What's Happening In the Securities Industry This Month
The newest member of the KADRS team
Every team needs a mascot. Boone is still negotiating his full job description, but so far he's excelling at looking adorable and getting into mischief.
Welcome to the March 2021 issue of my monthly newsletter, where you can read about important developments in the securities industry, learn about laws and decisions that affect your practice, and access free resources. Please feel free to share this newsletter with others who may benefit from the content.
- In-person mediation is making a comeback and I'm so excited to see you in person again soon!
- FINRA proposes additional changes to the expungement rule after reviewing comment letters
- Greensill Capital -- what you need to know about supply chain financing and the rise and fall of Lex Greensill's efforts to "Democratize Capital"
- How are REITs holding up during the pandemic? The 2020 stats by sector are in
- FINRA's latest scorecard on Zoom arbitration -- and who was able to arrange the ONE in-person arbitration in the country?
- The SEC wants you to know that celebrities endorsing SPACs might have a different financial profile than you!
Are You Ready to Return to In-Person Mediation?
Everyone's talking about it! Let's get together in person!
Important announcement -- I'm fully vaccinated and can hardly wait to see you IN PERSON! Requests for in-person -- or hybrid -- mediations are pouring in. Sometimes this involves ingenuity. While Claimants' counsel and their clients, along with outside counsel, are getting back on planes and into hotel rooms, many brokerage firms have not yet cleared their in-house counsel or other employees for travel. We've been creative and have been working with hybrid models, where some participants are in-person at the mediation location and others participate virtually. This structure has been working out quite well, as long as everyone agrees to use it. The fully-virtual platform continues to be a highly effective option, but it's exciting to have other options available! Nothing against Zoom, but I can hardly wait to see you in person again!
New Proposed Amendments to the Expungement Rule
Service upon investors and random panel assignments added after FINRA reviewed comments
FINRA has added new provisions to its proposed expungement rule after reviewing comment letters. Key newly-proposed provisions include a requirement that the broker serve the investor whose claim is the subject of the expungement request with the SOC and the Answer within 10 days of the filing of those pleadings. FINRA must serve the investor with notice of the time and place of the pre-hearing conference and the merits hearing. Investors must be allowed to participate in the pre-hearing conference and testify and present evidence at the merits hearing. Only public arbitrators who have seen at least four investor-initiated cases through to award, are chair qualified and have completed advanced expungement training may be part of the expungement roster -- and three panelist are randomly assigned. The only strikes permitted are for cause. Note that the rules differ for matters where the broker is named vs unnamed, for simplified cases and for matters that involve industry disputes. Time limits will also be imposed that begin to run on the date the new rule is finally adopted. This will be a sea change on several levels for expungement matters. Stay tuned for further updates.
Greensill Capital's Demise -- Supply Chain Financing and the "Democratization of Capital"
Supply chain financing and echoes of the past -- packaging good and not-as-good loans
Imagine you own a small orchard and supply apples to a supermarket. You deliver your apples as agreed, but the supermarket says it will pay you in 60 days. You need the money today to make payroll and the supermarket may need or want those 60 days to pay you. Enter Greensill Capital, who pay you for your apples today and collect the money plus a fee from the supermarket at a later date. This is basic supply chain financing. Banks finance these deals regularly for large clients, but smaller merchants have trouble obtaining financing. Greensill Capital decided to recruit investors, mostly wealthy individuals and pension funds, so it could structure supply chain financing deals for merchants large and small. Credit Suisse started several Greensill funds, pitching them as a safe way to earn better than bank interest rates with little risk. Softbank, through its Vision Fund, bought into the model and invested heavily in Greensill. But Greensill’s model had fundamental problems. Margins on supply chain financing deals are thin, and investors had to get a cut of that margin. So Greensill started structuring riskier deals with less credit-worthy merchants, and even financed deals that did not involve supply chain financing at all. Soon, Greensill was required to purchase insurance for the riskier deals – and that ate into profits even more. So the safer and riskier deals were packaged up and marketed to direct investors and Greensill Fund investors as safe investments. As Greensill financed riskier and riskier deals, insurers stopped writing policies. Eventually, Greensill was down to one insurer, then none. Credit Suisse investigated the underlying assets and questioned valuations. They froze four Greensill funds. Greensill filed for administration (bankruptcy) in the UK, Australia and the US. About half the investors in Greensill funds have been identified to the US. Investors and companies potentially left holding the bag, including West Virginia’s governor, Jim Justice – through his company, Bluestone Resources – have filed suit against Greensill. The Journal’s excellent recent podcast on Greensill’s demise is linked in This Month’s Free Resources section.
How REIT Sectors Performed in 2020
Self Storage and Industrial REITS Reign; Regional Malls Suffer
There's been quite a bit of action in the REIT space recently. Cases involving REITS have been surging. Statistics for commercial real estate occupancy rates, especially in cities, are dismal and nobody really knows what's going to happen when when it's safe to return to the office. Early reports are that many companies will allow employees to work 100% remotely through 2021. Other sources report that five days a week in the office may be a thing of the past. A few weeks ago, I heard a news outlet report that the current office space vacancy rate in Midtown Manhattan is a staggering 82%. With so many people buying almost exclusively online since the pandemic began over a year ago, what will happen to brick and mortar stores and the malls that house them? Business travel remains slow, leaving hotel rooms empty. And how many restaurants are gone for good, leaving behind more empty spaces. I've seen more "for lease" signs than I can count in both Colorado and California. I'm personally hoping for an incredible comeback, but time will tell. Commercial Property Executive posted an excellent chart and an accompanying article discussing REIT performance by sector in 2020.
More FINRA Statistics on Zoom Arbitration
With in-person arbitrations put off through at least June 4, Zoom arbitrations will continue to be the primary vehicle for trying FINRA cases.
FINRA reports that 13 arbitrations have gone to award so far in 2021. Of those 13 cases, 7 resulted in an award to Claimant and 6 resulted in a defense award. One in-person hearing has been held so far this year and the result was an award for Claimant. Did you know that you can have an in-person hearing if everyone involved in the hearing -- counsel, Claimants and Respondents, live witnesses and arbitrators -- all agree and if the local health regulations permit it. Note: if you are involved in that ONE case that was able to take place in-person this year, we all want to know how you were able to arrange it.
SPAC Update -- the SEC Warns About Celebrity-Endorsed SPACs
No, you should not rely on your favorite sports star for investment recommendations!
The SEC must be reading Bull or Bear, because shortly after the February issue was released, a new Investor Alert came out warning investors that they should not rely on celebrity endorsements of SPACs for their investment decisions. This alert should remind us that some people actually do take celebrity endorsements seriously and model their investment decisions based on someone whose financial profile is nothing like their own (I hope Tom Selleck doesn't really need a reverse mortgage). I've also included a link to the SEC's December 2020 Investor Bulletin, SPACs: What you Need to Know, in This Month's Free Resources. The Investor Bulletin is an excellent in-depth piece about how SPACs work. By the way, did you see that WeWork, a company that had to drop out of the IPO market, is being taken public through a SPAC?
This Month's Free Resources
FINRA's Page for Documents about Proposed Expungement Rule
"The Journal" Podcast Episode: "Greensill Wanted to 'Democratize Capital.' Now It's Bankrupt."
SEC Investor Bulletin: SPACs - What You Need to Know