Business Law Prof Blog

Paul Mahoney and Adriana Robertson just posted a fascinating new paper arguing that many index providers are, in fact, investment advisers under the legal definition, and therefore should be deemed to owe fiduciary duties to the mutual funds who license their indices.

The paper builds on Robertson’s earlier work studying index funds, including her finding that many indices are “bespoke”; they are created in order to be licensed to a single fund. Notice how the fees work in that scenario: the fund itself can charge a low management fee for a purported “passive” fund, and then bundled with other fees is an additional fee to license the index – often created by an affiliate of the fund. And, in fact, she finds that ETFs that call themselves passive but license an index from an affiliate charge higher fees than those that do not use an affiliated license provider.

Anyhoo, the new paper with Mahoney takes this to the next logical conclusion: in these kinds of cases, the index provider is serving as an investment adviser to the fund, and should be regulated that way.

January 30, 2021 in Ann Lipton | Permalink | Comments (0)

Friday, January 29, 2021

The New Normal of ESG Across Borders

By Marcia Narine Weldon

Please join me for this ABA Conference on February 10-11. I'm excited to serve as a mock board member on the 11th as well as on the plenary panel on “Leading Voices in ESG Initiatives” with representatives from United Airlines, Microsoft Asia, and others focusing on the many and sometimes conflicting imperatives of implementing ESG goals. I'll be particularly interested in the session by the General Motors GC, who will speak about the plan to go away from gasoline-powered vehicles, which GM just announced.

You can register by clicking here.

About the Virtual Conference:

The state of New York, on December 9, 2020, announced that its pension fund with over $226 billion in assets would divest its oil and gas stocks in companies that, in its view, contribute to global warming. The announcement emphatically highlights how ESG factors (Environmental, Social and Governance) across borders represent business risks but also opportunities for companies, their stockholders, and their other stakeholders. In-house legal departments are the first line of defense to re-orient business operations to address global ESG issues and to identify risks. These challenges, risks and opportunities are creating additional demands on legal departments with constrained resources as they navigate this “New Normal” in addition to their traditional responsibilities to stockholders. This two-day conference will provide in-depth critical analysis through three tracks that efficiently canvas each of the ‘E’, ‘S’ and ‘G’ elements. Through these three tracks, the conference will identify, explore, and evaluate key areas of relevance to in-house counsel wanting to navigate the numerous complex legal and operational issues raised by ESG in jurisdictions around the globe.

Key Speakers:

Craig Glidden, Executive Vice President and General Counsel, General Motors
Tim O’Connor, Senior Director, Environmental Defense Fund
Olga V. Mack, CEO, Parley Pro
Ashley Scott, Senior Counsel, Lime
In-House Executives: Several current and former General Counsel, along with numerous senior in-house counsel across various industries, including Google, Nestle, Microsoft, General Motors, Accenture, LexisNexis, Chubb, United Airlines, Liberty Mutual, OPEC, Lazard, Iron Mountain, Willis Towers Watson, Norsk Hydro, and Equinor.
ESG leaders: Leading ESG voices from law firms, non-profit organizations, and universities

What to Expect

This two-day cutting-edge conference will provide opportunities for-in-depth analysis of these issues through three tracks of interactive panel discussions that canvas each of the ‘E’, ‘S’ and ‘G’ elements, including how COVID-19 is accelerating ESG trends. Key areas of relevance to in-house counsel wanting to navigate the numerous complex legal and operational issues raised by ESG in jurisdictions around the globe, including NGO and government stakeholder perspectives, will also be examined.

CLEs will be available. I hope to see you there!

January 29, 2021 in Compliance, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Marcia Narine Weldon | Permalink | Comments (2)

University of Pennsylvania Journal of Business Law Symposium on Saturday, February 6th

The University of Pennsylvania Journal of Business Law will be hosting a business law symposium on Saturday, February 6th from 10 am to 4:45 pm EST. Here is the program:

It should be a great event, and if you'd like to (virtually) attend, you can register at this link.

January 29, 2021 | Permalink | Comments (0)

Thursday, January 28, 2021

GameStop Trading Stop Thoughts

By Benjamin P. Edwards

If you haven't been living under a rock, you probably know about the rally in GameStop's stock price now causing losses for hedge funds and dominating the news cycle. Today, major retail brokerages began to restrict trading activity in the stock, limiting their customers ability to place additional buy orders for the stock.

The increase in GameStop's stock's trading price from about $4 a share in July 2020 to a brief high of $492 today seems plainly disconnected from any fundamental value thesis. Many retail investors may have been simply buying the stock on the theory that because other people are buying the stock they'll be able to sell at a profit amid the continuing rise. Of course, it's impossible to know with certainty when this obvious bubble will pop.

A variety of reasons may explain the decision to no longer execute buy orders into the expanding GameStop bubble. Some of it may be simple paternalism. Regulators might ask why brokerages are letting retail investors commit possible financial suicide by buying into the bubble. Of course, this makes unknowable assumptions about the sources of capital being used to fuel the rally. We don't know how many people are actually putting everything they have behind this trade. It may just be a vast crowd of people throwing some cash at GameStop because they think it's funny.

Brokerages might also stop facilitating buy orders simply to protect themselves. In particular, retail brokerages may have also restricted trading in these stocks because of their own, or their clearing firms', concerns about risk. As this obvious bubble grows, the potential for the bubble to burst and GameStop's price to collapse may create real risk for market makers and clearing firms. They may not be able to manage their inventory with the rapid price changes. Many brokerages operate as introducing firms and use clearing firms on the back end to actually execute the trades their customers place. If a clearing firm tells an introducing firm that they don't feel comfortable taking any more buy orders on GameStop, the introducing firm won't be able to offer that option to its customers. Self-clearing firms like Robinhood may make this decision on their own. Some news reports now indicate that Robinhood has tapped capital recently, borrowing hundreds of millions. It's probably doing this because it thinks it may need it as the dust settles from this.

Update Bloomberg's Matt Levine explains how clearing difficulties likely led to the stoppage:

You don’t think about it much, but every stock trade involves an extension of credit. You see a price on the stock exchange and push a button and instantaneously get back a confirmation that you bought some shares of stock, but you actually get the shares, and pay the money for them, two business days later. This is called “T+2 settlement,” and it might seem a little silly in an age when a “share of stock” is an entry in an electronic database and “money” is also an entry in an electronic database. Why not just update the databases when you push the button? T+2 settlement feels like a vestige of the olden days, when traders agreed to trades on the stock exchange but then had to go back to their vaults to dig up stock certificates to hand over in exchange for sacks of cash. Back when I worked on Wall Street it was T+3. These days it is not hard to find people who want to talk to you about moving to instantaneous settlement on the blockchain. Bitcoin trades settle immediately. But U.S. stocks, for now, settle T+2.

This means that the seller takes two days of credit risk to the buyer.[4] I see a stock trading at $400 on Monday, I push the button to buy it, I buy it from you at $400. On Tuesday the stock drops to $20. On Wednesday you show up with the stock that I bought on Monday, and you ask me for my $400. I am no longer super jazzed to give it to you. I might find a reason not to pay you. The reason might be that I’m bankrupt, from buying all that stock for $400 on Monday.

The way that stock markets mostly deal with this risk is a system of clearinghouses. The stock trades are processed through a clearinghouse. The members of the clearinghouse are big brokerage firms—“clearing brokers”—who send trades to the clearinghouses and guarantee them. The clearing brokers post collateral with the clearinghouses: They put up some money to guarantee that they’ll show up to pay off all their settlement obligations. The clearing brokers have customers—institutional investors, smaller brokers—who post collateral with the clearing brokers to guarantee their obligations. The smaller brokers, in turn, have customers of their own—retail traders, etc.—and also have to make sure that, if a customer buys stock on a Monday, she’ll have the cash to pay for it on Wednesday.[5]

This is not stuff most people worry about most of the time. Generally if you buy a stock on Monday you still want it on Wednesday; even if you don’t, we live in a society, and you’ll probably cough up the money anyway because that’s what you’re supposed to do. But at some level of volatility things break down. If a stock is really worth $400 on Monday and $20 on Wednesday, there is a risk that a lot of the people who bought it on Monday won’t show up with cash on Wednesday. Something very bad happened to them between Monday and Wednesday; some of them might not have made it. You need to make sure the collateral is sufficient to cover that risk. The more likely it is that a stock will go from $400 to $20, or $20 to $400 for that matter,[6] the more collateral you need.

Some investors may have bought the stock or call options on the stock in hopes of forcing market makers and others to buy the stock and drive the price up. This seems as though it might run afoul of the Securities & Exchange Act's prohibition on market manipulation. Section 9(a)(2) of the Securities and Exchange Act makes it unlawful to "effect . . . a series of transactions in any security registered on a national securities exchange . . . for the purpose of inducing the purchase or sale of such security by others." As James Fallows Tierney has explained, "regulators have tools beyond "fraud" at their disposal to get at other objectionable market practices," including Section 9(a)(2).

If brokerages take the view that most of the increase has been driven by market manipulation, they may decide not to facilitate these trades and become knowingly complicit in the short squeeze. To be sure, many of the posts on WallStreetBets, the Reddit message board behind the rally, seem fixated on forcing short sellers to close their positions and drive the price up. Whether the SEC will take action against the posters remains to be seen.

There have also been news reports about Robinhood and others selling out retail investors and closing their positions. This seems unsurprising. Many retail investors likely bought GameStop on margin--that is to say by borrowing funds from Robinhood. In these arrangements, the customer's stock portfolio provides collateral for the loan. Robinhood and other retail brokers likely legitimately fear that margin collateral -- GameStop Stock will decline rapidly in value. They're likely to sell these positions in order to prevent themselves from taking a loss as the bubble collapses.

How will this all shake out? I don't know. With more news breaking, it looks as though the brokerage firm trading stops were predominantly related to clearing requirements.

But I do have a few thoughts on where it's going to shake out. Brokerage firms must all join FINRA in order to operate. FINRA maintains its own arbitration forum for individual claims. It does not allow brokerage firms to include class action waivers in their account agreements. This means that the customer actions against brokerages will happen in two places, FINRA arbitration for individual actions and public courts for the class actions. When it comes to the arbitrations, investors will likely struggle to win any claim so long as they don't actually have any net losses on the trade. As a practical matter, FINRA arbitrators only rarely award damages if the investor made money. Showing that they should receive even more money usually requires showing much more than these traders will be able to manage.

January 28, 2021 | Permalink | Comments (0)

Wednesday, January 27, 2021

Central Bank Digital Currencies and Stablecoins

By Colleen Baker

Have you heard about the idea of central bank digital currencies (CBDCs) and stablecoins? Are you interested in learning more... but maybe just the basics, briefly and quickly (because you're not focused on banking like some of us)? I've got a great solution for you! Today I read Clifford Chance's thought leadership piece, Central Bank Digital Currencies and Stablecoins - How Might They Work in Practice? It's a mere 7 pages of text, incredibly accessible, and provides a great introduction to these topics and even includes some banking and payment systems history. It will take you 15 minutes to read. You'll be glad that you did! Here's the abstract:

Payment media, from gold coins to stablecoins, exist to be used, and in practice their use requires payment systems. In my paper ‘Central Bank Digital Currencies And Stablecoins – How Might They Work In Practice?’ I consider the way in which existing payment infrastructures and particularly payment banks — might reconfigure their services to accommodate Central Bank Digital Currencies (CBDCs) and stablecoins.

For this purpose, it is probably irrelevant whether the ‘coins’ concerned are created by central banks or private providers, or for that matter what the form is of the technology by which they are constituted. What does matter is that they are capable of being directly owned by the user without any intermediation. The question is whether that is how they will be dealt with in practice.

There are two possible ways in which this intermediation could be structured. One is where the intermediary provides a ‘custody’ service. This will involve the customer being charged for the service, since the custodian derives no benefit from his holding of the asset. The other is where title to the coin is passed to the intermediary. This will enable the intermediary to use the asset in his business, and therefore result in the customer paying lower or no fees for the intermediation.

Since a legal structure involving a ‘custody’ structure — where the customer retains direct ownership of the coin — will be a more expensive offering for that customer, it seems unlikely that this will be the prevalent model. However, a structure involving a transfer of ownership of the coins to the bank would seem to have no benefits over the existing bank account offerings, and would arguably be worse for the customer, in that the customer potentially loses the benefit of deposit insurance (since a deposit of stablecoins is arguably not a ‘deposit’ for that purpose).

January 27, 2021 | Permalink | Comments (0)

Tuesday, January 26, 2021

Rogers Reviews Sunstein's "Too Much Information"

Over at Law & Liberty, James Rogers reviews Cass Sunstein's "Too Much Information: Understanding What You Don't Want to Know." Below is a brief excerpt from the review. There are apparently at least some references to the SEC in the book.

[Sunstein] writes, “The primary question in this book is simple: When should government require companies, employers, hospitals, and others to disclose information?” His answer, he writes, is simple, although perhaps deceptively simple. Government should require disclosure “When information would significantly improve people’s lives.” The surprise is that the book focuses mainly on the argument that making judgment of when disclosure “improves people’s lives” can be so complicated that government policymakers often should not attempt it except under carefully identified conditions.... The book reads almost as though Sunstein started the book with one hypothesis in mind—that he would develop a framework that would help with developing sensible government disclosure policies going forward—but he instead became increasingly skeptical of his initial project as he worked through the research.

January 26, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Monday, January 25, 2021

The Job-Seeking Cover Letter: An Exemplar

Over six years ago, I began writing about the job-seeking cover letter as an important piece of the career development and execution puzzle. My first post focused on the essential elements and formatting of an appropriate cover letter for a job search. My second cover letter post, written a bit more than a year later, honed in on best practices for creating the body of the letter--the part of the letter that does the key substantive work in making a case with the employer that you deserve an interview, principally by showing the employer that y0u have something the employer needs or finds valuable. A key element of that post was the its emphasis on introduction of the "PAR" method, which I maintain is a key to both cover letters and job interviews. About six months after that second post, I wrote a third post on networking letters.

That last post was published in July of 2016. That just does not seem possible. It cannot have been that long ago! But it is. Time flies when you are having fun, as they say.

It may go without saying, but I have continued to give resume, cover letter, and job search communication advice to law students and lawyers on a regular basis. In these interactions, two things have been coming up with some frequency recently. The first is the difference between a CV and a resume. I will leave that to a future post. The second is what the body of a well-drafted cover letter reads like. I illustrate that here by posting a simple form of cover letter that illustrates many points from my posts.

* * *

[Your Name]
[Address]
[Telephone Number]
[Email Address]

[Date]

[Name of Recipient]
[Employer]
[Address]
[City/State/Zip Code]

Re: Summer Associate - [Your Name]

Dear [Name of Recipient]:

I am a [first/second]-year student at [Law School Name] and I write to apply for a position as a summer associate in your [Specific Geographic Location] office. I am drawn to [Employer] because of its strong practice in corporate transactional law and because of its location in the [Geographic Region]. I am interested in the ways in which the firm’s emphasis on innovation operates in serving clients.

My curriculum at [Law School Name] has already given me experiential training in business law that I desire to leverage in my work next summer. For example, in my Business Associations course, I participated as part of a three-person team of students in an oral examination relating to a failed Tennessee distillery partnership based on facts drawn from a recently published Tennessee state court opinion. We were given a week to assess client facts and then met with the senior partner in our law firm (portrayed by our professor) to discuss possible courses of action to benefit the client. This assignment was instrumental in developing critical problem-solving skills and detail-orientation and allowed me to apply partnership and limited liability company law through oral communication in a real-world setting.

I also gained valuable research and writing experience in my [Name of Course] class in the fall semester. [Describe research in legal context]. I compiled the information obtained through that research into a [length] paper that examined [describe thesis or analysis]. The long-term nature of this assignment allowed me to develop and refine fact-finding, written composition, and time management skills while engaging in the analysis of [generalized description of legal issue resolved].

My resume is attached. I look forward to the opportunity to interview for a summer associate position with your firm. I can be reached at the telephone number or email address set forth above. I appreciate your time and consideration.

Yours truly,

[Signature]

[Typewritten Name]

Attachment

* * *

I hope that posting this exemplar is helpful to law students seeking employment and to the law professors and others who advise them. I post it here for that purpose and also in the hopes that it will generate commentary that is similarly useful in career counseling and in revising the form. So, have at it. What do you find worthwhile about the exemplar letter? What do you find less compelling? Post your comments here or send me a private message.

January 25, 2021 in Joan Heminway, Jobs | Permalink | Comments (0)

Sunday, January 24, 2021

Shaner on Privately Ordered Fiduciaries

Professor Megan Wischmeier Shaner (Associate Dean for Research & Scholarship; President's Associates Presidential Professor of Law, University of Oklahoma College of Law) recently published Privately Ordered Fiduciaries (28 Geo. Mason L. Rev. 345 (2020)). Below is an excerpt from the Introduction that might be of interest to readers.

Over the past two decades, legal and practical hurdles to developing doctrine addressing the corporate officer have been cleared away. In 2004, the Delaware Code was amended to provide for personal jurisdiction over nonresident officers of Delaware corporations. “Around this same time there was a dramatic shift underway in corporate governance norms that had been buttressed by federal regulation to create greater board independence from officers.” With fewer board seats occupied by company executives, officer conduct was no longer reliably regulated by bootstrapping obligations to an officer's concurrent director status, underscoring the need for specific rules addressing officer obligations.

The separation of director and officer status in public corporations led to a heightened focus on officers as distinct legal actors in the corporation and on the accompanying legal standards that would govern them. The Delaware Supreme Court's 2009 decision in Gantler v. Stephens clarified, in part, the fiduciary obligations and accountability of corporate officers. In Gantler, the court held that “officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty, and that the fiduciary duties of officers are the same as those of directors.” These developments in corporate law, individually and collectively, cleared a path for the exploration and development of the legal contours of officer duties. The courts, stockholders, and their counsel, however, have declined the invitation to tackle officer accountability and responsibility. And somewhat ironically, when faced with the few officer challenges that have been brought before them, the Delaware courts have applied a director-centric lens in evaluating officer issues, narrowing the potential avenues for legal challenges, closing the door on future doctrinal development, and limiting the guidance available to market actors.

The absence of officer doctrine has not gone unnoticed. Academics, jurists, corporate managers, and their counsel have all commented on the ambiguity that exists with respect to the legal rules governing officer decisionmaking and liability. In fall 2018, the Officer Liability Task Force (the “Task Force”) of the American Bar Association (“ABA”) met for the first time to discuss: (1) the uncertainty in the law surrounding the nature and scope of the fiduciary duties of, and applicability of the business judgment rule to, corporate officers; and (2) potential ways to address that uncertainty, including whether any potential products, such as annotated model employment agreements, would assist in providing additional clarity. The Task Force's objectives are, however, relatively narrow ….

This Article tackles the broader issues raised by the Task Force's work, taking a deep dive into the issue of private ordering of corporate officer fiduciary obligations and liability.

January 24, 2021 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, January 23, 2021

Courts really don’t like it when you intentionally issue false projections in order to make a merger look better

So much so, it seems, that they will go out of their way to make sure a securities fraud claim survives a motion to dismiss.

I speak of In re Mindbody Securities Litigation, 2020 WL 5751173 (SDNY Sept. 25, 2020) and Karri v. Oclaro, 2020 WL 5982097 (N.D. Cal. Oct. 8, 2020).

The problem for courts in this context is that projections of future performance are protected by the PSLRA safe harbor. Which means, faced with plausible allegations that corporate insiders were talking down the stock’s potential in order to persuade shareholders to accept a bad deal, courts feel they need to find some other basis on which to sustain the claim.

In Mindbody – the facts of which are also colorfully described in a related Chancery action for breach of fiduciary duty – that basis turned out to be the defendants’ statements about the value of the merger consideration relative to the (artificially low) stock price. The defendants were alleged to have intentionally lowballed their earnings guidance in order to sink the stock, so that the merger offer would seem generous by comparison. But by the end of the quarter, defendants had in their possession the true earnings figures, and confirmation that their earlier projections had been too pessimistic. The court wouldn’t allow a straight-up projections claim to proceed, but it did hold that the proxy materials contained an “actionable omission because Defendants’ statements about Vista’s 68% ‘premium’ implied that Mindbody had no non-public information that would materially affect its share price…. Here, the 68% measuring stick would only have been informative to shareholders if the Defendants believed that the December share price was an accurate reference point. By invoking the ratio of Mindbody’s share price to Vista's offer, Defendants impliedly warranted that, to their knowledge, the share price as of December 21, 2018, was not undervalued.”

Get it? The court wouldn’t allow a lawsuit based on the false projections themselves – and didn’t want to just come right out and say there was a duty to update the false guidance (indeed, it denied so holding) – so, it threaded the needle by treating references to a premium as their own, present-tense half-truths about the true value of the stock.

But that’s nothing compared to the contortions in Oclaro. There, again, plaintiffs alleged that defendants lowballed projections in order to drive the stock down, thus justifying the merger. There, again, the court held that false projections were protected by the PSLRA safe harbor. But what wasn’t protected were valuation estimates derived from the projections, or representations about how the projections were prepared, including representations that they were prepared in good faith, and those claims were allowed to proceed.

Now, defining “forward-looking” has always been something of a challenge in securities cases, but saying the projection is protected by the safe harbor but the valuation based on that projection is not protected is some next-level hairsplitting.

It’s like the fact/opinion distinction, which I’ve complained about before; the line is something that philosophers struggle with, let alone judges, and it’s absurd that courts allow so much to turn on which way the die falls. Everything in financial reporting is based on estimates, often future estimates, and in that context, attempting to distinguish fact from opinion from projection is meaningless; they’re all part of one process. That’s why, for example, the PSLRA safe harbor excludes from its protections any statements that are “included in a financial statement prepared in accordance with generally accepted accounting principles,” and why courts get it wrong when they characterize GAAP financial statements as matters of opinion.

January 23, 2021 in Ann Lipton | Permalink | Comments (2)

Friday, January 22, 2021

New Corporate and Financial Law Scholars at the Southeastern Association of Law Schools (SEALS) Annual Conference

By John P. Anderson

The Southeastern Association of Law Schools (SEALS) is scheduled to hold its annual conference in person, July 26-August 1, at The Omni Amelia Island Resort, Amelia Island, Florida. SEALS has always been one of my favorite law conferences. It combines the opportunity to attend fascinating panels and discussion groups (showcasing our colleagues’ latest research) with plenty of networking opportunities and some fun in the sun! And one of the highlights of the conference is always the New Scholars Workshop, which provides opportunities for new legal scholars to interact with their peers and experts in their respective fields. Here’s an excerpt from the SEALS New Scholars Committee website:

For over a decade, the New Scholars Workshop has provided new scholars with the opportunity to present their work in a supportive and welcoming environment. The New Scholars Committee accepts and reviews nominations to the program, organizes new scholars into colloquia based on subject matter, and coordinates with the Mentors Committee to match each new scholar with a mentor in his or her field. We also hold a New Scholars Luncheon at the Annual Meeting at which New Scholars and their mentors can get to know one another and the members of the New Scholars Committee. To ensure that the annual program runs smoothly, members of the New Scholars Committee attend the colloquia and, following the conference, survey the New Scholars to solicit their feedback and comments on the program’s success. Additionally, the Committee traditionally has organized at least one substantive panel or discussion group on a topic of particular relevance to new law teachers, including navigating the tenure track; balancing the demands of service, scholarship, and teaching; and effective self-promotion. In recent years, the Committee has organized a social function at which New Scholars could meet and interact with one another at the Annual Meeting. We also draft an annual report on our activities.

On Wednesday, July 28, there will be a New Scholars Workshop focusing on Labor, Tax, Corporate, and Financial Law. This program will feature the scholarship of Nicole Iannarone (Drexel University School of Law), Young Ran (Christine) Kim (The University of Utah College of Law), Jennifer B. Levine (Quinnipiac University School of Law), and Daniel Schaffa (University of Richmond School of Law). I look forward to attending this event, and I encourage all new business-law scholars (as well as new scholars in other disciplines) to participate in future New Scholars Workshops at SEALS. See you there!

January 22, 2021 in Corporations, Financial Markets | Permalink | Comments (0)

Thursday, January 21, 2021

More Comments on Expungement Rulemaking

By Benjamin P. Edwards

Amid the transition, the SEC continues to oversee rulemaking on expungement. I gave some initial thoughts in my last post before putting another comment letter together. FINRA does deserve some real credit for attempting to improve the process. Still, you shouldn't have much confidence in the overall system because it's not built in a way that is likely to surface relevant information for the arbitrators making the only meaningful decisions in the process. Today, if you find out a broker had an expungement, all you really know is that the broker is three times as dangerous to you as the average broker. You should probably just avoid doing business with the broker. It's hard to see how winning expungements in the current system would cause rational and well-informed investors to trust a broker if they knew about the expungement.

Under the current rules and the Amended Proposal, arbitrators will continue to apply inconsistent evidentiary standards before recommending expungements. My initial letter showcased an arbitrator using a preponderance standard. This second one presented another one who concluded that something more than a preponderance standard must apply. Despite the inconsistent standards already being applied within its forum, FINRA has declined to articulate a standard of proof for expungement matters. Which arbitrator had it right? FINRA has so far declined to answer the question.

Admittedly, this isn't something you'd ordinarily define for arbitrators. For regular civil matters, the parties should simply brief the arbitrators on it and the arbitrators should decide. But expungements are not ordinary civil matters and these decisions affect people who never agreed to be bound by any submission agreement. It strips information from other investors, state regulators, the SEC, and even FINRA. Besides, the parties to straight-in expungements usually all benefit from an expungement recommendation. Don't expect them to encourage arbitrators to apply rigorous standards. Consider the recent high-risk broker rule. Identifying high-risk brokers requires data.

There is also an interesting statutory angle for a possible challenge to the system. The statute requiring registered securities associations (today, FINRA) to make information available to the public also contains some interesting language. It says that FINRA "shall adopt rules establishing an administrative process for disputing the accuracy of information provided in response to inquiries under this subsection in consultation with any registered national securities exchange providing information pursuant to paragraph (1)(B)(ii)." (15 U.S.C.A. § 78o-3(i)(3))

Does the current arbitration-process qualify as an "administrative process" for disputing information? I don't think that it does. But how to read this language ultimately depends on how you define "administrative process" and I haven't found any guidance in the statute. I suggested that the SEC should hold a hearing on the Amended Proposal, something it doesn't do all that often, to gather more information.

January 21, 2021 | Permalink | Comments (0)

Wednesday, January 20, 2021

Is Critical Race Theory Headed to the Supreme Court?

Via Christopher Rufo (here):

Today, President Biden rescinded the Trump executive order banning critical race theory training programs from the federal government.

Critical race theory is a grave threat to the American way of life. It divides Americans by race and traffics in the pernicious concepts of race essentialism, racial stereotyping, and race-based segregation—all under a false pursuit of “social justice.” Critical race theory training programs have become commonplace in academia, government, and corporate life, where they have sought to advance the ideology through cult-like indoctrination, intimidation, and harassment.

It is time to fight back. Last year, I declared a “one-man war” against critical race theory, which led to the presidential order banning these trainings from the federal government. Today, I am announcing a new coalition of law firms and legal foundations with the explicit goal of fighting critical race theory in the courts. This coalition, called Stop Critical Race Theory, has already filed three lawsuits against public institutions conducting critical race theory programs and, in the coming months, will file additional lawsuits in the state and federal courts.

Our ambition is to take one of these cases to the United States Supreme Court and establish that critical race theory-based programs—which perpetuate racial stereotypes, compel discriminatory speech, and create hostile working environments—violate the Civil Rights Act of 1964 and the United States Constitution.

January 20, 2021 in Stefan J. Padfield | Permalink | Comments (0)

ABA Paper on Digital and Digitized Assets: Federal and State Jurisdictional Issues

By Colleen Baker

BLPB readers:

Wow, a great resource is now available: Digital and Digitized Assets: Federal and State Jurisdictional Issues: Download ABA Digital Assets White Paper Updates (December 2020 Final)

The paper was prepared by the Innovative Digital Products and Processes Subcommittee Jurisdiction Working Group of the Derivatives and Futures Law Committee of the American Bar Association. It's an update of a March 2019 version and is organized into 7 sections:

Section 1: Background on Digital Assets and Blockchain Technology

Section 2: Commodity Exchange Act and CFTC Regulation

Section 3: Federal Securities Regulation: Securities Act and Exchange Act

Section 4: Federal Securities Regulation: Investment Company Act and Investment Advisers Act

Section 5: The Need for a Better CFTC and SEC Regulatory Scheme for Digital Assets

Section 6: FINCEN Regulation

Section 7: International Regulation of Digital Assets and Blockchain Technology

Section 8: State Law Considerations

Lastly, the Derivatives and Futures Law Committee is (virtually) having their Winter Meeting next week. I'm really looking forward to the event and would love for other BLPB readers to join!

January 20, 2021 | Permalink | Comments (0)

Upcoming Program on New Directions for Consumer Finance Law

By Colleen Baker

Dear BLPB readers,

I wanted to share about great opportunity that I learned about from Professor Laurie Lucas at Oklahoma State University, a Member of the Governing Committee of the Conference on Consumer Finance Law (thanks, Laurie!!):

Those of you who may have interest in consumer finance, FinTech, antitrust issues, or the use of nonfinancial alternative data in this space are invited to attend this free program sponsored by the Conference on Consumer Finance Law and George Mason University Scalia Law School. During this program, three members of the CFPB's Taskforce on Federal Consumer Financial Law will discuss the report and its key recommendations.

This program, “New Directions for Consumer Finance Law. An Insider’s Look at the Report of the CFPB’s Taskforce,” is scheduled for Feb. 11, 2021, 12:00 – 1:30 p.m. EST. Registration is free, but closes February 8, 2021. (No CLE is available for this event.) Flyer is here: Download Ccfl_feb_webinar

January 20, 2021 | Permalink | Comments (0)

Monday, January 18, 2021

Akron Law Dean Peters on "Letter from a Birmingham Jail"

[I found the following in my inbox this morning and subsequently received permission from Dean Peters to republish it here.]

Dear members of the Akron Law family,

Over the weekend, I revisited Martin Luther King Jr.’s astounding Letter from a Birmingham Jail. If you haven’t read it, or haven’t read it recently, it is worth ten minutes of your time on this day devoted to Dr. King’s legacy. (Be aware that Dr. King twice repeats an offensive epithet in the Letter to describe racist insults in the South.) Letter from a Birmingham Jail is essential reading for all Americans, and it carries particular significance for lawyers.

Dr. King wrote Letter from a Birmingham Jail in April 1963, at the height of the Civil Rights Movement and a few months before his “I Have a Dream” speech in Washington. He and his colleagues had been arrested for illegally marching to protest segregation in Birmingham, Alabama, the fiefdom of the infamous Theophilus Eugene “Bull” Connor and his fire hoses and police dogs. While Dr. King sat in jail, a group of white Alabama clergymen published an open letter denouncing King’s methodology of public (and sometimes illegal) protest and resistance. The white clergy insisted that the anti-segregationist cause “should be pressed in the courts and in negotiations among local leaders, not in the streets.”

Letter from a Birmingham Jail was Dr. King’s response to this indictment, and there are many aspects of it that remain strikingly resonant today. The Letter is a cogent defense of civil disobedience, one of the most eloquent explorations of that topic ever written. But it is not an excuse for thoughtless lawbreaking or a call for disobedience without consequences. And it is a powerful rejection of the urge to violence.

In the Letter, Dr. King argued that while a person “has not only a legal but a moral responsibility to obey just laws, … one has a moral responsibility to disobey unjust laws.” But King was meticulous about the distinction between just and unjust laws. An unjust law is not simply a law that one does not like, or even a law that one personally believes to be unjust. Rather, an unjust law is one that is rotten at its core – a law that is made or applied so as to deny the equal humanity of those it purports to bind. For example, King wrote, “[a] law is unjust if it is inflicted on a minority that, as a result of being denied the right to vote, had no part in enacting or devising the law.”

Segregationist laws were unjust in this way, Dr. King understood, and so disobedience of them was justified. But even those who engage in justified disobedience had to be willing to pay the consequences: “In no sense do I advocate evading or defying the law …. That would lead to anarchy. One who breaks an unjust law must do so openly, lovingly, and with a willingness to accept the penalty.” For King, “an individual who breaks a law that conscience tells him is unjust, and who willingly accepts the penalty …, is in reality expressing the highest respect for law.”

Dr. King thus accepted the crucial distinction between peacefully resisting a particular unjust law and “defying the law” itself. And he emphatically rejected the legitimacy of violent disobedience of the law. In his Letter, King denounced the “force … of bitterness and hatred” that tugged at some opponents of segregation, one that “comes perilously close to advocating violence.” In place of violence, King advocated “a type of constructive, nonviolent tension which is necessary for growth. … It seeks so to dramatize [an] issue that it can no longer be ignored.”

These central threads of Dr. King’s message – the legitimacy of peaceful civil disobedience and the illegitimacy of unequal laws; the importance of respect for the underlying institution of the law; and above all the utter rejection of violence – deserve our attention now. And there is another dimension of Letter from a Birmingham Jail that carries lessons for us today. The Letter is an unfailingly civil document and a fastidiously reasoned one. King takes his antagonists to task, certainly; but he never insults them or the intelligence of his readers. He recognizes that his real audience is the nation and posterity, not the intransigent white clergymen whose letter sparked his reply. And so he is careful about his facts and scrupulous about his assertions. He lets his arguments speak for themselves.

Dr. King was an extraordinary man who lived in extraordinary times. We live in such times too, and although we can only glimpse Dr. King’s greatness across the distance of years, we can aspire for ourselves to the values he espoused: civility in the face of deep disagreement; reasoned argument supported by facts; abhorrence of violence; and an unflinching desire to make our laws more just.

Please be well; be safe; and be kind and respectful to each other.

All best,

CJP

January 18, 2021 in Stefan J. Padfield | Permalink | Comments (0)

In Praise of Practice Problems (and Jen Reise!)

As we launch into another online/hybrid semester of legal education, I want to share a new article by Jen Randolph Reise: Moving Ahead: Finding Opportunities for Transactional Training in Remote Legal Education. Here’s the abstract:

This article builds on the many calls for teaching business acumen and transactional skills in law school with a timely insight: the shift to remote legal education creates opportunities to do so, in particular by incorporating practice problems and mini-simulations in doctrinal courses. Weaving together the literature on emerging best practices in online legal education, cognitive psychology, and the science of teaching and learning, Professor Reise argues that adding formative assessments and experiential education is effective in teaching and is critical in remote learning.

Offering vivid examples from her experience teaching Business Organizations online, she urges legal instructors to use the opportunity presented by the shift to remote education to incorporate problems and simulations as an effective way to motivate students to prepare for class, to expose them to transactional practice skills, and to effectively teach them key doctrinal concepts.

For those of you who do not know Jen, she is currently a Visiting Professor at Mitchell Hamline School of Law (Twitter: @jenreise). She and I have communicated/traded information on transactional business law teaching. I am grateful that she brought this article to my attention--and effectively authored this post! I look forward to continuing to engage with her on teaching and scholarship in our mutual areas of interest.

January 18, 2021 in Business Associations, Joan Heminway, Teaching | Permalink | Comments (0)

Mutuality = Reality (with Gratitude to Dr. Martin Luther King Jr.)

It really boils down to this: that all life is interrelated. We are all caught in an inescapable network of mutuality, tied in a single garment of destiny. Whatever affects one directly, affects all indirectly. We are made to live together because of the interrelated structure of reality.

Did you ever stop to think that you can't leave for your job in the morning without being dependent on most of the world? You get up in the morning and go to the bathroom and reach over for the sponge, and that's handed to you by a Pacific islander. You reach for a bar of soap, and that's given to you at the hands of a Frenchman. And then you go into the kitchen to drink your coffee for the morning, and that's poured into your cup by a South American. And maybe you want tea: that's poured into your cup by a Chinese. Or maybe you're desirous of having cocoa for breakfast, and that's poured into your cup by a West African. And then you reach over for your toast, and that's given to you at the hands of an English-speaking farmer, not to mention the baker. And before you finish eating breakfast in the morning, you've depended on more than half of the world.

This is the way our universe is structured. It is its interrelated quality. We aren't going to have peace on earth until we recognize this basic fact of the interrelated structure of all reality.

Martin Luther King Jr.
Ebenezer Baptist Church
Atlanta, Georgia
December 24, 1967

+++++

Mutuality = reality. The truth of this is experienced in education, business and the professions, and our personal lives. I appreciate Dr. King's cogent reflection (parts of which are repeated from his other remarks and writings) today more than ever before. I honor him and his memory with the republication of his meaningful words here on the holiday that celebrates his life and legacy. May he rest in peace knowing these words continue to be heard.

[Should you want to listen to the entire Christmas Eve sermon from which the quoted words were taken, one of several online recordings can be found here.]

January 18, 2021 in Joan Heminway | Permalink | Comments (0)

Saturday, January 16, 2021

Corporations and Contracts: Continuing to Beat this Drum

I’ve previously lamented the blurring of the lines of corporate and contract law, usually arising in the context of forum selection provisions in bylaws or charters that are treated as indistinguishable from ordinary contracts. My most recent post on this concerned the dismissal of a Section 11 case against Uber; shortly thereafter, another California court dismissed claims against Dropbox, in a decision which I may or may not discuss in more detail at a later date.

As Kyle Wagner Compton, author of the invaluable Chancery Daily, recently brought to my attention, in Mack v. Rev Worldwide, VC Zurn went in the opposite direction. The plaintiff, John Mack (yes, that John Mack) argued that he was not bound to the forum selection clauses contained in certain Notes that he held because he had not assented to them. Zurn held that he had agreed to provisions that allowed the Notes to be amended by a vote of a majority of the noteholders, and he was thus bound by clauses added through that process. On that holding I express no opinion. What does grab me, however, is that Zurn supported this decision by reference to the forum selection bylaw cases, including Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), finding them to be an appropriate analogy.

Except, as I keep pointing out, Boilermakers rested explicitly on the statutory scheme that details the conditions and limits on directors’ power to adopt bylaws, including directors’ fiduciary obligations. See id. at 954, 956, 959. That’s very different from a contractual agreement that details the mechanisms by which the contract can be amended. And though Zurn did acknowledge that her analogy was not perfect, it represents a further erosion of judicial recognition of the differences between the two regimes.

Anyway, at least I’m not the only one concerned about this; here’s Mandatory Arbitration and the Boundaries of Corporate Law, by Asaf Raz, with further discussion of the distinction between the corporate legal framework and the contractual one.

January 16, 2021 in Ann Lipton | Permalink | Comments (0)

Friday, January 15, 2021

Attorney-Client Privilege in Business Networks