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.
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].
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.
- 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
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.
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.
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.
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.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.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.
Katherine Hunt, Law and Economics of Microfinance, 33 J.L. & Com. 1 (2014).
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/.
Giorgia Barboni, Repayment Flexibility in Microfinance Contracts: Theory and Experimental Evidence on Take Up and Selection, 142 J. of Econ. Behav. & Org. 425 (2017).
Rachael Meager, Understanding the Average Impact of Microcredit, Microeconomic Insights (July 17, 2019), https://microeconomicinsights.org/understanding-the-average-impact-of-microcredit/.
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.
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.
by Kellen Safreed, 2L Editor
As data collection, use, and analysis become increasingly central to the operations of many companies, users and governments are growing concerned about the risks this data harvesting may pose to individual privacy. Scandals over the past few years, such as Cambridge Analytica’s improper use of Facebook user data during the 2016 U.S. presidential campaign,major hacks of companies like Equifax and Target,as well as a range of other breaches,have made data privacy a major issue. Consequently, we need to consider what legislation can or should do to mitigate risks to our personal data.
In 2018, the European Union’s new data privacy framework, the General Data Privacy Regime, went into effect. This comprehensive regulation applies standards and rules for data collection and use across the EU and applies globally to all companies collecting data on users located within the bloc.A similar regulation, the California Consumer Privacy Act, is set to be enforced beginning in 2020. It, too, applies not only to companies within its jurisdiction, the State of California, but also to all companies nationwide and around the world which use the data of California residents. Due to their global reach and potential for heavy fines, these two pieces of legislation are set to be influential in their own right and as potential models for future regulations.
A major question is what, if anything, the U.S. federal government will do in the sphere of data protection. Current federal action in this area is limited to a “patchwork” of regulations which are limited to specific industries and types of data collection, with essentially free range given to companies who fall outside of current statutory ranges.This is a stark contrast to the GDPR and CCPA, which are blanket regulations based on data collection and use per se.
My development article looks at the requirements imposed by the GDPR and CCPA, the consequences of noncompliance, and what U.S. companies should do to meet adhere to the regulations as cleanly and inexpensively as possible. I also consider possible avenues for federal legislation, including what that legislation may look like and how it could interact with current federal and state regulations.
A potential alternative to such federal legislation is the application of fiduciary duties, i.e. care, loyalty, and confidentiality, to data-collecting entities.This could have the benefit of both better integrating into current U.S. legal structures and avoiding creating a new constitutional right to privacy while still correcting the current, major power imbalance between corporations and individual users.
Melissa Quinn, California data-privacy law may become the model for Congress, Washington Examiner(July 22, 2019, 12:01 AM) https://www.washingtonexaminer.com/news/california-data-privacy-law-may-become-the-model-for-congress [https://perma.cc/RE58-FY9R]
Almudena Arcelus, Brian Ellman, & Randal S. Milch, How Much Is Data Security Worth, 15 SciTech Law.10 (2019).
Zachary N. Layne, The Modern Threat: Data Breaches, Security Measures, and a Call for Changes, 23 N.C. Banking Inst.159 (2019).
Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation), 2016 O.J. (L. 119/1).
Stephen Mulligan et al., Data Protection Law: An Overview, Congressional Research Service (March 25, 2019).
California Consumer Privacy Act of 2018, A.B. 375, Ch. 55, § 3(2018), eff. Jan. 1, 2019.
Catherine Barrett, Are the EU GDPR and the California CCPA Becoming the De Facto Global Standards for Data Privacy and Protection?, 15 SciTech Law.24 (2019).
Stephen Mulligan et al., Data Protection Law: An Overview, Congressional Research Service 54 (March 25, 2019).
Lindsey Barrett, Confiding in Con Men: U.S. Privacy Law, the GDPR, and Information Fiduciaries, 42 Seattle U. L. Rev.1057, 76 (2019)
Student Blog: Protecting the Wealth Tax’s Achilles Heel: Incentivizing Fair Taxpayer Asset Valuation
by Kevin Brown, RBFL Student Editor
The desirability and practicality of taxing net wealth has become a hot topic in the United States over the past few months due to support for such a tax by democratic presidential candidates such as Elizabeth Warren.That being so, several European countries have already implemented (and some have subsequently repealed) a wealth tax in the past few decades. In almost all of those cases, administrative issues related to asset valuation resulted in governments narrowing the scope of the wealth tax or else unsustainable noncompliance on the part of taxpayers.
How can European experiences with taxing net wealth inform the implementation of an efficient and effective wealth tax in the United States? What issues unique to the United States arise related to implementing a wealth tax? If it is possible to survive constitutional challenges to such a law, would a wealth tax be administratively feasible?Are there ways to use the existing regimes of taxing estates, gifts, and income to solve the valuation-related problemsposed by the wealth tax?
My research seeks to collect and survey current scholarship in an effort to answer these questions.
Further, my article will address methods of incentivizing taxpayers to appropriately value their assets, especially ones that are typically difficult to value(think: IP, goodwill, art, partnership rights, &c). Despite the buzz about taxing wealth, many discussions stop short of actively addressing how to face the valuation problem.
As a coda to my research, my article will propose one possible method of incentivizing taxpayers to realistically value their assets.If that sounds ambitious, I will at the very least suggest a framework wherein taxpayers who dramatically undervalue their assets under the wealth tax face penalties within the income tax upon a realization event.
It may be helpful for some readers if I provide a brief distinction between income and wealth. Definitions abound, but, in a broad sense, income is the increase in wealth that comes within an individual’s control. Wealth, alternatively, is just the aggregate value of everything an individual owns at a given time.
As an example, imagine Abe and Beth. Abe is paid $100,000 each year for his work as a stunt man and has no other assets. Beth has $1,000,000 in an investment that pays her a 10% yearly return of $100,000. Abe and Beth earn the same amount taxable income (the $100,000 that comes under their control every year), but Beth clearly has more wealth. Beth’s $1,000,000 is safe from the income tax, however, because Beth simply lets it sit and grow.
Taxing wealth would allow the Treasury to tax each year a portion, say 2% (i.e. $20,000), of the $1,000,000 Beth owns. Such a tax is controversial, not only because it has never been implemented in the United States before, but also because it poses practical and theoretical difficulties. Namely, it motivates Beth or hide or misrepresent her wealth and imposes a tax on an individual’s assets without a traditional realization event (like a sale, exchange, gift event, or inheritance). Under a wealth tax, the investment would be taxed just for sitting there and growing.
Thus, imposing a wealth tax would change both the behavior of the tax base and would send ripples through settled areas of the law of taxation. My research does not seek to find affirmative answers to all the issues raised, but it does seek to collect and analyze current scholarship on the topic and to propose an original method of better incentivizing a taxpayer subject to a wealth tax to properly value her assets.
Ultra-Millionaire Tax, Warren for President(Jan. 24, 2019), https://elizabethwarren.com/plans/ultra-millionaire-tax.
Alexander Krenek & Margit Schratzenstaller, A European Net Wealth Tax, Austrian Institute of Economic Research4 (2018) (“Evaluation difficulties are one of the most common arguments against a recurrent net wealth tax.”).
Letter from Bruce Ackerman, Sterling Professor of Law and Political Science, Yale U., et al, to Senator Elizabeth Warren (Jan. 24, 2019) (addressing constitutionality of Senator Warren’s proposed wealth tax).
See Anthony J. Casey & Julia Simon-Kerr, A Simple Theory of Complex Valuation, 113 Mich. L. Rev. 1175, 1188 (2015) (surveying methods courts employ to address valuation problems); Nathan Matthews, The Valuation of Property in the Early Common Law, 35 Harv. L. Rev. 15, 29 (1921) (“[T]here is hardly any branch of law which is not concerned more or less with property values.”).
SeeMarsack's Estate v. Comm'r, 288 F.2d 533, 535 (7th Cir. 1961) (asserting that under the IRC “[a]scertainment of the fair market value of property may, at times, be difficult, but except in rare cases, it is not an impossible task”).
It is worth noting that 18 “ultra-millionaires” signed a June 24, 2019 letter supporting a tax on the net wealth of ultra-wealthy individuals, suggesting that at a class of highly net worth individuals willing to pay a wealth tax does exist. SeeJonathan Curry, Ultra-Wealthy Call for Warren-esque Wealth Tax, Tax Notes Federal(Jun. 25, 2019).
by Daniel McCarthy, RBFL Student Editor
On July 15, 2019, the House Financial Services Committee introduced the “Keep Big Tech out of Finance” Bill. This Bill, if enacted, would have a few major impacts on the financial services industry. First, the Bill would prohibit technology companies that have an annual global revenue of over twenty-five billion dollars from either acting as a financial institution or being affiliated with a financial institution. Additionally, the Bill would ban technology companies of that size from offering or maintaining a marketplace, which acts as a stock exchange, thus effectively banning cryptocurrency products. The companies that would be most affected by this Bill are Amazon, Facebook, Google, Apple, and Microsoft. However, it should be noted that a number of notable FinTech companies, such as Robinhood, Coinbase, and SoFi would not be affected by this Bill because each of these companies’ global annual revenues are less than twenty-five billion dollars.
There appears to be a few key concerns that drove the House Financial Services Committee to introduce the Keep Big Tech Out of Finance Bill. The first concern is consumer protection, particularly misuse of consumer data, which is at the forefront of legislators’ minds following the recent issues with Facebook. Another concern with allowing Big Tech Companies into the financial sector is the potential negative impact on financial stability due to the Big Tech Companies having a lack of expertise in systematic risk analysis. The last major concern is that Big Tech Companies may actually have a negative impact on competition, as Big Tech companies may be able to use their existing customer base and access to existing and new capital to gain share and potentially push out large financial institutions from the sector.
On the other hand, there are also potential negative impacts from barring Big Tech Companies from entering the space. For example, prohibiting these companies’ entry may eliminate a number of improvements that these Big Tech Companies could potentially provide for consumers. Additionally, banning the Big Tech Companies from developing and offering cryptocurrency may inadvertently stop the development of a technology that can provide greater access to financial services to the underbanked.
While the current proposal is an all-or-nothing approach, there are a few potential options that are less restrictive, and still may alleviate some of the concerns. First, a governmental agency can be established to regulate how Big Tech Companies act in the financial sector, similar to how agencies like the SEC and FDIC regulate large financial institutions. Another potential solution is prohibiting Big Tech Companies from acting as independent financial organizations, but allowing them to partner with large financial institutions. These solutions may be more effective, as they would allow for consumers to benefit from potential innovations or improved offerings that Big Tech Companies may drive, while eliminating potential issues with consumer protection and financial stability.
Pete Schroeder & Ismail Shakil,U.S. Proposes Barring Big Tech Companies from Offering Financial Services, Digital Currencies,Reuters (July 14, 2019), https://www.reuters.com/article/us-usa-cryptocurrency-bill/u-s-proposes-barring-big-tech-companies-from-offering-financial-services-digital-currencies-idUSKCN1U90NL[https://perma.cc/UBH6-WVFP].
Financial Stability Board, FinTech and Market Structure in Financial Services 1 (2019) (explaining FinTech firms are already in the market).
Keep Big Tech Out of Finance Act, H.R., 116thCong. (2019).
Fortune Global 500, Fortune (2019), https://fortune.com/global500/2019 [https://perma.cc/CT5W-TPHM].
Press Release, Federal Trade Commission, FTC Imposes $5 Billion Penalty and Sweeping New Privacy Restrictions on Facebook(July 24, 2019), https://www.ftc.gov/news-events/press-releases/2019/07/ftc-imposes-5-billion-penalty-sweeping-new-privacy-restrictions [https://perma.cc/YE8Q-FGFV].
Ron Shevlin, Amazon’s Impending Invasion of Banking, Forbes (July 8, 2019), https://www.forbes.com/sites/ronshevlin/2019/07/08/amazon-invasion/#59d9128c7921 [https://perma.cc/9KK4-EEFC].
Miguel de la Mano & Jorge Padilla, Big Tech Banking4 (Dec. 4, 2018), https://ssrn.com/abstract=3294723.
Anton Ruddenklau, Tech Giants in Financial Services, KPMG(Jan. 2018), https://assets.kpmg/content/dam/kpmg/xx/pdf/2018/02/tech-giants-in-financial-services.pdf [https://perma.cc/H43A-NCPD].
Aaron Cutler & Kevin Wyoscki, Insights: Cryptocurrency has Washington’s Attention, but Beware Overregulation, BloombergLaw (July 24, 2019), https://www.bloomberglaw.com/document/XCEI7I2S000000?bc=W1siU2VhcmNoIFJlc3VsdHMiLCIvc2VhcmNoL3Jlc3VsdHMvMjk0NmE5YjA3MDk2MjMxMTc2MDQzMTQ1YjVkNTcyYWIiXV0--b348b23c64f70855be04955b0ddc137a27853751&guid=f6e3535b-a1b3-438a-92f4-1de713c72279&search32=nXkcaSydpyrn0WNTLzitPw%3D%3DgriAfWWvxWWJ6zuuMgySxJo6z_soHsqDyRkSWy18GlnXsaJbLpKFHQ_Kf32G8B5yQpZO6qvBvXlhPUlrdd915geEIxvsIQfQZc-RpfWwAyalfurhPAg9Y_LaY2obmAvqeg24LeRtynz6At1Ag7tpaw%3D%3D [https://perma.cc/6UEA-CN5Z].
Philip Rosenstein, Facebook’s Libra Raising Unique Questions for Lawmakers, Law360 (July 22, 2019), https://www-law360-com.ezproxy.bu.edu/articles/1180635/facebook-s-libra-raising-unique-questions-for-lawmakers [https://perma.cc/2WWD-9AZN].
by Kevin Brothers, RBFL Student Editor
On the west coast, California and Oregon are dealing with serious affordable housing crises that have left many struggling to keep a roof over their heads, or left without one altogether. In Oregon, approximately 14,476 individuals are reported to be homeless.The number of those experiencing chronic homelessness has jumped 28.6% between 2017 and 2018, the second worst rate in the country.Fifty percent of renters in the state are cost burdened, meaning that they must pay more than thirty percent of their income on rent.This issue is highlighted by the fact that Oregonians, according to a study conducted by the National Low-Income Housing Coalition, had to earn $22.97 an hour at a full-time job in order to comfortably pay the average rent of a two-bedroom unit.In California, the situation is far more dire. Approximately 129,972 individuals experience homelessness accounting for nearly a quarter of the total homeless population in the country.Median home prices in the Golden State have crested over the $600,000 mark.Ranking second worst in the country, Californians must earn an average wage of $34.69 an hour in order to comfortably pay rent on the average two-bedroom unit.
California and Oregon legislators have both recently enacted legislation that imposes upon landlords a mandatory cap on annual rent increases as well as measures to protect tenants from no-fault evictions.Rent control, rent stabilization, rent inflation caps, inflation protection: brand it as you wish but this housing mechanism carries with it a checkered past and the nearly universal disdain of economists.My upcoming note explores the ramifications of these new rent control statutes and asks the question: Can the new rent control measures overcome previous issues created by similar regulations implemented in the past and provide effective relief for these states’ respective affordable housing crises? I chose to explore this topic because as a native Californian, I have seen firsthand the devastating effects of the housing crisis and hope that our legislators are taking the proper approach to address this dire situation.
Proponents of the rent control measures tout its positive effects on financial stability and certainty for renters’ budgets. However, economists argue that rent control makes renting to tenants less financially viable, thereby encouraging them to withdraw their property from the rental market to be repurposed into condos and other uses. Economists also attack rent control measures on the theory that it discourages investment in real estate development and production of affordable housing stock. A study of rent control implemented in San Francisco in 1994 pointed out that available rental stock decreased by fifteen percent as landlords were disincentivized from keeping their units on the market.These points address the need for more production of affordable housing stock as the core issue of the housing crisis. California Governor Gavin Newsom said it himself: “We need to build more damn houses.”Will this address that core issue? Sadly, I think not.
Dept. of Housing and Urban Development, 2018 Annual Homeless Assessment Report to Congress (2018).
Juan Carlos Ordonez, The epicenter of Oregon’s housing crisis, Oregon Center for Public Policy (Mar. 20, 2018), https://www.ocpp.org/2018/03/20/epicenter-oregons-housing-crisis/.
Out of Reach 2019, National Low Income Housing Coalition (2019)
Dept. Housing and Urban Development, supra note 1.
CA real estate: Median home price at $607,990 in July; 4th straight month above $600K, North Nev. Business Rev., https://www.nnbusinessview.com/news/ca-real-estate-median-home-price-at-607990-in-july-4th-straight-month-above-600k/ (last visited Oct. 14, 2019).
Out of Reach 2019, supra note 3
Cal Civ. Code§ 1946.2 (West 2019); Or. Rev. Stat. Ann.§ 90.427 (West 2019).
Megan McArdle, The one issue every economist can agree is bad: Rent control, Wash. Post(June 24, 2019), https://www.washingtonpost.com/opinions/2019/06/15/comeback-rent-control-just-time-make-housing-shortages-worse/.
Rebecca Diamond & Tim McQuade & Franklin Qian, The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco, 109 Amer. Econ. Rev. 3365 (2019).
Chuck Devore, Poverty And Affordable Housing - California's New Rent Control Law Will Make Things Worse,Forbes (Sept. 13, 2019), https://www.forbes.com/sites/chuckdevore/2019/09/13/poverty-and-affordable-housing-californias-new-rent-control-law-will-make-things-worse/#5f10fb744281
by Michael Waalkes, RBFL Student Editor
Altera Corp. v. Commissioneris a challenge to the validity of 26 C.F.R. § 1.482-7A(d)(2), which is a part of the framework governing cost-sharing arrangements (CSAs), a tax reduction technique often used by multinational companies. In a CSA, an American parent company and its foreign subsidiary reach an agreement to pool and share the research and development (R&D) costs of developing an intangible (usually intellectual property). The two entities then allocate the expenses of the R&D between them in proportion to what they expect to receive in income from the intangible. This has important tax consequences. Multinational corporations often incorporate foreign subsidiaries in low-tax jurisdictions, and thus are incentivized to allocate taxable income to those foreign subsidiaries, while keeping deductible expenses associated with the more heavily-taxed U.S. parent.
This is where the Internal Revenue Service (IRS) comes in. Under IRC § 482, the IRS has the authority to reallocate income and expenses between related entities to prevent tax evasion. Companies can avoid IRS reallocations by satisfying the requirements to qualify for a regulatory safe harbor (a “qualified CSA”). One of those requirements is that related CSA-participants share employee stock compensation costs. Tech companies with high R&D costs, such as Google and Facebook, are heavily reliant on employee stock compensation as an incentive for attracting and retaining highly skilled employees. From a tax perspective, companies want to avoid including stock compensation costs in the shared pool of their CSAs, as the expenses are far more useful as deductible set-off against their U.S. income. But on the other hand, companies want to qualify for the safe harbor and avoid the unpredictability and high transaction costs of dealing with IRS audit and assessment procedures.
Altera Corp., a software firm (since acquired in 2015 by Intel), made the decision to challenge the stock compensation provision of the safe harbor regulation, disputing a proposed IRS assessment in Tax Court. Altera’s primary substantive argument (it also asserted a violation of the Administrative Procedures Act) was that the regulation was inconsistent with a traditional test known as the “arm’s length standard”. Under this standard, costs need only be shared in a CSA if they would be shared in a comparable transaction conducted by unrelated parties (i.e. parties transacting at “arm’s length”). Stock compensation simply can’t meet that test. Any entity engaged in a rational arm’s length transaction would almost certainly not agree to share the cost of stock of an unrelated company not under its control.
The Tax Court focused on this inconsistency and, in a unanimous 15-0 panel ruling for Altera, found the regulation to be arbitrary and capricious. The IRS subsequently appealed to the 9th Circuit. After twice hearing oral arguments, the 9th Circuit panel reversed the Tax Court and upheld the regulation under Chevrondeference. Chief Judge Sidney Thomas issued a wide-ranging opinion, delving into IRC 482’s legislative history and finding the regulation justified by a strong congressional interest in achieving arm’s length results, rather than using a particular arm’s length method.
The reaction to the 9th Circuit’s opinion has been swift. Many companies have disclosed substantial anticipated losses in quarterly filings, as the IRS has announced it will begin auditing taxpayers on the stock compensation issue. Altera itself, meanwhile, has filed a petition for rehearing en banc, which is currently pending in the 9th Circuit. If unsuccessful, Altera may well seek certiorari from the Supreme Court, making this an issue to watch in the remainder of 2019 and beyond.
by Inri Panajoti, RBFL Student Editor
Facebook recently announced its new currency, termed Libra. Libra’s mission is to “enable a simple global currency and financial infrastructure that empowers billions of people.” Globally, about 1.7 billion adults do not have access to traditional banking and international money transfer fees average around seven percent of the amount transferred. Libra’s goal is to give the underbanked, along with everyone else, access to a new currency and a more efficient and connected financial system. Libra will run on the blockchain, a type of technology used by many cryptocurrencies. Libra is composed of three major parts: (1) the blockchain used to run the cryptocurrency; (2) a reserve of assets designed to back up the currency known as the Libra Reserve; and (3) an independent association tasked with governing the project known as the Libra Association (“Association”). Libra is not like other cryptocurrencies. Besides using blockchain and cryptography, Libra is dedicated to setting itself apart. The Libra Reserve backs up the currency, giving it stability and intrinsic value. Additionally, many cryptocurrencies value decentralized governance, while Libra has a more centralized form of governance through the Association. The Association can be a great solution to help comply with regulations. It gives Libra more decentralized control than traditional financial systems, but it does not leave control completely to the public. The Association will oversee all decisions, regulations, and matters relating to Libra, and will have all of the original validator nodes of the network. Meaning that the Association will be the only ones that can approve transactions, create, or destroy Libra. While Facebook came up with the idea for Libra, it will not be directly involved. Instead, it has set up an independent subsidiary, Calibra, to be part of the Association. The Association is designed to have around 100 by Libra’s anticipated launch in the first half of 2020, with each member having an equal one percent of the voting power. At its peak, the Libra Association had twenty-eight members. However, it had some trouble last week as several big names dropped out, including, PayPal, eBay, Visa, Mastercard, Stripe, and Mercado Pago, leaving 21 members. The Libra Association said earlier in the week that more than 1,500 entities have expressed interest in joining the project, with 180 meeting the organization’s membership criteria. A lot of the members that left are concerned about lawmaker’s harsh response to Libra and potential problems with money-laundering, data privacy, and privatizing the international money supply. While these are all valid concerns, it is disappointing to see lawmaker’s harsh response to a project that could revolutionize the current financial system. Technology has made major improvements in numerous industries throughout the past thirty years. It’s time to let technology make financial systems more efficient. While Libra, and other cryptocurrencies may have their problems, lawmakers should be more open to discussing new and innovative ways to modernize financial systems to improve efficiency and reduce costs.
Libra Ass’n Members, An Introduction to Libra 3 (Libra Ass’n Members eds., 2019). Libra whitepaper <https://libra.org/en-US/white-paper/#introducing-libra>
Usman W. Chohan, Cryptocurrencies: A Brief Thematic Review, 1 (2017)
Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System1(2008)
Jon Hill & Philip Rosenstein, Libra Sparks Bipartisan Angst, but What can Regulators Do, Law 360 (July 12, 2019), https://www-law360-com.ezproxy.bu.edu/articles/1177883/libra-sparks-bipartisan-angst-but-what-can-regulators-do-
Christian Catalini et al., The Libra Reserve 1 (Christian Catalini et al. eds., 2019)
Richard Partington, How the Wheels Came off Facebook’s Libra Project, Guardian(Oct. 18, 2019), https://www.theguardian.com/technology/2019/oct/18/how-the-wheels-came-off-facebook-libra-project
Nikhilesh De, Facebook-Led Libra Forms Governing Council After Big-Name Departures, Coindesk, (Oct. 14, 2019), https://www.coindesk.com/facebook-led-libra-forms-governing-council-after-big-name-departures
Jessica Bursztynsky, Libra’s Co-Creator at Facebook Touts Progress After an Exodus of Key Backs of the Crypto Coin, CNBC, (Oct. 16, 2019), https://www.cnbc.com/2019/10/16/libras-co-creator-touts-progress-after-exodus-of-the-crypto-backers.html