Archive Articles

DOL to Reverse Rules “Chilling” ESG Investing and Proxy Voting

by David Schwartz J.D. CPA | Oct 13, 2021

The U.S. Labor Department (DOL) has proposed regulations that would greatly expand how retirement and pension plans can invest in ESG strategies and clarify the scope of ERISA plans’ responsibility for proxy voting. If adopted, the DOL’s proposal, drafted by the Employee Benefits Security Administration (EBSA), will reverse the former administration’s regulations on ESG factors in retirement portfolios and ERISA fiduciaries’ use of proxy voting powers in favor of social or political goals.

SEC Expands Investment Company Proxy Disclosures

by David Schwartz J.D. CPA | Oct 12, 2021

The Securities and Exchange Commission issued a proposal to expand investment company disclosures of their proxy voting activities. If adopted, the rules would enhance the information mutual funds, exchange-traded funds, and other regulated investment companies are required to report on Form N-PX under the Investment Company Act. These expanded disclosures are intended to make proxy voting decisions made by investment company advisers more complete, accessible, and understandable to investors.

Reddit Trading and Resilience in U.S. Equity Finance Part 4

by Ed Blount | Sep 24, 2021

Paris, September 24, 2021 – The next shoe has fallen in reaction to the January 2021 GameStop short squeeze, by which certain online brokers interpreted clearinghouse rules to necessitate the suspension of their retail customers’ ability to buy “meme stocks”. Today, the European Securities Markets Authority (ESMA), citing SEC and EU data for January 2021 on suspiciously high levels of failed meme stock settlements, asked for public comment on rule changes to avoid future short squeezes in the EU. This ESMA consultation on systemic risk management will surely propel industry leaders to advance their previously-announced plans for a block-chained securities market infrastructure to add even more robust operating and disclosure protocols.

Exposing the Rogue Traders

by Ed Blount | Aug 19, 2021

Master Criminals don’t usually confess in public. If prosecutors’ charges are true, Sanjay Shah is the leading figure in the largest reported tax swindle in history. Yet, Mr. Shah, unbowed, pleading his case to reporters, has openly admitted to borrowing the assets of widows and orphans in one country to kick-start a pyramid scheme of dividend capture trades, so as to swindle widows and orphans in other countries.

Germany Throws the Book at Tax Criminals

by David Schwartz J.D. CPA | Aug 19, 2021

German courts and regulators have put securities lenders on notice that cross-border withholding tax (WHT) reclaim “schemes” are now “crimes.” Recent developments in Germany have cleared the way for sweeping tax audits and potential criminal prosecutions of borrowers and lenders reaching back 25 years. The so-called “cum-ex” trades have been a focus of European regulators, particularly in Germany and Denmark, whose treasuries have been hit hardest by these trades. Lenders are being advised that there is new potential for legal and criminal jeopardy attached to cum-ex securities lending transactions and that principals and their service providers should be ready for heightened scrutiny.

Unweaving a Tangled Web

by Ed Blount | Aug 11, 2021

The German Federal Court of Justice’s decision two weeks ago to prosecute as criminals anyone who abused dividend arbitrage trades anytime over the previous 25 years is bad news for everyone in the securities lending community. The German tax authorities’ new determination to conduct sweeps of securities loans that span dividend record dates should in particular sound the alarm for institutional securities lenders, especially if it presages a new trend among regulators.

RESTORING TRUST IN MARKETS: RMA Podcast Series

by Ed Blount | Jul 19, 2021

Good morning, this is Ed Blount and I am speaking to you from the Center for the Study of Financial Market Evolution here in Washington, D.C. I’ve been asked by my good friends at the Risk Management Association, RMA, just up the road in Philadelphia, to offer some thoughts on “how data-based models can be used to change the negative views of financial markets that are held by some bank customers and regulators, especially in the wake of the pandemic.” So, that is an interesting question.

Apple Sauce or Orange Juice?

by Ed Blount | Jun 11, 2021

Databases designed for specific purposes often fail when asked to solve a different problem. As an example, the securities finance databases of leading data providers such as FIS Astec, Datalend, and IHS Markit, designed more than 20 years ago for performance benchmarking, are inadequate when queried for the purpose of the loans themselves. Even regulatory databases enriched with new SFTR filings can only help supervisors monitor leverage based on end-of-day positions, and are unable to determine the propriety of the loans without mapped flow data.

Get Your ESG House in Order

by David Schwartz J.D. CPA | May 21, 2021

Environmental, social, and governance (ESG) investing has taken global financial markets by storm over the last few years. Post-pandemic, the demand for ESG investments has only intensified and has proven to be much more durable than a fad. However, lack of consistency and transparency threatens the trustworthiness of ESG as a category, and has led to accusations of ‘greenwashing.’

Live by the Sword. Die by the Sword. Part 1

by David Schwartz J.D. CPA | May 11, 2021

January’s GameStop frenzy, where amateur online retail traders took what they hoped would be a rollicking joyride through the world of high finance, has left regulators scratching their heads about what to do next and the retail buccaneers themselves with quite a hangover. The newly minted SEC Chair, Gary Gensler, told the Senate Banking Committee in testimony last week that the Commission is still trying to figure out what the GameStop drama meant and what, if anything, the market regulator should do about it.

Fund Advisers Brace for ESG Scrutiny

by David Schwartz J.D. CPA | Apr 22, 2021

After nearly twenty years of study, the Securities and Exchange Commission seems poised to rewrite the rules on proxy disclosure for mutual funds. Two SEC commissioners predicted within days of each other that there will be radical revisions to how regulated investment companies will report their proxy voting behavior. Both Acting Chair Allison Herren Lee and Commissioner Caroline Crenshaw said in separate speeches last month that the SEC’s current proxy reporting form is not meeting the needs of investors.

SEC’s ESG Momentum Turns to Proxy Voting

by David Schwartz J.D. CPA | Apr 12, 2021

Allison Herren Lee, the Securities and Exchange Commission’s acting chair, called for more disclosure and transparency about proxy voting by mutual funds and institutional investors to ensure they line up with shareholder sentiment, particularly environmental, social, and governance (ESG) issues.

Reddit Trading and Resilience in U.S. Equity Finance Part 3

by Ed Blount | Mar 29, 2021

Pressure is growing on industry and government to respond to 2021’s extreme stock market volatility. Following on the controversy around the GameStop retail buy-side suspensions, one of the remedies being discussed is shortening of the settlement cycle and, perhaps, even a shift to real-time settlement in the US equity markets.

EU Tips the Scales toward ESG-Friendly Financial Firms

by David Schwartz J.D. CPA | Mar 19, 2021

The European Union has embarked on an aggressive legislative push to make environmental, social, and governance (ESG) considerations as a focus of financial services industry regulation. The first salvo in the EU push, the Regulation on Sustainability-Related Disclosures in the Financial Services Sector (SFDR), was finalized in December of 2019, with an implementation deadline for key provisions (Level 1) on March 10, 2021.

The SEC Puts ESG Mutual Funds to the Test

by David Schwartz J.D. CPA | Mar 19, 2021

Interest in ESG investing and the broader area of sustainable finance has exploded over the past few years. Both institutional and retail investors are clamoring for ESG investment options. According to one recent Morgan Stanley survey, 95% of millennials and 85% of all investors are now interested in sustainable investing strategies. Consequently, the highly competitive mutual fund industry has gone into overdrive, creating ESG mutual funds to attract these investors. Given the high demand and the growth of new mutual funds aimed at these ESG-conscious investors, it was only a matter of time before the regulators noticed. Over the past year, the SEC has been unfolding a larger plan to police and regulate sustainable and ESG finance.

Reddit Trading and Resilience in U.S. Equity Finance Part 2

by Ed Blount | Mar 17, 2021

On February 4th, 2021, the Securities and Exchange Commission called for a “robust public discussion” about whether online brokers’ late January suspensions of retail trading should lead to changes in the market infrastructure. In the view of attorneys for the aggrieved retail traders, there will be a lot for the SEC to consider. More than 50 lawsuits have been filed as of today, creating another form of discussion. Our blog series on the potential infrastructure changes continues with a few of the likely discussion topics.

A large class-action lawsuit has cited, as evidence of an anti-trust conspiracy, the alleged wave of selling by hedge funds and institutions in the overnight markets of January 27th, 2021. Plaintiffs allege that the hedge funds, their brokers and the institutional investors conspired to prevent further increases in the prices for the contested issues, which would have deepened their already-substantial losses.

Reddit Trading and Resilience in U.S. Equity Finance Part 1

by Ed Blount | Mar 11, 2021

The trading suspensions set by online brokers in late January 2021 reminded many industry veterans of the systemic circuit breakers that were first deployed during the Black Monday crash of October 1987. In both instances, a loose band of derivatives traders was prevented by the capital rules of the equity clearing and settlement system from continuing to crush exposed short sellers and risk a systemwide collapse.

A Twenty-Year Journey to Transparency

by David Schwartz J.D. CPA | Jan 19, 2021

Securities lending has proven the most challenging aspect of shadow banking for regulators to bring under a regulatory rubric. One of the most vexing aspects for regulators has to be how to make securities lenders’ decision processes about whether to recall lent securities to vote proxies more transparent to investors and the regulators themselves.

An Existential Moment for Securities Finance

by Ed Blount | Jan 19, 2021

Feb 1, 2021: The social controversy over Gamestop’s (GME) battle of wills — r/wallstreetbets v ‘The Shorts’ — may well harden the scrutiny of regulators and litigators toward the US$2.4 trillion global equity finance ecosystem that supports hedge fund strategies. This is a pivotal moment, not only for GME and The Shorts, but also for the clearing systems that their lenders and agents use to secure the funds’ trade settlements and financings.

Ignorance of clearing house rules, coupled with uneven disclosures had clearly inflamed social tensions over the GME short squeeze. These tensions were exacerbated when risk managers at clearing houses were portrayed in the media as fighting the popular uprising of legions of day traders.

Compliance with the DOL’s New Proxy Rules May Stump ERISA Fiduciaries

by David Schwartz J.D. CPA | Dec 19, 2020

On Friday, December 11, the Department of Labor (DOL) issued its final rules on proxy voting by ERISA fiduciaries. As proposed last August 30, the draft rules drew hundreds of responses by the ESG-directed investing community, many of which criticized the proposal as unworkable. The final version of the rules eliminates the proposal’s rigid requirements for plan sponsors to weigh the economic vs. non-economic effects before casting their proxy votes.