Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, September 28, 2009

FINRA Proposes Changes to Rules Governing Communications with the Public

FINRA recently posted on its website a request for comments on proposed new rules governing communications with the public.  (Regulatory Notice 09-55).  While the regulatory approach is similar to the existing rules, the new rules would reduce the number of communications categories from six (advertisement, sales literature, correspondence, institutional sales material, independently prepared reprint, and public appearance) to three (institutional communication, retail communication, and correspondence).  The new rules would also require the filing of certain types of communications that currently are not required to be filed.  The public comment period expires November 20, 2009.

September 28, 2009 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Sunday, September 27, 2009

Blair & Gerding on OTC Credit Derivatives

Sometimes Too Great a Notional: Measuring the 'Systemic Significance' of OTC Credit Derivatives, by Margaret M. Blair, Vanderbilt University - School of Law, and Erik F. Gerding, University of New Mexico - School of Law, was recently posted on SSRN.  Here is the abstract:

This article proposes several simple financial market reforms that can help regulators both identify systemically risky institutions and mitigate the systemic risk associated with derivative trading, especially trading in credit derivatives such as credit default swaps.

The Federal Reserve (or other systemic risk regulator) should require that financial institutions publicly disclose detailed information on all credit derivatives in their portfolio - including counterparties and notional value - on a frequent basis. The notional value of credit derivatives provides a gauge of the maximum amount the derivative seller must pay the buyer if the underlying credit instrument defaults. Although the notional value is not a good indicator of a derivative’s market value (it is unlikely that each contract in the portfolio would have to be settled for the full notional amount), the notional value of all credit derivatives in an institution’s portfolio is a powerful indicator of the systemic risk posed by that institution’s investments because it is the maximum amount the institution could owe to (or be owed by) other institutions in an extreme event such as the 2008 credit freeze.

The government should use this disclosure to identify which financial institutions are “systemically significant.” Any institution whose credit derivative portfolio has a notional value exceeding a certain threshold for a several days would be regulated for several years as a “Tier 1 Financial Holding Company” per the Administration’s proposal.

Exchange-traded derivatives should not count in the notional value threshold for systemic significance, creating an incentive to move OTC contracts to exchanges.

September 27, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Ramirez on Subprime Bailouts

Subprime Bailouts and the Predator State, by Steven A. Ramirez, Loyola University of Chicago School of Law, was recently posted on SSRN.  Here is the abstract:

Recent bailouts in response to the subprime crisis evince an ad hoc government response that benefited general unsecured creditors and managers within the financial sector, while inflicting great loss upon taxpayers. The bailouts violated notions of the rule of law and sound macroeconomic science. In fact, the bailouts were followed by restricted lending and capital hoarding. This paper argues that such bailouts should be powerfully discouraged by imposing a legal framework including civil, criminal and administrative sanctions designed to discourage CEOs and other senior managers from flirting with too-big-to-fail status. Specifically, such managers would face near-automatic termination, discharge of employment agreements, the loss of protections under the Private Securities Litigation Reform Act, civil fines for causing losses to TBTF firms through unsafe and unsound practices, criminal sanctions for recklessly causing a loss to TBTF firms, and the prospect of administratively ordered prudential divestitures of operating units when a regulator identifies a firm as being TBTF. The goal is to eliminate the attractiveness of TBTF and thereby avert the huge costs implicit in TBTF. This should assure that bailouts are not a function of political power rather than sound economic policy.

September 27, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Roe & Siegel on Finance and Politics

Finance and Politics: A Review Essay Based on Kenneth Dam's Analysis of Legal Traditions in the Law-Growth Nexus, by Mark J. Roe, Harvard Law School; European Corporate Governance Institute (ECGI), and Jordan I. Siegel, Harvard Business School, was recently posted on SSRN.  Here is the abstract:

Strong financial markets are widely thought to propel economic development, with many in finance seeing legal tradition as fundamental to protecting investors sufficiently for finance to flourish. Kenneth Dam, in the Law-Growth Nexus, finds that the legal tradition view inaccurately portrays how legal systems work, how laws developed historically, and how government power is allocated in the various legal traditions. Yet, after probing the legal origins’ literature for inaccuracies, Dam does not deeply develop an alternative hypothesis to explain the world’s differences in financial development. Nor does he challenge the origins core data, which could be origins’ trump card. Hence, his analysis will not convince many economists, despite that his legal learning suggests conceptual and factual difficulties for the legal origins explanations. Yet, a dense political economy explanation is already out there and the origins-based data has unexplored weaknesses consistent with Dam’s contentions. Knowing if the origins view is truly fundamental, flawed, or secondary is vital for financial development policymaking, because policymakers who believe it will pick policies that imitate what they think to be the core institutions of the preferred legal tradition. But if they have mistaken views, as Dam indicates they might, as to what the legal traditions’ institutions really are and which types of laws really are effective, or what is really most important to financial development, they will make policy mistakes - potentially serious ones.

September 27, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Anderson on Global Corporate Citizenship

Law and Global Corporate Citizenship: A Research Agenda, by Rachel J. Anderson, William S. Boyd School of Law, UNLV, was recently posted on SSRN.  Here is the abstract:

The role and purpose of large transnational corporations is among the defining questions of our times. Large transnational corporations have economic, political, social, and legal influence that rivals that of some sovereign nations. Transnational corporations act in ways that protect and infringe upon human rights. Transnational corporations engage in activities that can destroy or preserve the environment. However, the regulation of transnational corporations does not adequately create incentives for transnational corporations to make decisions that adequately incorporate ethical and moral values. As a result, the acts of transnational corporations are not as beneficial to society as they could be and often they are downright harmful by violating human rights and damaging the environment.

How should transnational corporations be regulated? I argue that mechanisms based on economic assumptions alone are insufficient. Economic-based mechanisms do not fully make provisions for the dualistic nature of corporations and the transjurisdictional nature of foreign direct investment. Rather, law making and enforcement should take into consideration both the economic and social nature of corporations, their operation in public and private spheres, and the fact that transnational corporations have stakeholders and are stakeholders themselves. I suggest that understanding transnational corporations as global citizens furnishes a lens with which to develop a wider range of regulatory options.

This article is part of a larger project on law and Global Corporate Citizenship. In this series of articles, I identify gaps in the domestic and international regulation of transnational corporations, identify strengths and weaknesses of previous attempts to regulate transnational corporations, and propose options for the implementation of more comprehensive regulation. My first article in this series, Toward Global Corporate Citizenship: Reframing Foreign Direct Investment Law, is forthcoming in the Michigan State Journal of International Law. In that article, I argue that the asymmetry and fragmentation of foreign direct investment law encourages excesses by transnational corporations, and I propose developing a legal framework for Global Corporate Citizenship as part of a comprehensive reform of foreign direct investment law.

In this article, I begin to develop a legal theory of Global Corporate Citizenship and propose a new research agenda called Law and Global Corporate Citizenship. This article presents the case for and maps out this new research agenda in which I analyze ways to reform the regulation of transnational corporations. The purpose of this agenda is to critically analyze weaknesses in current regulation of transnational corporations, provide a framework for developing proposals for regulatory reform, and map out future research. I argue that Global Corporate Citizenship is an appropriate vehicle by which to delineate the ethical responsibilities of transnational corporations and the values that should guide their engagement with society. Further, I propose legal obligations for transnational corporations and explore new substantive rules addressing the role of transnational corporations in human rights, environmental protection, and globalization.

There are three question complexes that this research agenda seeks to answer. First, is there a deficit in domestic and international regulation of transnational corporations, why does this deficit exist, and what harms result from this deficit? Second, are there existing models that could be tweaked to close the gap or is a new model needed and, if so, are there prior efforts or initiatives that could inform the development of a new regulatory framework? Third, what would a new regulatory system based on theories of Global Corporate Citizenship look like and what forms could the implementation of a legal framework for Global Corporate Citizenship take?

September 27, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Chung on Wall St.'s Responses to Women

From Lily Bart to the Boom Boom Room: How Wall Street’s Social and Cultural Response to Women Has Shaped Securities Regulation, by Christine Sgarlata Chung, Albany Law School, was recently posted on SSRN.  Here is the abstract:

In Edith Wharton’s 1905 novel House of Mirth, Lily Bart learns in one brutal moment what happens to women who get tangled up with the stock market. Though she is beautiful and well-born, Lily is vulnerable when she seeks salvation in the stock market - she has no family to support her, no fortune of her own, no training in business matters, and no socially acceptable means of acquiring money, save marriage. When the husband of a friend (Gus Treanor) offers to help Lily by speculating in the stock market, Lily agrees. And when Treanor begins presenting Lily with money, she gladly accepts what she assumes are trading profits. One night, however, after luring Lily to his house under false pretenses, Treanor makes his true intentions known. After accusing Lily of leading him on, Treanor demands sexual favors, telling Lily that she must “pay up.” Even though Lily manages to extricate herself from the house without submitting to Treanor’s demands, she is ruined by this encounter. Cast off by her social circle, Lily eventually leaves her last pennies to Treanor, takes an overdose of sleeping medication and dies alone in a boarding house room. One hundred years later, when senior Morgan Stanley executive Zoe Cruz sought her fortune in the stock market, she appeared to have none of Lily Bart’s limitations. Ms. Cruz was a long-time Wall Street warrior. She began working on Wall Street in 1982 after graduating from Harvard College and Harvard Business School. After proving herself on the trading desk, she spent more than twenty years working her way up through management, eventually earning millions of dollars per year in compensation, and billions in profits for her employer. By 2007, she was the heir apparent for the CEO job. Just months after praising Ms. Cruz’s market insights and her contributions to the Morgan Stanley’s bottom line, however, Ms. Cruz’s boss called her to his office. With the subprime mortgage crisis unfolding, losses mounting and his own job under pressure, Ms. Cruz’s boss said that he had “lost confidence” in her and asked her to resign. After a ten minute meeting, Ms. Cruz left the building and never went back. In the wake of termination, some former colleagues questioned whether the woman they had nicknamed “the Cruz Missile” had ever understood the markets, trading or how to manage financial risk.

In this article, I argue that even though Lily Bart’s fictional ruin and Ms. Cruz’s rise and fall are separated by more one hundred years, “stories” like theirs are typical, and reflect Wall Street’s fixed and surprisingly narrow social and cultural response to women who wish to trade securities or work in the financial industry. In Wall Street lore, the “masters of the universe” are almost invariably men - they are the high-flying traders, the crusading regulators and even the notorious scoundrels though to have shaped the markets and our system of securities regulation. Women, by contrast, are portrayed as social and cultural outsiders to the Wall Street world. They are either omitted from Wall Street narratives, as if they are (and should remain) absent from securities markets, or they are relegated to the status of hapless victims or allegedly incompetent shrews. In either case, they are presumed to lack the skills and characteristics necessary to navigate on Wall Street, and they are thought to risk financial and reputational ruin if foolish enough to venture into the markets alone.

With this context in mind, I argue that Wall Street’s social and cultural response to women has become embedded in our system of securities regulation. Drawing upon selected case law, legislative history and administrative agency reports, I show how reform-minded legislators, courts and regulators have used stories of vulnerable female victims of investment abuse - particularly “poor widows” - when seeking to curb abusive sales practices on Wall Street. Drawing upon employment discrimination cases, I show how Wall Street firms have used the same stereotypes about women to justify excluding women from employment on Wall Street and to rebut discrimination, harassment and retaliation claims.

Finally, having exposed links between Wall Street’s social and cultural response to women and our regime of securities regulation, I argue that Wall Street’s singular narrative for women has come at a cost, and one that we have yet fully to explore. Securities regulation purports to be a gender-neutral exercise. It uses supposedly gender-neutral standards like “reasonable,” “sophisticated” and “unsophisticated,” and it assigns rights and obligations based on purportedly gender-neutral roles like “broker” and “customer.” In reality, however, relevant standards and systems reflect unstated gender norms about who is sophisticated and skilled when it comes to the markets, and who is not. And because the law, with its tendency to use labels and stereotypes, has seized upon Wall Street’s image of women as incompetent outsiders, it has reinforced and in some cases legitimized Wall Street’s gender norms. As a result, instead of examining the skills and characteristics of individual market participants, we assume that some people are competent merely because they “look the part” (say, Bernard Madoff) and we are skeptical of those who do not. We presume that some people are vulnerable and in need of protection (poor widows), but we are skeptical when people who do not fit this stereotype allege investment abuse. And, we assume that norms and systems impact all system participants equally, when in reality, they may reflect the experiences and perspectives of one or more dominant groups.

This paper examines links between Wall Street’s prevailing image of women and case law, legislative and regulatory activity as a first step in understanding how Wall Street’s gender norms have affected securities regulation. Going forward, this paper urges scholars to ask hard questions about the unexamined underpinnings of our system of securities regulation (including but not limited to unexamined gender stereotypes), so that our regulatory regime might be as effective and efficient as our times demand.

September 27, 2009 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)