Content Moderation Controversies Coming to Audio

In late January, Neil Young came across an open letter published earlier in the month from a group of scientists and healthcare professionals urging Spotify to address what they deemed false information about Covid-19 vaccines on Joe Rogan’s podcast. Soon after, Young wrote a letter titled “They Can Have Rogan or Young. Not Both” to his manager and record label, demanding Spotify to remove his music from the platform over “false information about vaccines.” Two days later, Spotify obliged.

Over the past few years, Spotify has been aggressively pushing into the podcast industry to differentiate itself from other services and to become more profitable. In 2019, Spotify’s Chief Executive, Daniel Ek, wrote a blog post illuminating the company’s transition from a typical music streaming platform to a comprehensive audio platform, expecting podcasts to play an important role. In 2020, Spotify spent over $100 million to exclusively host The Joe Rogan Experience. Since the beginning of the deal, Rogan has emphasized that he and his team maintain control over the show. Spotify does not produce or edit the show, approve guests or topics, or review the content before it goes live.

Choosing Rogan over Young was a straightforward business choice for Spotify. The Joe Rogan Experience is currently the No. 1 show on Spotify in 93 markets. The show has been crucial to making Spotify the top U.S. podcast platform by listeners. The company’s internal research suggests Rogan’s listeners are highly engaged and tend to return to Spotify to listen more, including other content beyond the show.

Initially, Young’s ultimatum did not feel like a new crisis at Spotify. Rogan’s podcast sparked tensions inside Spotify as early as September 2020 when some employees expressed concern over the podcast’s content during a town-hall meeting. These concerns related to material they felt was anti-transgender. However, the controversy finally crossed into the mainstream when other artists and podcasters followed Young’s lead. Even Prince Harry and Meghan Markle, who have an exclusive multiyear podcast deal with Spotify, issued a statement expressing concerns over misinformation tied to the COVID-19 on the platform. Attempting to address the issue before it snowballed, Rogan posted a conciliatory video, pledging to be more careful in how information is presented on his show. Spotify promised to begin tagging COVID-19 related content with an advisory pointing users to a health-and-science information hub.

The crisis escalated after a compilation video emerged of Rogan using a racial slur in previous episodes over 12 years of his podcast. Joe Rogan apologized, but many commentators found the apology insufficient. According to Mr. Ek, Spotify spoke with Rogan about the content in his show, “including his history of using some racially insensitive language,” and Rogan “chose to remove a number of episodes from Spotify.” As of February 4, Spotify removed more than 100 episodes from its platform. Even so, Mr. Ek insisted that he did not believe that silencing Rogan was the answer, and he stood by Spotify’s gamble that Rogan’s show would attract more listeners than it’d repel.

Ultimately, the ongoing controversy points to a trickier emerging problem: whether audio platforms like Spotify are beginning to look like social media, but without the content control. Just like Facebook and YouTube, Spotify started as a tech platform indifferent to what it hosted. However, as its business strategy shifts, Spotify is now moving toward being a media company responsible for what it distributes, and is inevitably confronting difficult decisions about content that can spark heated reactions from listeners, employees, artists and podcasters. Today, Spotify hosts about 3.2 million podcasts, and the vast majority of which are created by amateurs who upload their contents to Spotify as easily as they would to a social network. With RSS feeds, once a podcast has been produced, it appears immediately on platforms when searched.

Spotify, a 16-year-old company, published its “platform rules” only after the Rogan controversy exploded. Even Mr. Ek acknowledged that the company has not been transparent around the policies that guide its content more broadly. As a result, the Rogan Crisis spurred Spotify into a content moderation frenzy because there were not any bright line rules in place. In recent weeks, Spotify deleted 20,000 other podcast episodes over Covid misinformation. This reveals that Spotify has extreme discretionary power over amateur podcast hosts who don’t have the same kind of social capital as Rogan. All too often, the view­points of many historically excluded groups, such as BLM activists, LGBTQ+ communities, and religious minorities, are at risk of over-enforcement, but the censorship may go unnoticed because those podcasts are so small. Furthermore, this arbitrary content moderation poses risks that may having a chilling effect, resulting in more careful deliberations by podcast hosts and guests, and ultimately steering creators clear of controversial, yet important, topics.

Audio platforms have been a massive blind-spot under the content-moderation radar. Moderation task for audio poses more challenges than for text, images, or video. Spoken word content can be analyzed with actual human ears or using natural language processing techniques, but it is often prohibitively expensive to transcribe huge amount of content. Even if the audio is transcribed, it will still be challenging for an automated system to understand the nuance of the content and draw the line between someone’s opinion versus spreading misinformation. From an infrastructure perspective, the nature of the RSS feed, which is open-sourced and accessible by design, represents a significant hurdle for content moderation.

Ready or not, as Spotify opens its gates to more user-generated content, the same old free-speech battles are coming to audio. Just as Mr. Ek pointed out in an memo to Spotify employees, Spotify “should have clear lines around content and take action when they are crossed, but canceling voices is a slippery slope.” For Spotify, these kinds of disputes will be ongoing and inevitable. Perhaps the best thing it could do now is to get its rules straight, so the public knows what circumstances, processes, and remedies are available when content is modified or deleted.

The Peloton Breakdown: Causes, Consequences, and Bailouts

The interactive fitness company Peloton has been recently caught in the midst of turmoil amid investors’ accusations of gross mismanagement. The claims being made focus on poor decision-making by top executives, along with the lack of a clear long-term strategy for the company’s growth and abysmal returns for Peloton’s shareholders. Peloton, on its side, tried to discard allegations of mismanagement and attributed the dissatisfying financial performance to a seasonal downturn caused by an inversion of trend following the spike in sales driven by “stay-at-home” orders (issued worldwide during the earlier phases of the COVID-19 pandemic).

Despite Peloton’s efforts to ease pressures on its top executive, a hard-hearted presentation prepared by the privately held investment firm Blackwell Capital caused the ex-CEO John Foley – who is still keeping his hold on Peloton thanks to ownership of super-voting shares – to step down and be appointed as executive chair of the company. The issues raised by Blackwell followed worrisome data from the last quarterly reports indicating a declining financial performance (Peloton’s one-year stock price was down 85% since February 2021), coupled with a loss in “active users” among Peloton’s subscriber base. Consequently, Blackwell is currently pushing towards a strategic sale of the company to a potential new acquirer to solve its existing financial and managerial problems.

In the context of its presentation, Blackwell suggested several potential acquirers for Peloton, among which companies like Apple, Amazon, and Nike. None of such companies has approached Peloton for a potential acquisition, even though Amazon and Nike started exploring the possible scenarios involving a takeover. The Financial Times also reported considerations of people informed on the matter, deeming the decision to acquire Peloton as seemingly “opportunistic” due to the recent steep decline in the company’s market value. Indeed, interest in the company appears to be driven by Peloton stocks being currently undervalued. With that in mind, a Peloton deal could provide Nike and Amazon with appealing opportunities to strengthen their revenues and acquire a strategic workforce. Similarly, a Peloton takeover would prove to be for Amazon an effort to increase its business presence in the e-fitness industry.

Despite all the hype around a potential takeover, some practical obstacles remain. First, Peloton’s valuation is far from generating consensus. Blackwell evaluates Peloton’s share price at a minimum of $65 – a figure that does not correspond to the sentiment of the rest of the market. Second, former CEO Foley appears resistant to any sale, which may pose a significant threat to the possibility of getting a deal done (Foley remains executive chair of the company and owns super-voting shares which allow him to exercise control on the company).

However, let us not rush to conclusions. Peloton announced on February 8 a series of steps as part of a comprehensive program aiming to decrease costs and result in “long-term growth, profitability, and free cash flow,” suggesting that the company intends to recover on its own before considering an acquisition. The first step in this ultimate effort to avoid selling the company to the best offeror consisted of a major internal reorganization, initiated with the appointment of ex-Spotify-and-Netflix CFO Barry McCarthy as new CEO. “Peloton is at an important juncture, and we are taking decisive steps… This restructuring program is the result of diligent planning to address key areas of the business and realign our operations so that we can execute against our growth opportunity with efficiency and discipline,” said John Foley.

Amongst the restructuring measures announced, Peloton will suspend its plans to build its own manufacturing facilities in Ohio, which should result in $60 million in restructuring capital expenditures. The construction of Peloton Output Park was indeed expected to start in summer 2021 and had initially been scheduled to open in 2023. This project would have cost an estimated $400 million. Instead, Peloton intends to minimize expenditures on in-house warehouses and delivery centers to rely mostly on third-party logistic providers. The other significant measure announced to place Peloton for sustainable growth will be job cuts of approximately 2,800 positions, the equivalent of 20% of the company’s workforce. The company said this will impact “almost all operations across almost all levels“. When implemented, these restructuring initiatives are estimated to yield around $800 million in annual run-rate cost savings in 2022,  along with a decrease in capital expenditures by approximately $150 million. If Peloton implements these changes correctly, it may be enough to keep the wheels spinning.


Freedom of Compromise: How Big Tech is Losing the Battle for Free Internet in Authoritarian Countries

The issue of corporate social responsibility represents a long-lasting debate in academia and the corporate world, with solid arguments on both sides. One side claims businesses should operate for the sole purpose of increasing their profits. The other side advocates that corporations have to embrace goals of public benefit. For now, decisions about corporate purpose still remain the prerogative of directors and investors.

However, sometimes corporations create services and technologies that transcend business interests and become essential to our existence, inherent to social cohesion, and the exercise of civil rights. For example, during the Arab Spring, Facebook became more than just a social network––it was the main platform for freedom of expression, communication, and organization of protests, which were otherwise banned or restricted in those countries. In many parts of the world plagued by dictatorships, repressive regimes, and failing democracies, Facebook, Twitter, Google, and Apple became popular not just because they offered a “cool” product, but because they brought opportunities to access information, speak freely, and organize against oppression. Authoritarian governments couldn’t create such platforms, and these markets soon provided Silicon Valley with another competitive edge.

But recently we have been witnessing concerning developments. Big tech companies are making more and more concessions to authoritarian regimes around the world in desperate efforts to keep their businesses running there. An increasingly unsettling question is whether corporations will adhere to the values they promote, such as progress, free speech, and diversity––or will they ultimately bend to the whims of oppressive regimes? To borrow from Professor Colin Mayer, can big tech companies “solve the problems of people profitably, and not profit from causing them?

As an example of this disconcerting trend, we can look into the recent federal elections in Russia where Google and Apple were forced to remove an opposition-created app from their stores called Navalny amid increasing pressure from Russian authorities. The app was meant to coalesce opposition votes against “United Russia”––the pro-establishment party––through a system called “smart-voting,” which many thought was the only efficient tool to withstand the enormous pro-government machinery.

Despite oppressive laws and restrictions on protests and free speech in the country, the Russian internet remained mainly untouched and uncensored. As a result, it became the last stronghold for anti-regime advocates. Now it stands to fall, not without the help of Google and Apple. Access Now, an internet freedom group, declared that “[t]his is bad news for democracy and dissent all over the world. We expect to see other dictators copying Russia’s tactics.”

The tech giants defend this decision as necessary after Russian courts found Navalny’s organization as being extremist, banned the app, and threatened to initiate a criminal investigation against local employees of Google and Apple. However, skeptics claim that this is just an excuse to mask Silicon Valley’s ulterior motive: to continue business in Russia.

This is not the only “compromise” between big corporations and authoritarian regimes. In 2016, Google and Apple removed the LinkedIn app from their stores after a Russian court banned it due to a regulation which mandates data be stored within national borders. Earlier this year, Apple had made another concession to the Kremlin when it decided to obey a law which required Apple to include in its products a pre-installed package of “state-approved” software, such as browsers and messaging apps. Freedom House, an international non-profit, declared that “[t]his is part of a broader trend we’ve seen in countries like Iran, Turkey, and India, where authorities are trying to replace frustrating foreign apps with domestic equivalents, more tightly controlled by the government.”

Twitter, YouTube, and Facebook also routinely remove some of their content in many authoritarian countries based on court decisions, requests from authorities, or national laws and regulations. For instance, in 2016 the New York Times reported that Facebook was developing censorship features to access the Chinese market. Those intentions did not materialize since Facebook is still banned in China, but the willingness of big tech corporations to please authoritarian governments for a chance to reach their markets speaks for itself.

From this perspective, the debate on corporate purpose is more important than ever. What in Silicon Valley may be just a marketing strategy for profit maximization, on the other side of the world could mean a lot more. What might be a pure business decision for Apple or Google, may be a chance to fight for free elections in Russia, stand against oppression in Turkey, or advocate for women’s rights in Afghanistan.


Insurer Culture: A Key Piece for Regulatory Corporate Governance

Corporate culture and insurance regulation are traditionally not considered in tandem. However, after the Global Financial Crisis (GFC), it has been concluded that the responsibility and ethical standards have been eroded in the context of a “[t]one from the top … [and that] [n]o one said ‘no’.” In Europe, this led to a significant regulatory proliferation. In this vein, European Parliament’s recital 29 Solvency II Directive acknowledges that an effective system of governance is essential for the adequate management of insurance companies. In the broader context of corporate governance, corporate culture is vital.

At present, corporate culture is gaining attention in the context of corporate finance but has yet to achieve such attention in insurance regulation. Some define corporate culture as “[a] prevalent attitude or atmosphere created by a company’s rules, policies, practices […], and communications from management, such as those touching on compliance or noncompliance with legal requirements.” Contrastingly, scholars emphasize that defining corporate culture is challenging, if not impossible and that culture is just “a mental construct.” Amidst its subjective and initially imperceptible character, one has to look at its elements, such as a company’s values, norms, conventions, customs, traditions or knowledge.  In essence, corporate culture affects a company’s risk-taking and ethics, and is essentially important for the decision-making process on various levels. Is paying more attention to corporate culture also important in the insurance regulatory context?

A major take-away from the GFC was that corporations suffered from lapsing ethics and insufficient leadership. For insurance companies, this is particularly concerning due to the pivotal role they play in our societies. The focus on their culture, consequently, cannot be overstated. A supervisory focus on insurer culture can enhance the regulated entities’ ability to effectively pursue the regulatory goals. For instance, under European law, insurance companies are subject to rigorous remuneration requirements to avoid short-term compensation, which incentivizes board members in taking too high of risks.  Sound culture can lead to less risky and more sustainable remuneration practices, and thus, enhance prudential insurance business. In sum, proper values and proper business conducts exemplify the intersection of both corporate culture and regulatory corporate governance.

The importance of insurer culture is also emphasized by the Draft Issues Paper on Insurer Culture of the International Association of Insurance Supervisors (IAIS) from June 2021. Accordingly, culture is “the set of norms, values, attitudes and behaviours of an insurer that characterizes the way in which the insurer conducts its activities.” The paper further states that “[e]ffective insurer cultures are pivotal to strengthening and maintaining public trust and confidence in the sector as a whole.”  Therefore, understanding an insurer’s culture will lead to better and more effective supervision from a prudential angle.

Even in the US, regulators are beginning to focus on insurer culture. On the occasion of the National Association of Insurance Commissioners (NAIC) annual fall meeting in 2021, a commissioner noted that “culture is a cornerstone to an insurer’s … risk management framework”. In Europe apparently, the European Insurance and Occupational Pensions Authority (EIOPA) has not deliberately looked at insurer culture yet, rather focusing on a common supervisory culture among EIOPA and National Competent Authorities.

After all, paying more attention to corporate culture is important in the insurance regulatory context. Both the US and Europe need to work on embedding insurer culture in their regulatory and supervisory scheme. Especially, since technology and digitalization are disrupting the insurance business. The cultural ideals that technology firms embrace are likely to be quite different from the ones of traditional insurance companies. Without regulatory and supervisory consideration of insurer culture, the industry could become more risky and less sustainable as these technological ideals spread within the market. For regulators, it could be helpful to recur on the Insurance Core Principles (ICPs). For instance, these principles require insurance companies to set and oversee the implementation of an insurer’s corporate culture (ICP 7.2) or include the promotion and sustainment of a sound risk culture in an effective risk management function (ICP 19.2). At the same time, supervisors will face the major hurdle to actually getting a hand on the culture of an insurance company. Because this is typically like an iceberg, largely hidden and imperceptible supervisors and supervised will have to work closely together not only to allow greater supervisory compliance, but also, to achieve sound culture and, ultimately, better insurance business.

Help Wanted: COVID-19, Worker Absences, and What Needs to Change

Employers around the country—from Domino’s Pizza to FedEx Corp.—have reported that hiring challenges caused by the ongoing pandemic have suppressed growth and, in many cases, led to significant decreases in their bottom lines.

A significant cause of this has been absence due to illness. Almost 9 million people—approximately 6% of workers on payroll in the United States—missed work in the first ten days of January because of the spike in the Omicron variant of the COVID-19 virus. Though this is a slight improvement from the 14 million people absent from work in late December, it is still an alarming statistic. Even more troubling is that 1.6 million individuals have reportedly dropped out of the workforce due to long COVID—which can lead to symptoms like fatigue, memory loss, and brain fog for months on end.

The knock-on effects of such absences can be felt around the country. Millions of individuals have quit their jobs in search of better pay or opportunities in a labor market saturated with openings. In fact, hiring challenges were so great that in December, McDonald’s Corp. cut its hours back by 10% across the board. And in an attempt to onboard over 100,000 associates in anticipation of its bustling spring season, Home Depot has reported adopting an ‘accelerated hiring process.’

Yes, the effects of current hiring challenges have significantly affected the growth of large businesses, led to product shortages, and in turn led to consumer frustration and dissatisfaction. But, one of the most significant impacts of the current labor market has been on the working individuals themselves; many of whom have reported that though finding work may be easier, open positions are too often part-time, with low pay, and uncertain shifts—regularly changed at the last minute.

Perhaps even more troubling, is the fact that government aid packages—like the COVID-19 stimulus checks and enhanced unemployment benefits—though few and far between before, have completely ceased. To make matters worse, since most available positions on the labor market are part-time, they offer no health care or retirement benefits. Although many workers received wage hikes last year, these raises still do not keep pace with the aggressive inflation facing the American economy. This is all to say, the situation continues to worsen for U.S. workers as the pandemic stretches on, creating an incredibly dire situation for working-class Americans. Where are they to turn for the assistance they so desperately need and deserve?

The media portrayal of employee shortages has overwhelmingly been one of a working-class who—after receiving minimal assistance in the form of stimulus checks—refuses to work. This could not be further from the truth. People want to work, but they need higher pay, better benefits, and more flexibility.

The responsibility falls squarely on employers, not working individuals, to ensure that they are fully staffed. In order to do so, in the current economy—with a plethora of job openings and serious inflation—employers are going to have to compete to fill their payrolls. We have seen some positive outcomes on this front: Amazon now covers front-line workers’ full tuition and other corporations are following suit. But, this doesn’t go far enough. Working individuals should have their work from home expenses covered, sick leave packages should be enhanced, student loan benefits should be provided, and so on.

That being said, government inaction on this issue has been bewildering. With eviction moratoriums coming to an end, many individuals making a good faith effort to engage in the labor market are losing access to their homes. Beyond this, the appallingly low federal minimum wage has remained at $7.25 since 2009 and over 38 million Americans (approx. 10%) still owe money on student loans. With this in mind, I believe it’s time for the federal government to raise its minimum wage to $15, pass student loan forgiveness, provide extensive job training programs, and mandate that health care benefits be provided for part-time workers.

México’s Energy Reform: Bad for Business, Great for Nationalism

Although the Mexican economy continues to grapple with the economic impacts of the COVID-19 pandemic, foreign investment is on the horizon. However, México’s president, Andrés Manuel López Obrador, commonly known as AMLO, is unafraid to scare off foreign investors as he aggressively seeks to increase state control over México’s energy industry.

In the campaign trail, AMLO continuously rallied against what he perceived as an infringement on México’s “energy sovereignty”: an increased reliance on large imports of oil and gas.

To address this crisis, his administration is taking a page out of the political book of AMLO’s political hero, President Lázaro Cárdenas. In 1938, President Cárdenas invoked Article 27 of the Mexican Constitution and seized control of all privately-owned petroleum reserves and facilities. Many were owned and operated by British and American companies.

Similarly, AMLO’s energy reform would increase state control over México’s energy sector by canceling long-term energy supply contracts (many with foreign companies) and prioritizing government-run suppliers’ right to sell energy into the grid over private suppliers. In addition, AMLO seeks to bolster domestic oil production by constructing oil refineries in México, as well as purchasing facilities outside the country.

Unsurprisingly, AMLO’s moves have strained relations with the United States. In recent bilateral talks, U.S. Energy Secretary Jennifer Granholm highlighted the uneasiness these reforms were creating within the U.S. business community. Secretary Granholm’s remarks in México came after the U.S. Chamber of Commerce and the powerful American Petroleum Industry lobbied the Biden Administration to raise their concerns to the Mexican government.

The uneasiness has garnered the attention of global law firms, like Holland & Knight. The firm is now advising investors and operators to maintain a close eye on the proposal and to consider local and international investment protection and defense strategies. This is crucial in the event that AMLO’s energy proposal is successful in the Mexican Congress.

The American business community is not alone in sounding the alarm, as Mexican business leaders and economists have also expressed their concerns with the reform. Like their American counterparts, Mexican critics of AMLO’s proposal assert that his proposed reforms would have a chilling effect on foreign investment – a must-have if México is to revitalize its energy infrastructure and its economy.

Despite the sharp criticism, AMLO is moving ahead full force with his proposal. Interestingly, it appears the aversion of the reform among the business community is not reflected among the general public. AMLO continues to enjoy an approval rating of 66% of the population and his party seems poised to win big in this year’s gubernatorial elections, according to recent polls.

Every March 18, México jubilantly celebrates el Día de la Expropriación Petrolera, the day President Cárdenas nationalized the oil and gas industry. The celebration, which highlights a developing nation’s prevalence over Western business interests, promotes a sense of pride and national sovereignty. While many may view AMLO’s energy reforms as a blow to foreign and domestic business interests, it is not difficult to see why he remains a wildly popular president: his proposal, often compared to the Expropiación Petrolera of 1938, appeals to the nationalist feelings that catapulted him to the presidency in the first place.

Developments in Cryptocurrency Regulation: U.K. Edition

At the beginning of 2021, the Financial Conduct Authority (FCA) warned consumers of the risks related to investing in “cryptoassets or [undertaking activities related to] lending or investments linked to cryptoassets, that promise high returns.” Consumers who invest in cryptoasset-related products are not likely to have recourse to the Financial Ombudsman Service or to the Financial Services Compensation Scheme; therefore, they need to understand the nature of the products they are investing in, the risks associated with their investments, and most importantly they need to be prepared for financial loss.  FCA research covering the cryptocurrency consumer market shows that approximately 2.3 million consumers held cryptocurrency in 2021, and that consumers increasingly  view crypto as investment alternatives rather than “gambles.” In addition, the Cryptoassets Taskforce also found that cryptoassets advertisements are frequently targeted at retail consumers and regularly overemphasize benefits without including appropriate warnings of risks and lack of regulation.

This year started off with a bang: Her Majesty’s Treasury (HM Treasury) announced plans for qualifying cryptoasset advertisements to be introduced into the scope of the financial promotions regime. The age of unfettered and misleading advertisements covering various mediums from public transport billboards to social media depicting cryptoassets investments will come to an end. Financial promotions are invitations or inducements to engage in investment activity and can only be communicated by an authorized person, unless the content of the communication is approved by an authorized person or otherwise subject to an exemption. Under the changes, financial promotions of qualifying cryptoassets will be subject to legislative restrictions and FCA rules that are aimed to ensure that the presentation and substance of such promotions contain accurate information and that warnings are prominent. HM Treasury will bring qualifying cryptoassets promotions into the scope of the financial promotions regime by amending the Financial Promotion Order (FPO) to include controlled investments and controlled activities related to and representative of qualifying cryptoassets investments. This will extend the regulatory perimeter of the FCA to include the regulation of qualifying cryptoasset-related financial promotions.

When unpacking the changes to the regulation of cryptoasset financial promotions, it is important to understand which investments and activities will fall within the FPO’s extended scope and what effect will the changes have on the corresponding market. Per the consultation, the proposed qualifying cryptoassets that will be introduced into the scope of the financial promotions regime as controlled investments capture “cryptographically secured digital [representations] of value or contractual rights which [are] fungible and transferable.” The proposed definition includes assets that are “fungible [i.e., Bitcoin] , transferable [i.e., tokens that can be traded between users for speculation], [but it excludes] . . . electronic money [per] Electronic Money Regulations, and . . . currency issued by a central bank.” In addition, controlled activities such as “dealing, . . . arranging deals in investments, managing investments, advising on investments and agreeing to carry on specified kinds of activity” are proposed to be revised to apply to qualifying cryptoassets. It is important to note that extending the scope of the FPO to include investments and activities that pertain to qualifying cryptoassets will have no effect on the regulatory status of the underlying activities.

The FCA’s current proposal is to align the cryptoassets financial promotion rules with the rules for high-risk investment promotions that fall under the ‘Restricted Mass Market Investments’ classification. The proposed ruleswould permit mass marketing of cryptoassets to retail consumers and direct financial promotions subject to further requirements. Cryptoassets financial promotions will also need to be compliant with the existing FCA rules as stated in the Conduct of Business Sourcebook, and be fair, clear, and not misleading. While the introduction of cryptoassets into the scope of the financial promotions regime is a step in the right direction for consumer protection, the proposed rules that cryptoasset firms will need to comply with are technical. Compliance with these rules may require firms to make operational changes to their systems and controls and to review their product and services offerings in light of the upcoming requirements. In addition, because the financial promotions rules apply to all in scope promotions capable of having an effect in the U.K. if directed at persons in the U.K., they have wide applicability that could extend to overseas persons. The financial promotion rules, once in effect, will operate in parallel with the anti-money laundering and counter-terrorist financing FCA registration requirements for cryptoasset firms.

The changes to the regulation of cryptoasset financial promotions are expected to come into effect after a transitional period of approximately six months after the publication of the proposed FPO regime and the corresponding FCA rules. The FCA consultation will close in March 2022 and the Policy Statement and final Handbook rules are expected to be published in the summer. The FCA is estimating that the new rules will affect approximately 300 firms. Once the new rules are in effect, we will be able to evaluate how they will shape the cryptoasset market and their participants.

SEC to Seek Near-Instant Disclosure From Private Equity Firms Through Amendments to Form PF

The Securities and Exchange Commission (SEC) voted 3-1 on January 26 to issue a proposal that would increase the amount and timeliness of disclosures under form PF—a reporting form for investment advisors at private equity firms and hedge funds. This represents the first major amendment to form PF since its adoption in 2012. The proposed changes are aimed at improving the ability of the regulator to identify possible systemic risks in the financial markets and to prevent investor harm. But Commissioner Hester Pierce, the commission’s sole Republican, voted against the proposal, citing concerns about the deviation from the purpose of Form PF and the bureaucratic burden of requiring near-instant reporting from distressed firms.

The SEC adopted Form PF in 2011 to help the Financial Stability Oversight Counsel (FSOC) in its monitoring obligations as required by the Dodd-Frank Act. Now, with a decade of experience gathering and analyzing data from private firms, the proposal explains that the FSOC has identified areas where more and more timely information would enhance its capability to fulfill its mandate.

Indeed, the developments in the private financial markets since the onset of the Covid pandemic support the view that more should be done to avoid systemic risk and protect investors. The January 2021 meme-stock phenomenon was as much tied to hedge fund activity as it was to retail investors’ behavior, given these firms’ massive short positions and their position as the largest sources for payment for order flow for zero-fee trading platforms. Bill Hwang’s hedge fund Archegos Capital Management’s dramatic meltdown in March 2021 caused banks more than $10 billion in losses – with $5.5 billion suffered by Credit Suisse alone. Further underscoring the potential for systemic risk, Bloomberg recently reported that hedge funds are increasingly becoming too big to fail. Against this background, the new proposal is unsurprising and fits with SEC Chairman Gary Gensler’s tougher stance on private equity and hedge funds.

The key proposed changes to Form PF are as follows. First, the proposal will lower the reporting threshold for private equity fund advisers from $2 billion assets under management to $1.5 billion. Second, and more significantly, the proposal will require firms to file reports within one business day on the occurrence of certain major events, marking a stark departure from the current annual or quarterly reporting. For example, a firm will have to report within one business day if it suffers an extraordinary investment loss, defined as an aggregate 20% or greater loss over a 10 business day rolling period in its most recent net asset value. Similarly, major increases to the collateral posted by the firm, failing to meet margin calls, and major defaults will require near-instant reporting. The proposal also includes new, more abstract triggers that try to capture other major disruptions to firms, such as cybersecurity attacks, relationships with brokers, severe weather events, and more.

Ms. Pierce’s objection to the proposal centered on two issues: first, that the SEC has not adequately shown that newly sought data will actually help the FSOC in its task, and second, that near-instant reporting will only impose a bureaucratic burden on firms already dealing with major disruptions. Calling the proposal an attempt to turn Form PF into a “tool of the government to micromanage private fund risk investment,” Ms. Pierce raised the concern that “the fund adviser will have its hands full in such a fraught period and will have little time to spare to fill out government forms.” The Commissioner also criticized the lower threshold, arguing that to fulfill its task of monitoring systemic risk, the FSOC need only look at the largest firms, and that therefore the threshold should be increased, rather than decreased.

The proposal tries to ease the burden of filling out Form PF by allowing reporting firms to check boxes that contain pre-set context, such that advisers do not have to come up with narrative responses. Providing context through a check-the-boxes approach seems unlikely to provide the meaningful data the FSOC seeks to discover systemic risk. But that is probably not the point – rather, it is enough that a firm’s Form PF raise a red flag for the FSOC to investigate further. As we head into dangerous territory in 2022, as evidenced by recent market volatility and the upcoming interest rate increases, it then only makes sense for SEC reporting to catch up to the speed of today’s financial markets.08

Significant Challenges Ahead for Microsoft’s Proposed Activision Acquisition

On January 18th, Microsoft agreed to acquire Activision Blizzard in a deal valued at $68.7 billion. If Microsoft completes the deal, it will move from the fourth to the third largest video game company, trailing Sony and Tencent. This acquisition, expected to be completed by July 2023, would be Microsoft’s and the video game industry’s largest deal – ever. The move continues a string of other video game studio acquisitions by Microsoft in recent years, most notably the purchase of ZeniMax Media for $7.5 billion and Mojang for $2.5 billion. The Activision purchase stands out, though, due to the transaction’s cost and the impact it could potentially have on both Microsoft and the industry.

Microsoft’s proposed acquisition of Activision synergizes well with its video game division’s current focus: Game Pass. The subscription service lets its subscribers access an extensive catalog of games for $14.99 a month, and one of the key drivers in the growth of Game Pass has been the breadth and variety of its catalog. Recognizing this, Microsoft has constantly looked to expand that list, and the service currently offers its 25 million subscribers over 1,000 titles to play. Microsoft believes that adding Activision’s many popular game series like “Call of Duty” and “Overwatch” will further bolster that catalog.

Microsoft also views this purchase as a way to move into the “metaverse.” During Microsoft’s media call announcing the acquisition, Microsoft CEO Satya Nadella emphasized the importance of the metaverse in Microsoft’s plans for their video game division. Satya said, “we believe there won’t be a single centralized metaverse…we need to support many metaverse platforms.” The acquisition of Activision could be a useful part of this plan. Activision’s game “World of Warcraft” already has some metaverse traits like making avatars and interacting with other players in a virtual environment. How exactly this will manifest is unclear, as the metaverse is still in its infancy, but Microsoft thinks there is something worth investing billions here.

Despite the advantages of this acquisition for Microsoft, it comes with two substantial challenges: antitrust concerns and reforming one of the most maligned work cultures in the industry. On the same day that Microsoft and Activision announced the deal, the Justice Department and Federal Trade Commission announced a review on how they approve mergers and acquisitions. This announcement comes as lawmakers and regulators have promised to try and curtail the power of the tech giants. The vertical merger of Microsoft and Activision will surely catch the eye of regulators, who have thus far declined to comment.

While it is still unclear how this regulatory battle will unfold, it seems likely that they will approve the deal. The transaction cost may attract attention, but it is not enough to find the acquisition anticompetitive. And, crucially, the purchase would still see Microsoft behind competitors Sony and Tencent. Microsoft can argue that this deal will allow them to better compete with these rivals. Furthermore, Microsoft’s CEO of Gaming, Phil Spencer, tweeted the company’s intention to keep the popular franchise “Call of Duty” on Sony’s PlayStation. This is a smart move to help prevent concerns about title exclusivity, a common feature of the video game industry that has anti-competitive effects. While regulatory approval is a concern, it’s unlikely that the greatest challenge facing this acquisition will be antitrust claims; the greatest challenge is far more likely to come from rehabilitating Activision’s corporate culture.

Microsoft will be acquiring a company that is still reeling from a litany of sexual harassment and gender-pay disparity allegations. Reports state that Activision executives, including CEO Bobby Kotick, ignored claims of sexual harassment and discrimination allegedly committed by members of the managerial staff. Claims that crimes as significant as rape were hidden from Directors have led to subpoenas by the SEC to investigate further. These allegations have weighed heavily on the company’s stock, which dropped 27% as the investigations escalated. While the impact of these scandals likely provided the opportunity for Microsoft to target Activision, whether or not Microsoft remedies these problems will be a substantial factor in the acquisition’s success or failure.

While it will be a challenge, Microsoft seems to have the leadership culture to help fix Activision’s cultural problems. Current Microsoft CEO Satya Nadella is credited with changing Microsoft’s combative culture into a collaborative and inclusive environment. Furthermore, responding to complaints by Activision employees seeking more female representation in leadership, Microsoft made it a point to showcase that half of their video game division’s senior leadership positions are led by women during the deal’s announcement.

Whether Microsoft can reform the cultural problem at Activision will be of massive importance. While the future is very much uncertain, Microsoft’s latest move has the potential to impact the video game industry forever.

Upsolve School of Law or Simple Consumer Debt Justice?

Fundamental civil rights injustice. This is what Upsolve co-founder, Rohan Pavuluri, claims to be resulting due to the ban against nonlawyers providing simple legal advice for consumer debts. Upsolve is a non-profit organization based in New York City that promotes financial literacy and helps consumers handle their debts. Recently, the company has created the “American Justice Movement”, a program where volunteer counselors are trained to help people who are facing lawsuits over consumer debts; a growing concern for many Americans. In fact, in 2020, at least “four millionAmericans a year were sued over consumer debt, with less than 10 percent retaining lawyers and more than 70 percent of cases ending in default judgments against the defendant.” Moreover, an astonishing 265,000 consumer debt suits were filed in New York, with over 95% percent of the defendants not represented by a lawyer between 2018 and 2019. The inability to get into contact with a lawyer, coupled with their hourly rate greatly exceeding the debt the consumer is trying to dispute, are possible explanations behind the lack of lawyer representation. Upsolve decided that they wanted to fill that role, hence their inspiration for the legal training program. Once implemented, volunteers would be able to sign up to undergo “training” to assist people with their consumer debt suits. The “training” in question consists of reading an 18-page justice advocate training guide.

However, Upsolve has not yet been able to put this program into motion due to New York’s law that bars people without a license from practicing law. This sparked a recent lawsuit, where Upsolve filed against the Manhattan’s attorney general, arguing that barring non-lawyers from giving basic advice through Upsolve’s program violates the First Amendment. The company is hoping the New York law will carve out an exception for their legal training program. Upsolve argues that the services their legal volunteers would provide would simply be helping consumers with debt to understand how to respond to the pending lawsuit. Specifically, in New York, consumers can respond to the summons by filling out a fill-in-the-blank form in which they will assert possible defenses. Thus the question becomes, is this really the practice of law, or rather, simple advice which is protected under the First Amendment? Upsolve argues the latter, in that with the streamlined process in New York, the program’s services are just narrowly tailored towards filling out the form. While most ordinary laypersons would be able to fill out the form, low-income consumers who struggle with financial literacy are likely to have issues.

Laurence Tribe, a legal scholar who headed the access to justice initiative during President Obama’s term, claims the ban on non-lawyers who want to help unrepresentative consumers afflicted with consumer debt seems to be a law that was created to prevent competition for legal services. However, would the availability of more people to assist consumers really take away from those billable hours? Debt claim cases have increased tremendously over the past few years, filling up the civil court dockets, as cases have doubled from 12% in 1993 to 24% in 2013. With volunteer counselors helping consumers faced with consumer debts suits, this could potentially eliminate the need to go to court and reduce the amount of cases filed in civil courts substantially. In fact, Pew Charitable Trust believes the increased availability of online services for consumers with debt could help to lessen the floodgates in courts.

Nonetheless, the court’s decision on this upcoming suit is uncertain. Of course, the ban on non-legal advice was intended to ensure that consumers aren’t being manipulated by others and obtaining the full justice system. But couldn’t it be said that Upsolve and the law share that same mission by ensuring consumers are obtaining the full justice system? At the end of the day, an 18-page training manual could never replace an experienced lawyer with years of legal training.