Regulation and Deregulation of Industry

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    Biden Administration Unveils Tougher Guidelines on Mergers

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    The proposed road map for regulatory reviews, last updated in 2020, includes a focus on tech platforms for the first time.The Biden administration’s top antitrust officials unveiled tougher guidelines against tech mergers on Wednesday, signaling their deepening scrutiny of the industry despite recent court losses in their attempts to block tech deal-making.Lina Khan, the chair of the Federal Trade Commission, and Jonathan Kanter, the top antitrust official at the Department of Justice, released draft guidelines for merger reviews that for the first time include a focus on digital platforms and how dominant companies can use their scale to harm future rivals.The guidelines — which generally provide a road map for whether regulators block or approve deals — show the Biden administration’s commitment to an aggressive antitrust agenda aimed at curtailing the power of companies like Google, Meta, Apple and Amazon.The guidelines, which aren’t enforced by law, follow a losing streak in the courts. A ruling last week prevented the F.T.C. from delaying the closing of Microsoft’s $69 billion acquisition of the video game maker Activision Blizzard. In January, a court sided against the F.T.C. in its lawsuit to stop Meta’s purchase of Within, a virtual reality app maker.The forceful antitrust posture is a pillar of President Biden’s agenda to stamp out economic inequality and encourage greater competition. “Promoting competition to lower costs and support small businesses and entrepreneurs is a central part of Bidenomics,” a senior administration official said in a call with reporters.The new guidelines would apply to all deals across the economy. But they highlight obstacles to competition among digital platforms, including how an acquisition of a nascent rival may be intended to kill off future competition. Such deals, known as killer acquisitions, are prevalent in the tech industry and at the heart of an F.T.C. antitrust lawsuit against Meta, which owns Facebook, Instagram and WhatsApp. The agency has accused Meta of buying Instagram in 2012 and WhatsApp in 2014 to prevent future competition.The F.T.C. and Justice Department also said they would look at how companies used their scale, including their large number of users, to ward off competition. These so-called network effects have helped companies like Meta and Google maintain their dominance in social media and internet search.The agencies also laid out ways in which mergers involving “platform” businesses, the model used by Amazon’s online store and Apple’s App Store, could harm competition. An acquisition could hurt competition by giving a platform control over a significant stream of data, the draft guidelines said, echoing concerns that tech giants use their vast troves of information to squash rivals.“As markets and commercial realities change, it is vital that we adapt our law enforcement tools to keep pace so that we can protect competition in a manner that reflects the intricacies of our modern economy,” Mr. Kanter said in a statement. “Simply put, competition today looks different than it did 50 — or even 15 — years ago.”While they lack the force of law, the guidelines can influence how judges look at challenges to mergers and acquisitions. The effort to update the guidelines has been closely watched by businesses and corporate lawyers that navigate regulatory scrutiny of megadeals.The guidelines were last updated in 2020. In 2021, Mr. Biden ordered the Justice Department and the F.T.C. to update them again as part of a broader effort to improve competition across the economy. The agencies will take public comment on the proposals and could make amendments before final guidelines are adopted.“These guidelines contain critical updates while ensuring fidelity to the mandate Congress has given us and the legal precedent on the books,” Ms. Khan said in a statement.While the F.T.C. experienced the recent court losses, it has forced some companies, including the chip-maker Nvidia and the aerospace giant Lockheed Martin, to abandon some large deals. The Justice Department blocked the publisher Penguin Random House from buying Simon & Schuster, using an unusual argument that the merger would harm authors who sold the publication rights to their books. More

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    The Fed’s Vice Chair for Supervision Suggests Big-Bank Regulation Changes

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    In a series of changes that has bank lobbyists on the defensive, Michael Barr is calling for higher bank capital and tougher annual stress tests.Michael S. Barr, the Federal Reserve’s vice chair for supervision, announced on Monday that he would be pushing for significant changes to how America’s largest banks were overseen in a bid to make them more resilient in times of trouble — partly by ratcheting up how much capital they have to get them through a rough patch.The overhaul would require the largest banks to increase their holdings of capital — cash and other readily available assets that could be used to absorb losses in times of trouble. Mr. Barr predicted that his tweaks, if put into effect, would be “equivalent to requiring the largest banks hold an additional two percentage points of capital.”“The beauty of capital is that it doesn’t care about the source of the loss,” Mr. Barr said in his speech previewing the proposed changes. “Whatever the vulnerability or the shock, capital is able to help absorb the resulting loss.”Mr. Barr’s proposals are not a done deal: They would need to make it through a notice-and-comment period — giving banks, lawmakers and other interested parties a chance to voice their views. If the Fed Board votes to institute them, the transition will take time. But the sweeping set of changes that he set out meaningfully tweak how banks both police their own risks and are overseen by government regulators.“It’s definitely meaty,” said Ian Katz, an analyst at Capital Alpha who covers banking regulation.The Fed’s vice chair for supervision, who was nominated by President Biden, has spent months reviewing capital rules for America’s largest banks, and his results have been hotly anticipated: Bank lobbyists have for months been warning about the changes he might propose. Midsize banks in particular have been outspoken, saying that any increase in regulatory requirements would be costly for them, reining in their ability to lend.Monday’s speech made clear why banks have been worried. Mr. Barr wants to update capital requirements based on bank risk “to better reflect credit, trading and operational risk,” he said in his remarks, delivered at the Bipartisan Policy Center in Washington.For instance, banks would no longer be able to rely on internal models to estimate some types of credit risk — the chance of losses on loans — or for particularly tough-to-predict market risks. Beyond that, banks would be required to model risks for individual trading desks for particular asset classes, instead of at the firm level.“These changes would raise market risk capital requirements by correcting for gaps in the current rules,” Mr. Barr said.Perhaps anticipating more bank pushback, Mr. Barr also listed existing rules that he did not plan to tighten, among them special capital requirements that apply only to the very largest banks.The new proposal would also try to address vulnerabilities laid bare early this year when a series of major banks collapsed.One factor that led to the demise of Silicon Valley Bank — and sent a shock wave across the midsize banking sector — was that the bank was sitting on a pile of unrealized losses on securities classified as “available for sale.”The lender had not been required to count those paper losses when it was calculating how much capital it needed to weather a tough period. And when it had to sell the securities to raise cash, the losses came back to bite.Mr. Barr’s proposed adjustments would require banks with assets of $100 billion or more to account for unrealized losses and gains on such securities when calculating their regulatory capital, he said.The changes would also toughen oversight for a wider group of large banks. Mr. Barr said his more stringent rules would apply to firms with $100 billion or more in assets — lowering the threshold for tight oversight, which now applies the most enhanced rules to banks that are internationally active or have $700 billion or more in assets. Of the estimated 4,100 banks in the nation, roughly 30 hold $100 billion or more in assets.Mr. Katz said the expansion of tough rules to a wider set of banks was the most notable part of the proposal: Such a tweak was expected based on remarks from other Fed officials recently, he said, but “it’s quite a change.”The bank blowups this year illustrated that even much smaller banks have the potential to unleash chaos if they collapse.Still, “we’re not going to know how significant these changes are until the lengthy rule-making process plays out over the next couple of years,” said Dennis Kelleher, the chief executive of the nonprofit Better Markets.Mr. Kelleher said that in general Mr. Barr’s ideas seemed good, but added that he was troubled by what he saw as a lack of urgency among regulators.“When it comes to bailing out the banks, they act with urgency and decisiveness,” he said, “but when it comes to regulating the banks enough to prevent crashes, they’re slow and they take years.”Bank lobbyists criticized Mr. Barr’s announcement.“Fed Vice Chair for Supervision Barr appears to believe that the largest U.S. banks need even more capital, without providing any evidence as to why,” Kevin Fromer, the chief executive of the lobby group the Financial Services Forum, said in a statement to the news media on Monday.“Further capital requirements on the largest U.S. banks will lead to higher borrowing costs and fewer loans for consumers and businesses — slowing our economy and impacting those on the margin hardest,” Mr. Fromer said. Susan Wachter, a finance professor at the University of Pennsylvania’s Wharton School, said the proposed changes were “long overdue.” She said it was a relief to know that a plan to make them was underway.The Fed vice chair hinted that additional bank oversight tweaks inspired by the March turmoil were coming.“I will be pursuing further changes to regulation and supervision in response to the recent banking stress,” Mr. Barr said in his speech. “I expect to have more to say on these topics in the coming months.” More

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    TikTok, Shein and Other Companies Distance Themselves From China

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    Companies are moving headquarters and factories outside the country and cleaving off their Chinese businesses. It’s not clear the strategy will work.As it expanded internationally, Shein, the rapidly growing fast fashion app, progressively cut ties to its home country, China. It moved its headquarters to Singapore and de-registered its original company in Nanjing. It set up operations in Ireland and Indiana, and hired Washington lobbyists to highlight its U.S. expansion plans as it prepares for a potential initial public offering this year.Yet the clothing retailer can’t shake the focus on its ties with China. Along with other brands like the viral social app TikTok and shopping app Temu, Shein has become a target of American lawmakers in both parties. Politicians are accusing the company of making its clothes with fabric made with forced labor and calling it a tool of the Chinese Communist Party — claims that Shein denies.“No one should be fooled by Shein’s efforts to cover its tracks,” Senator Marco Rubio, Republican of Florida, wrote in a letter to other lawmakers this month.As relations between the United States and China turn increasingly rocky, some of China’s most entrepreneurial brands have taken steps to distance themselves from their home country. They have set up new factories and headquarters outside China to serve the United States and other foreign markets, emphasized their foreign ties and scrubbed any mention of “China” from their corporate websites.TikTok has set up headquarters in Los Angeles and Singapore, and invested in new U.S. operations that it says will wall off its American user data from its parent company, ByteDance. Temu has established a headquarters in Boston, and its parent company, PDD Holdings, has moved its headquarters from China to Ireland.Chinese solar companies have set up factories outside China to avoid U.S. tariffs on solar panels from China and limit their exposure to Xinjiang, a region that the United States now bars imports from because of its use of forced labor.JinkoSolar, a behemoth that produces one in 10 solar modules installed globally, has set up a supply chain entirely outside China to make goods for the United States.Other companies, including those that are foreign-owned, are building walls between their Chinese operations and their global businesses, judging that this is the best way to avoid running afoul of new restrictions or risks to their reputation.Sequoia Capital, the venture capital firm, said last week that it would split its global business into three independent partnerships, spinning off unique entities for China and India.Shein said in a statement that it was “a multinational company with diversified operations around the world and customers in 150 markets, and we make all business decisions with that in mind.” The company said it had zero tolerance for forced labor, did not source cotton from Xinjiang and fully complied with all U.S. tax and trade laws.A spokesperson for TikTok said that the Chinese Communist Party had neither direct nor indirect control of ByteDance or TikTok, and that ByteDance was a private, global company with offices around the world.“Roughly 60 percent of ByteDance is owned by global institutional investors such as BlackRock and General Atlantic, and its C.E.O. resides in Singapore,” said Brooke Oberwetter, a spokesperson.Temu did not respond to requests for comment.Analysts said companies were being driven out of China by a variety of motivations, including better access to foreign customers and an escape from the risk of a crackdown by the Chinese authorities.Some companies have more practical concerns, like reducing their costs for labor and shipping, lowering their tax bills or shedding the shoddy reputation that American buyers continue to associate with goods made in China, said Shay Luo, a principal at the consulting firm Kearney who studies supply chains.But a wave of tougher restrictions in the United States on doing business with China appears to be having an effect, too.Research by Altana, a supply chain technology company, shows that since 2016, new regulations, customs enforcement actions and trade policies that hurt Chinese exports to the United States were followed by “adaptive behavior,” like setting up new subsidiaries outside China, said Evan Smith, the company’s chief executive.For Chinese companies, going global is not a new phenomenon. The Chinese government initiated a “go out” policy at the turn of the century to encourage state-owned enterprises to invest abroad to gain overseas markets, natural resources and technology.Private companies like the electronics firm Lenovo, the appliance maker Haier and the e-commerce giant Alibaba soon followed, seeking investment targets and new customers.As tensions between the United States and China have risen in recent years, investment flows between the countries have slowed. U.S. tariffs on Chinese goods put in place by President Donald J. Trump and maintained by President Biden encouraged companies to move manufacturing from China to countries like Vietnam, Cambodia and Mexico. The pandemic, which halted factories in China and raised costs for moving goods across the ocean, accelerated the trend.International companies are now increasingly adopting a “China plus one” model of securing an additional source of goods in another country in case of supply interruptions in China. Chinese companies, too, are following this practice, Ms. Luo said.In the 12 months that ended in April, the share of imports to the United States from China reached its lowest level since 2006.“It is definitely a rational strategy for these companies to offshore, to move manufacturing or their headquarters to a third country,” said Roselyn Hsueh, an associate professor of political science at Temple University.In addition to tariffs and the ban on products from the Xinjiang region, the United States has imposed new restrictions on trade in technology and tougher security reviews for Chinese investments.The Chinese government, too, is clamping down on the transfer of data and currency outside the country, and it has squashed some Chinese companies’ efforts to list their stocks on American exchanges because of such concerns.Beijing has detained and harassed top tech executives, and foreign consulting firms. And its draconian lockdowns during the pandemic made clear to businesses that they operate in China at the mercy of the government.“Companies like Shein and TikTok move overseas both to reduce their U.S. regulatory and reputational risk, but also to reduce the likelihood that their founders and staff get intimidated or arrested by Chinese officials,” said Isaac Stone Fish, the chief executive of Strategy Risks, a consultant on corporate exposure to China.But companies like Shein and Temu still source nearly all of their products from China, and it’s not clear that the changes the Chinese companies are making to their businesses have done much to lower the heat.The opposition to these companies in Washington is being fueled by an incendiary combination of legitimate concerns over national security and forced labor, and the political appeal of appearing tough on China. It also appears to be driven by the opposition of certain competitors to these services, which are now some of the most downloaded apps in the United States.Shou Chew, the chief executive of TikTok, was questioned at a House hearing in March over whether the social app would make U.S. user data available to the Chinese government.Haiyun Jiang/The New York TimesIn March, a group called Shut Down Shein sprang up to pressure Congress to crack down on the retailer. The group, which has hired five lobbyists with the firm Actum, declined to disclose who is funding its campaign.In a five-hour hearing in March, lawmakers grilled TikTok’s chief executive over whether it would make U.S. user data available to the Chinese government, or censor the information broadcast to young Americans. Legislation is being considered that could permanently ban the app.Some lawmakers are arguing that JinkoSolar’s U.S.-made panels should not be eligible for government tax credits, and, for reasons that have not yet been disclosed, the company’s Florida factory was raided by customs officials last month.State governments, which have often been more welcoming to Chinese investment, are also growing more hostile. In January, Glenn Youngkin, the Republican governor of Virginia, blocked a deal for Ford Motor to set up a factory using technology from a Chinese battery maker, Contemporary Amperex Technology, calling it a “Trojan-horse relationship.”A House committee set up to examine economic and security competition with China is investigating the ties that Temu and Shein have with forced labor in China, and lawmakers are calling for Shein to be audited before its I.P.O.“The message of our investigation of Shein, Temu, Adidas and Nike is clear: Either ensure your supply chains are clean — no matter how difficult it is — or get out of countries like China implicated in forced labor,” Representative Mike Gallagher, the Republican chair of the committee, said in a statement.An investigation by Bloomberg in November found that some of Shein’s clothes were made with cotton grown in Xinjiang. In a statement, Shein said it had “built a four-step approach to ensure compliance” with the law, including a “code of conduct, independent audits, robust tracing technology and third-party testing.Jordyn Holman More

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    Labor Board, Reversing Trump-Era Ruling, Widens Definition of Employee

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    The National Labor Relations Board, with a Democratic majority, restored a standard that counts more workers as employees rather than contractors.Labor regulators issued a ruling on Tuesday that makes it more likely for workers to be considered employees rather than contractors under federal law.Overturning a ruling issued when the board was under Republican control, the decision effectively increases the number of workers — like drivers, construction workers or janitors — who have a federally protected right to unionize or take other collective action, such as protesting unsafe working conditions.The ruling ensures that “workers who seek to organize or exercise their rights under the National Labor Relations Act are not improperly excluded from its protections,” said a statement by Lauren McFerran, the Democratic chairman of the labor board, which voted 3 to 1 along party lines to broaden the standard.Determining whether a worker is an employee or a contractor has long depended on several variables, including the potential employer’s control over the work and provision of tools and equipment.In 2019, when the board was controlled by appointees of President Donald J. Trump, it elevated one consideration — workers’ chances to make more money based on their business savvy, often described as “entrepreneurial opportunity” — above the others. It concluded that such opportunities should be a key tiebreaker when some factors pointed to contractor status and others indicated employment.In its decision in 2019, the board said that a ruling during the Obama administration had improperly subordinated the question of moneymaking opportunities.That 2019 ruling appeared to be a victory for gig companies like Uber and Lyft, whose supporters have argued that ride-share drivers should be considered contractors in part because of the opportunities they have for potential profit — say, by determining which neighborhoods to work in.The latest decision returned the board to the standard laid out in the Obama era, explicitly rejecting the elevation of entrepreneurial opportunity above other factors.The turnabout was criticized on Tuesday by businesses that rely heavily on contractors. In a statement, Evan Armstrong, chair of the Coalition for Workforce Innovation, which represents companies like Uber and Lyft as well as industry trade groups, said that the ruling “decreases clarity and threatens the flexible independent model that benefits workers, consumers, entrepreneurs, businesses and the overall economy.”Some labor experts, however, say it is not clear that gig companies like Uber and Lyft, which set the prices that passengers pay, provide drivers with enough bona fide entrepreneurial opportunity to qualify them as contractors even under the old standard.In his dissent, Marvin E. Kaplan, the board’s lone Republican member, made a version of this argument, concluding that the workers in the case before the board — wig, hair and makeup stylists who work with the Atlanta Opera — “have little opportunity for economic gain or, conversely, risk of loss.”As a result, he agreed with the board’s majority that the stylists should be considered employees who have the right to unionize.But Mr. Kaplan wrote that the lack of entrepreneurial opportunities meant that the stylists should have been considered employees even under the Trump-era standard, and that there was no need to alter it. More

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    Restaurant Chain Franchises Face Scrutiny From the FTC

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    Troubles at the restaurant chain Burgerim highlight concerns about whether franchisees need more protection in their contracts with franchisers.“Making It Work” is a series about small-business owners striving to endure hard times.When Kenneth Laskin flew to California to meet with executives at Burgerim, a start-up chain of restaurants, he was made to feel not just like another prospective franchisee, but like part of a family.The company’s executives, he said, made a point one evening of highlighting their common Jewish faith by praying with him in Hebrew.At the time, in 2017, Mr. Laskin believed he was being offered a plum deal. He paid $50,000 for the right to open up as many Burgerim franchised restaurants as he wanted in Oregon. “I got an entire state,” Mr. Laskin recalled.Today, Burgerim has run into trouble, leaving a trail of financial problems, a lawsuit by the Federal Trade Commission and broader regulatory scrutiny of whether protections for franchisees like Mr. Laskin are adequate.The challenges highlighted by Burgerim come as franchising continues to grow as a way that people are choosing to start small businesses.There has been rising concern about whether franchisees need more protection in their contracts with franchisers. That concern has found a sympathetic ear in the Biden administration and in several state legislatures, and has resulted in multiple proposed limits on franchisers’ powers.In the end, Mr. Laskin opened only one Burgerim restaurant, in Eugene, Ore., which closed in 2020 during the pandemic. Since then, Mr. Laskin has been depleting his savings to pay the bills.Burgerim, which boasted of having inventive high-quality burgers, has been criticized by former franchisees for making grand promises and poor disclosure about business risks. Of the more than 1,500 franchises Burgerim sold, most never opened, the commission said in a lawsuit that the agency filed last year against the company and its founder in U.S. District Court in California.Peter Bronstein, a lawyer for Oren Loni, who was the company’s principal executive in the United States, said that Burgerim made some business mistakes but that it was often trying to help its franchisees succeed. The two sides have been in mediation, according to the court file. Kenneth Laskin believed he got a plum deal to start as many Burgerim franchised restaurants as he wanted in Oregon. He ended up opening only one, which closed during the pandemic.Zack Wittman for The New York TimesEven as the pandemic was still bearing down, the number of franchised establishments in the country grew 2.8 percent in 2021 and 2 percent in 2022. That number is expected to increase an additional 2 percent this year, bringing the total to 805,436 franchises, according to the latest data released by the International Franchise Association, an industry group.As the franchising network expands, so does its contribution to the broader economy. Franchises employed 8.4 million people last year, a 3 percent increase from 2021.There is historical evidence, according to the International Franchise Association, that the first U.S. franchise dates back to Ben Franklin, who created a network of printing partnerships.Franchising took root in the American business landscape in the decades following World War II, with the growth of franchised brands like Howard Johnson’s hotels.Sam Falk/The New York TimesToday a fundamental symbiosis drives the business model: Franchisees pay an upfront fee to an franchiser like Dunkin’ Donuts or Applebee’s, which gets them access to all of that brand’s suppliers, advertising and technology. The franchisee can lean on these established systems to get their business up and running quickly rather than having to start from scratch. And the franchiser, in turn, receives the franchising fee, typically tens of thousands of dollars, in addition to a regular royalty payment from the franchisee.“Franchising has always been an on-ramp for the middle class to open their own business,” said Charlie Chase, the chief executive of FirstService Brands, a franchiser of home renovation and painting services.Over the years, Mr. Chase, who has served on the board of directors of the International Franchise Association, said he had helped hundreds of successful franchisees get their start. “We have created a lot of millionaires,” he said.Still, Mr. Chase said he was concerned about how some franchisees were being pushed into businesses without understanding all of the risks.He blames aggressive internet advertising for some of this (Mr. Laskin learned about Burgerim from a Facebook advertisement, for example), and also a network of third-party brokers that often push prospective franchisees to buy multiple franchises at a time.The Federal Trade Commission, under the leadership of Lina Khan, is looking broadly at industry practices including disclosure and issues such as franchisers’ unilaterally changing the terms of an agreement with a franchisee.“Franchising can be a good business model, but it can also lead to a lot of harm,” Elizabeth Wilkins, the director of the commission’s Office of Policy and Planning, said. “We are concerned about instances where the promise does not match with reality. We believe there is a significant gap that is worth our investigation.”In the case against Burgerim,  federal officials said that the company executives told franchisees they would refund their franchise fees if their business did not open, but that many people never got their money back. Mr. Bronstein, the lawyer for Mr. Loni, said offering refunds “was not the best way to run a business.”In the years since the 2008 financial crisis and mortgage meltdown, regulators have bolstered protections for consumers by improving disclosure by banks and banning certain fees they can charge. But small businesses, including franchisees, have not benefited from the same extensive regulatory scrutiny.“There is a view in the consumer protection world that small businesses do not get the same level of protections as other consumers,” Samuel Levine, the director of the F.T.C.’s Bureau of Consumer Protection, said. “Yet, consumers and small businesses, including franchisees, face many of the same challenges. That is something we are trying to address.”The F.T.C., under the leadership of Lina Khan, above, is looking broadly at industry practices at franchises including disclosure about business risks. Saul Loeb/Agence France-Presse, via Getty ImagesAs part of that effort, the Federal Trade Commission is looking at how to apply laws like the Robinson-Patman Act, an antitrust law that prevents large corporations from using discriminatory pricing to take advantage of small businesses. The agency also has proposed a rule banning noncompete clauses in employment contracts and may consider limiting the use of noncompete clauses in franchise agreements.When Mr. Laskin bought a franchise, he was not looking to become a millionaire, but rather to build a stable middle-class life.He opened his sole Burgerim store in Oregon in September 2019.But the problems started soon after his grand opening, Mr. Laskin said. Burgerim had not established a reliable food distribution system in Oregon, he said, forcing Mr. Laskin to fend for himself to supply his restaurant. In trying to help new locations get off the ground, the company never collected royalties from the franchisees, which limited its ability to support its restaurant network over the long term, Mr. Bronstein said. Still, he added, there are many Burgerim restaurants that operated successfully.Mr. Laskin kept the business going during the pandemic by offering take out. But he couldn’t find people to work during the lockdowns, which meant he and his wife ran the entire operation themselves.Mr. Laskin, who has severe back pain from years of restaurant work, hoped a franchise would offer him the chance to delegate work to employees and spare his back.But some days, Mr. Laskin would return from the burger restaurant at night unable to walk the final few yards up his driveway because of the pain from standing on his feet all day.The Burgerim leadership, Mr. Laskin said, provided no support during the pandemic.A Burgerim restaurant in Walnut Creek, Calif., last year.Gado/Getty ImagesHe closed his restaurant in May 2020 and moved to Florida. Mr. Laskin, 57, said that his back problems limited the type of work he can do and that it had been difficult finding work after his burger business closed.The struggles of the former Burgerim franchisees were brought to light in 2020 by the publication Restaurant Business, which focuses on the food service industry, in a series of articles.Some franchisees say improving disclosure or increasing regulations on fee structures will not be a panacea in rooting out the industry’s troubled actors.“Transparency is a great thing, but I am not sure more disclosure is going to change any outcomes,” said Greg Flynn, the founder and chief executive of Flynn Restaurant Group, the largest franchisee in the country with 2,400 locations and 73,000 employees, operating brands like Taco Bell, Pizza Hut and Panera.“There are a lot of stories of franchisees buying into a system and then it goes badly for them,” he added. “I would just suggest that they might have had a similar experience outside of a franchise system.”Mr. Laskin says it is not just bad timing or circumstances that were to blame. “The system is fundamentally crippled,’’ he said. “There is too much secrecy. It shouldn’t be this difficult.” More

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    New York City Moves to Regulate How AI Is Used in Hiring

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    European lawmakers are finishing work on an A.I. act. The Biden administration and leaders in Congress have their plans for reining in artificial intelligence. Sam Altman, the chief executive of OpenAI, maker of the A.I. sensation ChatGPT, recommended the creation of a federal agency with oversight and licensing authority in Senate testimony last week. And the topic came up at the Group of 7 summit in Japan.Amid the sweeping plans and pledges, New York City has emerged as a modest pioneer in A.I. regulation.The city government passed a law in 2021 and adopted specific rules last month for one high-stakes application of the technology: hiring and promotion decisions. Enforcement begins in July.The city’s law requires companies using A.I. software in hiring to notify candidates that an automated system is being used. It also requires companies to have independent auditors check the technology annually for bias. Candidates can request and be told what data is being collected and analyzed. Companies will be fined for violations.New York City’s focused approach represents an important front in A.I. regulation. At some point, the broad-stroke principles developed by governments and international organizations, experts say, must be translated into details and definitions. Who is being affected by the technology? What are the benefits and harms? Who can intervene, and how?“Without a concrete use case, you are not in a position to answer those questions,” said Julia Stoyanovich, an associate professor at New York University and director of its Center for Responsible A.I.But even before it takes effect, the New York City law has been a magnet for criticism. Public interest advocates say it doesn’t go far enough, while business groups say it is impractical.The complaints from both camps point to the challenge of regulating A.I., which is advancing at a torrid pace with unknown consequences, stirring enthusiasm and anxiety.Uneasy compromises are inevitable.Ms. Stoyanovich is concerned that the city law has loopholes that may weaken it. “But it’s much better than not having a law,” she said. “And until you try to regulate, you won’t learn how.”The law applies to companies with workers in New York City, but labor experts expect it to influence practices nationally. At least four states — California, New Jersey, New York and Vermont — and the District of Columbia are also working on laws to regulate A.I. in hiring. And Illinois and Maryland have enacted laws limiting the use of specific A.I. technologies, often for workplace surveillance and the screening of job candidates.The New York City law emerged from a clash of sharply conflicting viewpoints. The City Council passed it during the final days of the administration of Mayor Bill de Blasio. Rounds of hearings and public comments, more than 100,000 words, came later — overseen by the city’s Department of Consumer and Worker Protection, the rule-making agency.The result, some critics say, is overly sympathetic to business interests.“What could have been a landmark law was watered down to lose effectiveness,” said Alexandra Givens, president of the Center for Democracy & Technology, a policy and civil rights organization.That’s because the law defines an “automated employment decision tool” as technology used “to substantially assist or replace discretionary decision making,” she said. The rules adopted by the city appear to interpret that phrasing narrowly so that A.I. software will require an audit only if it is the lone or primary factor in a hiring decision or is used to overrule a human, Ms. Givens said.That leaves out the main way the automated software is used, she said, with a hiring manager invariably making the final choice. The potential for A.I.-driven discrimination, she said, typically comes in screening hundreds or thousands of candidates down to a handful or in targeted online recruiting to generate a pool of candidates.Ms. Givens also criticized the law for limiting the kinds of groups measured for unfair treatment. It covers bias by sex, race and ethnicity, but not discrimination against older workers or those with disabilities.“My biggest concern is that this becomes the template nationally when we should be asking much more of our policymakers,” Ms. Givens said.“This is a significant regulatory success,” said Robert Holden, center, a member of the City Council who formerly led its committee on technology.Johnny Milano for The New York TimesThe law was narrowed to sharpen it and make sure it was focused and enforceable, city officials said. The Council and the worker protection agency heard from many voices, including public-interest activists and software companies. Its goal was to weigh trade-offs between innovation and potential harm, officials said.“This is a significant regulatory success toward ensuring that A.I. technology is used ethically and responsibly,” said Robert Holden, who was the chair of the Council committee on technology when the law was passed and remains a committee member.New York City is trying to address new technology in the context of federal workplace laws with guidelines on hiring that date to the 1970s. The main Equal Employment Opportunity Commission rule states that no practice or method of selection used by employers should have a “disparate impact” on a legally protected group like women or minorities.Businesses have criticized the law. In a filing this year, the Software Alliance, a trade group that includes Microsoft, SAP and Workday, said the requirement for independent audits of A.I. was “not feasible” because “the auditing landscape is nascent,” lacking standards and professional oversight bodies.But a nascent field is a market opportunity. The A.I. audit business, experts say, is only going to grow. It is already attracting law firms, consultants and start-ups.Companies that sell A.I. software to assist in hiring and promotion decisions have generally come to embrace regulation. Some have already undergone outside audits. They see the requirement as a potential competitive advantage, providing proof that their technology expands the pool of job candidates for companies and increases opportunity for workers.“We believe we can meet the law and show what good A.I. looks like,” said Roy Wang, general counsel of Eightfold AI, a Silicon Valley start-up that produces software used to assist hiring managers.The New York City law also takes an approach to regulating A.I. that may become the norm. The law’s key measurement is an “impact ratio,” or a calculation of the effect of using the software on a protected group of job candidates. It does not delve into how an algorithm makes decisions, a concept known as “explainability.”In life-affecting applications like hiring, critics say, people have a right to an explanation of how a decision was made. But A.I. like ChatGPT-style software is becoming more complex, perhaps putting the goal of explainable A.I. out of reach, some experts say.“The focus becomes the output of the algorithm, not the working of the algorithm,” said Ashley Casovan, executive director of the Responsible AI Institute, which is developing certifications for the safe use of A.I. applications in the workplace, health care and finance. More

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    San Francisco Fed Ties to S.V.B. Chief Attracts Scrutiny to Century-Old Setup

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    As Greg Becker, the former C.E.O. of Silicon Valley Bank, prepares to testify before Congress, boards that oversee regional Federal Reserve branches are in the spotlight.The collapse of Silicon Valley Bank has drawn attention to the relationship between the Federal Reserve Bank of San Francisco, which was in charge of overseeing safety and soundness at the lender, and the bank’s former chief executive, Greg Becker, who for years sat on the San Francisco Fed’s board of directors.The bank’s collapse on March 10 has prompted criticism of the Fed, whose bank supervisors were slow to spot and stop problems before Silicon Valley Bank experienced a devastating run that necessitated a sweeping government response.Now, Mr. Becker could face lawmaker questions about his board role — and whether it created too close a link between the bank and its regulators — when he testifies on Tuesday before the Senate Banking Committee about Silicon Valley Bank’s collapse.In prepared testimony published before the hearing, Mr. Becker said he was “truly sorry” for the bank’s failure. “I do not believe that any bank could survive a bank run of that velocity and magnitude,” he said.Mr. Becker’s position on the San Francisco Fed board would have given him little formal power, according to current and former Fed employees and officials. The Fed’s 12 reserve banks — semiprivate institutions dotted across the country — each has a nine-person board of directors, three of whom come from the banking industry. Those boards have no say in bank supervision, and serve mainly as advisers for the Fed bank’s leadership.But many acknowledged that the setup created the appearance of coziness between S.V.B. and the Fed. Some outside experts and politicians are beginning to question whether the way the Fed has been organized for more than a century makes sense today.“They’re like a glorified advisory committee,” said Kaleb Nygaard, who researches central banks at the University of Pennsylvania. “It causes massive headaches in the best of times, potentially fatal aneurysms in the worst of times.”The Fed boards date back to 1913.In the days after Silicon Valley Bank’s collapse, headlines about Mr. Becker’s close ties to his bank’s regulator abounded, with many raising questions about a possible conflict of interest.Though regional Fed presidents and other officials play a limited role in bank oversight — which is mostly in Washington’s domain — some critics wondered if supervisors at the San Francisco Fed failed to effectively police Silicon Valley Bank partly because of the reserve bank’s close ties to the bank’s chief executive.And some asked: Why do banks have representatives on the Fed Board at all?The answer is tied to the Fed’s history.When Congress and the White House created the Fed in 1913, they were skeptical about giving either the government or the private sector unilateral power over the nation’s money supply. So they compromised. They created a public Fed Board in Washington, alongside quasi-private reserve banks around the country.Those reserve banks, which ended up numbering 12 in total, would be set up like private companies with banks as their shareholders. And much like other private companies, they would be overseen by boards — ones that included bank representatives. Each of the Fed reserve banks has nine board members, or directors. Three of them come from banks, while the others come from other financial companies, businesses, and labor and community groups.“The setup is the way that it is because of the way the Fed was set up in 1913,” said William Dudley, the former president of the Federal Reserve Bank of New York, who said that the directors served mainly as a sort of advisory focus group on banking issues and operational issues, like cybersecurity.The boards may give members benefits.Several former Fed officials said that the bank-related board members provided a valuable function, offering real-time insight into the finance industry. And 10 current and former Fed employees interviewed for this article agreed on one point: These boards have relatively little official power in the modern era.While they vote for changes on a formerly important interest rate at the Fed — called the discount rate — that role has become much less critical over time. Board members select Fed presidents, though since the 2010 Dodd Frank law, the bank-tied directors have not been allowed to participate in those votes.But the law didn’t go so far as to cut bank representatives from the boards altogether because of a lobbying push to keep them intact, said Aaron Klein, who was deputy assistant secretary for economic policy at the Treasury Department at the time and worked closely on the law’s passage.“The Fed didn’t want that, and neither did the bankers,” Mr. Klein said.From a bank’s perspective, directorships offer prestige: Regional Fed board members rub shoulders with other bank and community leaders and with powerful central bankers.They might also offer either an actual or a perceived information advantage about the economy and about monetary policy. Although the discount rate is not as important today, directors at some regional banks are given economic briefings as they make their decisions.Mr. Becker would have seen Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, at meetings held roughly once a month, her calendars suggest.Jim Wilson/The New York TimesRegional board discount votes have often been seen as a sort of weather vane for how a regional bank’s leadership is thinking about policy — suggesting that directors might know how their president is going to vote when it comes to the federal funds rate, the important interest rate that the Fed uses to guide the speed of the economy.That is notable in an era in which Wall Street traders hang on Fed officials’ every word when it comes to interest rates.“It’s a very awkward thing,” said Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis. “There’s no gain to having them vote on discount rates.”Renée Adams, a former New York Fed researcher who studies corporate boards and is now at the University of Oxford, has found that when a bank executive becomes a director, the stock price of their firm rises on the news.“The market believes that they have some advantage,” she said.And Board members do get substantial face time with Fed presidents, who meet regularly with their directors. Mr. Becker would have seen Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, at meetings held roughly once a month, her calendars suggest.‘Supervisory leniency’ is a risk.Bank-tied directors have no direct role in supervision, nor can they appoint officials or participate in budget decisions related to bank oversight, according to the Fed.But Mr. Klein is skeptical that Mr. Becker’s position on the San Francisco Fed’s board did not matter at all in the case of Silicon Valley Bank.“Who wants to be the person raising problems about the C.E.O. who is on the board of your own C.E.O.?” he said, explaining that even though the organizational structure might have drawn clear lines, those may not have cleanly applied in the “real world.”Ms. Adams’s research found that banks whose executives sat on boards did in fact see fewer enforcement actions — slaps on the wrist from Fed supervisors — during the director’s tenure. “There may be supervisory leniency,” she said.Changing the system might prove difficult.This is not the first time the Fed regional boards have raised ethical issues. In the years leading up to the 2008 financial crisis, Dick Fuld, the Lehman Brothers chief executive at the time, and Steve Friedman, who was a director at Goldman Sachs, both served on the New York Fed board.Mr. Fuld resigned just before Lehman collapsed in 2008. Mr. Friedman left in 2009, after news broke that he had bought Goldman Sachs stock during the crisis, at a time when the Treasury and the Fed were drawing up plans to bolster big banks.Given that controversy, politicians have at times focused on the Fed boards. The Democratic Party included language in its 2016 platform to bar executives of financial institutions from serving on reserve bank boards. And the issue has recently garnered bipartisan interest. Draft legislation under development by members of the Senate Banking Committee would limit directorships to small banks — those with less than $10 billion in assets, according to a person familiar with the material.The committee has a hearing on Fed accountability planned for May 17. Senators Elizabeth Warren, Democrat from Massachusetts, and Rick Scott, Republican from Florida, plan to introduce the legislation ahead of that, a spokesperson for Ms. Warren said.“It’s dangerous and unethical for executives from the largest banks to serve on Fed boards where these bankers could secure preferential regulatory treatment or exploit privileged information,” Ms. Warren said in a statement.But — as the Dodd Frank legislation illustrated — stripping banks of their power at the Fed has been a heavy lift.“As a political target,” said Ms. Binder, the political scientist, “it’s a little in the weeds.” More

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    Late-Night Negotiating Frenzy Left First Republic in JPMorgan’s Control

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    The resolution of First Republic Bank came after a frantic night of deal making by government officials and executives at the country’s biggest bank.Lawmakers and regulators have spent years erecting laws and rules meant to limit the power and size of the largest U.S. banks. But those efforts were cast aside in a frantic late-night effort by government officials to contain a banking crisis by seizing and selling First Republic Bank to the country’s biggest bank, JPMorgan Chase.At about 1 a.m. Monday, hours after the Federal Deposit Insurance Corporation had been expected to announce a buyer for the troubled regional lender, government officials informed JPMorgan executives that they had won the right to take over First Republic and the accounts of its well-heeled customers, most of them in wealthy coastal cities and suburbs.The F.D.I.C.’s decision appears, for now, to have quelled nearly two months of simmering turmoil in the banking sector that followed the sudden collapse of Silicon Valley Bank and Signature Bank in early March. “This part of the crisis is over,” Jamie Dimon, JPMorgan’s chief executive, told analysts on Monday in a conference call to discuss the acquisition.For Mr. Dimon, it was a reprise of his role in the 2008 financial crisis when JPMorgan acquired Bear Stearns and Washington Mutual at the behest of federal regulators.But the resolution of First Republic has also brought to the fore long-running debates about whether some banks have become too big too fail partly because regulators have allowed or even encouraged them to acquire smaller financial institutions, especially during crises.“Regulators view them as adults and business partners,” said Tyler Gellasch, president of Healthy Markets Association, a Washington-based group that advocates greater transparency in the financial system, referring to big banks like JPMorgan. “They are too big to fail and they are afforded the privilege of being so.”He added that JPMorgan was likely to make a lot of money from the acquisition. JPMorgan said on Monday that it expected the deal to raise its profits this year by $500 million.JPMorgan will pay the F.D.I.C. $10.6 billion to acquire First Republic. The government agency expects to cover a loss of about $13 billion on First Republic’s assets.`Normally a bank cannot acquire another bank if doing so would allow it to control more than 10 percent of the nation’s bank deposits — a threshold JPMorgan had already reached before buying First Republic. But the law includes an exception for the acquisition of a failing bank.The F.D.I.C. sounded out banks to see if they would be willing to take First Republic’s uninsured deposits and if their primary regulator would allow them to do so, according to two people familiar with the process. On Friday afternoon, the regulator invited the banks into a virtual data room to look at First Republic’s financials, the two people said. The government agency, which was working with the investment bank Guggenheim Securities, had plenty of time to prepare for the auction. First Republic had been struggling since the failure of Silicon Valley Bank, despite receiving a $30 billion lifeline in March from 11 of the country’s largest banks, an effort led by Mr. Dimon of JPMorgan.By the afternoon of April 24, it had became increasingly clear that First Republic couldn’t stand on its own. That day, the bank revealed in its quarterly earnings report that it had lost $102 billion in customer deposits in the last weeks of March, or more than half what it had at the end of December.Ahead of the earnings release, First Republic’s lawyers and other advisers told the bank’s senior executives not to answer any questions on the company’s conference call, according to a person briefed on the matter, because of the bank’s dire situation.The revelations in the report and the executives’ silence spooked investors, who dumped its already beaten-down stock.When the F.D.I.C. began the process to sell First Republic, several bidders including PNC Financial Services, Fifth Third Bancorp, Citizens Financial Group and JPMorgan expressed an interest. Analysts and executives at those banks began going through First Republic’s data to figure out how much they would be willing to bid and submitted bids by early afternoon Sunday.Regulators and Guggenheim then returned to the four bidders, asking them for their best and final offers by 7 p.m. E.T. Each bank, including JPMorgan Chase, improved its offer, two of the people said.Regulators had indicated that they planned to announce a winner by 8 p.m., before markets in Asia opened. PNC executives had spent much of the weekend at the bank’s Pittsburgh headquarters putting together its bid. Executives at Citizens, which is based in Providence, R.I., gathered in offices in Connecticut and Massachusetts. But 8 p.m. rolled by with no word from the F.D.I.C. Several hours of silence followed.For the three smaller banks, the deal would have been transformative, giving them a much bigger presence in wealthy places like the San Francisco Bay Area and New York City. PNC, which is the sixth-largest U.S. bank, would have bolstered its position to challenge the nation’s four large commercial lenders — JPMorgan, Bank of America, Citigroup and Wells Fargo.Ultimately, JPMorgan not only offered more money than others and agreed to buy the vast majority of the bank, two people familiar with the process said. Regulators also were more inclined to accept the bank’s offer because JPMorgan was likely to have an easier time integrating First Republic’s branches into its business and managing the smaller bank’s loans and mortgages either by holding onto them or selling them, the two people said.As the executives at the smaller banks waited for their phones to ring, the F.D.I.C. and its advisers continued to negotiate with Mr. Dimon and his team, who were seeking assurances that the government would safeguard JPMorgan against losses, according to one of the people.At around 3 a.m., the F.D.I.C. announced that JPMorgan would acquire First Republic.An F.D.I.C. spokesman declined to comment on other bidders. In its statement, the agency said, “The resolution of First Republic Bank involved a highly competitive bidding process and resulted in a transaction consistent with the least-cost requirements of the Federal Deposit Insurance Act.” The announcement was widely praised in the financial industry. Robin Vince, the president and chief executive of Bank of New York Mellon, said in an interview that it felt “like a cloud has been lifted.”Some financial analysts cautioned that the celebrations might be overdone.Many banks still have hundreds of billions of dollars in unrealized losses on Treasury bonds and mortgage-backed securities purchased when interest rates were very low. Some of those bond investments are now worth much less because the Federal Reserve has sharply raised rates to bring down inflation.Christopher Whalen of Whalen Global Advisors said the Fed fueled some of the problems at banks like First Republic with an easy money policy that led them to load up on bonds that are now performing poorly. “This problem will not go away until the Fed drops interest rates,” he said. “Otherwise, we’ll see more banks fail.”But Mr. Whalen’s view is a minority opinion. The growing consensus is that the failures of Silicon Valley, Signature and now First Republic will not lead to a repeat of the 2008 financial crisis that brought down Bear Stearns, Lehman Brothers and Washington Mutual.The assets of the three banks that failed this year are greater than of the 25 banks that failed in 2008 after adjusting for inflation. But 465 banks failed in total from 2008 to 2012.One unresolved issue is how to deal with banks that still have a high percentage of uninsured deposits — money from customers well in excess of the $250,000 federally insured cap on deposits. The F.D.I.C. on Monday recommended that Congress consider expanding its ability to protect deposits.Many investors and depositors are already assuming that the government will step in to protect all deposits at any failing institution by invoking a systemic risk exception — something they did with Silicon Valley Bank and Signature Bank. But that’s easy to do when it is just a few banks that run into trouble and more difficult if many banks have problems.Another looming concern is that midsize banks will pull back on lending to preserve capital if they are subject to the kind of bank runs that took place at Silicon Valley Bank and First Republic. Depositors might also move their savings to money market funds, which tend to offer higher returns than savings or checking accounts.Midsize banks also need to brace for more exacting oversight from the Fed and the F.D.I.C., which criticized themselves in reports released last week about the bank failures in March.Regional and community banks are the main source of financing for the commercial real estate industry, which encompasses office buildings, apartment complexes and shopping centers. An unwillingness by banks to lend to developers could stymie plans for new construction.Any pullback in lending could lead to a slowdown in economic growth or a recession.Some experts said that despite those challenges and concerns about big banks getting bigger, regulators have done an admirable job in restoring stability to the financial system.“It was an extremely difficult situation, and given how difficult it was, I think it was well done,” said Sheila Bair, who was chair of the F.D.I.C. during the 2008 financial crisis. “It means that big banks becoming bigger when smaller banks begin to fail is inevitable,” she added.Reporting was contributed by More