt for a third party service provider like Mint.com. Mint provides a platform to consolidate all of these accounts into one place and provide a fuller picture of one’s financial health. But how does Mint know all of your financials across all of these accounts? As with Mint and many other third party financial services in the United States, you’ve given them your username and password to log into your financial accounts and record the financial data. It’s a process called screen scraping. The user provides his login credentials to the data aggregator, usually a separate company working on behalf of the third party service provider, which employs proprietary software to collect your account balances, transactions, fees, and interest charges. Given the nature of the data aggregator’s access, they not only have full reign over your financial accounts, but also other data including non-essential personal data that you may have added to your account like home address, phone number, and your birthday. In fact, it is hard for your banking institution to track whether it is you or the data aggregator logging into your account. While this all seems quite scary, there has yet to be any data breaches due to data aggregators using screen scraping techniques. What might be scarier is that in the United States, some financial institutions have unilaterally blocked some third party services. Thus, the consumer may feel like they do not actually own their financial data because the financial institution decides who may access it. Financial institutions use the argument that there are serious security concerns with screen scraping as well as some logistical concerns to rationalize blocking third party service providers.
In the European Union, the revised Payment Services Directive (PSD2) puts an end to this monopoly over consumer financial data and placed it back into the hands of consumers. It also almost completely did away with screen scraping, opting for the use of Application Programming Interfaces (APIs). With APIs, data aggregators can access the consumer data through a specialized portal on the financial institution’s website instead of the consumer-facing interface as was done with the screen scraping technique. APIs allow greater control over the range of personal data shared with data aggregators and eases many of the logistical concerns financial institutions had with screen scraping. While on the face of the issue it seems APIs are a clear answer for where the United States should head for its financial data regulation, it is much muddier than that. APIs are expensive and many community banks would not be able to offer extra services to its consumers like it can through screen scraping. APIs appear impenetrable, but the Equifax breach proved otherwise. Lastly, many third party service providers have relied on screen scraping so long that it would be a hardship on their business to switch to APIs.
For now, the Consumer Financial Protection Bureau has not taken any affirmative actions towards regulating our financial data. The industry is self-regulating, and hopefully, that will get us through until we take stock with the result of the newly enacted PSD2 in the EU.
Sources
- Fintech: Examining Digitization, Data, and Technology: Hearing Before the S. Comm. on Banking, Housing and Urban Affairs, 115th Cong., at 31 (Sept. 18, 2018), https://www.govinfo.gov/content/pkg/CHRG-115shrg27749/pdf/CHRG-115shrg27749.pdf
- Consumer Financial Protection Bureau, Consumer Protection Principles: Consumer-Authorized Financial Data Sharing and Aggregation(Oct. 17, 2018), https://files.consumerfinance.gov/f/documents/cfpb_consumer-protection-principles_data-aggregation.pdf
- S. Dep’t of Treas., A Financial System That Creates Economic Opportunities Nonbank Financials, Fintech, and Innovation Report to President Donald J. Trump Executive Order 13772 on Core Principles for Regulating the United States Financial System, at 25, https://home.treasury.gov/sites/default/files/2018-07/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financi....pdf
- Erin Fonte & Brenna McGee, EU Law Brings Data Sharing Pointers For US Financial Cos., Law360 (June 29, 2018), https://www.law360.com/articles/1056977/eu-law-brings-data-sharing-pointers-for-us-financial-cos
Student Blog: Flexibility in Microfinance
by Steven Young, 2L Editor
Microfinance gives low-income, seasonal-income, and otherwise indigent persons access to financial products that are typically reserved for wealthier customers. Microfinance Institutions (MFIs) specifically target these individuals who cannot participate in typical credit markets by providing atypical financial products and services. However, microloans are costly. Default risks are high, and the burden of administering numerous small loans can be significant. As a way to combat these additional costs for microloans, MFIs issue typical microloans with high interest rates, sometimes well over 30%, and standardized terms and conditions. Some microloan contracts even require the borrower to begin paying back the loan the week after the loan is issued.[1]
The purported primary goal of all of microfinance is poverty alleviation. Yet, research suggests that these rigid contracts may do little to actually improve the lives of the borrowers. The strict terms and seemingly harsh consequences of default can detract from the benefits that would otherwise flow from financial inclusion. A borrower may be barred from ever borrowing again if she defaults. Likewise, because many microloans rely on social pressure rather than collateral to substantiate the microloan, other people may not qualify for a loan if another member of the community defaults. This incentive scheme reduces the possibility that borrowers will realize the true potential of the microloan proceeds. Rather than invest in profitable, long-term projects, borrowers of these microloans become so preoccupied by repaying them. For example, a borrower may elect to either sell productive assets or skip a few meals in order to make the next set of payments.[2]
Research suggests restructuring microloans to incorporate more flexibility could reduce these unintended consequences. Grace-periods, relaxed payment schedules, and individually-tailored contracts may provide more opportunity for borrowers to deploy capital for productive purposes, without countervailing detriments to MFIs.[3]
However, the empirical data supporting the need for more flexible microfinance contracts is unfortunately limited. Despite being conducted under rigorous academic standards, studies typically have small sample sizes and contain almost no demographic diversity.[4]Deducing any generalized principles about flexibility in all of microfinance is nearly impossible, as the results of an experiment may not hold true for other demographics.[5]Microfinance is also typically issued in turbulent conditions, where identifying cause and effect is difficult. Finally, flexibility does not address the fact that most microloans are specifically sought to augment consumption. Introducing flexibility may not encourage investment if borrowers are never looking to invest in the first place.
[1]Katherine Hunt, Law and Economics of Microfinance, 33 J.L. & Com. 1 (2014).
[2]Navjot Sangwan, Make Microfinance Great Again: A Shift Towards Flexibility, Developing Economics (Mar. 8, 2019), https://developingeconomics.org/2019/03/08/make-microfinance-great-again-a-shift-towards-flexibility/.
[3]Giorgia Barboni, Repayment Flexibility in Microfinance Contracts: Theory and Experimental Evidence on Take Up and Selection, 142 J. of Econ. Behav. & Org. 425 (2017).
[4]Rachael Meager, Understanding the Average Impact of Microcredit, Microeconomic Insights (July 17, 2019), https://microeconomicinsights.org/understanding-the-average-impact-of-microcredit/.
[5]Of course, abstracting principles may not be necessary if the vast majority of microloans are issued to demographics similar to the ones in the studies. For example, over 90% of microloans worldwide are issued to women. What flexibility in microloans does for female borrowers may hold true for microfinance generally, despite its effects for male borrowers.
Student Blog: The Cannabis Industry is Still Underbanked — Will the Federal Government Step Up?
by Lizbelle Taveras, 2L Editor
The budding cannabis industry is a disruptive force that has crept—and is creeping—its way into a number of other industries. CB Insights has compiled a list of 23 wide-ranging industries that have begun incorporating cannabis products, or will begin to do so in the near future. Such industries include medicine, wellness and beauty, food, law, construction, and more. Legal sales of cannabis, as reported by Associated Press, exceeded $10 billion in 2018, and Cowen’s managing director forecasted cannabis sales to reach $80 billion by 2030.
Despite all the success and revenue being garnered by the cannabis industry, cannabis businesses struggle to find banks that are willing to service them. For example, NPR shared the story of a cannabis business owner who consistently faces dangerous predicaments where he is forced to transport actual bags of millions of dollars to his local Department of Revenue in order to comply with state tax reporting requirements.
By way of federal law, the Controlled Substance Act classifies cannabis as a Schedule I substance; this means cannabis is considered unsafe, has a high potential for abuse, and has no accepted medical use. Furthermore, the Bank Secrecy Act and the Money Laundering Control Act establish strict reporting requirements for banks, and make money laundering a federal crime. These federal regulations, in conjunction with the Schedule I classification, criminalize cannabis and prevent federally-backed institutions from engaging with the cannabis industry.
So what has been done in an attempt to remedy this situation and keep up with the booming industry? Earlier this year, the Secure and Fair Enforcement Banking Act (“SAFE Act”) was introduced in both the House and the Senate. The SAFE Act proposes to “create protections for depository institutions that provide financial services to cannabis-related legitimate businesses and service providers for such businesses.” As reported by NPR and Bloomberg, the enactment of this law would provide banks with the assurances they need to properly serve the cannabis industry, and would eliminate much of the risks of operating an all-cash business. My primary concern is that the SAFE Act does not do enough by way of widespread cannabis reform. For example, Senator Cory Booker has expressed that cannabis reform that focuses solely on the financial industry will cause criminal justice issues related to federal cannabis laws to be further ignored. In order to open the gates for sweeping reform, cannabis ought to be declassified from a Schedule I substance.
Declassification, however, is not being contemplated by the federal government. Any step toward national reform that will allow the cannabis industry to fully flourish is a step in the right direction; and currently, the SAFE Act is the most promising legislation for federal banking reform of the cannabis industry. Its passage is what the nation needs to begin to reap the ample benefits of a thriving, intersectional industry. Whether this opportunity will be taken lies in the hands of the federal government.