“To create hope and opportunity for investors, consumers, and entrepreneurs by ending bailouts and Too Big to Fail, holding Washington and Wall Street accountable, eliminating red tape to increase access to capital and credit, and repealing the provisions of the Dodd-Frank Act that make America less prosperous, less stable, and less free, and for other purposes.”
The opening of the 593 page draft of the Financial Choice Act 2.0 by the House Financial Services Committee sets multiple far-reaching goals. Essentially, the Committee attempts to find solutions to limit the SEC’s enforcement power, give Congress greater authority, and strip away the Dodd-Frank Act in order to deregulate the market.
At first glance, the draft appears to give greater authority to the Securities and Exchange Commission (SEC) by increasing the amount of penalties for market violations, and tripling penalties for recidivists. However, the “economics of crime suggests that fines imposed by regulators may need to rise still further if they are to offset the rewards from lawbreaking.” (The Economist (2012) “Fine and Punishment”). For large companies and corporations whose profits are in the billions, a single or multiple $10 million fine will not necessarily deter their behavior. The bill additionally obliges the SEC to take into consideration whether a hefty fine will be detrimental to the shareholders of the company. This provision aims to prevent “innocent” shareholders’ liability, but restricts the SEC’s power to impose fines on wrongdoers.
The draft bill further strips the SEC’s authority by encouraging the SEC to file cases in a Federal District Court as opposed to filing administrative cases in front of their in-house judges. This would effectively permit defendants in administrative cases to ask for a dismissal, and give them greater leverage if the case were to be subsequently heard in federal court. The House Financial Services Committee’s reasoning behind this decision is to reverse a provision from the Dodd-Frank Act that allows the SEC to bring an extensive array of penalties before their in-house judges. However, empirical studies exemplify that the SEC wins 90% of cases before in-house judges, and 88% in federal court. Therefore, changing the mechanism of how cases are heard may not have the impact the legislators intend.
The Financial Choice Act 2.0 further attempts to limit the SEC’s authority and ensure it does not overstep its legal boundaries by requiring the SEC to give “adequate notice” before bringing any enforcement actions for an alleged violation (Sec. 819). Once individuals receive a notice, they will have 180 days to appear before the SEC and make a presentation, after which the Commission will determine whether to bring administrative or judicial action. This bill could cause tension between Congress and the SEC. “If the measure is adopted Congress would be inserting itself fairly deeply into the enforcement division’s practices, reflect a general mistrust of the SEC’s decision-making process” (Henning, P.J. (2017) “A Whack at Dodd-Frank Could Hamstring the SEC.” NY Times). From bitcoin exchanges to Ponzi scheme cases, the SEC has a plethora of hurdles ahead. There is no argument that there needs to be some type of reform to modernize the procedures of the SEC, but the Financial Choice Act 2.0 may be severing too many of the Commission’s limbs.
Looking for ways to save on your property taxes? The New York State STAR program (School Tax Relief) grants property tax relief to qualifying homeowners. The benefit applies to school district taxes and for city taxes in New York City, Buffalo, Rochester, Yonkers and Syracuse.
There are two types of STAR programs for partial tax exemption or credit. Basic STAR is accessible to all homeowners and their spouses if they both earn less than $500,000 a year. The exemption is based on the first $30,000 of the full value of a home. The benefit is approximately a $300 tax reduction. Enhanced STAR is targeted for senior citizens (65 years and older) and their spouses with a collective income of $86,000 or less. This benefit is for the first $65,000 of the full value of a home. The benefit approximates a $600 tax reduction. For both programs, at least one owner must use the property as a primary residence.
Gov. Andrew Cuomo and the state legislature have altered the STAR program for 2016-17. A provision has been added to the New York state budget to provide new homeowners with a check for a partial amount of their school property taxes rather than a tax credit. Cuomo’s budget spokesperson, Morris Peters, assures homeowners that “[t]here is no change to the amount of the STAR credit for taxpayers, only the mechanism used to claim the credit.” Cuomo and his administration changed the system because it is expected to save New York state roughly $180 million a year. This method is meant to curb any corruption in the system with registered users receiving STAR benefits for more than one property. The money saved by the state will “pay for new spending in the state budget, such as the $1 billion income tax cut” (Joseph Spector Albany Bureau Chief).
The STAR program can be applied to condos and co-ops, which is a great way for your building to save on property taxes. For co-op shareholders, the credit normally went to the corporation and reduced maintenance fees for all shareholders by cutting the cost of the property tax payment. Due to the recent changes, shareholders who purchased their unit after August 1, 2015, will receive a direct check. However, since the co-op pays the property taxes as a whole, this amendment is not significant. Condo owners also receive a direct check. Unfortunately, properties that are eligible for the 421a taxabatement are not eligible for the STAR program.
The STAR program does not affect income taxes, but you will usually have to deduct the credit from your paid real estate taxes. In all, the changes to the STAR program will mean that co-op shareholders and condo owners will have to pay a slightly higher property tax without the automatic credit, but will receive a partial reimbursement after they made the payment. To get your savings this year, make sure your register with STAR at https://www.tax.ny.gov.
The New York City Planning Commission recently certified a new rezoning proposal in East Harlem designed to benefit lower-income residents. It is currently moving through the Uniform Land Use Review Procedure (ULURP), and if approved, will likely go into effect sometime this fall. The new rezoning is expected to lead to the development of up to 3,500 housing units, most of which will be affordable for lower-income families.
The proposed rezoning would affect a 96-block area bordered by Second Avenue to the east, Park Avenue to the west, East 132nd Street to the north, and East 104th Street to the south. Within that area, developers are already bidding on available space. One project involves the construction of a massive 655-unit housing development on East 111th Street, with sixty percent (60%) of units reserved for families earning less than $50,000 per year.
Unlike some of the other rezoning initiatives currently under review, the East Harlem proposal has seen very little community backlash. In fact, such rezoning was early advocated by the East Harlem Neighborhood Plan—an amalgamation of local residents’ ideas for neighborhood improvement, organized by some of the same people on the ULURP committees.
Besides copious affordable housing, this rezoning proposal also includes plans to revamp the entire community. The proposal calls for all developments with ground-floor commercial units to ensure that those units are open for business – specifically, businesses that benefit the public. For example, the East 111th Street project includes plans for a supermarket, YMCA, healthcare facility, job-training center, and a charter school. Finally, the proposal provides for expansion of the Second Avenue subway, in order to open up the area to the surrounding communities.
Pursuant to ULURP, Community Board 11 has sixty (60) days to review the proposal. A public hearing is scheduled for May 16 at 6:30p.m. at the Silberman School of Social Work at Hunter College.
The business judgment rule, adopted from commercial law, permits co-op and condo boards to make decisions without the fear of judicial inquiry. In the 1990 case Levandusky v. One Fifth Ave. Corp. the court held “[i]t is well settled that the business judgment rule protects the actions of a board of directors of a cooperative cooperation so long as the board acts for the purposes of the cooperative, within the scope of its authority, and in good faith.” However, what are the limits to this rule and when do a board’s decisions fall outside the scope of its authority? Case law brings to light the limits of the business judgment rule used by co-op and condo boards in Manhattan. These examples exemplify some of what your co-op and condo boards can and cannot do.
In Hersh v. One Fifth Avenue Apartment Corp., et al. the plaintiff, Ms. Hersh, experienced water leaking into her unit. The engineer evaluated the building’s structure and recommended the building make repairs to the exterior, but the board neglected to take action until there was significant water damage. The board used the business judgment rule as a defense for not initially mending the leaks into Ms. Hersh’s unit. The court held that although the business judgment rule “protects co-op boards from judicial inquiry into the efficacy of the decisions made within the scope of their authority … However, no court has ruled that the shield of the business judgment rule may be fashioned into a sword that cuts away proprietary lessees’ rights under statutory warranty of habitability.” Therefore, the business judgment rule cannot be abused by boards as a blanket defense to all their decisions. Boards cannot make decisions that breach the rights of the shareholders, owners, or tenants, particularly when infringing the warranty of habitability.
Similarly, a co-op or condo board is unable to make self-dealing decisions, or those not in the interests of shareholders, owners, and tenants. The business judgment rule can provide necessary protection, but it does not protect a board who abuses its power for self-serving purposes. In Sharie Graham v. 420 East 72nd Tenants Corp. et al. a co-op board sought to buy a shareholder’s unit and alter it into a gym. The shareholder initially listed the property for $499,000, and the board made an offer of $400,000. Another buyer, paying in cash, offered the listed amount, but the board denied the purchase. Co-op boards do have the authority to reject a transfer of shares, however, in the present case, the board’s reasoning was that the purchase price was below the market rate. The buyer increased his offer to the board’s assessment of the market value of $535,000, but the board rejected the offer and further increased the market price to $610,000. The board “wrongfully denied” the sale of the apartment and engaged in self-dealing by preventing the transfer of shares to a third party. Co-op and condo boards must act in good faith, without “discrimination, self-dealing or misconduct” (Auerbach v Bennett).
It is important to understand the authority of your co-op or condo board. Make sure that they are protecting your rights, but remember they also have the authority to make unpopular decisions for the interest of the building.
On Tuesday, April 18th, the Supreme Court heard argument in Kokesh v. SEC regarding whether the Securities and Exchange Commission (SEC) should be permitted to order defendants to return illegal and fraudulent profits that are older than five years. This remedy is a “disgorgement”. Kokesh v. SEC concerns investment adviser Charles Kokesh who misappropriated investors’ assets. The SEC brought an action against Kokesh in 2009, where he was ordered to pay $2.4 million in penalties and $34.9 million in disgorgement of illicit profits.
Both conservative and liberal justices examined whether the SEC’s remedy of disgorgement should be restricted by a statute of limitations. In 2013, the Supreme Court held in Gabelli et al. v. SEC that penalties, forfeitures and punitive remedies in civil proceedings brought by the SEC are restricted to a five year statute of limitations from the time the fraud occurs. Chief Justice Roberts explained that without a statute of limitations, “[i]t would leave defendants exposed to Government enforcement action not only for five years after their misdeeds, but for an additional uncertain period into the future. And repose would hinge on speculation … Deciding when the Government knew or reasonably should have known of a fraud would also present particular challenges for the courts…” (at 301).
In Kokesh, the conduct making the defendant subject to the penalties falls within the five year timeframe, however, the disgorgement mostly falls outside of this period. The defendant’s attorney argues that disgorgement should be considered as punitive forfeiture and therefore fall within the ambit of the statute of limitations. If this is the case, Kokesh would only owe $5 million instead of $34.9 million. The Justice Department stresses that disgorgement is necessary and intended to put the defendants back in the position before they conducted the illicit activity, regardless of the timeframe. Elaine Goldenberg for the Justice Department argues that “[i]t just remedies unjust enrichment.” However, the Justices are skeptical whether this should have no boundaries.
The new Supreme Court Justice Neil Gorsuch argued that the Supreme Court is “just making it up” due to a lack of statute and direction from Congress regarding disgorgement. Congress has not addressed what remedies there should be and who the remedied money should go to, whether that is the government or victims. Gorsuch continued by arguing that in criminal proceedings this would be regarded as a penalty and therefore would fall within the ambit of the statute of limitations. If the Court does not rule in favor of the SEC it will prevent the Commission from collecting money going all the way back to the time the fraud occurred. This would be a significant monetary and power loss for the SEC, who received over $4 billion from disgorgement actions in 2016. This ruling can limit the SEC’s power and authority by overruling their methods of punishing defendants, essentially restricting how the agency monitors and regulates fraudulent activity.
Furthermore, if the Supreme Court’s decision is retroactive and in favor of Kokesh, it will open the floodgates of litigation proceedings brought by defendants who already paid these fees. The ruling is scheduled for June.
New plans to rezone Midtown East, Manhattan have recently been proposed by the Department of City Planning (DCP) and Mayor Bill de Blasio. These plans incorporate many different development strategies in an attempt to revitalize business in the area, which has recently been emigrating to more financially and technologically-progressive areas of the City. Workspace is tight in Midtown East, and the average office building is 75 years old. Advocates of the rezoning plan believe it will allow the area to meet the needs of modern business and real estate interests.
The plan was originally introduced under Mayor Michael Bloomberg in 2013, but it was unable to gather support in the City Council. In 2015, the plan was reintroduced by Mayor de Blasio, and tweaked with the help of City Council member Dan Garodnick and Manhattan Borough President Gale Brewer. It is currently undergoing the Uniform Land-Use Review Procedure, which is a seven-month process incorporating environmental review and ending with a vote by the City Council.
If voted into law, the rezoning would bring with it many changes in local development policy. Buildings would be able to increase their floor-to-area ratio (FAR) from about 15 to as high as 18. Put simply, this means buildings could grow up and out to a greater extent than ever before. Higher FAR may be purchased on the condition that any transit routes affected by greater building size be appropriately rerouted and upgraded in conjunction with the MTA, and paid for by the developers. Sixteen new office and residential buildings are currently being planned in anticipation of this rezoning.
Under this new rezoning proposal, the air rights above city landmarks would be available for sale to private interests. The law currently forbids (except with special permit) the air rights above structures such as Grand Central Terminal and St. Patrick’s Cathedral from being sold to any entity other than adjacent landowners. This proposal would give developers additional building space while simultaneously funding these landmarks. A minimum 20 percent of the sale price would be withheld by the City to pay for improvements in public infrastructure.
The price of air rights above landmarks has been set by the DCP at $393 per square foot. This has been criticized by the Real Estate Board of New York, which believes this price is unrealistically high and should instead be negotiable between buyer and seller. The New York Landmarks Conservancy also criticizes the air rights proposal, arguing that the high price and minimum withholding of proceeds would disincentivize prospective buyers.
In a move to modernize, Midtown East is proposing a zoning overhaul. Certain aspects of the plan still need to be hammered out, but it is quickly moving through the review process and looks destined to pass.
Bitcoin and blockchain are on the rise as cryptocurrencies are becoming increasingly popular around the world. As financial institutions are rushing to file patents and implement blockchain technology, other companies are focusing on bitcoin and blockchain security measures so that large companies feel more secure using this innovative technology. Bitcoin and blockchain’s main criticism is the lack of security. Financial technology startups and financial institutions are collaborating around the world to make the use of bitcoin and blockchain technology more secure, efficient and user friendly.
Nets, an electronic payment provider based in Copenhagen, Denmark, works with 240 banks and is now collaborating with the software developer Chainalysis “to help banks validate bitcoin transactions and comply with regulations” (Reuters (2017) “Nets Partners with Blockchain Analysis Firm to Fight Dirty Bitcoins” New York Times). Chainalysis determines the “risk of doing business” with customers using blockchain and exchanging bitcoins. The software company can detect suspicious behavior and can locate the source of the bitcoin funds being traded. Chainalysis works with legal and investigatory authorities such as Europol. Their technology is important to regulate illicit activity such as money laundering.
The main concern large companies and financial institutions have is that bitcoin previously fueled the dark web, such as through Silk Road. This online platform permitted anonymous users to sell illicit drugs, weapons, and forged documents using bitcoin as the currency. The collaboration of Nets and Chainalysis will facilitate financial institutions when preventing customers using cryptocurrencies for money-laundering or any other illicit activity. The issue of customers using cryptocurrencies in traditional financial institutions is that the banks need to be able to trace where the funds originatedin order to comply with legislation and anti-money laundering regulations. Therefore, banks need to tackle the risks for the growing financial technology industry. Chainaylsis CEO Michael Gronager says that “[w]e can make risk assessments and analyze block chain activities … And banks are interested in being able to risk-score customers, so they do not end up being used for money laundering.”
The partnership of Nets and Chainalysis has been beneficial to the Nordic market as it provides financial institutions with the tools necessary to combat any illicit activity when using bitcoin. The head of Fraud & Dispute Services at Nets, Katy Rintala, asserts that “banks have held back on facilitating Bitcoin payments because they didn’t have the tool we are now able to offer them.” Now, blockchain technology essentially traces bitcoin transactions and Nets with Chainalysis can create greater security measures to protect financial institutions and their customers using bitcoin.
In the U.S., the technology company Chain Inc. is working with Thales Group, an international security company, in order to create a secure platform for companies to use blockchain technology. The concern for companies and financial institutions is that blockchain technology is not completely secure. Chain “partners with organizations to build, deploy, and operate blockchain networks that enable breakthrough financial products and services.” As they believe bitcoin and blockchain are the future for all our financial assets, their main priority is securing the existing technology.
These two companies have created hardware security modules (HSM) which the companies have said are “highly secure processors designed to safeguard passwords and ‘digital keys’ – to make it more attractive for large companies to adopt blockchain”. What companies are Chain Inc. and Thales Group targeting? Large companies such as Khosla Ventures, RRE Ventures, Capital One, Citigroup, Fiserv, Nasdaq, Orange and Visa, who have already invested $40 million in Chain. This new technology, the combination of Thales’ HSMs and Chain’s technology to “operate blockchain networks”, enables these large companies to securely store data on the blockchain. Since blockchain is not centralized, the users control the database using cryptographic keys. These keys essentially secure the users financial assets. What Chain’s technology does is provide a further layer of high-grade security and privacy for large companies who hold sensitive and confidential information. Chain’s mission is to make blockchain technology so secure for leading companies that the future of our assets will all be digitalized. This trend of financial technology start-ups collaborating with large companies and financial institutions illustrates the growing potential for cryptocurrencies in our economy. Once security measures have been ironed out, bitcoin and blockchain technology will become even more popular amongst these companies.
In New York, about 75% of residential buildings are cooperatives. From 2000 to 2010, the Department of Aging has recorded that there has been a 12.4% increase of the 60-plus population, which will grow to 35.3% by 2030. Many of these individuals aged 62 and above live in co-ops, but in the past they have been unable to apply for reverse mortgages. The National Association of Housing Cooperatives (NAHC) and the Council of New York Cooperatives and Condominiums (CNYC) have spent the past sixteen years lobbying the Department of Housing and Urban Development (HUD) for the implementation of legislation for reverse mortgages for co-ops. The greatest hurdle is that co-ops are not real property. When you purchase a co-op you are purchasing the shares that are equal to the value of your unit. So naturally, reversing a mortgage for a co-op is inherently trickier than for a condo because there is no property to collateralize. But is it impossible?
Reverse mortgages, also known as Home Equity Conversion Mortgages (HECM), are loans for borrowers 62 years and older. These mortgages permit borrowers to transfer the equity in their property into liquid assets that they can use. Reverse mortgages were implemented with the intention of easing the burden of living expenses and health care for retirees. The benefit for retirees is that they have accessible liquid assets not tied up into their home, and they do not have to repay the lender until they sell their property. Reverse mortgages cannot be lent to everyone who applies. How do you know if a reverse mortgage is right for you? Individuals must undergo specific counseling to assess their mortgage. Requirements for a reverse mortgage:
Brian Sullivan, supervisory public affairs specialist for the HUD asserts that “[a]s America has grown older, truthfully, we’ve aged as a nation, and senior citizens are seeing this as a viable, sustainable way of providing them some security later in life, and allowing them to age gracefully in place, which is really why the program was born.”
Last May, New York Senator Jeffrey Klein and Assemblyman Jeffrey Dinowitz proposed S.07844 and A.10246 (respectively) to alter existing real property laws to allow borrowers who are 70 years and older to obtain proprietary reverse mortgages. However, these bills have yet to make it into law. Naturally, there are many liabilities and risks associated with taking a reverse mortgage for the lenders, especially in regards to co-ops. However, the Federal Housing Administration (FHA) is structured in a way to “mitigate those liabilities.” The FHA sets a limit as to how much borrowers are allowed to take. What happens if the sale of the property is an insufficient amount to pay off the remaining loan? According to Sullivan, “FHA will pay the lender the amount of the shortfall. FHA collects an insurance premium from all borrowers to provide this coverage.” With the correct regulations and liability protection, the older population should be permitted to obtain reverse mortgages in co-ops instead of being forced to relocate from their homes.
As of today, HUD continues to deny co-op owners from applying for reverse mortgages. For co-ops, Debra A. Estock (writer for The Cooperator) argues that “the door has opened a crack for ultimately gaining approval for reverse mortgages, but HUD is still shutting cooperative homeowners out of the HECM process.” Given the two bills already put before the New York Senate, change may be on the horizon for co-op shareholders in New York City.
Hurricane Sandy brought a new test of New York City’s infrastructure when it made landfall just south of Manhattan in October 2012. As locals surely remember, power was out across much of the city for a week or more. Tunnels were flooded, street signs were blown away, and some of the most vulnerable among us lost their lives. Global warming is happening, and with rising seas and changing air patterns, storms like Sandy are likely to occur more frequently in the future.
Although it’s not ideal, we have to adapt. Luckily, one fore-thinking development company is currently constructing a pair of apartments designed for the worst of crises. This company, JDS, obtained prime real estate along the East River soon after Sandy hit, when the lot was flooded and virtually unusable. However, now that the waters have receded, JDS is building what will be the American Copper Buildings at that scenic location. JDS is well aware of the dangers that this location—and all of New York City—may face when another environmental crisis strikes. For that reason, these buildings will substitute some of the luxuries of their ilk for security features designed to keep residents safe.
The buildings will have huge natural gas-powered generators on the uppermost floors—in place of penthouse suites. These will keep the buildings’ power running even if the rest of New York City suffers a black out. However, in such an event, it will still be necessary to ration emergency power: refrigerators and elevators will still run, and one electric outlet in each unit will be usable to charge cell phones and power electric burners. With these amenities available at the worst of times, JDS believes residents will be able to survive for a week or more before rescue comes. It likely will not be long before other development companies follow suit.
The Securities and Exchange Commission (SEC) has issued a landmark decision, which will transform the efficiency of buying and selling securities. At the end of March, the Securities and Exchange Commission (SEC) agreed to amend Rule 15c6-1(a) of the Securities and Exchange Act 1934 to limit the timeframe to settle broker-dealer securities transactions from three business days to two. The rule will officially be in force on September 5, 2017. The SEC says this decision will “enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants”. This will allow exchanges to be quicker, which will serve the interest of investors because there is a risk within the space of three days of the deal not going through.
This rule will ensure that once the investor buys or sells a security, the brokerage firm will have a maximum of two days to receive or deliver the payment. This will encompass all transactions related to stocks, bonds, municipal securities, exchange-traded funds, specific mutual funds, and limited partnerships. The three day rule has been stagnant since 1993 when the SEC shortened the timeframe from five days — a time where technology was not fast or efficient. The amendment is a promising step from the SEC to evolve in light of today’s new technology, which our economy is becoming increasingly reliant on. According to the Securities Industry and Financial Markets Association, 6.8 billion shares are traded every day and in 2015, the “securities industry raised $2.3 trillion of capital for businesses.” This reform will have a huge impact on the stock market and economy. However, the SEC is late to the game as other international markets have already implemented the low risk two day regulation.
SEC Chairman Michael Piwowar asserts that the “SEC remains committed to ensuring that U.S. securities regulation is reflective of modern times, and in shortening the settlement cycle by one day we aim to increase efficiency and reduce risk for market participants.” However, although this is a big step for the SEC, the Commission continues to be reluctant to permit bitcoin exchanges. Last week the SEC rejected for the second time a request to list and trade bitcoin due to bitcoin’s lack of regulation. The SEC earlier refused a request from the Winklevoss brothers to list Bitcoin ETF and secondly dismissed Intercontinental Exchange Inc’s NYSE Arca to list SolidX Bitcoin Trust. Bitcoin has reached $1,300, bypassing the price for an ounce of gold. Large companies, financial institutions and growing financial technology start-ups are increasingly making the case that bitcoin and a digitalized economy are our inevitable future. It is interesting that the SEC is so reluctant to approve of a decision to list and trade bitcoin, although as we have previously discussed, a company using blockchain technology and bitcoin could technically register as an exchange, Alternative Trading System, or broker/dealer to meet the SEC’s regulations.
Although this rule does not need to be implemented until September, investors, companies and brokerage firms are already preparing for this change. The SEC may not reform as quickly as investors would like, but at least this two day amendment will have positive impacts on the U.S. stock market.