Blog
Gamify This: FINRA and the SEC’s Decision on Gamification Looms Large
BY: Michael J. Pioso, Student Editor
In early 2021, the stock market was on fire. An army of retail investors, people like you and me, had seemingly taken over. Most of these retail investors placed their trades through Robinhood, an application-based online brokerage. How did Robinhood attract 18 million active users and nearly $80 billion in assets? Robinhood attracted these traders through distinct application features, such as generous referral programs, a sleek user-interface, the option to purchase fractional shares, and a confetti explosion to celebrate each trade.
This army of retail investors produced extreme market volatility. This should not come as a shock, especially given that ordinary retail investors accounted for 23% of total US Equity trading in 2021. Regulatory bodies like FINRA and the SEC quickly noticed this volatility, as well as the horror stories that emerged of retail investors taking massive losses. The regulators specifically homed in on the platforms, not the users. The big question was whether online brokerages’ gamification features were harming retail investors.
Starting in February 2021, FINRA has increased its oversight of application-based online brokerages that maintain game-like features. The regulatory body is concerned that online brokerages are attracting young, inexperienced investors through their easy-to-use, incentive-filled platforms. At the time this Developmental Article was written, FINRA had not drafted any formal rules to address online brokerages. FINRA is expected to play a secondary role in the charge against online brokerages and gamification features and will likely follow the SEC’s lead.
The SEC has been far more aggressive in their response to online brokerages and gamification features. In late August 2021, the SEC began soliciting public commentary on the use of digital engagement practices to assist them in drafting a new rule. SEC Chair Gensler hoped that the public would answer two questions: (1) “how the financial regulator should protect investors against a potential conflict of interest”; and (2) “if brokerages’ game-like or predictive prompts assume optimal outcomes and impact how often customers trade, should the regulator consider those in-app prompts as formal investment recommendations or investment advice?”
The SEC has received considerable push-back from various securities associations, who have argued that the existing regulatory framework properly covers gamification features. U.S. Senator Pat Toomey has also argued in favor of the online brokerages, stating that the brokerages have made investing far more accessible and that adults should be free to invest their money how they see fit.
In mid-October 2021, the SEC released a 45-page report stating that gamification features “on stock-trading apps could lead investors to trade more than they would have otherwise and need to be further examined.” However, the SEC did not provide any specific regulatory recommendations or actions, punting on the issue for the time being. Over the coming months, all eyes will be on the SEC to see what kinds of regulations and protections they will enact. The one thing we do know is that whatever the SEC decides, FINRA will follow.
Sources:
Thomas Franck & Maggie Fitzgerald, SEC steps up research into brokers’ ‘gamification’ of trades, Chair Gary Gensler says, CNBC (Aug. 27, 2021), https://www.cnbc.com/2021/08/27/sec-steps-up-research-into-gamification-of-trading-with-online-brokers-gary-gensler-says.html
Hailey Konnath, SEC Says 'Game-Like' Trading Apps Need More Examination, LAW360 (Oct. 18, 2021), https://www-law360-com.ezproxy.bu.edu/articles/1432171/sec-says-game-like-trading-apps-need-more-examination
Kate Rooney & Maggie Fitzgerald, Here’s how Robinhood is raking in record cash on customer trades — despite making it free, CNBC (Aug. 13, 2020), https://www.cnbc.com/2020/08/13/how-robinhood-makes-money-on-customer-trades-despite-making-it-free.html
Al Barbarino, FINRA Report Puts ‘Game-Like’ Trading Apps On Notice, LAW360 (Feb. 2, 2021), https://www-law360-com.ezproxy.bu.edu/articles/1350865/finra-report-puts-game-like-trading-apps-on-notice
Robert W. Cook, President and Chief Exec. Officer, Financial Indus. Regul. Auth., Statement Before the Financial Services Committee U.S. House of Representatives (May 6, 2021) (transcript available at https://www.finra.org/media-center/speeches-testimony/statement-financial-services-committee-us-house-representatives#_ftnref23)
Al Barbarino, 'Gamification' Exposes Major Reg BI Flaw, SEC Official Says, LAW360 (Oct. 13, 2021), https://www-law360-com.ezproxy.bu.edu/articles/1430578/-gamification-exposes-major-reg-bi-flaw-sec-official-says
Al Barbarino, Toomey, SIFMA Say No To New SEC 'Gamification' Regs, LAW360 (Oct. 1, 2021), https://www-law360-com.ezproxy.bu.edu/articles/1427346/toomey-sifma-say-no-to-new-sec-gamification-regs
Annie Massa & Tracy Alloway, Robinhood’s Role in the ‘Gamification’ of Investing, Bloomberg (Dec. 19, 2020), https://www.bloomberg.com/news/articles/2020-12-19/robinhood-s-role-in-the-gamification-of-investing-quicktake
Rug Pulling: Common NFT Scheme to Defraud Investors
BY: Angel Rodriguez, RBFL Student Editor
Cryptocurrency has become more mainstream as Russians and Ukrainians turned to
Bitcoin and other alternative cryptocurrencies in response to limitations imposed by financial
institutions amidst the ongoing war. [1] While there are clear benefits for using crypto, there
are still lingering fraud concerns due to a lack of adequate regulation. An especially susceptible
area of ongoing concern are non-fungible tokens (“NFTs”). A pair of 20-year-olds were recently
charged with conspiracy to commit wire fraud and money laundering in a roughly $1.1 million
NFT scam. [2] Ethan Nguyen and Andre Llacuna were responsible for a fraud commonly known
as a "rug pull" in the cryptocurrency space, meaning they abandoned their NFT project and took
off with investors’ capital. [3] “Rug pulling” is in vogue as NFTs remain largely unregulated,
leaving many victims in its wake. Because the existing regulatory scheme is not adaptive peer-
peer-nature of virtual assets, it will continue to be ineffective at warding off smaller scale
fraudulent schemes and illicit uses of crypto. [4]
Like many other rug pulling schemes, Nguyen and Llacuna advertised their NFT project
on social media platforms, Twitter, and Discord. [5] They sold digital tokens to raise money for a
metaverse gaming project, promising token purchasers that they would eligible for rewards,
such as early access to their game and passes to upcoming "seasons." [6] However, within
hours of selling all their 8,888 “Frosties” tokens for 0.04 ether — each about $123 to $136
apiece at the time, they abandoned the project. [7] In total, they raised about $1.1 million in an
hour. [8]
"Rather than providing the benefits advertised to Frosties NFT purchasers, Nguyen and
Llacuna transferred the cryptocurrency proceeds of the scheme to various cryptocurrency
wallets under their control," the U.S. Department of Justice said. [9] Before their arrest in Los
Angeles, Nguyen and Llacuna were preparing to launch another set of NFTs, called "Embers,"
which were allegedly expected to bring in about $1.5 million. [10]
While Nguyen and Llacuna are unlikely to escape retribution for their fraudulent
scheme, investors will likely never see their cryptocurrency's return. This case is illustrative of
the shortcomings of recent efforts by U.S. regulators to regulate cryptocurrency through the
passage of the Anti-Money Laundering Act of 2020 (“AMLA”), which expanded the definition of
“money transmitting business” and “financial institution” under the Bank Secrecy Act (“BSA”) to
include businesses involved in the exchange or transmission of “value that substitutes for
currency.” [11] Because NFTs do not constitute currency as provided under the definition, it has
fallen outside of the purview of the AMLA. Although not readily adaptive to the unique peer-to-
peer nature of cryptocurrencies, the European Commission is making efforts to expand its
current crypto regulations to reach NFTs through its legislative proposal called, Markets in
Cryptoassets Regulation (“MiCA”). [12] The MiCA proposal includes regulations that would
apply to NFTs in some instances and defines for the first time in the EU a crypto asset as a
“digital representation of value or rights which may be transferred and stored electronically,
using distributed ledger technology or similar technology.”[13] The MiCA Proposal generally
references three main categories of token (asset referenced token, e-money token and other
cryptoassets), with different requirements for each regarding licensing and operations of
issuers. [14] Under Title II of the MiCa Proposal, NFTs would likely fall into the “catch-all”
category of other cryptoassets. [15] The provision for a catch-all category is a necessary starting
point for regulating crypto assets, but as the technology continues to evolve and there is a
greater demand for decentralization, an intermediary, centralized regulatory scheme is unlikely
to counteract the illicit schemes of ever-creative criminals.
References
[1] Emily Stewart and Rebecca Heilweil, War in the time of crypto,
https://www.vox.com/recode/22955381/russia-ukraine-bitcoin-donation-war-crypto (March
15, 2022)
[2] Elise Hansen, ‘Frosties’ NFT Project Was A $1.1M Fraud, Prosecutors Say, https://www-
law360-com.ezproxy.bu.edu/articles/1477335/-frosties-nft-project-was-a-1-1m-fraud-
prosecutors-say (March 24, 2022)
[3] Id.
[4] Jaime Boucher, Are Nonfungible Tokens Subject to US Anti-Money Laundering
Requirements?, https://www.skadden.com/insights/publications/2021/04/are-nonfungible-
tokens-subject (April 16, 2021).
[5] Hansen, supra note 2.
[6] Id.
[7] Id.
[8] Id.
[9] Id.
[10] Id.
[11] Boucher, supra note 4.
[12] Proposal for a Regulation of the European Parliament and of the Council on Markets in
Cryptoassets, and amending Directive (EU) 2019/193, COM/2020/593 final, https://eur-
lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A52020PC0593
[13] Id.
[14] Id.
[15] Id.
Enhanced Disclosure Requirements for Special Purpose Acquisition Companies
BY: Tim Kolankowski, RBFL Student Editor
On August 26, 2021, the SEC’s Investor Advisory Committee published recommendations that call for the Commission to implement enhanced disclosure requirements for special purpose acquisition companies, otherwise known as “SPACs.” SPACs are shell companies that accumulate capital during an initial public offering with the intention of using that capital to acquire a private target company. Since 2020, SPACs have drastically grown in popularity as a means for private companies to go public, and as an investment opportunity for institutional and retail investors. The meteoric rise in SPAC formation and investing has caused the SEC, and its new chairman Gary Gensler, to evaluate whether retail investors are protected by the current SPAC regulatory regime. After taking note of various vulnerabilities in current
SPAC regulations, the Investor Advisory Committee devised recommendations calling for enhanced disclosures in order to allow retail investors to make more informed decisions when SPAC investing. Although more information would likely help retail investors, the question must be asked, is it enough?
My Note explores whether the enhanced disclosure requirements that the Investor Advisory Committee calls for would sufficiently protect SPAC investors. The Note first tries to offer a clear explanation on how SPACs operate, and why they have grown so much since 2020. Then, drawing on studies that showcase how enhanced disclosure can lead to better investor decision-making, the Note discusses how there is certainly evidence demonstrating that providing investors with more information about the SPAC could lead to a safer world for SPAC investors. At the same time, however, given investors’ limited attention and other dangerous risks that are inherent to SPAC investing, there is reason to believe that something beyond mere disclosure should be done. Finally, considering the complexities of SPACs and the risks that are
inherent to SPAC investing, I will briefly consider whether retail investors should be able to invest in SPACs at all, and whether an accredited investor requirement should be implemented for SPAC investing.
This is a unique discussion as there is a fair amount of literature on whether disclosure iseffective at protecting consumers and investors in various different contexts. However, there issignificantly less scholarly work discussing the relationship between disclosure and SPAC investing. Given that there are a number of risks to investors that are unique to SPAC investing, the analysis conducted here is necessary to determine how the SEC can best regulate SPACs to provide sufficient investor protection.
Sources:
1. SEC INVESTOR ADVISORY COMMITTEE, RECOMMENDATIONS OF THE INVESTOR AS PURCHASER
AND INVESTOR AND INVESTOR AS OWNER SUBCOMMITTEES OF THE SEC INVESTOR ADVISORY
COMMITTEE REGARDING SPECIAL PURPOSE ACQUISITION COMPANIES (2021),
https://www.sec.gov/spotlight/investor-advisory-committee-2012/draft-recommendation-
of-the-iap-and-iao-subcommittees-on-spacs-082621.pdf.
2. Max H. Bazerman & Paresh Patel, SPACS: What You Need to Know, HARV. BUS. REV.,
https://hbr.org/2021/07/spacs-what-you-need-to-know (last visited Feb. 6, 2022).
3. Michael Klausner et al., A Sober Look at SPACs, (Stanford L. and Econ. Olin Working
Paper No. 559, 2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3720919#
4. Lora Dimitrova, Perverse incentives of special purpose acquisition companies, the “poor
man’s private equity funds”, J. OF ACCT. AND ECON. (Oct. 12, 2016),
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2139392
5. SEC, WHAT YOU NEED TO KNOW ABOUT SPACS – UPDATED INVESTOR BULLETIN, (2021)
https://www.sec.gov/oiea/investor-alerts-and-bulletins/what-you-need-know-about-spacs-
investor-bulletin
6. John Lambert, Why so many companies are choosing SPACs over IPOs, KPMG,
https://advisory.kpmg.us/articles/2021/why-choosing-spac-over-ipo.html
[https://perma.cc/73KW-L748] (last visited Feb. 16, 2022).
7. Ramey Layne & Brenda Lenahan, Special Purpose Acquisition Companies: An
Introduction, HARV. L. SCH. F. ON CORP. GOVERNANCE (July 6, 2018),
https://corpgov.law.harvard.edu/2018/07/06/special-purpose-acquisition-companies-an-
introduction/ .
8. Allan Ferrell, Mandatory Disclosure and Stock Returns: Evidence from the Over-the-
Counter Market, THE J. OF LEGAL STUD. (June 2007),
https://www.journals.uchicago.edu/doi/pdf/10.1086/511898.
9. Dennis Chung, Does the large amount of information in corporate disclosures hinder or
enhance price discovery in the capital markets?, J. OF CONTEMP. ACCT. & ECON. (Dec. 19,
2018), https://www.sciencedirect.com/science/article/pii/S181556691830184X.
10. David Hirschleifer & Siew Hong Teoh, Limited attention, information disclosure, and
financial reporting, J. OF ACCT. & ECON. (Oct. 14, 2003),
https://www.sciencedirect.com/science/article/pii/S0165410103000648..
Finfluencers, Meme Stocks, and Regulatory Response
BY: Megan R. Miller, RBFL Student Editor
“Finfluencer” activity has exploded in recent years, especially during the COVID-19 pandemic. According to Bloomberg Wealth, “finfluencers” are online personalities who share financial advice, particularly on social media. Social media platforms like YouTube, TikTok, and Instagram are full of young people offering investment, budgeting, and other financial advice to large, also mostly younger Gen Z and Millennial audiences.
The explosion of young people investing and consuming financially focused social media content may be due in part to the 2019 “stampede” to eliminate stock-trading fees at investment advisory firms such as Fidelity and TD Ameritrade following Robinhood’s uptick in popularity. Regardless of the primary cause of the uptick in finfluencing, its effects are clear; for instance, r/WallStreetBets, a popular investing subreddit, grew from 4.5 to 6 million members overnight.
While increasing the accessibility of investing via the internet and social media allows younger investors to access the market, regulators and finance law experts have raised concerns that come with the finfluencer market and the uptick in online investment access. Although social media finfluencer activity may be permissible under the FTC’s online advertising rules, multiple areas of financial influence appear to be in violation of securities regulations prohibiting unauthorized investment advising.
Three main issues affecting finfluencers and securities regulators today include the recent uptick in “meme stocks,” which often results in market manipulation, sometimes at the hands of previously registered investment advisers; celebrity endorsements of their special purpose acquisition companies (“SPACs”); and the unregulated distribution of unauthorized investment advisory services from cryptocurrency finfluencers.
Several securities industry regulators including the SEC and FINRA have announced plans to address and remedy these alarming increases in fintech securities law violations. SEC chair Gary Gensler has announced plans to address gaps in cryptocurrency regulation and SPAC endorsements in particular. However, little has been done to actually address and account for these violations or legal loopholes.
In the case of SPACs, Congress proposed two pieces of legislation, one of which would require SPAC management to be held liable for their forward-looking statements. However, no proposed legislation to date exists to help regulate things like meme stocks and potentially unauthorized cryptocurrency investment advice distribution. In a highly regulated industry like financial services, much more guidance and regulation is needed to ensure that young investors are not taken advantage of or misled with respect to their investment vehicles and their investment advisers.
Sources:
Sarah Ponczek, Gen Z and Millenials Really are Trading More in the COVID Era, BLOOMBERG (Aug. 19, 2020), https://www.bloomberg.com/news/articles/2020-08-19/gen-z-and-millennials-really-are-trading-more-in-the-covid-era [https://perma.cc/5M6Y-Y36L].
Misyrlena Egkolfopoulou, Wall Street Influencers Are Making $500,000, Topping Even Bankers, BLOOMBERG WEALTH (Sept. 17, 2021, 12:01 AM EDT), https://www.bloomberg.com/news/articles/2021-09-17/social-media-influencers-income-advertising-wall-street-products [https://perma.cc/A6GN-RF4T].
Jeff Cox, Fidelity joins the stampede to eliminate fees for online trading, CNBC (Oct. 10, 2019, 7:56 AM EDT) https://www.cnbc.com/2019/10/10/fidelity-joins-the-stampede-to-eliminating-fees-for-online-trading.html [https://perma.cc/G4WP-YD8B].
Shona Ghosh, Reddit Group WallStreetBets Hits 6 Million Users Overnight After a Wild Week of Trading Antics, BUSINESS INSIDER (Jan 29, 2021, 8:14 AM), https://www.businessinsider.com/wallstreetbets-fastest-growing-subreddit-hits-58-million-users-2021-1 [https://perma.cc/WDX7-D4CV].
See, e.g., SEC, Investor Alert, “Celebrity Involvement with SPACs” (March 10, 2021), https://www.sec.gov/oiea/investor-alerts-and-bulletins/celebrity-involvement-spacs-investor-alert [https://perma.cc/Z8Z8-WM4E]; FINRA, Investor Insight, “Investing in a SPAC” (March 29, 2021), https://www.finra.org/investors/insights/spacs [https://perma.cc/FP83-T3TD].
FED. TRADE COMM’N, .com Disclosures: How to Make Effective Disclosures in Digital Advertising (2013), https://www.ftc.gov/sites/default/files/attachments/press-releases/ftc-staff-revises-online-advertising-disclosure-guidelines/130312dotcomdisclosures.pdf [https://perma.cc/8PHR-AQRQ].
Avi Salzman, Gary Gensler Says SEC is Focusing on SPACs and Retail Trading Apps, BARRON’S (June 23, 2021 11:01 AM ET), https://www.barrons.com/articles/gary-gensler-says-sec-is-focusing-on-spacs-and-retail-trading-apps-51624460483 [https://perma.cc/Y8C6-V5XH].
See Bob Pisani, Gary Gensler has a full agenda as he gets set to take over the SEC, CNBC (Apr. 14, 2021, 7:39 AM EDT), https://www.cnbc.com/2021/04/14/gary-gensler-has-a-full-agenda-as-he-gets-set-to-take-over-the-sec.html [https://perma.cc/8QYL-WG7J] (discussing Gensler’s focus on addressing gaps in cryptocurrency regulation and the gamification of stock trading following the GameStop stock market frenzy).
House Proposal, Certain Special Purpose Acquisition Companies Excluded from Safe Harbor for Forward-Looking Statements, https://financialservices.house.gov/uploadedfiles/5.24_bills-117pih-hr____.pdf [https://perma.cc/DU2B-YBTL]; House Proposal, Enhanced Disclosures for Blank Check Companies During IPO and Pre-Merger Stages, https://www.kennedy.senate.gov/public/_cache/files/8/c/8c5a665c-b7e8-48ce-a2bf-6cd1dbc504c3/A1E8BB9BDA5EB64CB106B92056D91B57.the-sponsor-promote-and-compensation-act-spac-act-.pdf [https://perma.cc/47G8-V9TT].
Robinhood IPO – Continued Regulatory Issues After Going Public
BY: Aspen Schneider, RBFL Student Editor
Throughout its eight years of operation, Robinhood has faced many problems. The company has been penalized by multiple regulatory bodies for a variety of offenses. In response to the penalties, Robinhood has made hopeful additions to the board of directors and made various improvements within the platform. However, regardless of efforts to improve, it is likely that Robinhood will face more regulatory challenges in the future. The mission of Robinhood is to “democratize finance for all.” However, is the company truly bringing finance to the people if regulatory matters indicate otherwise?
Amongst the various penalties that Robinhood has faced are massive fines from the SEC and FINRA. The SEC found that, between 2015 and 2018, Robinhood made misleading statements and omissions in customer communications regarding its largest revenue source when describing how it created revenue. One of the marketed attractions of Robinhood is that it offers “commission free” trading to users. However, due in part to unusually high payment for order flow rates, Robinhood executed user orders at prices that were inferior to those of other brokers. In aggregate, Robinhood provided inferior trade prices that deprived customers of $34.1 million, even after accounting for the savings derived from not paying a commission.
On June 30, 2021, FINRA announced that it had fined Robinhood $57 million and ordered the company to pay approximately $12.6 million in restitution to harmed customers. This is the largest financial penalty ever ordered by FINRA. First, FINRA found that during certain periods after September 2016, Robinhood negligently communicated false and misleading information to its customers despite its mission to “de-mystify finance for all.” Second, FINRA found that since Robinhood began offering options trading to customers in December 2017, Robinhood had failed to exercise due diligence before approving customers to place options trades. Third, “FINRA found that from January 2018 to February 2021 Robinhood failed to reasonably supervise the technology that it relied upon to provide core broker-dealer services, such as accepting and executing customer orders.” Fourth, FINRA found that between 2018 and 2020 Robinhood failed to report tens of thousands of written customer complaints that it was required to report to FINRA.
The penalties that Robinhood faced are likely not the last. Robinhood's IPO documents show that the company has reserved millions of dollars for a potential settlement with the New York Department of Financial Services over "anti-money laundering and cybersecurity-related issues." Robinhood’s registration statement also notes the outstanding investigations that are not resolved by the FINRA order, including issues with Robinhood’s customer support procedures and customer arbitration agreements.
Robinhood acknowledges that it is “subject to claims and lawsuits in the ordinary course of business, including arbitrations, class actions and other litigation…” The company continues by noting that it “operate[s] in a highly regulated industry and many aspects of [its] business involve substantial risk of liability, and [it is] regularly the subject of actions, inquiries, investigations, examinations and proceedings by regulatory and other governmental agencies.” From speculation from industry experts, as well as Robinhood itself, it is probable that there are many more penalties in the company’s future.
Sources:
Press Release, Sec. and Exch. Comm’n, SEC Charges Robinhood Financial With Misleading Customers About Revenue Sources and Failing to Satisfy Duty of Best Execution (Mar. 21, 2020) (on file with author).
Press Release, Financial Industry Regulatory Authority, FINRA Orders Record Financial Penalties Against Robinhood Financial LLC (June 30, 2021) (on file with author).
Registration Statement, File No. 333-258474 (July 1, 2021)[hereinafter Registration].
The SEC and Climate-Related Disclosures
BY: Jacob Robart, RBFL Student Editor
Motivated by strong investor demand, the Securities and Exchange Commission is expected to announce new rules for climate-related disclosures. In crafting a new climate disclosure framework, the SEC will be guided by the principles of consistency and comparability while seeking to mandate disclosures that will be decision useful to investors. Furthermore, The SEC will consider several important factors when determining what information should be disclosed. The SEC will consider where disclosures should be located and whether they should be furnished or filed. The SEC will also consider introducing a variety of both qualitative and quantitative disclosures. Qualitative disclosures might include how a company’s leadership addresses climate-related risks and opportunities. In terms of quantitative disclosures, the SEC will distinguish between scope 1, 2, and 3 disclosures. Finally, the SEC will consider whether there should be specific disclosures by industry, whether companies should provide forward looking scenario analysis, and whether a new SEC climate disclosure framework should resemble an existing framework such as the TCFD.
Proponents of mandatory climate-related disclosures, such as Elizabeth Warren, have emphasized that climate-related disclosures can be mandated because climate risks are material to investors. Former SEC Commissioner Allison Herren Lee has asserted that the SEC has the authority to mandate climate-related disclosures through the broad statutory powers of the Securities Act of 1933. Regardless of materiality, the SEC believes it can mandate climate-related disclosures because such information is important for protecting investors. Opponents of the SEC’s potential climate-related disclosure mandate argue that climate-related disclosures are outside of the scope of the authority that Congress has delegated to the SEC. Opponents also argue that mandatory climate-related disclosures would violate the first amendment. Other opponents argue that even if the SEC can mandate climate-related disclosures, doing so would be impractical.
Public comments to the SEC have mostly been positive; however, commenters were divided on what exactly should be included in disclosures and whether disclosures should be furnished or filed. Commenters critical to filing believe that filing climate-related disclosures in a similar fashion as traditional financial disclosures would inappropriately expose public companies to liability. Many democratic politicians, along with environmental NGOs, would like to see climate-related disclosures filed in annual or quarterly statements, such as the 10-K. They believe that by filing climate-related disclosures instead of furnishing, companies will be properly motivated to make disclosures completely and accurately.
Depending on how the SEC ultimately tailors its climate-related disclosure rules, I expect SEC registrants will challenge the SEC. Particularly, I would expect SEC registrants to fiercely oppose mandated scope 3 emission disclosures and furnished climate-related disclosure statements.
Sources:
Gary Gensler, Chairman, Sec. and Exch. Comm’n, Prepared Remarks Before the Principles for Responsible Investment “Climate and Global Financial Markets” Webinar (July 28, 2021)
Alexandra Thornton & Tyler Gellasch, The SEC Has Broad Authority To Require Climate and Other ESG Disclosures, Center for American Progress (June 10, 2021)
Lee Reiners & Mario Olczykowski, Summary of Comment Letters for the SEC’s Climate Risk Disclosure RFI, Glob. Fin. Mkts. Ctr. FinReg Blog (July 9, 2021), https://sites.law.duke.edu/thefinregblog/2021/07/09/summary-of-comment-letters-for-the-secs-climate-risk-disclosure-rfi/ [perma.cc/FX76-T46J]
Allison Herren Lee, Comm’r, Sec. and Exch. Comm’n, Living in a Material World: Myths and Misconceptions about “Materiality” (May 24, 2021)
Andrew N. Vollmer, Does the SEC Have Legal Authority to Adopt Climate-Change Disclosure Rules?, Mercatus Ctr.: Fin. Regul. (Aug. 19, 2021) https://www.mercatus.org/publications/financial-regulation/does-sec-have-legal-authority-adopt-climate-change-disclosure [https://perma.cc/98QU-JEMP]
Adam Bryla et al., Commenters weigh in on SEC climate disclosures request for public input, Davis Polk (July 6, 2021), https://www.davispolk.com/insights/client-update/commenters-weigh-sec-climate-disclosures-request-public-input [https://perma.cc/AK7U-C9CG]
Elad Roisman, Comm’r, Sec. & Exch. Comm’n, Putting the Electric Cart before the Horse: Addressing Inevitable Costs of a New ESG Disclosure Regime (June 3, 2021)
Thomas L. Strickland et al., SEC Redoubles Focus on Climate Change, ESG Disclosures, WilmerHale (Mar. 15, 2021), https://www.wilmerhale.com/en/insights/client-alerts/20210315-sec-redoubles-focus-on-climate-change-esg-disclosures [https://perma.cc/63G2-VA45]
Comparing Unprofitable Companies to SPAC Investments Following AMG Capital Management, LLC v. Federal Trade Commission
BY: Matthew Rosen, RBFL Student Editor
In April of 2021, the Supreme Court laid down a ruling that severely diminished the Federal Trade Commission’s ability to obtain monetary relief in federal court. In AMG Capital Management, LLC v. Federal Trade Commission (AMG v. FTC) the court radically overhauled the dynamic within the court system. The ruling prevents the FTC from looking retrospectively at a company’s wrongdoings to obtain monetary relief for those who have been harmed. Justice Breyer held that the statute should only be applied towards injunctive relief.
This ruling is considered to be especially applicable to unprofitable companies and SPACs, who often find themselves more vulnerable to litigation. Using MoviePass as an example of an unprofitable company, MoviePass went to great lengths to keep their company afloat as it was slowly dying. The company began employing deceptive business practices, such as taking their service offline entirely in an effort to prevent the users from costing them any more money. Prior to the AMV v. FTC decision, the FTC would have been able, or at least try, to obtain monetary relief for those users who were harmed by these deceptive behaviors. Following the ruling, the FTC is only capable of seeking an injunction to prevent this type of behavior in the future. While MoviePass still ended up bankrupt as a company, they will suffer not suffer directly for their actions.
SPAC investments provide some different angles to the discussion of the FTC’s power compared to unprofitable companies. Often, companies may choose to go public through a SPAC prior to becoming profitable, leading to many of the same potential liabilities as any other unprofitable company. Additionally, SPACs create a lengthened negotiation period during the acquisition process. One common issue with SPACs is stockholders suing for misrepresentations and a failure to find the best target company. While stockholders maintain their own litigation rights, AMG v. FTC insulates the SPAC leaders from federal intervention for monetary damages. Furthermore, as a rapidly growing market, SPACs are staring down potential regulations from the SEC. While a concern for the SPAC market, these regulations could provide a level of protection for investors rather than the company itself.
As the market continues to evolve, it will be interesting to follow the behaviors of both unprofitable companies and SPACs. The unprofitable company business model appears to be more popular than ever before, with many of these companies carrying with them large amounts of debt. As for the relatively new SPAC boom, it remains unclear how these companies will perform long-term and if the SPAC strategy will continue to grow.
Sources:
Anna B. Naydonov, SCOTUS: FTC Has No Authority to Obtain Monetary Relief Under Section 13(b) of the FTC Act, Nat’l L. Rev. (May 14, 2021), https://www.natlawreview.com/article/scotus-ftc-has-no-authority-to-obtain-monetary-relief-under-section-13b-ftc-act [https://perma.cc/BU5J-Z9N5] (“For over four decades the Commission has relied on this Section to bring consumer protection and antitrust actions before federal courts seeking injunctions and monetary relief, such as restitution and disgorgement . . . .").
Nick Statt, Why MoviePass Really Failed, The Verge (Sept. 19, 2019, 10:00 AM), https://www.theverge.com/2019/9/19/20872984/moviepass-shutdown-subscription-movies-
helios-matheson-ted-farnsworth-explainer [https://perma.cc/3JBJ-DTCK] (“As the CEO of Helios and Matheson, however, Farnsworth set his sights on Hollywood, and he decided to acquire the six-year-old-film-subscription service MoviePass in summer 2017.”).
Dan Seitz, MoviePass Temporarily Shuts Down For the Second Time in Weeks After Running Out of Money, Uproxx (July 28, 2018), https://uproxx.com/movies/moviepass-outage-money/ (providing an example of one of the times MoviePass shut down).
Max H. Bazeman & Paresh Patel, SPACs: What You Need to Know, Harv. Bus. Rev. (July 2021), https://hbr.org/2021/07/spacs-what-you-need-to-know (“A SPAC is a publicly traded corporation with a two-year life span formed with the sole purpose of effecting a merger . . . .”).
Regulatory Landscape in Wyoming and Wyoming’s Leadership in Cryptocurrency
BY: Melissa Pereira, RBFL Student Editor
Cryptocurrency (“Crypto”) financial technology may be the future of transacting. However, there are regulatory obstacles to overcome before widespread adoption and usage can be achieved. My developmental article extensively discusses these regulatory obstacles, the need for a clear regulatory framework of crypto, Wyoming’s leadership in implementing crypto-friendly regulation, as well as anticipations for the future of digital asset regulation.
There are thousands of crypto technologies, and many vary in their function, goals, and codes. Issues arise when trying to reconcile crypto technology with the current regulatory framework. It is unclear which existing laws are applicable to crypto and there is uncertainty regarding which regulatory authority should govern the trading and transfer of digital assets, thus causing confusion and ambivalence among market participants and regulators. The complexities of the technology and wide variance in function of cryptos may help to explain why it is so persistently unclear. Having regulation in the crypto space will not only facilitate efficient and stable operations of crypto transacting, but also increase consumer protection and crypto usage.
The state of Wyoming is gaining a reputation as “Cryptocurrency’s Wild West” because of their leadership in passing crypto-friendly laws, and because these new laws are attracting many crypto companies to the state. There are several elements and nuances to the groundbreaking crypto-friendly Wyoming legislation, which can be broken down into three primary parts: First, the legislation provides clear definitions of the technology and divides blockchain based assets into three different categories of personal property assets. Secondly, the legislation establishes and recognizes an LLC entity formation for blockchain technology known as decentralized autonomous organizations (DAOs). Lastly, it allows for the chartering of special purpose depository banking institutions, which enable banks to provide regular banking services as well as blockchain based services to customers.
Wyoming’s crypto-friendly legislation provides more consumer protection and investment security, as well as an easier means of acquiring digital assets. These regulations give crypto companies a better understanding of their legal status and it will likely decrease operational risk and uncertainty. Less risk will not only incentivize consumers to invest and engage with crypto technology, but also encourage crypto companies to continue operating and innovating toward the future of digital asset technology.
As for the future of crypto regulation, Wyoming’s leadership may have spawned other states to follow in their legislative footsteps. Other states may be attracted to the crypto industry to create jobs and capital for the state or to stay on pace with the emergence of this innovative technology. Regardless of what particularly attracts a state to crypto legislation, many states will consider adopting crypto legislation in 2021 and 2022, according to the National Conference of State Legislators.
Sources:
Bailey Reutzel, What is cryptocurrency? Here’s what you need to know about blockchain, coins and more, CNBC (Sep. 22, 2021), https://www.cnbc.com/select/what-is-cryptocurrency/ [https://perma.cc/46R8-7JH5]
Jonathan Marcus & Stephanie Cannuli, Crypto Bills Show Consensus On Need For Federal Oversight, Law360 (Apr. 21, 2021), https://www-law360-com.ezproxy.bu.edu/articles/1377590/crypto-bills-show-consensus-on-need-for-federal-oversight
Maria Aspan, How Caitlin Long turned Wyoming into crypto country, Fortune (July 29, 2021), https://fortune.com/2021/07/29/caitlin-long-wyoming-crypto/ [https://perma.cc/59HB-SQE5]
See Wyoming’s Pro-Blockchain Laws Tame The Wild West of Crypto, Sygna U.S. Crypto Regulations, Blog, https://www.sygna.io/blog/wyomings-pro-blockchain-laws-tame-cryptos-wild-west/ (last visited Nov. 20, 2021); [https://perma.cc/WC3D-VJZD]
Kristin Alford, Wyoming House Bill Further Defines a Digital Asset, NCS (April 26, 2021), https://www.ncscredit.com/education-center/blog/wyoming-house-bill-further-defines-a-digital-asset/ [https://perma.cc/ZJ8B-APWZ]
Jimmy Aki, Wyoming Passes Bill to Secure Banking Relations for Blockchain Companies, Bitcoin Magazine (Dec. 3, 2018), https://bitcoinmagazine.com/culture/wyoming-passes-bill-secure-banking-relations-blockchain-companies [https://perma.cc/5ALM-4NVA]
Gina Chon, Cryptocurrency’s Wild West in Wyoming, Reuters, (Jul. 7, 2021), https://www.reuters.com/breakingviews/cryptocurrencys-wild-west-is-wyoming-2021-07-07/ [https://perma.cc/SMG6-YEAM]
The United States’ Foreign Direct Investment Screening Regime in a Post-COVID World
BY: Margaux Arntson, RBFL Student Editor
The COVID-19 pandemic (“pandemic”, “COVID-19”) and countries’ responsive containment measures brought shockwaves to the world, especially to worldwide supply and demand. The pandemic disrupted global production networks, leaving many countries’ economies in turmoil. This environment presented opportunistic buyers with the chance to acquire or invest in foreign sectors and companies that had been weakened by the pandemic. In an effort to protect critical and strategically important companies and sectors from foreign control, many countries both temporarily and permanently revised their foreign direct investment (“FDI”) screening regimes. These measures generally surround certain strategic sectors like telecom, technology, infrastructure, and raw materials. Shortages of personal protective equipment (“PPE”) for healthcare workers and restrictions on exports of medical equipment have prompted state actors to guard their pharmaceutical and medical manufacturing sectors more closely. Many countries’ updated FDI screening laws subject any potential foreign acquisition to automatic review by the country’s FDI regulatory body.
Yet, United States has not enacted any new FDI legislation in response to COVID-19. The most recent FDI-related legislation passed was the Foreign Investment Risk Review and Modernization Act of 2018 (“FIRRMA”), which President Trump signed into law over a year before the first COVID-19 case was reported. While FIRRMA strengthens and modernizes the Committee on Foreign Investment in the United States (“CFIUS”) and allows CFIUS to reach a broader range of foreign investment transactions, the pandemic and its economic effects have highlighted important yet vulnerable U.S. sectors that remain unprotected by CFIUS. Despite greatly expanding CFIUS’s jurisdiction, FIRRMA and CFIUS’s final regulations fail to protect, in any meaningful way, U.S. companies that develop and manufacture PPE, medications and medical goods for highly contagious diseases, or in-vitro diagnostics for highly contagious diseases. Yet, the pandemic has exacerbated shortages of medical drugs and devices to critical levels in the United States. Virtually all U.S. hospitals and health care systems (99%) have reported challenges in procuring supplies needed not only for the treatment of COVID, but many other diseases as well. These ongoing shortages will only grow if foreign parties are able to acquire U.S. medical manufacturing companies as a way to supplement their own domestic shortages of medical supplies.
CFIUS could theoretically prevent foreign acquisitions of U.S. medical development and manufacturing companies by characterizing the company as a TID U.S. business. This would most plausibly be done under CFIUS’s jurisdiction over U.S. businesses that design and manufacture “critical technologies”. That being said, CFIUS’s narrow focus on national security would make fitting these businesses within a stated list extremely challenging. For example, while the United States Munitions Lists references biological agents, it does so in reference to chemical agents deployed in warfare such as mustard gas and nerve agents. It is hard to imagine how CFIUS would reasonably include products like PPE or medications and medical goods for highly contagious diseases within FIRRMA as it currently stands. Plus, the President maintains control over the final contends of the list CFIUS can amend. He could legally remove any addition relating to the pandemic and is not obligated to present a rationale for doing so.
Overall, COVID has weakened critical U.S. sectors that remain unprotected by the United States’ FDI screening regime. It is of critical importance that Congress, CFIUS, and the President work together update the country’s FDI screening process in ways that address these weaknesses.
Sources:
Joanna Kenner, FDI in a post-covid-19 worlds: A threat to the European project?, Inst. Montaigne, (May 11, 2020), https://www.institutmontaigne.org/en/blog/fdi-post-covid-19-world-threat-european-project.
Mary Ellen Stanley, From China with Love: Espionage in the Age of Foreign Investment, 40 Brooklyn J. Intl. l. 1033, 1035-36 (2015).
Jones Day, Foreign Investment Control Heats Up: A Global Survey of Existing Regimes and Potential Significant Changes on the Horizon, Jones Day (January 2018), https://www.jonesday.com/files/upload/Foreign%20Investment%20Control%20Heats%20Up.pdf.
Farhad Jalinous et. al, CFIUS Finalizes New FIRRMA Regulations, White & Case (Jan. 22, 2020), https://www.whitecase.com/publications/alert/cfius-finalizes-new-firrma-regulations.
Jayden r. Barrington, CFIUS Reform: Fear and FIRRMA, An Inefficient and Insufficient Expansion of Foreign Direct Investment Oversight, 21 Transactions: Tenn. J. Bus. L. 77, 104 (2019).
James K. Jackson, Cong. Res. Serv., RL33388, The Committee on Foreign Investment in the United States (CFIUS) (2019).
Pension Funds Investing in Private Equity
BY: Morgan Sciumbato
Public pension funds issue retirement benefits to many of the public servants in the United States. Beneficiaries contribute money to the fund throughout their careers, and then once they retire, they are guaranteed steady retirement payments from the pension fund. However, many of the public pension funds in the United States are underfunded due to investment choices and economic downturns. To make up for their underfunding, many public pensions funds have turned to alternative investments, like private equity. Pension fund managers are attracted to private equity because of the private equity industry’s reputation for high returns. [1]
While private equity’s reputation presents the hope of high returns and access to unique investments, it also has several detriments such as lack of transparency and high fees. These types of downfalls are exactly why many underperforming pension funds have recently faced criticism for their private equity investments. [2]
The State Teachers Retirement System of Ohio (STRS) is one pension fund that has been criticized. Over the past decade, STRS has paid over $4.1 billion in management fees for their alternative investments despite having to disappoint their beneficiaries by eliminating annual cost-of-living increases due to underfunding. [3] Another example is the Pennsylvania Public School Employees Retirement System (PSERS). PSERS has allocated more than half of its assets to alternative investments in recent year. [4] However, critics have argued that the fund would be better off with a strategy that favors stocks and bonds because their return over the last 10 years was only 7.7%, lower than the S&P 500. [5]
However, not all pension funds that invest in private equity suffer from bad performance. For example, the Illinois State Board of Investment has a private equity portfolio with a 10-year annualized return of 16.10%. [6] Pension funds with private equity portfolios that perform well prove that private equity investments can be lucrative. Further, private equity investments allow pension funds to diversify their portfolios by giving them access to assets that are not available on public markets.
So, should public pension funds invest in private equity? Many critics would be happy if pension funds steered clear of private equity and instead allocated their funds to more stable investments like index funds. [7] However, I think this would be unwise. Pension fund managers must take risks in order to fix their problem of being underfunded. [2] Further, many pension funds have proven to be successful in their private equity strategies. Thus, pension funds should take risks with private equity investments in their search for high returns, but they must be smart about where their money is going if they want the reward.
Sources:
[1] Jamal Hagler, Pension Funds and Private Equity, Am. Inv. Council 1 (2019), https://www.investmentcouncil.org/wp-content/uploads/pension-funds-and-private-equity.pdf
[2] Marc Joffe, Examining Private Equity In Public Pension Investments, Reason Found. (Jan. 2021), https://reason.org/wp-content/uploads/examining-private-equity-public-pension-investments.pdf
[3] Gretchen Morgenson, Private equity and hedge fund firms invested pension cash for retired Ohio teachers. Here’s what happened., NBC News (June 9, 2021, 6:00 AM),
[4] https://www.nbcnews.com/business/personal-finance/private-equity-hedge-fund-firms-invested-pension-cash-retired-ohio-n1269885 [https://perma.cc/M7AW-XHRT][4] Joseph DiStefano, Why PSERS investment strategy has failed to pay off for Pa. taxpayers and school employees, The Phila. Inquirer (Aug 8,2021),