Tuesday, November 8, 2022

Fireside Chats with Four CFTC Commissioners!

Dear BLPB Readers:

The ABA's Derivatives and Futures Law Committee's virtual mid-year event on October 6, 2022, included fireside chats with CFTC Commissioners Johnson, Goldsmith-Romero, Mersinger, and Pham.  I wasn't able to watch these interesting and highly-informative discussions in real-time, so I'm happy that recordings are now available and wanted to share a link to each with BLPB readers!

Fireside chat with Commissioner Johnson

Fireside chat with Commissioner Goldsmith-Romero

Fireside chat with Commissioner Mersinger

Fireside chat with Commissioner Pham

 

    

November 8, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, November 2, 2022

Sept 20, 2022, Meeting of the CFTC's Energy and Environmental Markets Advisory Committee

Today, I finally had a chance to watch a recording of the September 20, 2022, meeting of the CFTC’s Energy & Environmental Markets Advisory Committee (EEMAC). In past posts, I’ve mentioned having coauthored my first energy paper and my involvement with the University of Oklahoma’s Robert M. Zinke Energy Management Program, the first of its kind in the U.S.! The roles of derivatives in energy and commodity markets is increasingly in the spotlight. For example, last spring, European energy traders reached out to the European Central Bank (ECB) for emergency liquidity support because of clearinghouse collateral calls, but the ECB declined to assist. And there was the LME nickel incident of March 2022 (a post here). Undoubtedly, the interconnections between energy and financial markets, particularly derivatives, are set to become increasingly critical, especially in the global transition to a clean energy future.

The EEMAC meeting focused on two topics: 1) “Investment in physical energy infrastructure and the effect on price volatility in the commodities markets” and 2) “The role of the metals market as components in transitional energy sources and the potential impact on financial markets regulated by the CFTC.” The agenda can be found is here. The EEMAC voted to recommend to the CFTC Commissioners that Subcommittees be formed to study/write reports on each topic.

I thought I’d also note a few areas of the meeting that I found particularly interesting. First, Derek Sammann from CME Group gave a fascinating presentation on The Impact of the Energy Transition on the Global Metals Markets (starts at about 2:01:30). The concluding slide had the statement: “More than anything, the energy transition is a Metals story.” Second, I listened intently to a couple of participants discuss aspects of the LME nickel incident (3:00:25). Third, I found several participants’ discussion of systemic risk, FCMs, and their capital requirements really insightful (1:40:18).

November 2, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Tuesday, November 1, 2022

Griffin on the Index Fund Voting Process

Professor Caleb Griffin (University of Arkansas School of Law) offered testimony before the Senate Committee on Banking, Housing, and Urban Affairs in June of 2022 on problems associated with the fact that the “Big Three” index fund managers (Vanguard, BlackRock, and State Street) cast almost a quarter of the votes at S&P 500 companies. As a result, enormous power is concentrated in the hands of just a few index fund managers, whose interests and values may not align with those whose shares they are voting. Professor Griffin proposed two solutions to this problem: (1) “categorical” pass-through voting, and (2) vote outsourcing. Professor Griffin’s remarks were recently posted here, and here’s the abstract:

In recent years, index funds have assumed a new and unprecedented role as the most influential players in corporate governance. In particular, the “Big Three” index fund managers—Vanguard, BlackRock, and State Street—occupy a pivotal role. The Big Three currently cast nearly a quarter of the votes at S&P 500 companies, and that figure is expected to grow to 34% by 2028 and over 40% in the following decade.

The best solution to the current problem—where we have virtually powerless index investors and enormous, concentrated power in the hands of index fund management—is to transfer some of that power to individual investors.

There are two primary ways to do so. The first is to allow individual investors to set their own voting instructions with “categorical” pass-through voting, where investors are able to give semi-specific instructions on common categories of topics. The second approach is vote outsourcing, where investors could instruct management to vote their shares in alignment with a third party representative.

Pass-through voting preserves the economies of scale at the Big Three while addressing the root of the problem: concentrated voting power in the hands of a small, unaccountable group. Ultimately, index funds occupy a unique and important role in financial markets, not least because they're disproportionately owned by smaller, middle-income investors. These investors have a valuable voice, and pass-through voting would help us hear it.

November 1, 2022 in Corporate Governance, Corporations, Financial Markets, John Anderson, Securities Regulation | Permalink | Comments (0)

Wednesday, October 26, 2022

This Friday - Professor Macey on Market Power and Financial Risk in U.S. Payment Systems

Dear BLPB Readers:

This Friday, October 28th, at 10am ET, the Wharton Initiative on Financial Policy and Regulation is hosting an hour-long online seminar with Professor Joshua C. Macey on Market Power and Financial Risk in U.S. Payment Systems.  It should be a great event!  Registration information and a link to the whitepaper is here: Download Market Power_Financial Risk

 

October 26, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, October 19, 2022

Recording of Sept. 28th Meeting of CFTC's Market Risk Advisory Committee Available

Dear BLPB Readers,

Today, I had an opportunity to review a recording of the September 28th meeting of the CFTC's Market Risk Advisory Committee (MRAC).  For those of you who might have also missed the opportunity to view it in real time and are interested in learning more about the Committee's work, a recording is here and I list the various sections of the meeting, with approximate start times, below.

Section 1: The Future of Finance (32:25)

Section 2: Climate Related Market Risk (1:09)

Section 3: Interest Rate Benchmark Reform - Transition Away From LIBOR (1:43:50)

Section 4: CCP Risk and Governance and the Transition of CCP Services to the Cloud (1:55)

Section 5: Market Structure (2:12:50)   

October 19, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, September 14, 2022

Professor Skinner on The Monetary Executive

Today, I enjoyed reading Professor Christina Parajon Skinner's timely and important new article, The Monetary Executive, forthcoming in the George Washington Law Review.  It's definitely a worthwhile read!  Here's the abstract:

"As inflation in 2022 surges to a forty-year high, economists, lawmakers, and the public continue to question why. As part of that inquiry, experts and onlookers seek explanations grounded in errors recently made by the central bank, the U.S. Federal Reserve. This Article argues that, while there is no doubt a host of contributing factors to the current bout of inflation, the President’s role remains comparatively understudied. In particular, the Article adds a new dimension to the growing literature on the fiscal foundations of inflation by studying its longstanding statutory roots, which can be traced back to the New Deal Era. Although the Framers of the Constitution were deliberate in vesting power over money and spending with Congress, and separating it from the President, in time, Congress eroded this separation with successive ad hoc delegations directly to the Executive. As a consequence, today, the President has far more influence over money in the economy—and levers for “fiscal dominance”—than the Constitution arguably allows, casting a long shadow over the Federal Reserve’s ability to properly rein in inflation. The Article traces the development of a “Monetary Executive” through the lens of statutory delegations, and suggests the need for new constraints on Fed policy tools to help buffer against pressure from the President to increase the money supply."

September 14, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Professor Skinner on The Monetary Executive

Today, I enjoyed reading Professor Christina Parajon Skinner's timely and important new article, The Monetary Executive, forthcoming in the George Washington Law Review.  It's definitely a worthwhile read!  Here's the abstract:

"As inflation in 2022 surges to a forty-year high, economists, lawmakers, and the public continue to question why. As part of that inquiry, experts and onlookers seek explanations grounded in errors recently made by the central bank, the U.S. Federal Reserve. This Article argues that, while there is no doubt a host of contributing factors to the current bout of inflation, the President’s role remains comparatively understudied. In particular, the Article adds a new dimension to the growing literature on the fiscal foundations of inflation by studying its longstanding statutory roots, which can be traced back to the New Deal Era. Although the Framers of the Constitution were deliberate in vesting power over money and spending with Congress, and separating it from the President, in time, Congress eroded this separation with successive ad hoc delegations directly to the Executive. As a consequence, today, the President has far more influence over money in the economy—and levers for “fiscal dominance”—than the Constitution arguably allows, casting a long shadow over the Federal Reserve’s ability to properly rein in inflation. The Article traces the development of a “Monetary Executive” through the lens of statutory delegations, and suggests the need for new constraints on Fed policy tools to help buffer against pressure from the President to increase the money supply."

September 14, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, August 10, 2022

A CDS Market Auction-Related Development to Follow

For those BLPB readers watching the derivatives markets, specifically CDS (credit default swaps), an interesting development to be following right now is the potential auction related to the EMEA (Europe) Determinations Committee’s decision that a failure to pay credit event had occurred with respect to the Russian Federation.

Really really briefly – if you want a deeper dive into CDS and the Determinations Committees, see here – CDS are insurance-like contracts in which a protection buyer makes periodic payments akin to an insurance premium to a protection seller to financially “protect” them should a credit event (failure to pay, bankruptcy, etc.) occur on an underlying reference entity, for example, the Russian Federation.  The protection buyer may or may not have actual economic exposure to the underlying entity.   

The importance of a credit event determination is that it triggers the CDS protection seller’s payout obligation.  In general, the amount of this payout obligation is determined by an auction.  The Credit Derivatives Determinations Committees is the dispute resolution mechanism which decides whether or not a credit event has occurred and, if so, whether a settlement auction will be held.  The decision of a Committee applies market-wide.  There are five regional Committees: Americas, Australia-New Zealand, Asia (non-Japan), Japan, and EMEA (Europe).  In general, each Committee is responsible for decisions surrounding reference entities related to their region.  An independently managed subsidiary of ISDA, DC Administration Services, is secretary to each Committee.  The voting members of a full Committee consist of 10 dealer members and 5 non-dealer members.  The most recent list of Determinations Committees members is here.

On June 1, 2022, the EMEA (Europe) Determinations Committee decided “Yes” in answer to the question: “Has a Failure to Pay Credit Event occurred with respect to the Russian Federation under the 2014 Definitions and the Updated 2003 Definitions?”  Generally, a Committee votes to hold a settlement auction following its determination that a credit event has occurred.  However, the EMEA Determinations Committee decided to defer making a decision about whether to hold an auction.  As noted in its Meeting Statement of July 25, 2022: “On 9 June 2022, the EMEA DC announced that it was deferring making a decision on holding an Auction and the date of any Auction. Such deferral was as a result of the publication by OFAC [Office of Foreign Assets Control] of updated FAQs on 6 June 2022 in respect of new investment prohibitions relating to entities in the Russian Federation (further to Executive Order (E.O.) 14066, E.O. 14068, and E.O. 14071).”  On June 24, 2022, a Bloomberg news article noted “Swaps Panel Asks US Treasury for Russia Sanctions Workaround.”  On July 22, 2022, OFAC released General Licenses No. 45 “Authorizing Transactions Related to the Wind Down of Certain Financial Contracts Prohibited by Executive Order 14071” and No. 46 “Authorizing Transactions in Support of an Auction Process to Settle Certain Credit Derivative Transactions Prohibited by Executive Order 14071.”

An August 5, 2022, Determinations Committee website update (the latest as of this post) shares that the EMEA Committee has now published a “Preliminary List of Deliverable Obligations for the purposes of a potential auction” and also that “The EMEA DC continues to consider the potential impact of restrictions on settlement of the debt obligations of the Reference Entity within clearing systems, including the restrictions on transfer of debt obligations within Clearstream referenced in the DC Meeting Statement of 25 July 2022.” 

With CDS and clearing involved, this is definitely a developing story I’ll continue to follow, think about, and write on!                  

August 10, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, August 3, 2022

Call for Papers - Fifth Conference on Law and Macroeconomics

Dear BLPB readers:

"Fifth Conference on Law and Macroeconomics
October 20-21, 2022 (virtual)

The macroeconomic instability of the 2020s continues to fuel economic, social, and political
turmoil worldwide and to recast our understanding of law and macroeconomics. The ongoing crisis
has opened up new and vitally important research opportunities. As we press on towards pandemic
recovery and confront new challenges, the Fifth Conference on Law and Macroeconomics will
focus on the law’s role in shaping a sustainable and resilient macroeconomy and on the role of
macroeconomic policy in national, regional, and global governance."

September 15, 2022 is the deadline for submitting papers for consideration.  The conference website and complete call for papers is here.

August 3, 2022 in Call for Papers, Colleen Baker, Financial Markets | Permalink | Comments (0)

Friday, July 29, 2022

Practical Tips for Teaching or Training Adult Learners

Millions of law school graduates around the US just took the bar exam. Others are preparing to enter colleges and graduates schools in a few weeks. How will these respective groups do? While a lot depends on how much and how well they study, a large part of their success or failure may depend on how they've been taught. I recently posted about how adults learn and what the research says we should do differently. In this post, I'll show how I used some of the best practices in the last ten days when I taught forty foreign lawyers from around the world  and thirty college students in separate summer courses offered by the University of Miami as well as nine Latin American lawyers who were taking courses in business law from a Panamanian school. I taught these disparate groups about ESG, disclosures, and human rights. With each of the cohorts, I conducted a simulation where I divided them into groups to prioritize issues based on whether they were a CEO, an investor, a consumer, the head of an NGO, and for the US college students, I added the roles of a member of Congress or influencer. In a future post, I will discuss how the groups prioritized the issues based on their demographics. Fascinating stuff. 

Depending on what you read, there are six key principles related to adult learning:

1. It seems obvious, but adults need to know why they should learn something. Children learn because they are primed to listen to authority figures. Too often in law school or corporate training, there's no correlation to what they learn and what they actually do. When I taught the two groups of foreign lawyers, I talked about the reality and the hype about ESG and how the topic could arise in their practices with specific examples. When I spoke to the college students who were considering law school, I focused on their roles and responsibilities as current consumers and as the future investors, legislators, and heads of NGOs. Same powerpoint but different emphasis.

2. Adults are self-directed. Under one definition, "self-directed learning describes a process by which individuals take the initiative, with or without the assistance of others, in diagnosing their learning needs, formulating learning goals, identifying human and material resources for learning, choosing and implementing appropriate learning strategies, and evaluating learning outcomes." This may seem radical because many of my colleagues complain that today's students need a lot of hand holding and spoon feeding, and I agree to some extent. But I also think that we don't give students enough credit and we underestimate them. I developed my curriculum for the practicing lawyers but I also asked what they wanted to learn and what would be most useful for them. I only had a few hours with them, so I wasn't able to explore this much as I would have. But in some of my traditional courses at the law school and when I train adults in other contexts, I often give a choice of the exam type and topic. This ensures that they will submit a work product that they are passionate about. At the end of my traditional classes at the law school, I also ask them to evaluate themselves and me based on the learning outcomes I established at the beginning of the semester. They tend to be brutally honest about whether they've taken responsibility for their own learning.

3. Adults filter what we tell them through their life experiences. In my traditional classes, I send out a survey to every student before the semester starts so that I understand their backgrounds, perspectives, and what's important to them. I often pick hypotheticals in class that directly address what I've learned about them through the surveys so it resonates much more clearly for them. With my three groups this week, I didn't have the chance to survey them but I knew where they were all from and used examples from their countries of origin, when I could. When the college students entered the Zoom room, I asked them to tell me why they picked this class. This helped me understand their perspectives. I also picked up on some of their comments during discussion and used those data points to pivot quickly when needed. It would have been easy to focus on my prepared lecture. But what does ESG mean to a lawyer in Bolivia, when that's not a priority? College students quickly grasped the context of socially responsible investing, so I spent more time there than on the Equator Principles, for example. The cultural and generational differences were particularly relevant when talking about the responsibility of tech companies from a human rights perspective. The lawyers and students from authoritarian regimes looked at social media and the power to influence the masses in one way, while the college students saw the issues differently, and focused more on the mental health issues affecting their peers. Stay tuned for a future post on this, including interesting discussion on whether Congress should repeal Section 230.

4. Adults become ready to learn only when they see how what they are learning applies to what they need to do at work and at home. With the foreign lawyers, I focused on how their clients could have to participate in due diligence or disclosure as part of a request from a company higher up in the supply chain. I focused on reputational issues with the lawyers who worked at larger companies. College students don't deal with supply chains on a regular basis so I spent more time focusing on their role as consumers and their participation in boycotts at their universities and their activism on campus and how that does or does not affect what companies do. 

5. Adults need a task-centered or problem-focused approach to learning. I had to lecture to impart the information, but with each group, they learned by doing. I had 12 hours with the Latin American lawyers so to test them on their understanding of US business entities, instead of having them complete a multiple choice quiz, I asked them to interview me as a prospective client and develop a memo to me related providing the advice, which is what they would do  in practice. They, with the other groups, also prioritized the issues discussed above from their assigned roles as CEO, NGO head, institutional investor, or consumer. When I teach my compliance course to law students, they draft policies, hold simulated board meetings, and present (fake) CLEs or trainings. My business and human rights students  have the option to draft national action plans, write case studies on companies that they love or hate, or write develop recommendations for governments for their home country. Students are much more likely to engage with the material and remember it when they feel like they are solving a real problem rather than a hypothetical.

6. Adults need extrinsic and intrinsic rewards. Everyone I taught this week will get some sort of certificate of completion. But they all chose to take these courses and those who weren't part of the UM program either self paid or were reimbursed by their employers. None of them were required to attend the classes, unlike those in elementary and high school. When students choose a course of study and learn something relevant, that's even more important than the certificate or diploma. 

I hope this helps some of you getting ready for the upcoming semester. Enjoy what's left of the summer, and if you try any of these suggestions or have some of your own, please leave a comment.

 

July 29, 2022 in Business Associations, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, International Business, Law School, Lawyering, LLCs, M&A, Marcia Narine Weldon, Teaching | Permalink | Comments (0)

Wednesday, July 27, 2022

Tomorrow!! Are SPACs Illegal Investment Funds?

Tomorrow, the Wharton Initiative on Financial Policy and Regulation is hosting a webinar entitled, Are SPACs Illegal Investment Funds?  I encourage you to register (here) and decide what you think about this issue!

Wharton Spac Event Social Media

 

July 27, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, July 20, 2022

UPenn Law Inaugural Junior Faculty Business and Financial Law Workshop

Dear BLPB Readers:

"The Institute for Law & Economics (ILE) at The University of Pennsylvania Carey Law School is pleased to announce its inaugural Junior Faculty Business and Financial Law Workshop. The Workshop will be held in person on December 8, 2022 at Penn Law School, unless pandemic protocols require otherwise.

The Workshop supports and recognizes the work of untenured legal scholars in accounting, banking, bankruptcy, corporations, economics, finance and securities regulation and litigation , while promoting interaction among them and selected tenured faculty and practitioners. By providing a forum for the exchange of creative ideas in these areas, ILE also aims to encourage new and innovative scholarship in the business and financial arena."

The complete call for papers is here.

July 20, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Saturday, July 16, 2022

Baker on Derivatives and ESG

I’m excited to share that my most recent article, Derivatives and ESG, is forthcoming in the American Business Law Journal (Vol. 59, no.4)!  I recently posted a draft of this article to SSRN.  As the abstract below suggests, it examines the role of the derivatives ecosystem - the instruments themselves, trading exchanges, and clearinghouses - in promoting ESG objectives. 

I've written a lot about credit default swaps (for example, here and here).  So, in researching this topic, I was especially struck by the potential for well-known past and existing challenges in credit default swap markets – specifically, decentralized decision-making and conflicts of interest – to eventually become issues in the currently nascent sustainability-linked derivatives (SLDs) market, a type of over-the-counter ESG derivative.  Undoubtedly, the SLDs market is set to grow, so I’ll likely be posting on this topic again in the future!   

Here’s the abstract:

Financial markets are increasingly developing innovative, ESG-related derivatives and relying upon these instruments to hedge ESG-related risks. The global derivatives markets are among the largest, most consequential financial markets in the world. Derivatives are financial contracts that derive their value from an underlying reference entity which can be almost anything, including interest rates, credit, equities, foreign exchange, the weather, or the price of carbon. They provide for hedging, investment (speculation), and arbitrage, and trade on regulated exchanges and in the over-the-counter markets. Derivatives can also facilitate access to the tremendous amounts of capital necessary for the transition to a cleaner energy future and to the objective of net zero emissions by 2050 of governments around the world.

Through an exploration of recent innovations and developments in the exchange-traded and over-the-counter derivatives markets, this Article explores the role of the derivatives ecosystem - the instruments themselves, trading exchanges, and clearinghouses - in promoting ESG objectives. It also highlights the potential for the nascent sustainability-linked derivatives market to face certain challenges experienced by and present in the market for credit default swaps
.”

July 16, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Monday, July 4, 2022

Celebrating Independence without the Trappings: A Business Law Prof "Take"

Stefan's Independence Day post is far more erudite than mine.  Kudos and thanks to him for the substantive legal content.  This post covers more of a teaching point--one that I often think about in the background but want to being to the fore here.

I am focused in writing this on things like family reunions, local holiday festivities, grilling out, and fireworks.  It has been a rocky road to the Fourth in these and other aspects this year.  Overlapping causes can easily be identified.  As if the continuing COVID-19 nightmare were not enough . . . .

I will start with COVID-19, however.  I have heard of many who are missing family and other events this weekend because of positive COVID-19 diagnoses, test results, or exposures.  I was sad to learn, for example, that Martina Navratilova had to miss the historic Wimbledon centennial celebration, including the Parade of Champions, yesterday.  But there is more.

The air travel debacles have been well publicized.  Weather, labor shortages, and other issues contribute to the flight changes and cancellations airlines need to make on this very popular travel weekend--expected to set records.  And gas prices have stymied the trips of some by land (again, at a time during which travel was expected to be booming), although news of some price drops in advance of the weekend was certainly welcomed.  Even for those who are well and able to travel to spend holiday time with family, it has been a challenge.

The cost of your cookout this year also may be higher, should you choose to have one.  Supply chain turmoils and the effects of inflation and the war in Ukraine all are listed as contributing factors.  (The linked article does note that strawberries are a good buy, nevertheless, which is welcome news to me.)

And yes, fireworks displays also have been disrupted.  The causes include both concerns about weather (dry conditions and flammables do not mix well!) as well as the impact of labor shortages, inflation, and other factors influencing the supply of goods.  Of course, there also is a high demand for fireworks in the re-opened socio-economic environment.  All have been widely reported.  See here, here, here, and here.

These holiday weekend disappointments create personal strife.  But why should a business law prof care about all of this? 

I find that stepping back and looking at the state of business at given times can be instructive in reflecting on the ways in which business law policy, theory, and doctrine do and should operate in practice.  In an inflationary period with labor shortages, what profit-seeking business would not be looking at customers, clients, and employees as an important constituencies?  In an era of supply chain dislocations, what business managers would not be focused on strong, positive relationships with those who sell them goods and services significant to their business?  And, of course, with investment returns of direct and indirect import to the continued supply of funding to business ventures, firms need to pay heed to investor concerns.  Note how these observations allow for commentary on principles of/underlying contract law, contract drafting, securities regulation, fiduciary duty in (and other elements of) business associations law, insurance law, and more.

Looking at legal theory, policy, and doctrine in practical contexts can useful to a business law prof for teaching, scholarship, and service--depending on the nature of a person's appointment and the institution at which the prof teaches.  The current Fourth of July woes are but one example of how those connections can be made.  But I want to invite folks to make them, especially in their teaching--in current courses (if you are teaching over the summer) and in fall and spring course planning, which I know many folks are now doing.

In closing, I send sympathetic vibes to all who had plans foiled by (or who decided to have a "staycation" and avoid) some or all of the holiday weekend dislocations I highlight in this post.  I hope you found joy in your Independence Day weekend nonetheless.

July 4, 2022 in Business Associations, Contracts, Corporate Finance, Current Affairs, Financial Markets, Insurance, Joan Heminway, Law School, Lawyering, Research/Scholarhip, Service, Teaching | Permalink | Comments (0)

Saturday, June 25, 2022

House Majority Staff Report on the GameStop Market Event

Last year, several BLPB posts focused on the GameStop market event (for example, here, here, here, here, and here). For BLPB readers with continuing interest in this topic, I wanted to flag that yesterday, a report prepared by the Majority Staff of the Committee on Financial Services of the U.S. House of Representatives was released: Game Stopped: How the Meme Stock Market Event Exposed Troubling Business Practices, Inadequate Risk Management, and the Need for Legislative and Regulatory Reform.  I look forward to reviewing the report in more detail!

[revised]

 

June 25, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Friday, June 24, 2022

Rethinking Insider Trading Compliance Policies in Light of the SEC's New "Shadow Trading" Theory of Insider Trading Liability

In August 2021, the SEC announced that it had charged Matthew Panuwat with insider trading in violation of Section 10(b) of the Securities Exchange Act of 1934. Panuwat was the head of business development at Medivation, a mid-sized biopharmaceutical company when he learned that his company was set to be acquired by Pfizer at a significant premium.

If Panuwat had purchased Medivation stock in advance of the announcement of the acquisition, it is likely he would have been liable for insider trading under the classical theory. Liability for insider trading under the classical theory arises when a firm issuing stock, its employees, or its other agents strive to benefit from trading (or tipping others who then trade) that firm’s stock based on material nonpublic information. Here the insider (or constructive insider) violates a fiduciary duty to the counterparty to the transaction (the firm’s current or prospective shareholders) by not disclosing the information advantage drawn from the firm’s material nonpublic information in advance of the trade.

If Panuwat had purchased shares of Pfizer in advance of the announcement, then it is likely he would have been liable under the misappropriation theory. Liability for insider trading under the misappropriation theory arises when one misappropriates material nonpublic information and trades (or tips another who trades) on it without first disclosing the intent to trade to the information’s source. As the Supreme Court held in United States v. O’Hagan, 521 U.S. 642, 652 (1997), the “misappropriation theory premises liability on a fiduciary-turned-trader’s deception of those who entrusted him with access to confidential information” by duping them out of “the exclusive use of that information.”

But Panuwat did not trade in either Medivation or Pfizer. Instead, he purchased stock options in Incyte, another pharmaceutical company that was similar in size and market focus to Medivation. According to the SEC’s litigation release, “Panuwat knew that investment bankers had cited Incyte as a comparable company in discussions with Medivation and he anticipated that the acquisition of Medivation would likely lead to an increase in Incyte’s stock price.” Panuwat’s gamble paid off. Incyte’s stock price increased 8% when Pfizer’s acquisition of Medivation was announced. Panuwat earned $107,066 from his trade.

Panuwat moved to dismiss the SEC’s insider trading charges, arguing that his trading in the shares of an unrelated third-party issuer did not violate any recognized theory of insider trading liability.  While the district court acknowledged this was a case of first impression, it denied Panuwat’s motion and permitted the SEC to proceed with its first enforcement action under the "shadow trading" theory of insider trading liability.

The principal basis for the court’s decision seems to be that Panuwat’s trading arguably violated the misappropriation theory by breaching the broad terms of Medivation’s insider trading policy, which includes the following language:

During the course of your employment…with the Company, you may receive important information that is not yet publicly disseminated…about the Company. … Because of your access to this information, you may be in a position to profit financially by buying or selling or in some other way dealing in the Company’s securities…or the securities of another publicly traded company, including all significant collaborators, customers, partners, suppliers, or competitors of the Company. … For anyone to use such information to gain personal benefit is illegal.

To me, the most interesting question raised by the Panuwat case, and the problem of shadow trading more generally, is why would Medivation (or any company) adopt such a broadly worded insider trading policy? How did this broad proscription on employee trading benefit Medivation’s shareholders?

Medivation’s shareholders could not have been harmed by Panuawat’s trading. Such trading could not affect Medivation’s stock price, nor could it put the acquisition in jeopardy. So why is the blanket proscription against trading in “another publicly traded company” in the policy at all? The final sentence of the policy as quoted above suggests that the drafters were under the impression that such trading would be illegal under the securities laws. This may be true under the misappropriation theory, but only because Medivation chose to make it so by including the language in the policy. What if Medivation’s policy had instead provided something like the following language:

Because of your access to this information, you may be in a position to profit financially by trading in the Company’s securities, or the securities of its customers and suppliers. Such trading is strictly prohibited. Nothing in this policy should, however, be read as prohibiting your trading or dealing in any other issuers’ securities unless expressly restricted by the Company.

Under this policy, the SEC would have had no basis for the charge that Panuwat’s trading violated the misappropriation theory. In other words, it is entirely up to issuers whether they want to expose themselves and their employees to “shadow trading” liability. But if such exposure to liability does not benefit an issuer’s own shareholders, it can only hurt them (by needlessly exposing the company’s employees and the company itself to direct or derivative insider trading liability). So what business justification is there for issuers to include the broader language in their insider trading compliance policies? I hope readers will offer their thoughts in the comments below.

June 24, 2022 in Compliance, Financial Markets, John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (9)

Wednesday, June 15, 2022

Custodia Bank Sues the Fed

In December 2018, in one of my earliest posts on the BLPB, I shared “although esoteric, such issues as who has access to an account at the Fed are critical social policy choices with real world implications that merit broad-based public debate.”  And I’ve continued to highlight this issue with posts such as “Master Accounts at the Fed: An Arcane But Highly Important Issue” and “Professor Hill on Bank Access to Federal Reserve Accounts and Payment Systems.”  And I’m going to continue to do so today and in the future.  It's just that important. 

So today, I want to highlight that Custodia Bank, Inc. recently filed a lawsuit against the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City.  Custodia alleges that the defendants have unlawfully delayed – for more than 19 months now – processing its application for a Fed master account.  A few related news stories are: here, here, and here.  Recall that TNB USA Inc. sued the Federal Reserve Bank of New York for related reasons (here), but this lawsuit was dismissed.  I’ll be sure to keep BLPB readers posted regarding what happens in Custodia’s case.            

June 15, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Friday, June 10, 2022

Why Transactional Lawyers Need to Educate Themselves on Compliance

Prior to joining academia, I served as a compliance officer for a Fortune 500 company and I continue to consult on compliance matters today. It's an ever changing field, which is why I'm glad so many students take my Compliance, Corporate Governance, and Sustainability course in the Fall. I tell them that if they do transactional or commercial litigation work, compliance issues will inevitably arise. Here are some examples: 

  • In M&A deals, someone must look at the target's  bribery, money laundering, privacy, employment law, environmental, and other risks
  • Companies have to complete several disclosures. How do you navigate the rules that conflict or overlap?
  • What do institutional investors really care about? What's material when it relates to ESG issues?
  • What training does the board need to ensure that they meet their fiduciary duties?
  • How do you deal with cyberattacks and what are the legal and ethical issues related to paying ransomware?
  • How do geopolitical factors affect the compliance program?
  • Who can be liable for a compliance failure?
  • What happens when people cut corners in a supply chain and how can that affect the company's legal risk?
  • What does a Biden DOJ/SEC mean compared to the same offices under Trump?
  • Who is your client when representing an organization with compliance failures?
  • and so much more

I'm thrilled to be closing out the PLI Compliance and Ethics Essentials conference in New York with my co-panelist Ben Gruenstein of Cravath, Swaine, & Moore. It's no fun being the last set of presenters, but we do have the ethics credits, so please join us either in person or online on June 28th. Our areas of focus include:

  • Risk assessment, program assessment, and attorney-client privilege
  • Ethical obligations for lawyers and compliance officers
  • Which compliance program communications can (and should) be privileged?

In addition to discussing the assigned issues, I also plan to arm the compliance officers with more information about the recent trend(?) of Caremark cases getting past the motion to dismiss stage and compliance lessons learned from the Elon Musk/Twitter/Tesla saga. 

Here's the description of the conference, but again, even if you're not in compliance, you'll be a better transactional lawyer from learning this area of the law. 

Compliance and ethics programs are critically important to the success of any organization. Effective programs allow organizations to identify and mitigate legal risks. With an increasingly tough enforcement environment, and greater demands for transparency and accountability, an effective compliance program is no longer just “nice-to-have.” It’s essential. 

Whether you are new to the area or a seasoned compliance professional, PLI’s program will give you the tools you need to improve your organization’s compliance program.  We will review the principal elements of compliance programs and discuss best practices and recent developments for each.  Our distinguished faculty, drawn from major corporations, academia, law firms and the government, can help you improve your program, increase employee awareness and decrease legal risk.  Compliance and Ethics Essentials 2022 is highly interactive and includes case studies, practical tools and real-time benchmarking.

What You Will Learn 

  • Designing and conducting effective compliance risk assessments that enhance your program
  • Structuring your program for appropriate independence and authority
  • The evolving role of the board
  • ESG and your compliance program
  • Using data analytics to improve your program
  • Encouraging reporting and investigating allegations of wrongdoing
  • Best practices in compliance codes, communications, training and tools
  • Ethics for compliance professionals

Who Should Attend

If you are involved in any aspect of corporate compliance and ethics as in-house counsel, a compliance and ethics officer, human resources executive, outside counsel, or risk management consultant, this event should be on your annual calendar.

Special Feature: Special luncheon presentation with guest speaker

If you do come to the conference, I would love to grab a cup of coffee with you, so reach out.

June 10, 2022 in Compliance, Conferences, Consulting, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Lawyering, Legislation, M&A, Marcia Narine Weldon | Permalink | Comments (0)

Monday, June 6, 2022

Colin Marks: Total Return Swaps ≡ Secured Transactions?!

I am excited to be promoting here an inventive and interesting paper, Total Return Meltdown: The Case for Treating Total Return Swaps as Disguised Secured Transactions, written by friend-of-the-BLPB Colin Marks (St. Mary's School of Law).   The SSRN abstract follows.

Archegos Capital Management, at its height, had $20 billion in assets. But in the spring of 2021, in part through its use of total return swaps, Archegos sparked a $30 billion dollar sell-off that left many of the world’s largest banks footing the bill. Mitsubishi UFJ Group estimated a loss of $300 million; UBS, Switzerland’s biggest bank, lost $861 million; Morgan Stanley lost $911 million; Japan’s Nomura, lost $2.85 billion; but the biggest hit came to Credit Suisse Group AG which lost $5.5 billion. Archegos, itself lost $20 billion over two days. These losses were made possible due to the unique characteristics of total return swaps and Archegos’ formation as a family office, both of which permitted Archegos to skirt trading regulations and reporting requirements. Archegos essentially purchased beneficial ownership in large amounts of stocks, particularly ViacomCBS Inc. and Discovery Inc., on credit. Under Regulation T of the Federal Reserve Board, up to 50 percent of the purchase price of securities can be borrowed on margin. However, to avoid these rules, Archegos instead entered into total return swaps with the banks whereby the bank is the actual owner of the stock, but Archegos would bear the risk of loss should the price of the stock fall and reap the benefits if the stock were to go up or were to make a distribution. Archegos would still pay the transaction fees, but the device permitted Archegos to buy massive amounts of stock without having the initial margin requirements, thus making Archegos heavily leveraged. This article argues that the total return swap contracts are analogous to and should be re-characterized as what they really are – disguised secured transactions. Essentially the banks are lending money to enable the Archegoses of the world to buy stocks, and are simply retaining a security interest in the stocks. Such a re-characterization should place such transactions back into Regulation T and the margin limits. But re-characterization also offers another contract law approach that is more draconian. If the structure of the contract violates a regulation, then total return swaps could be declared void as against public policy. This raises the specter that a court could apply the doctrine of in pari delicto and leave the parties where they found them in any subsequent suits to recover outstanding debts.

I do not teach, research, or write in the secured transactions space, but this work engages corporate finance and contract law as well.  (I am grateful that Colin, among others, has encouraged my forays into contract law research over the years.)  I was privileged to have the opportunity to preview Colin's arguments and offer some feedback during his research and writing of this paper, which is forthcoming in the Pepperdine Law Review.  I find his argument creative and intriguing.  I think you may, too.

June 6, 2022 in Contracts, Corporate Finance, Financial Markets, Joan Heminway, Securities Regulation | Permalink | Comments (1)

Wednesday, June 1, 2022

Two Quick Clearing Follow-ups on Last Week's Post

I wanted to make two quick follow-ups to last week’s post on FTX’s proposed new clearing model for retail customers.  First, I highly recommend reading the recent FT Alphaville piece Did a major financial institution kinda maybe slightly default in March 2020? (FT subscription required) Among other things, it highlights remarks made by some participants during last week's CFTC Staff Roundtable on Disintermediation relating to the potential cost of largely removing human discretion from the clearing risk management process (thanks to today’s Money Stuff by Matt Levine for bringing this piece to my attention!).  Second, a recent article by Rebecca Lewis and David Murphy, What Kind of Thing Is a Central Counterparty? The Role of Clearinghouses As a Source of Policy Controversy, does an excellent job of discussing clearing for BLPB readers who want to learn more about this area.  Murphy was among the participants in the CFTC Staff Roundtable!  I highly recommend this piece!  Here’s the abstract:

"Public policy surrounding central counterparties (‘CCPs’) is beset by conflicts between stakeholders. These turn on who bears which risks, who profits from clearing, and who has what say in CCP governance. They involve CCP equity holders, clearing members, clients, regulators, and taxpayers, among others. In order to probe them, three stylized edge case models of the role of the CCP are introduced: utilities, for-profit corporations under shareholder primacy, and clubs. The governance of each edge case is discussed and compared to the current situation in clearing and its framing in regulatory requirements. The risks in central clearing, who bears them, and the policies surrounding them, are surveyed. The paper argues that stakeholder risk-bearing affects CCP governance because risk bearing should, in equity, be accompanied by governance rights. Each edge case model suggests a different resolution to the key conflicts but none of the models are sufficient to explain existing CCP practice, and the resolutions suggested are unsatisfactory. This insufficiency suggests that the current policy conflicts are rooted in fundamental disagreements about the role of the CCP and thus in whose interests the CCP should act. Stakeholder theory is presented as a model which explains the nature of these conflicts and their persistent character, and which can provide an equitable setting for their continuing re-negotiation."

 

June 1, 2022 in Colleen Baker, Financial Markets | Permalink | Comments (0)