Regulatory

A Slow Government’s Response to High-Frequency Trading

December 1, 2016
Regulatory

Nolan Hudalla, MJLST Staffer

High-frequency trading (HFT) is the use of enhanced technological speed to gain an edge in trading financial instruments. This edge over other investors is often only 1/100th of the blink of an eye, but can provide a company with years of unwavering success. Although HFT became significant within the past decade because of its positive economic advantages, the recent discussion of HFT is becoming increasingly negative. A major reason for this shift in opinion about HFT is due to the increased awareness of unethical trading practices after the 2008 financial crisis.

MJLST published an article last year on the ethics of HFT. In that article, The Law and Ethics of High-Frequency Trading, Steven McNamara advanced various reasons why certain HFT practices violate both business ethics and federal agency regulations. But where do Congress and the SEC stand, and what have they done to correct such unethical practices in HFT?

It appears that the federal government is taking a middling approach to fighting unethical HFT practices. In particular, the SEC has not taken a hard stance on many HFT issues, and Congress has followed suit by not passing any bills in 2016 to fight HFT. However, it is also evident that the SEC and Congress are troubled by ongoing bad practices and are aware of the risk of future violations. Specifically, Congress has introduced several bills “imposing a tax on a broad array of financial transactions that could impact HFT . . . [and] also held hearings in the 114th Congress touching on HFT issues as part of its oversight of the SEC and CFTC.” In addition, the SEC has increased enforcement on serious HFT ethics violations. The agency also approved a new public stock exchange in June with a “speed bump” capable of deterring some HFT activity.

Has GoPro’s Voluntary “Karma” Refund Program Revealed a Gap in Regulatory Jurisdiction over Commercial and Private Drones?

November 26, 2016
Regulatory, Torts Law

Joey Novak, MJLST Staffer

Drones in the year 2016 are involved in everything from assisting law enforcement to recordings at weddings and sporting events to even the potential for package delivery, and as such, have been rapidly expanding further into recreational and commercial settings. Drones also have one of the most imaginably widespread liability palates you could think of, as 4th Amendment, privacy, property, and products liability issues all combine to form the Frankenstein’s monster of liability, that is if that monster was also subject to 152 pages of operational FAA regulation because he could fly.

With such a wide breadth of hot topic liability issues, it’s not surprising that what should be the most common issue for commercial use has been somewhat overlooked: product liability.  On November 8th, GoPro announced the “recall” of 2,500 Karma drones after the $800 drone had only been on the market for two weeks. Apparently, the design of an off-center camera placement led to increased vibration, leading to connectivity issues and in turn, drones unexpectedly falling out of the sky. Although no actual injuries have been reported, one does not have to make a large leap to imagine a falling drone leading to injury and subsequent liability issues.

The interesting thing about this “recall” is that it revealed a regulatory gap between the FAA (Federal Aviation Administration) and the CPSC (Consumer Product Safety Commission) for drone product liability. With the FAA taking over regulation of drones with their Part 107 regulations released in June of this year, a CPSC spokesperson has stated simply that “[w]e do not have jurisdiction over drones.” But while the FAA does regulate manufacturing of larger aircraft through a certificate process, its oversight of drones to this point has been restricted to operational issues, not the classic manufacturing or design defects that lie at the heart of products liability. Both agencies ended up “recommending” that GoPro proceed with their refund program, and GoPro has stated that they are working “in close coordination” with both agencies. However, GoPro was not actually required to report to either agency or participate in any government-mandated recall program.

Now with drones falling out of the sky, GoPro was greatly self-incentivized to get their products off of the market to avoid what would be pretty cut-and-dry liability in the event that any injuries actually did occur. But what if a potential issue with drones was not so obviously open to liability? Commercial drone companies could unilaterally decide to keep their products on the market if they determine that whatever injury that is occurring may, for example, be more of a result of user error rather than a classic manufacturing or design defect. Companies would then take their chances with potential suits, and the absence of an agency-mandated reporting and recall program could actually assist companies in their defense, as companies would only need to fulfill their post-sale duty to warn about the product’s dangers rather than recall the product entirely.

Restatement (Third) of Torts: Products Liability § 11 imposes liability for failure to recall pursuant to a governmental directive, but in the absence of such a government-mandated requirement a company can only be liable in recall if they decide to voluntarily recall the product and are negligent in doing so. This governmental requirement stems from the thought that, as the Michigan Supreme Court puts it, “the duty to repair or recall is more properly a consideration for administrative agencies and the Legislature.” In fact, as comment c. to the Restatement states, “voluntary recalls are typically undertaken in the anticipation that a government agency will require one anyway.”

If no government agency is requiring recall or repair for drones, companies are presumably left to make the counter-policy determination of whether the cost of potential liability from public injury outweighs the costs associated with repair or recall. While such a determination may require more than this cost-benefit vacuum (such as shareholder relations, consumer goodwill, future sales & outlook, etc.), government-mandated recall programs are put in place to prevent companies from having to weigh costs against public safety. GoPro certainly did the “right thing” here by swiftly engaging in a voluntary refund program (maybe they just wanted some good “Karm- ah forget it), but look for Congress to clarify agency jurisdiction over drone recalls in the near future to protect recreational and commercial drone producers against themselves.

How Yuge Will Trump’s Influence Be on United States Science?

November 16, 2016
Education, Immigration, Regulatory

Daniel Baum, MJLST Staffer

Science was only a minute fragment of the candidates’ campaigns, but many researchers have expressed fears about Trump. “Trump will be the first anti-science president we have ever had,” Michael Lubell, director of public affairs for the American Physical Society, told Nature. “The consequences are going to be very, very severe.” How severe, and which kinds of science will Trump influence?

One science topic that was explicitly discussed in the campaigns was climate change. Trump has long denied climate change, and as Trump turned to the Republican Party’s conservative base, he said that his administration will focus on “real environmental challenges, not phony ones.” However, Trump has expressed support for economically beneficial climate change research: he told Science Debate that “[p]erhaps we should be focused on developing energy sources and power production that alleviates the need for dependence on fossil fuels” and specified that those energy sources worth developing include wind, solar, nuclear, and bio-fuels.

Trump has also taken the Republican Party’s businessman’s approach to space and public health research. For space research, Trump thinks that we should seek global partners and would like to expand the role of the commercial space industry in the US space program. Discussing public health research, Trump told conservative radio host Michael Savage, “I hear so much about the NIH, and it’s terrible.” Trump told Science Debate that instead of giving the NIH all the funding it needs, “efforts to support research and public health initiatives will have to be balanced with other scarce resources” by Congress, where the Republicans now control both houses.

In order to do good science, the United States needs the best researchers. However, Trump’s strong anti-immigration stance may dissuade foreign scientists from coming to or staying in the United States to do research—why should a highly skilled researcher come to or stay in the U.S. if he or she will have to do research in an environment hostile to immigrants? With fewer noncitizen scientists, we’ll need to train our own scientists with great science education. Unfortunately, Trump has expressed essentially anti-education policies. He argues that some colleges and universities should bear the burden of students’ loan debt and that the federal government should stop making money off student loans. Trump also wants to pull federal funding from the Department of Education, or demolish it altogether, and make management of public education at the state and local level while removing federal funding for low-income public schools.

Overall, Trump will change science in the United States bigly. If he sticks to the points he made on the campaign trail, the United States will have fewer scientists, and they will mostly only receive federal funding to do research on things that the Republican Party thinks will make Americans money. That could include the development of new environmentally friendly energy sources, but most likely not space or public health research. But there is still hope: this change will only be so yuge if Trump sticks exactly to what he said while campaigning. Already, less than a week after being elected, Trump has backpedaled on his rabid anti-Obamacare stance, and maybe he’ll realize that the best way to make America great again is to make Americans and American science great again.

Haiti, Hurricanes and Holes in Disaster Law

October 31, 2016
natural disaster law, Regulatory, Social Welfare

Amy Johns, MJLST Staffer

The state of national disaster relief is one that depends greatly on the country and that country’s funds. Ryan S. Keller’s article, “Keeping Disaster Human: Empathy, Systematization, and the Law,” argues that proposed legal changes to the natural disaster laws (both national and international) could have negative consequences for the donative funding of disaster relief. In essence, he describes a potential trade–off: do we want to risk losing the money that makes disaster relief possible, for the sake of more effectively designating and defining disasters? These calculations are particularly critical for countries that rely heavily on foreign aid to recover after national disasters.

In light of recent tragedies, I would point to a related difficulty: what happens when the money is provided, but because of a lack of accountability or governing laws, the funds never actually make it to their intended purposes? Drumming up financial support is all well and good, but what if the impact is never made because there are no legal and institutional supports in place?

Keller brings up a common reason to improve disaster relief law: “efforts to better systematize disaster may also better coordinate communication procedures and guidelines.” There is a fundamental difficulty in disaster work when organizations don’t know exactly what they are supposed to be doing. A prime example of the lack of communication and guidelines has been seen in Haiti, in which disaster relief efforts are largely dependent on foreign aid. The fallout from Hurricane Matthew has resurrected critiques of the 2010 earthquake response—most prominent was the claim of the Red Cross to build 130,000 homes, when in fact it only built six. Though the Red Cross has since disputed these claims, this fiasco pointed to an extreme example of NGOs’ lack of accountability to donors. Even when such efforts go as planned and are successful, the concern among many is that such efforts build short—term solutions without helping to restructure institutions that will last beyond the presence of these organizations.

Could legal regulations fix problems of accountability in disaster relief? If so, the need for those considerations is imminent: climate change means that similar disasters are likely to occur with greater frequency, so the need for effective long-term solutions will only become more pressing.

Permissionless Innovation or Precautionary Principle: The Policy Menu of the Future

October 31, 2016
3-D Printing, EU Law, New Technology, Public Safety, Regulatory

Ethan Konschuh, MJLST Staffer

In their recent paper, Guns, Limbs, and Toys: What Future for 3D Printing?, published in the Minnesota Journal of Law, Science, and Technology Volume 17, Issue 2, Adam Thierer and Adam Marcus discussed the potential regulatory frameworks for technological innovations that could spur what they call “the next great industrial revolution.”  They believe that 3D printing, one such innovation, could offer such great benefits that it could significantly enhance global welfare.  However, they worry that preemptive regulations on the technology could undermine these benefits before giving them a chance to be realized.  The paper advocates for a method of regulation called “permissionless innovation,” as opposed to regulations following the “precautionary principle.”  While there are many pros to the former, it could leave unchecked the risks curtailed by the latter.

“Permissionless innovation refers to the notion that experimentation with new technologies and business models should generally be permitted by default.”  It follows from the idea that unless a compelling case can be made that a new invention will bring serious harm to society, innovation should be allowed to continue unabated, and problems, should they arise, can be addressed later.  The authors point to numerous benefits of this approach with respect to emerging technologies.  One of the most obvious benefits is that this type of regulatory framework does not prematurely inhibit potential benefits.  “Regulatory systems based on precautionary thinking focus on preemptive remedies that aim to predict the future and its hypothetical problems. But if public policy is rooted in fear of hypothetical worst-case scenarios, it means that best-case scenarios will never come about.”  It would also preserve the modern startup culture where “just about anyone can afford to launch a business.”  Implementing a framework based on the precautionary principle will create barriers to entry and raise the cost of innovation.  This would also reduce the ability to maximize competitive advantage through trial and error, which refines the technology and efficient allocation of resources for development.  As an example of the potential detriments to competitive advantage from preemptive regulation, the authors point to the different policies of the Europe and the U.S. in the mid-nineties internet explosion where the former preemptively regulated and the latter allowed for permissionless innovation, resulting in the U.S. being a global leader in information technologies and Europe lagging far behind.

An alternative regulatory approach discussed in the article is based on the precautionary principle, which generally refers to the belief that new innovations should be curtailed or disallowed until it can be proven that they will not cause harm.  This approach, while posing problems of its own discussed above, would solve some of the problems arising under permissionless innovation.  While there are many economic and social benefits to permissionless innovation as the bedrock on which policy rests, it inherently allows for the “error” half of “trial and error.”  The whole concept is rooted in the idea of ex post regulation, creating policy to correct for problems that have already occurred.  While traditionally, as shown through the internet regulation difference and outcome between Europe and the U.S., the risk of error has not outweighed the benefits that result, new technologies pose new risks.

For example, in the realm of 3D printing, one of the hot topics is 3D printed firearms.  Current laws would not make 3D printed guns illegal, as most regulations focus on the sale and distribution of firearms, not creation for personal use.  The reasons why it might be more prudent to adopt a precautionary principle approach to regulating this technology are obvious.  To adopt an ex post approach to something that could have such dire consequences could be disastrous, especially considering the amount of time required to adopt policy and implement regulations.  Permissionless innovation could thus become a sort of self-fulfilling prophecy in that major tragedies resulting from 3D printing could result in exactly what advocates of permissionless innovation seek to prevent in the first place: strict regulation that undermines the development of the technology.

The debate will likely heat up as technology continues to develop.  In the era of self-driving cars, private drones, big data, and other technologies that continue to change the way that humans interact with the world around them, 3D printing is not the only area in which this discussion will arise.  The policy decisions that will be made in the next few years will have far reaching consequences that are difficult to predict.  Do the economic and social benefits of being able to manufacture goods at home outweigh the risks of legal, discrete self-armament and its consequences?  The proverbial pill may be too large for some to swallow.

A New Option for Investors Warry of High Frequency Trading

October 24, 2016
Administrative Law, Regulatory, Securities Law

Spencer Caldwell-McMillan, MJLST Staffer

In his recent paper, The Law and Ethics of High Frequency Trading, which was published in the Minnesota Journal of Law, Science, and Technology Issue 17, Volume 1, Steven McNamara examined the cost and benefits of a high frequency trading (HFT) on stock exchanges. He observed that problematic practices such as flash orders and colocation can provide HFT firms with asymmetrical information compared to retail or even sophisticated institutional investors.

In June, a new type of exchange was approved by the Securities and Exchange Commission (SEC). IEX Group Inc. was granted exchange status from the SEC. Before this designation the firm was handling less than 2% of all equity trades, with this new designation the exchange is likely to see volume increase as orders are routed to the exchange. IEX uses 38 miles of looped fiber optic cable to combat some of the information asymmetry that HFT firms exploit. IEX uses this coil to slow incoming orders down by about 350 microseconds. This is roughly half the time a baseball makes contact with a baseball bat. While this may seem like an insignificant amount of time, the proposal proved extremely controversial. The SEC asked for five revisions to IEX application and released the decision at 8 PM on a Friday.

This speed bump serves two purposes: to stop HFT firms from taking advantage of stale prices found on IEX orders and to prevent them from removing liquidity on other exchanges so that IEX’s customer are unable to fill their orders. Critics of this system claim that the speed bump violates rules that requires exchanges to fulfill orders at the best price. However, IEX pushes back on these points to arrangements like colocation that allows firms to pay for faster access to markets by buying space on the servers of the stock exchanges. These policies allow HFT firms to get information faster than even the most sophisticated investors because of their proximity to the data. IEX began operations as an exchange in August and time will tell whether it can generate profits without compromising their pro-investor stance.

This debate is likely to continue long after public attention has faded from HFT. Institutional investors are the most likely beneficiaries of these changes, in fact, in a letter to the SEC the Teacher Retirement System of Texas, claimed that using IEX to process trades could save the fund millions of dollars a year. More recently, Chicago Stock Exchange has submitted a proposal to include a similar speed bump on its exchange. Taken together these two exchanges would represent a small fraction of the order volume being processed by U.S. exchanges but these changes could have a lasting impact if they drive institutional investors to change their trading behavior.

Three’s a Crowd: Identifying the Shifting Parental Rights in Three-Parent Babies

October 3, 2016
Ethics, FDA, New Technology, Regulatory

Daniel Green, MJLST Staffer

Once again, science is spurring the law to adapt in ways it never could have predicted. A baby boy was recently born with genetic material of three different people. Aside from being born slightly premature, the now three-month-old child is very healthy. Even though three-parent techniques have been used before, this child marked the first healthy birth.

Given the obvious religious, safety, and ethical disputes behind such a medical procedure it may seem unclear as to why anyone would want to go through with it. The answer, however, avoids the arguments that the procedure is simply done to “play God” or for polyamorous relationships. The mother underwent the treatment to ensure both the happiness of parents and the health the child.

In this instance, the mother carried genetic defects identified to cause Leigh syndrome. This disorder which affects the brain resulted in the mother having had four pregnancy losses in addition to the death of two previous children at the ages of 8 months and 6 years. Leigh syndrome is caused by defects in a cells mitochondria, and the three-parent treatment was able to bypass the damaged mitochondrial DNA.

The process involves implanting the mother’s DNA into an egg from a donor. The egg has the donor’s main genetic DNA removed prior. The egg is then fertilized with sperm from the father. This process allows the DNA from the mother to pass down virtually unchanged since “mitochondrial DNA makes up less than 1% of the total cellular DNA.” However, small amounts of the donor’s mitochondrial DNA are still left throughout the child’s body.

The treatment was done in Mexico involving a team of fertility specialists from the United States and Great Britain. The procedure took place in Mexico since the treatment used has not yet been approved in the United States by the Food and Drug Administration, but this may not be the case for long due, in part, to recent successes. Another indicator of this possible change is that the treatment has already been approved in Britain.

Given this rapidly changing landscape, the law, in particular regarding parental rights, needs to somehow catch up quickly on an incredibly complex topic. As the donor parent will only be contributing 37 genes out of the total 22,000, it is likely that a donor’s right will be the most contested. Given the precedent already set forth, courts may adopt one of several strategies if and when three-parent babies are no longer barred in the United States.

  1. The donor parent has no legal claims: This would be similar to the mostly commonly accepted view concerning to sperm donors. In most states, if a sperm is donated through a licensed medical professional then the donor loses all legal claims to the child unless the parents are married. It seems logical that the treatment of an egg donor, in a three-parent situation, would be similar given what the term “donor” implies. Great Britain, which has already approved the three-parent treatment, has already adopted a stance similar to this. However, states are in contention regarding of parental rights and even custody of traditional style egg donors. Given the distribution of DNA it may be easier for a court to rule against the egg donor, but this is still very unclear.
  1. The donor parent has an equal claim to the child: California has already passed a version of a three-parent law, but this was mainly for same-sex couples who wish to have the donor on the birth certificate as well. However, the process leaves the door open for unintended parents, such as the donors, to assert claims over a child. In such a case, a court may find that, despite the objections of two parents, the donor has a right to be considered as a parent. Instances of this have already come up in traditional sperm and egg donation. Such conflicts could create a great degree of instability for the life of the child.
  1. The parties agree through a contract prior to the treatment as to what claims exist: The last apparent possibility is that parties may be able to contractually agree what their family is to look like. This would likely create the most amiable way to go about the process, but it is time-consuming and still may run into problems with the existing laws of certain states.

Clearly, there is no solid answer regarding three-parent babies even though three-parent birth certificates are already becoming more common in the United States. It seems like it is only a matter of time before three-parent babies are introduced into the culture as well. This leaves the question as to whether the law will be ready in time so as to hopefully create a circumstance that, whatever the family may look like, is best for the child.

A View to the Development of the FAA’s Ban on the Use of Galaxy 7 Phones on Airplanes.

September 25, 2016
Law Enforecement, Public Safety, Regulatory

Joshua Wold, MJLST Staffer

Samsung’s Galaxy Note 7 has problems. Under normal charging and use conditions, the battery in some devices can start on fire. As of September 1, Samsung reported that 35 of these problems had come to its attention, and more have been reported since that time. Samsung has already begun a recall—officially a “replacement program”—offering to replace the potentially dangerous devices with new ones. At the same time, US government agencies are also moving to prevent the harm that a malfunction from these devices could cause.

The Federal Aviation Administration (FAA) has not banned the device from airplanes. According to Matt Novak at Gizmodo, the FAA stated on September 6th that it was “working on guidance related to this issue,” and said, “If the device is recalled by the manufacturer, airline crew and passengers will not be able to bring recalled batteries or electronics that contain recalled batteries in the cabin of an aircraft, or in carry-on and checked baggage.” On September 8th, the FAA issued a statement “strongly” advising airline passengers to keep the devices off, not charge them while aboard, and to keep them out of checked baggage.

Then, on September 9th the Consumer Product Safety Commission (CPSC) put out a press release urging Galaxy Note 7 owners to power off the device, and not to charge or use it. The press release indicated that it was cooperating with Samsung “to formally announce an official recall of the devices, as soon as possible.”

Based on the comments made to Gizmodo, the FAA appeared unwilling to ban the device until the official recall was put into effect. This is understandable. Cell phones are a significant part of modern life. Nearly every person getting onto a plane is carrying at least one. TSA would thus be forced to distinguish between types of cell phones. Its task would be complicated by cases and other types of personalization which obscure the appearance of a cell phone.

Even more challenging, however, is the fact that some versions of the Note 7 have a battery which is not prone to overheating, and poses no threat. Unless these safe phones were to also be banned, security personnel would need to determine which battery was in a phone in order to know if it were permissible. People want to have their phones when they get wherever they are flying to, and banning a safe phone because it looks like an unsafe phone seems like a sure recipe for passenger dissatisfaction.

It may seem that a ban is be appropriate despite the difficulties. Certainly, the potential for harm is significant. A widely circulated photo of a Jeep engulfed in flames is evocative of the threat, and airline passengers have gotten used to restrictions on items which seem to pose even less risk than an exploding phone. FAA’s suggestion that those with Note 7 phones simply turn them off and not charge them may have had the potential to eliminate the threat. On the one hand, it was only a strong recommendation, and not a rule. On the other hand, with airlines repeating the FAA’s warning, it seems unlikely that many people would have failed to take it seriously.

On the 15th of September, the situation changed further, as the CPSC announced an official recall. With that decision, the ground mentioned to Gizmodo for not instituting a ban disappeared. Considering  some data (which can be found here), suggesting that people aren’t really taking Samsung’s warnings seriously, it seemed very likely that the FAA would decide to strengthen their recommendation against use to a prohibition on use, or even a prohibition on flying with the phones at all.

On the next day, September 16th, the FAA banned use of the phone on airplanes, but not the phones themselves. This new policy fits with the reality of modern cellphone use, that people rely on their phones, even if they are fire hazards. While this move takes the pressure off the TSA (which is probably a good move in terms of the overall happiness of air travelers), the regulation (which can be found here) doesn’t specifically mention the Galaxy Note 7, but refers instead to “defective or recalled” lithium batteries.

Of course, this creates the same sort of enforcement problems as appeared with earlier recommendations: can airline staff identify a Galaxy Note 7 with such “defective or recalled” lithium batteries? The FAA itself notes that it is difficult to distinguish between phones which have had the battery replaced and those which are still risked. The FAA’s recommendation on how to manage this problem is pretty general, and it essentially boils down to training of airline staff, and provision of information to airline passengers. One hopes that this is sufficient.

H.R.8 and the Hydropower Improvement Act of 2015—Another Missed Opportunity

October 28, 2015
Energy Law, Environmental Law, Regulatory

Catherine Cumming, MJLST Lead Note & Comment Editor

While many people see the hydropower industry as a clean and sustainable energy source, most hydropower facilities are decades old and have severe environmental, economic, and social externalities. Relicensing provides an opportunity to bring aging dams up to modern environmental standards and compliance requirements. Over the past thirty years, American Rivers and the Hydropower Reform Coalition used the licensing process to improve hydropower dams and restore rivers. With over 6,000 megawatts of hydropower due for relicensing within the next five years, there are hundreds of dams and thousands of miles of river with an opportunity for improvement. Recent legislation, however, has failed to address the amount of hydropower due for relicensing and the opportunities it presents for increased energy production and environmental compliance. When Congress passed the Hydropower Regulatory Efficiency Act of 2013, it failed favored efficiency over oversight and failed to the amount of hydropower due for relicensing and the opportunity it provided for efficiency upgrades.

This fall, Congress missed yet another opportunity to modernize hydropower and decrease its negative externalities. Rather than “modernize” hydropower, the Energy & Commerce Committee’s approval of a hydropower amendment to H.R.8, the “North American Energy Security and Infrastructure Act of 2015” and Senator Lisa Murkowski’s “Hydropower Improvement Act” ignore the opportunity for increased efficiency and sustainability by creating compliance loopholes for the hydropower industry. If enacted, these bills would allow energy companies to opt out of Clean Water Act, Endangered Species Act, and state water quality and wildlife protections; allow dam owners to pass the costs and burdens of obeying water quality standards, wildlife laws, and cleaning up pollution caused by dams to taxpayers; and transfer state and federal agency authority to protect natural resources to the Federal Energy Regulatory Commission. While 2011 was the “Year of the River,” 2015 is becoming the “Year of Hydropower.” Community interest groups and environmental organizations are concerned that H.R.8 and the “Hydropower Improvement Act” will “turn back the clock and take the hydropower industry back to a time when they could destroy rivers with impunity.”

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