Sunday, May 10, 2020

New FSB Consultative Document on Clearinghouses (CCPs)

Last Monday, the Financial Stability Board (FSB) released the consultative document, Guidance on financial resources to support CCP resolution and on the treatment of CCP equity in resolution (here).  As readers know, I’ve written several times about clearinghouses, the central feature of the G20’s reforms to the over-the-counter derivative markets following the 2007-08 crises, implemented in the US in Dodd-Frank’s Title VII (for example, here and here).    

The Guidance’s title is a succinct encapsulation of its two-part focus.  In the first part, it uses a five-step process to evaluate the adequacy of a CPP’s resources and available tools to support its resolution (were that to prove necessary).  These steps include:

Step 1: identifying hypothetical default and non-default loss scenarios (and a combination of them) that may lead to resolution;

Step 2: conducting a qualitative and quantitative evaluation of existing resources and tools available in resolution;

Step 3: assessing potential resolution costs;

Step 4: comparing existing resources and tools to resolution costs and identifying any gaps; and

Step 5: evaluating the availability, costs and benefits of potential means of addressing any identified gaps.     

In the second part, the Guidance focuses on how to treat CCP equity in resolution.  A resolution of a CCP would be distinct from a “wind down” of the CCP.  Readers might ask why one would have to think about such a thing – equity will likely get wiped out, right?  Not necessarily.  Today, most CCPs are shareholder-owned, but the CCP users/customers (clearing members) are mostly on the hook for any losses resulting from a user’s default.  As I’ve written about in Incomplete Clearinghouse Mandates (here), this creates a foundational incentive problem because the shareholders benefit from the CCP’s profits, but the users are primarily responsible for any default losses. 

As the Guidance notes, in theory, CCPs could experience losses due to user defaults, non-default issues, or a combination of both.  How CCPs owned by shareholders will allocate losses between themselves and users in a “combination” scenario is completely unclear (allocation of non-default losses is also unclear in many cases) and should be addressed as I’ve noted before (here).  Should the combination scenario arise, I think loss allocation will prove to be an intractable problem. 

In reading the second part of the Guidance, one realizes how complicated and legally fraught the question of CCP equity could be in a resolution given the status quo.  Towards the end of the second part, the Guidance states that:

Based on the analysis undertaken in accordance with the previous sections, the relevant home authorities should address the challenges relating to CCP equity fully bearing losses in resolution. This may include, where possible, that home authorities having the relevant powers and authority require that CCPs modify their capital structures, rules or other governance documents in a manner that subordinates shareholders to other creditors or sets out the point at which equity absorbs losses in legally enforceable terms. This may also include identifying or proposing potential changes to laws, regulations or powers of the relevant supervisory, oversight or resolution authorities that would enable achieving the resolution objectives or limit the potential for NCWOL claims.

In the short term, the last sentence of this quote likely offers a more feasible approach to handling CCP equity than what I think would be a more sensible approach: addressing the ownership structure of these institutions.  This would almost certainly be much more difficult to implement in practice, but it’s ultimately a simpler, more sensible long-term solution for addressing CCP equity in resolution and for addressing loss allocation under a combination scenario.  Until we fix this foundational issue of ownership, we shouldn’t be surprised if the path of a distressed, systemically significant clearinghouse ultimately resembles that of the government‐backed mortgage lenders whose fate more than 11.5 years after entering government conservatorship still remains uncertain. Let’s not repeat this history!   

May 10, 2020 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, April 15, 2020

Excerpts from "OPEN LETTER TO BLACKROCK CEO LARRY FINK"

The National Center for Public Policy Research has posted an open letter to Blackrock CEO Larry Fink that should be of interest to readers of this blog.  I provide some excerpts below.  The full letter can be found here.

Dear Mr. Fink,

….

This economic crisis makes it more important than ever that companies like BlackRock focus on helping our nation’s economy recover. BlackRock and others must not add additional hurdles to recovery by supporting unnecessary and harmful environmental, social, and governance (ESG) shareholder proposals.

…. we are especially concerned that your support for some ESG shareholder proposals and investor initiatives brings political interests into decisions that should be guided by shareholder interests…. when a company’s values become politicized, the interests of the diverse group of shareholders and customers are overshadowed by the narrow interests of activist groups pushing a political agenda.

…. ESG proposals will add an extra-regulatory cost .... This may harm everyday Americans who are invested in these companies through pension funds and retirement plans. While this won’t affect folks in your income bracket, this may be the difference between affording medication, being able to retire, or supporting a family member’s education for many Americans.

There is a financial risk to this tack as well. The Wall Street Journal recently reported that “[p]erformance of BlackRock’s own iShares range of ESG funds shows that ESG is no guarantee of gold-plated returns. Its two oldest in the U.S., set up in 2005 and 2006 and now tracking the MSCI USA ESG Select index and the MSCI KLD 400 Social index, have both lagged behind iShares’ S&P 500 fund.”

And while publicly traded companies operate under a legal fiduciary duty to their investors, this is also a moral imperative. Free market capitalism has lifted more people out of poverty than any economic system in world history. That’s because, at its simplest level, capitalism operates under the basic rule that all exchanges are voluntary. Therefore, to achieve wealth and create growth in a capitalist system, one must appeal to the self-interest of others….

April 15, 2020 in Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Shareholders, Stefan J. Padfield | Permalink | Comments (0)

Thursday, April 9, 2020

New Paper: Congressional Securities Trading

Iowa's Greg Shill has a new paper out on Congressional Securities Trading.  As a former congressional staffer, he brings a special appreciation to the issue.

Congressional securities trading has attracted a good bit of attention after controversial trades by Senators Burr and Loeffler.  The scrutiny has even drawn more attention to another surprisingly well-timed trade by Senator Burr.

In his essay, Shill takes up the issue from a policy perspective, looking at how we ought to regulate Congressional Securities Trading.  He draws from ordinary securities regulation and suggest pulling over the trading plan approach and short-swing profit prohibition we use for corporate executives.  This approach should help manage ordinary securities transactions by members of Congress and their staff.  He also advocates for limiting Congressional investing to U.S. index funds and treasuries.  This would reduce the incentive to favor one market participant over another.

The proposed reforms would be a substantial improvement over the status quo.  We should not have legislators with significant financial incentives to favor one company over another when making law and setting policy.  We should also not subsidize public service by tolerating Congressional trading on Congressional information.

Of course, we'll still face some implementation challenges.  When and how would we require newly-elected and currently-serving officials to liquidate existing portfolios?  What kinds of exceptions would we make for private-company investments where no ready, liquid market exists?  These implementation challenges strike me as mild compared to the benefits.

And Congressional adoption of the proposal would certainly yield substantial benefits.  Although difficult to quantify, two broad benefits seem clear. First, adopting the proposal would generally increase confidence in government's integrity.  As we're seeing with the pandemic, public trust in public officials can shift how society responds in times of collective crisis.  

Allowing federal officials to trade securities generates real harm, confusion, and suspicion.  Consider the hubbub over Trump's indirect ownership of a tiny stake in drug-maker Sanofi.  Some have seized on the small, indirect interest to contend that he now hypes a particular drug for personal gain.  A public-trust-focused regime limiting all elected officials to only broad index funds and U.S. Treasuries would likely cut down on the fear that officials recommend particular things to the public because of their economic interests.  To be clear, it strikes me as extremely unlikely that the President now hypes the drug because of his minuscule ownership stake.  The much likelier explanation is simply disordered magical thinking.

Many politicians have been targeted by similar attacks. This particular type of ill-informed charge has also been leveled at Senator Elizabeth Warren.  One deeply misleading headline claimed she "invested in private prisons" before going on to explain that she owned a Vanguard index fund.  It would be better to remove this line of attack entirely by sharply limiting the ways public officials invest.

Limiting Congressional ownership would also advance another vital national interest by increasing confidence in American securities markets.  Our ability to attract capital and move it from investors to the real economy depends on confidence in the system.  If investors fear that Congressional insiders have a leg up, they may not be as likely to participate in our markets.

As Congress considers how to regulate on these issues in the future, it should pay close attention to Shill's recommendations.

April 9, 2020 in Financial Markets, Securities Regulation, White Collar Crime | Permalink | Comments (1)

Sunday, March 29, 2020

Master Accounts at the Fed: An Arcane But Highly Important Issue

In a December 2018 post (here), I noted that “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.” 

This past week, a federal district court judge granted the Federal Reserve Bank of New York’s (FRBNY) motion to dismiss The Narrow Bank’s (TNB) complaint in TNB USA Inc. v. Federal Reserve Bank of New York (USDC SDNY) (here).  In light of this recent opinion, I wanted to reiterate my invitation to BLPB readers to think about seemingly technical, arcane issues such as who gets an account at the Fed – a master account is essentially a bank account at a regional Federal Reserve Bank enabling access to the Federal Reserve Payments System –  and how such decisions should be made. The importance of this critical policy issue is only set to increase.  A few months ago, the Federal Reserve announced plans to develop FedNow Service (here).

TNB is a financial institution with an innovative business model.  Professor Peter-Conti Brown has written about it (here).  It’s model is essentially this: open an account at the Federal Reserve, deposit customer funds (financial institution customers), receive interest on the funds deposited at the Fed’s Interest on Excess Reserves Rate (“IOER rate”), keep a slice of the gains, and pay out the remainder to customers.  The Federal Reserve is a risk-free counterparty, but it is not limited to paying the risk-free interest rate.  So, TNB has a really clever business model.  TNB’s Chairman & CEO, James McAndrews spent 28 years working in the Federal Reserve System (19 at the FRBNY).  Its Board members also includes two highly respected finance professors: Gary Gorton at Yale University and Darrell Duffie at Stanford University.         

TNB received a “temporary Certificate of Authority” from the Connecticut Department of Banking, contingent on several things, including “that the FRBNY would open a master account for TNB.”  As the opinion explains, the FRBNY has not actually denied TNB’s application for a master account…though at least 18 months have passed since TNB applied for it!  However, as the opinion notes, “the FRBNY’s delay is not TNB’s cause of action.”  Hence, United States District Judge Andrew L. Carter, Jr. granted the FRBNY’s motion to dismiss, writing that “TNB lacks standing to pursue its claim, which is also constitutionally and prudentially unripe.”    

The decision strikes me as technically correct, and it will be interesting to see TNB’s strategy from here.  I’m not taking a position on whether TNB should/should not have a master account without additional research and thought.  However, what I am taking a position on is the importance of greater public debate about the underlying policy questions surrounding who does/doesn’t get an account at the Fed. 

In Regulating the Invisible: The Case of Over-the-Counter Derivatives (here), I noted that ICE US Trust LLC, an uninsured NY trust company clearing credit default swaps – controversial financial instruments that had just played a huge role in the financial crisis of 2007-08 – had been granted membership in the Federal Reserve System in 2009 (here).  ICE Trust was essentially the predecessor of ICE Clear Credit, which essentially has the monopoly on CDS clearing today.  Dodd-Frank’s Title VIII explicitly provides the Federal Reserve with the ability to provide accounts and services to clearinghouses designated as systemically important under that title.  But prior to Dodd-Frank, I think that granting ICE Trust membership in the Federal Reserve System was a questionable decision.   

The Fed obviously has its hands full at the moment with much more urgent issues.  In the future, however, it should provide additional clarity about the granting of master accounts and the general timing of such decisions.   

March 29, 2020 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Sunday, February 16, 2020

Amazon's #1 New Release in Banking Law: Zaring's The Globalized Governance of Finance

What’s the #1 new release in Banking Law on Amazon?  I’m glad you asked!  It’s Professor David Zaring’s first book, The Globalized Governance of Finance (Cambridge University Press).  In 2008, Zaring joined Wharton's Legal Studies and Business Ethics Department as an assistant professor.  At the time, I was a PhD student in the Department and also focused on banking law.  So, it was really exciting for me to have a banking law scholar join us and I’m thrilled to now have a chance to highlight his new book.  My copy is on its way from Amazon, so for now, I’ll share Zaring’s description of his book and my own thoughts with BLPB readers soon!

The book pulls together work I’ve done on the regulatory networks – the Basel Committee, IOSCO, IAIS, e.g., – that have become the global taste for harmonizing financial regulation.  I think the regimes, and their relative bindingness (especially Basel), are interesting in their own right, and they are also an interesting way of doing global governance, where the sine qua non is often thought to be a treaty enforced by a tribunal, a la the World Trade Organization. 

But in finance, you see neither of those things, and still robust oversight that American regulators, regardless of administration, seem to embrace.  Even as the Trump administration has pushed for changes in trade law, Randal Quarles of the Fed has been installed as chair of the Financial Stability Board, the network of networks that keeps everything moving.  The Obama administration tried to get a Basel-like process into its trade deals, and issued an executive order encouraging agencies to harmonize regulations.

Moreover, since the financial crisis, regulators have doubled down on these networks, adding political oversight from the G-20, a middle manager in the FSB, and standardizing notice and comment rulemaking at the network level.  That, I think, makes the whole scheme look increasingly like a cross-border bureaucracy.  After all, American agencies make policy through notice and comment rulemaking overseen by career regulators overseen by political leaders.  So too Basel, IOSCO, IAIS, and the other networks. 

February 16, 2020 in Books, Colleen Baker, Financial Markets | Permalink | Comments (0)

Friday, January 24, 2020

Transparency and Banking Supervision

On January 17, I headed to the University of Florida’s Warrington College of Business to be a discussant at the Huber Hurst Seminar.  A great event!  On the same day, Randal K. Quarles, the Vice Chair for Supervision (a position created by Dodd-Frank) and Governor of the Federal Reserve System gave a speech, Spontaneity and Order: Transparency, Accountability, and Fairness in Bank Supervision, at the 2020 American Bar Association Banking Committee Meeting.  Legal scholars have focused scant attention on bank supervision in the past, but this is starting to change.  It can be a challenging area to work in as Wharton Assistant Professor Peter Conti-Brown explains in The curse of confidential supervisory information.  Indeed, confidential supervisory information is protected from disclosure with criminal penalties.     

Bank regulation (which has received a bit more attention) and bank supervision, though linked concepts, are distinct.  Supervision “implements the regulatory framework.”  An important tension exists in banking supervision.  In his speech, Quarles explains that “We have a public interest in a confidential, tailored, rapid-acting and closely informed system of bank supervision.  And we have a public interest in all governmental processes being fair, predictable, efficient, and accountable.  How do we square this circle?”  It’s an important question.  Quarles terms it “a complex and consequential issue that, for decades now, has received far too little attention from practitioners, academics, policymakers and the public.” 

Quarles’ speech makes several suggestions regarding “some obvious and immediate ways that supervision can become more transparent, efficient, and effective.”  To improve transparency, he makes three proposals: 1) “create a word-searchable database on the Board’s website with the historical interpretations by the Board and its staff of all significant rules,” 2) “putting significant supervisory guidance out for public comment,” and 3) “submitting significant supervisory guidance to Congress for purposes of the Congressional Review Act.”

All three proposals strike me as reasonable.  What would be the drawback of the Board making interpretations of significant rules transparent and easily accessible?  Regulatory guidance, as opposed to rules, is not legally binding.  Yet in reality, there may be no difference in practice.  I’d welcome both additional public comment on significant supervisory guidance and review by Congress.  However, it’s also critical that a variety of stakeholders, especially academics, policymakers, and the public, actively participate in these processes.                       

January 24, 2020 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Tuesday, December 24, 2019

Did A Child Die to Make Your Smartphone, Tablet, Laptop, or Car?

Happy holidays! Billions of people around the world are celebrating Christmas or Hanukah right now. Perhaps you’re even reading this post on a brand new Apple Ipad, a Microsoft Surface, or a Dell Computer. Maybe you found this post via a Google search. If you use a product manufactured by any of those companies or drive a Tesla, then this post is for you. Last week, a nonprofit organization filed the first lawsuit against the world’s biggest tech companies alleging that they are complicit in child trafficking and deaths in the cobalt mines of the Democratic Republic of Congo. Dodd-Frank §1502 and the upcoming EU Conflict Minerals Regulation, which goes into effect in 2021, both require companies to disclose the efforts they have made to track and trace "conflict minerals" -- tin, tungsten, tantalum, and gold from the DRC and surrounding countries. DRC is one of the poorest nations in the world per capita but has an estimated $25 trillion in mineral reserves (including 65% of the world's cobalt). Armed militia use rape and violence as a weapon of war in part so that they control the mineral wealth. The EU and US regulators believe that consumers might make different purchasing decisions if they  knew whether companies source their minerals ethically. The EU legislation, notably, does not limit the geography to the DRC, but instead focuses on conflict zones around the world.

If you’ve read my posts before, then you know that I have written repeatedly about the DRC and conflict minerals. After visiting DRC for a research trip in 2011, I wrote a law review article and co-filed an amicus brief during the §1502 litigation arguing that the law would not help people on the ground. I have also blogged here about legislation to end the rulehere about the EU's version of the rule, and here about the differences between the EU and US rule. Because of the law and pressure from activists and socially-responsible investors, companies, including the defendants, have filed disclosures, joined voluntary task forces to clean up supply chains, and responded to shareholder proposals regarding conflict minerals for years. I will have more on those initiatives in my next post. Interestingly, cobalt, the subject of the new litigation, is not a “conflict mineral” under either the U.S. or E.U. regulation, although, based on the rationale behind enacting Dodd-Frank §1502, perhaps it should have been.  Nonetheless, in all of my research, I never came across any legislative history or materials discussing why cobalt was excluded.

The litigation makes some startling claims, but having been to the DRC, I’m not surprised. I’ve seen children who should have been in school, but could not afford to attend, digging for minerals with shovels and panning for gold in rivers. Although I was not allowed in the mines during my visit because of a massacre in the village the night before, I could still see child laborers on the side of the road mining. If you think mining is dangerous here in the U.S., imagine what it’s like in a poor country with a corrupt government dependent on income from multinationals.

The seventy-nine page class action Complaint was filed filed in federal court in the District of Columbia on behalf of thirteen children claiming: (1) a violation of the Trafficking Victims Protection Reauthorization Act of 2008; (2) unjust enrichment; (3) negligent supervision; and (4) intentional infliction of emotional distress. I’ve listed some excerpts from the Complaint below (hyperlinks added):

Defendants Apple, Alphabet, Dell, Microsoft, and Tesla are knowingly benefiting from and providing substantial support to this “artisanal” mining system in the DRC. Defendants know and have known for a significant period of time the reality that DRC’s cobalt mining sector is dependent upon children, with males performing the most hazardous work in the primitive cobalt mines, including tunnel digging. These boys are working under stone age conditions for paltry wages and at immense personal risk to provide cobalt that is essential to the so-called “high tech” sector, dominated by Defendants and other companies. For the avoidance of doubt, every smartphone, tablet, laptop, electric vehicle, or other device containing a lithium-ion rechargeable battery requires cobalt in order to recharge. Put simply, the hundreds of billions of dollars generated by the Defendants each year would not be possible without cobalt mined in the DRC….

Plaintiffs herein are representative of the child cobalt miners, some as young as six years of age, who work in exceedingly harsh, hazardous, and toxic conditions that are on the extreme end of “the worst forms of child labor” prohibited by ILO Convention No. 182. Some of the child miners are also trafficked. Plaintiffs and the other child miners producing cobalt for Defendants Apple, Alphabet, Dell, Microsoft, and Tesla typically earn 2-3 U.S. dollars per day and, remarkably, in many cases even less than that, as they perform backbreaking and hazardous work that will likely kill or maim them. Based on indisputable research, cobalt mined in the DRC is listed on the U.S. Department of Labor’s International Labor Affairs Bureau’s List of Goods Produced with Forced and Child Labor.

When I mentioned above that I wasn’t surprised about the allegations, I mean that I wasn’t surprised that the injuries and deaths occur based on what I saw during my visit to DRC. I am surprised that companies that must perform due diligence in their supply chains for conflict minerals don’t perform the same kind of due diligence in the cobalt mines. But maybe I shouldn't be surprised at all, given how many companies have stated that they cannot be sure of the origins of their minerals. In my next post, I will discuss what the companies say they are doing, what they are actually doing, and how the market has reacted to the litigation. What I do know for sure is that the Apple store at the mall nearest to me was so crowded that people could not get in. The mall also has a Tesla showroom and people were gearing up for test drives. Does that mean that consumers are not aware of the allegations? Or does that mean that they don’t care?  I’ll discuss that in the next post as well.

Wishing you all a happy and healthy holiday season.

December 24, 2019 in Compliance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, Litigation, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)

Tuesday, October 29, 2019

Major Banks and Asset Managers Want More Regulation for Clearinghouses

“Big banks do not usually gang up to demand more financial regulation, least of all with asset managers in tow.”  That’s the first sentence of Gillian Tett’s recent piece, Banks are right to say that clearing houses are ripe for reform, in the Financial Times (here – subscription required).  Her title and lead sentence are spot on.  That should be worrisome to all.  Tett’s piece centers on a white paper, A Path Forward for CCP Resilience, Recovery, and Resolution (here), released on October 24, 2019, by nine financial institutions (Allianz Global Investors, BlackRock, Citi, Goldman Sachs, Societe Generale, JPMorgan Chase & Co., State Street, T.RowePrice, and Vanguard).  Tett states: “the current status quo around clearing houses is worrying.”  As BLPB readers know, I agree. 

The white paper calls for “enhanced risk management standards and aligning incentives through requirements for meaningful CCP [clearinghouse] own capital for covering both default and non-default losses and recapitalization resources.” (p.1)  It highlights the incentive misalignment present in many clearinghouses given their publicly-traded, shareholder ownership status: “Although CCP shareholders take 100% of the returns a CCP earns from clearing revenues, they bear only a small portion of the losses the CCP incurs as a result of a default.” (p.10)  Many of its recommendations are not new, but some are.  These include: a clearing member voting mechanism in recovery; ex-ante provision of financial resources for resolution; and, the possibility of “long-term debt that could be bailed in for recapitalization.” (p.1)        

While I generally agree with the white paper’s recommendations, I don’t think they go far enough.  As I’ve posted before on clearinghouses (here, here, here, here) and will do so in the future, I’ll just highlight a few things.  First, while increasing clearinghouse capital is a step in the right direction towards better incentive alignment, it’s only a start.  The ownership structure itself of these institutions needs to be addressed.  If clearinghouses were owned by their members – as they were historically – the incentive misalignment between members and owners would largely diminish.  However, as I’ve noted in Incomplete Clearinghouse Mandates (here), even if clearinghouses are all member-owned, this doesn’t solve the problem of who ultimately holds the extreme tail risk of these institutions.  In a previous post (here), I pointed out parallels between clearinghouses and the residential mortgage giants, Fannie Mae and Freddie Mac, whose exit from government ownership is still pending more than a decade after the financial crisis.  Let’s not go down the same route in the clearinghouse space.  

Second, the white paper argues that clearinghouses should generally be responsible for non-default losses.  I agree.  However, as I’ve noted before, both types of losses could occur in close proximity.  Hence, it could be very difficult in practice to separate them out to allocate any losses in the case of investor-owned clearinghouses.  Finally, as I write about in forthcoming research, clearinghouses are self-regulatory organizations (SROs).  Presumably, they would be acting in a regulatory capacity in a recovery scenario as it is arguably the analog to government action in a resolution scenario.  Exchanges, as SROs, are generally entitled to regulatory immunity for actions taken in a regulatory capacity (for more on exchange immunity, see here).  At the same time, the recovery of an investor-owned, distressed clearinghouse is also inherently a commercial endeavor.  It is fundamentally about the survival of the clearinghouse, and potentially the exchange group structure itself.  So, it could be very difficult in practice to separate regulatory from commercial action for purposes of regulatory immunity.  Given this consideration, investor-owned clearinghouses could have less incentive to be circumspect about recovery decisions that might adversely impact members.      

Tett refers to a “trenchant letter” from the Systemic Risk Council to the Financial Stability Board “demanding action” on clearinghouses.  Paul Tucker, who chairs the Council, is the former Deputy Governor of the Bank of England.  In closing, I recommend that readers interested in understanding more about the centrality of clearinghouses in financial markets read a 2014 speech by Tucker: Are Clearing Houses the New Central Banks?  If the answer to Tucker's question is yes, that says it all!          

October 29, 2019 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Saturday, September 7, 2019

Beyond Bitcoin: Leveraging Blockchain to Benefit Business and Society

Have you ever wanted to learn the basics about blockchain? Do you think it's all hype and a passing fad? Whatever your view, take a look at my new article, Beyond Bitcoin: Leveraging Blockchain to Benefit Business and Society, co-authored with Rachel Epstein, counsel at Hedera Hashgraph.  I became interested in blockchain a year ago because I immediately saw potential use cases in supply chain, compliance, and corporate governance. I met Rachel at a Humanitarian Blockchain Summit and although I had already started the article, her practical experience in the field added balance, perspective, and nuance. 

The abstract is below:

Although many people equate blockchain with bitcoin, cryptocurrency, and smart contracts, the technology also has the potential to transform the way companies look at governance and enterprise risk management, and to assist governments and businesses in mitigating human rights impacts. This Article will discuss how state and non-state actors use the technology outside of the realm of cryptocurrency. Part I will provide an overview of blockchain technology. Part II will briefly describe how public and private actors use blockchain today to track food, address land grabs, protect refugee identity rights, combat bribery and corruption, eliminate voter fraud, and facilitate financial transactions for those without access to banks. Part III will discuss key corporate governance, compliance, and social responsibility initiatives that currently utilize blockchain or are exploring the possibilities for shareholder communications, internal audit, and cyber security. Part IV will delve into the business and human rights landscape and examine how blockchain can facilitate compliance. Specifically, we will focus on one of the more promising uses of distributed ledger technology -- eliminating barriers to transparency in the human rights arena thereby satisfying various mandatory disclosure regimes and shareholder requests. Part V will pose questions that board members should ask when considering adopting the technology and will recommend that governments, rating agencies, sustainable stock exchanges, and institutional investors provide incentives for companies to invest in the technology, when appropriate. Given the increasing widespread use of the technology by both state and non-state actors and the potential disruptive capabilities, we conclude that firms that do not explore blockchain’s impact risk obsolescence or increased regulation.

Things change so quickly in this space. Some of the information in the article is already outdated and some of the initiatives have expanded. To keep up, you may want to subscribe to newsletters such as Hunton, Andrews, Kurth's Blockchain Legal Resource. For more general information on blockchain, see my post from last year, where I list some of the videos that I watched to become literate on the topic. For additional resources, see here and here

If you are interested specifically in government use cases, consider joining the Government Blockchain Association. On September 14th and 15th,  the GBA is holding its Fall 2019 Symposium, “The Future of Money, Governance and the Law,” in Arlington, Virginia. Speakers will include a chief economist from the World Bank and banking, political, legal, regulatory, defense, intelligence, and law enforcement professionals from around the world.  This event is sponsored by the George Mason University Schar School of Policy and Government, Criminal Investigations and Network Analysis (CINA) Center, and the Government Blockchain Association (GBA). Organizers expect over 300 government, industry and academic leaders on the Arlington Campus of George Mason University, either in person or virtually. To find out more about the event go to: http://bit.ly/FoMGL-914.

Blockchain is complex and it's easy to get overwhelmed. It's not the answer to everything, but I will continue my focus on the compliance, governance, and human rights implications, particularly for Dodd-Frank and EU conflict minerals due diligence and disclosure. As lawyers, judges, and law students, we need to educate ourselves so that we can provide solid advice to legislators and business people who can easily make things worse by, for example, drafting laws that do not make sense and developing smart contracts with so many loopholes that they cause jurisdictional and enforcement nightmares.

Notwithstanding the controversy surrounding blockchain, I'm particularly proud of this article and would not have been able to do it without my co-author, Rachel, my fantastic research assistants Jordan Suarez, Natalia Jaramillo, and Lauren Miller from the University of Miami School of Law, and the student editors at the Tennessee Journal of Business Law. If you have questions or please post them below or reach out to me at mweldon@law.miami.edu. 

 

 

September 7, 2019 in Compliance, Conferences, Contracts, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, Law Reviews, Lawyering, Legislation, Marcia Narine Weldon, Securities Regulation, Shareholders, Technology | Permalink | Comments (0)

Friday, May 10, 2019

Managing Compliance Across Borders Conference at the University of Miami- June 26-28

 

 

 

Join me in Miami, June 26-28.

 

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Managing Compliance Across Borders

June 26-28, 2019

Managing Compliance Across Borders is a program for world-wide compliance, risk and audit professionals to discuss current developments and hot topics (e.g. cybersecurity, data protection, privacy, data analytics, regulation, FCPA and more) affecting compliance practice in the U.S., Canada, Europe, and Latin America. Learn more

See a Snapshot: Who Will Be There?
You will have extensive networking opportunities with high-level compliance professionals and access to panel discussions with major firms, banks, government offices and corporations, including:

  • BRF Brazil
  • Carnival Corporation
  • Central Bank of Brazil
  • Endeavor
  • Equal Employment Opportunity Commission
  • Eversheds Sutherland
  • Fidelity Investments
  • Hilton Grand Vacations
  • Ingram Micro
  • Jones Day
  • Kaufman Rossin
  • LATAM Airlines
  • Laureate Education, Inc.

 

  • MasterCard Worldwide
  • MDO Partners
  • Olin Corporation
  • PwC
  • Royal Caribbean Cruises
  • Tech Data
  • The SEC
  • TracFone Wireless
  • U.S. Department of Justice
  • Univision
  • UPS
  • XO Logistics
  • Zenith Source

 

Location
Donna E. Shalala Student Center
1330 Miller Drive
Miami, FL 33146

 

CLE Credit
Upwards of 10 general CLE credits in ethics and technology applied for with The Florida Bar

 

Program Fee: $2,500 $1,750 until June 1 
Use promo code “MCAB2019” for discount 

Non-profit and Miami Law Alumni discounts are available, please contact:
Hakim A. Lakhdar, Director of Professional Legal Programs, for details

Learn More: Visit the website for updated speaker information, schedule and topic details.

This program is designed and presented in collaboration with our partner in Switzerland

University of St. Gallen

 

 

 

 

 

 

 

May 10, 2019 in Compliance, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, International Business, Law Firms, Law School, Marcia Narine Weldon, White Collar Crime | Permalink | Comments (0)

Thursday, November 29, 2018

Observations from a Financial Regulation Academic on Carreyrou's Bad Blood

I’d like to thank the Business Law Prof Blog for the opportunity to be a guest blogger!  In this first post, I build on a subject of previous posts (here, here, and here): Theranos, a now defunct Silicon Valley health-care start-up.

I rely heavily on the Financial Times to follow developments in one of my main research areas: financial market clearing and settlement (I’ll plan to report next week on the upcoming December 4th meeting of the Market Risk Advisory Committee, sponsored by CFTC Commissioner Rostin Behnam).  The FT recently announced that Wall Street Journal investigative reporter John Carreyrou’s book, Bad Blood: Secrets and Lies in a Silicon Valley Startup, had been named the FT/McKinsey Business Book of the Year 2018.  Having immensely enjoyed reading past winners, I wasted no time in ensuring that Amazon Prime speedily delivered it to my doorstep. 

Bad Blood is a riveting tale of Theranos’ spectacular rise and fall, and well-worth the reader’s time.  A fun fact is that a pathologist blogger, Adam Clapper (founder of the former Pathology Blawg), tipped Carreyrou onto the Theranos story (Chapter 19).  Additionally, in the months after Bad Blood’s publication, its founder and CEO, Elizabeth A. Holmes, and former COO, Ramesh “Sunny” Balwani, were charged by the Justice Department with wire fraud.    

I know little about the health-care industry.  Yet in reading Bad Blood, I was struck by links to and concerns shared with the financial industry (an area about which I know more).  Below, I make a few observations and invite reader comments on their importance in these and other industries.

Post-financial crisis, rock-bottom interest rates acted as a “key ingredient” to a new Silicon Valley boom (p.82).  Similarly, these low rates have also been a key ingredient for the many years of increasing stock market prices post-financial crisis.  Indeed, recent equity market declines made at least a temporary rebound yesterday after comments by Federal Reserve Chairman Jerome Powell at the Economic Club of New York.     

The increasing expansion of private markets enables companies such as Theranos to “avoid the close scrutiny” (p.178) to which public companies are subject (nevertheless, Theranos and Holmes settled fraud charges with the SEC).  Given current regulatory structures, it also risks severely limiting retail investment opportunities.  And it adversely impacts financial journalists’ access to information!  

When I teach Banking and Financial Institutions Law, the term “regulation-induced innovation” tends to amuse students.  The Theranos tale demonstrates, however, that such practices aren’t a laughing matter.  For example, its business strategies appeared to include: maneuvering in regulatory “gray zones” between the FDA and Centers for Medicare and Medicaid Services (p.88), exploiting “gap[s] spawned by outdated statutes” (p.125), and “operat[in]g in a regulatory no-man’s-land” (p.260).  Such practices can be troublesome enough in financial markets.  However, in Theranos’ case, the stakes (patient health) were much higher.    

Finally, who doesn’t love a good story?  Carreyrou, a two-time Pulitzer Prize-winning journalist, is an expert storyteller.  His portrayal of Holmes suggests that she too profoundly understood the power of stories, and that she had a bewitching talent for telling them.  Clearly, untruthful, non-fictional narratives are generally unethical and, depending upon the context, might also be illegal.  However, taking a cue from Holmes on the importance of stories and honing one's ability to tell them could assist financial market policymakers.  Indeed, several years ago, the FT’s Gillian Tett wrote an opinion piece entitled, “Central bank chiefs need to master the art of storytelling.”  Enhanced storytelling capabilities could also assist academics researching financial market regulation.  For both, the ability to compellingly communicate with the public about issues in financial markets and their broad-based importance is critical.  Even so, constructing a fascinating narrative about clearing and settlement along the lines of Bad Blood would be no small feat!  

November 29, 2018 in Books, Current Affairs, Entrepreneurship, Financial Markets | Permalink | Comments (4)

Sunday, September 16, 2018

How I Became (Semi) Literate About Distributed Ledger and Blockchain Technology

I knew it would be impossible. There was no way to relay my excitement about the potential of blockchain technology in a concise way to lawyers and law students last Friday at the Connecting the Threads symposium at the University of Tennessee School of Law. I didn't discuss cryptocurrency or Bitcoin other than to say that I wasn't planning to discuss it. Still, there wasn't nearly enough time for me to discuss all of the potential use cases. I did try to make it clear that it's not a fad if IBM has 1500 people working on it, BITA has hundreds of logistics and freight companies signed up to explore possibilities, and the World Bank, OECD, and United Nations have studies and pilot programs devoted to it. As a former supply chain person, compliance officer, and chief privacy officer, I'm giddy with excitement about everything related to distributed ledger technology other than cryptocurrency. You can see why when you read my law review article in a few months in Transactions.

I've watched over 100 YouTube videos (many of them crappy) and read dozens of articles. I go to Meetups and actually understand what the coders and developers are saying (most of the time). A few students and practitioners asked me how I learned about DLT/blockchain. First, see herehere, here, and here for my prior posts listing resources and making the case for learning the basics of the technology. What I list below adds to what I've posted in the past.

Here are some of the podcasts I listen to (there are others, of course):

1) The Decrypting Crypto Podcast 

2) Block that Chain

3) Block and Roll

4) Blockchain Innovation

Here are some of the videos that I watched (that I haven't already linked to in past posts):

1) Using Blockchains for Supply Chains

2) IBM and Maersk demo: Cross-border supply chain solution on blockchain

3) How to Activate a Blockchain with IBM (Demo)

4) Examples of Blockchain Changing Every Day Life

5) 19 Industries The Blockchain Will Disrupt

6) Vitalek Buterin Explains Ethereum

7) In Conversation with Vitalik Buterin, Justin Drake and Karl Floersch (Ethereum Foundation)

8) Fireside Chat With Vitalek Buterin

9) Blockchain and Food Safety With IBM and Walmart

10) Applying Blockchain Technology to Customs Declarations

11) Your 31st Human Right Guaranteed by Blockchain

12) How Blockchain Can Transform India

13) Blockchain, A Tool for Social Good

14) Blockchain for Social Impact

15) Bitcoin, Blockchain, and the Law

16) Blockchain and the Law: What Lawyers (And their Clients) Need to Know

17) Blockchain and the Law: The Rule of Code

18) The Blockchain: A Revolution You Need to Understand

19) Vitalik Buterin on Ethereum, Bitcoin, and Scaling

20) Exploring Blockchain Use Cases: Microsoft Azure

21) How the Blockchain is Changing Money and Business

22) Blockchain and Corporate Law

23) Blockchain Innovation in Law and Corporate Governance

24) Changing the Legal Game With Blockchain

25) Blockchain and Smart Contracts

26) Code is Not the Law: Blockchain and Artificial Intelligence

27) Linklaters Blockchain Legal & Regulation Panel

28) How Do You Square Blockchain with Privacy Laws

29) Jeff Jonas on GDPR and Integrating IBM Blockchain with Senzing at IBM Think 2018

30) CPDP 2018: BLOCKCHAIN AND DATA PROTECTION: CHALLENGES AND OPPORTUNITIES

31) John McAfee: about blockchain, bitcoins and cyber security

There are dozens more, but this should be enough to get you started. Remember, none of these videos or podcasts will get you rich from cryptocurrency. But they will help you become competent to know whether you can advise clients on these issues. 

 

September 16, 2018 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, Law Firms, Law Reviews, Law School, Lawyering, Marcia Narine Weldon | Permalink | Comments (1)

Thursday, August 16, 2018

Elizabeth Warren's Accountable Capitalism Act and Benefit Corporations

On Tuesday, Elizabeth Warren penned an article in The Wall Street Journal entitled Companies Shouldn’t Be Accountable Only to Shareholders: My new bill would require corporations to answer to employees and other stakeholders as well.

The article announced and promoted her Accountable Capitalism Act. With Republicans in control of Congress and the White House, Warren’s bill almost certainly doesn’t stand a chance of passing in the short-term.

Yet, because the bill draws on benefit corporation governance, a main scholarly interest of mine, and because it may foreshadow moves by a Democrat-controlled Congress in the future, I decided to read the 28-page bill and report here briefly.

Portions of the bill summarized:

  • As has been widely reported, the bill only applies to companies with more than $1 billion in revenue.
  • The bill seeks to establish an “Office of United States Corporations” within the Department of Commerce, which will review, grant, and rescind charters for the large companies covered by the bill.
  • The bill takes language from benefit corporation law and requires that U.S. Corporations must have a purpose to serve a “general public benefit” – “a material positive impact on society resulting from the business and operations of a United States corporation, when taken as a whole.” This purpose is in addition to any purpose in the company’s state filing.
  • The governance requirements are a mix of the Model Benefit Corporation Legislation and Delaware version of benefit corporation law – requiring both that directors balance the “pecuniary interests of shareholders” with the "best interests of persons that are materially affected by the conduct of the United States corporation” (drawn from Delaware) and that directors consider a litany of stakeholders in their decisions (including shareholders, employees, customers, community, local and global environment - drawn from the Model). Only shareholders with 2%+ of the shares can sue derivatively.
  • Employees must elect 40%+ of the board of directors.
  • 75%+ of shareholders and 75%+ of directors must approve political spending of over $10,000 on a single candidate.

My brief thoughts:

  • This is a lot of press for benefit corporations.
  • The press may not be good for benefit corporation proponents who have been largely able to pitch to both sides of the political aisle in their state bills. B Lab co-founder Jay Coen Gilbert has already written an article trying to promote what he sees as the bipartisan nature of benefit corporations: Elizabeth Warren, Republicans, CEOs & BlackRock's Fink Unite Around 'Accountable Capitalism'
  • I have noted in my scholarly work how the state benefit corporation laws fail to align the purported “general public benefit” corporate purpose with effective accountability mechanisms. This bill, however, takes one step toward aligning company purpose and accountability by requiring that employees elect 40%+ of the board. Of course, that still leaves out many other stakeholders that directors are supposed to consider, and shareholders are still the only stakeholders with the ability to sue derivatively. A better solution is to have stakeholder representatives who elect the entire board and also possess, collectively, the right to sue derivatively. This stakeholder representative framework, articulated in my 2017 American Business Law Journal article, has the benefit of keeping the board united on a common goal – instead of fighting on behalf of the single stakeholder group who elected them – while also being held to account by representatives of all major stakeholder groups, collectively.
  • Suggesting that benefit corporation law become mandatory will likely not be popular among many conservatives. See, e.g., this early response in the National Review: Elizabeth Warren’s Batty Plan to Nationalize . . . Everything. Currently, a fair response to conservative critics of state benefit corporation laws is "if businesses do not like the benefit corporation framework, they can just choose to be a traditional corporation." This bill attempts to remove that choice for large companies. 

(My co-blogger Joshua Fershee may be horrified to learn that the bill purports to apply not only to corporations, but also to LLCs, even though they use the term "U.S. Corporations" throughout).   

August 16, 2018 in Business Associations, Corporations, CSR, Financial Markets, Haskell Murray, Social Enterprise | Permalink | Comments (7)

Tuesday, January 9, 2018

Back to Reality and (Mostly) Staying the Course on Shareholder Proposals

The new semester is upon us, and AALS (as it tends to) ran right into the new semester.  Joan Heminway provided a nice overview of some of her activities, including her recognition as an outstanding mentor by the Section on Business Associations, and it was a pleasure to see her recognized for her tireless and consistent efforts to make all of us better.  Congratulations, Joan, and thank you! 

I, too, had a busy conference, with most of it condensed to Friday and Saturday. (As a side note, it was pretty great to run along the water in 55-65 degree weather. As much as I love New York and appreciate San Francisco and DC, I'd be quite content with AALS moving between San Diego and New Orleans.)  I spoke on a panel with my co-bloggers, as Joan noted, about shareholder proposals, and I spoke on a panel about the green economy and sustainability, which was also fun.  It's nice when I am able to spend some time with a focus on my two main areas of research. 

As to our panel on shareholder proposals, I thought I'd share a few of my thoughts.  First, as I have explained in the past, I am not anti-activist investor, even though I often think their proposals are wrong headed. I think shareholder (and hedge fund) activist can add value, even when they are wrong, as long as directors continue to exercise their judgment and lead the firm appropriately.   

Second, although I tend to have a bias for staying the course and leaving many laws and regulations alone, I am open to some changes for shareholder proposals. The value of the current system (especially one that has been in place for some time) is that everyone knows the rules, which means there is some level of efficiency for all the players.  

That said, the threshold for shareholder proposals has been in places since the 1950s.  The Financial Choice Act looks to move the proxy threshold from $2,000 and one-year holdings to a 1%/three-year hurdle.  That is a pretty big move. Updating the $2,000 threshold from 1960 would mean raising the threshold to around $16,000, so a move to what can be millions may be too much.  But $16,000 (basically updating for inflation), would make some sense to me, too.  Anyway, just a few simple thoughts to start the year. Hope your classes are starting well.  

January 9, 2018 in Corporations, Financial Markets, Joan Heminway, Joshua P. Fershee, Securities Regulation, Shareholders | Permalink | Comments (2)

Wednesday, October 11, 2017

Call for Proposals: Organizing, Deploying & Regulating Capital in the U.S.

From our friend and BLPB colleague, Anne Tucker, following is nice workshop opportunity for your consideration: 

Dear Colleagues,

We (Rob Weber & Anne Tucker) are submitting a funding proposal to host a works-in-progress workshop for 4-8 scholars at Georgia State University College of Law, in Atlanta, Georgia in spring 2018 [between April 16th and May 8th].  Workshop participants will submit a 10-15 page treatment and read all participant papers prior to attending the workshop.  If our proposal is accepted, we will have funding to sponsor travel and provide meals for participants. Interested parties should email amtucker@gsu.edu on or before November 15th with a short abstract (no more than 500 words) of your proposed contribution that is responsive to the description below. Please include your name, school, and whether you will require airfare, miles reimbursement and/or hotel. We will notify interested parties in late December regarding the funding of the workshop and acceptance of proposals.  Please direct all inquiries to Rob Weber (mailto:rweber@gsu.edu) or Anne Tucker (amtucker@gsu.edu).

Call for Proposals: Organizing, Deploying & Regulating Capital in the U.S.

Our topic description is intentionally broad reflecting our different areas of focus, and hoping to draw a diverse group of participants.  Possible topics include, but are not limited to:

  • The idea of financial intermediation: regulation of market failures, the continued relevance of the idea of financial intermediation as a framework for thinking about the financial system, and the legitimating role that the intermediation theme-frame plays in the political economy of financial regulation.
  • Examining institutional investors as a vehicle for individual investments, block shareholders in the economy, a source of efficiency or inefficiency, an evolving industry with the rise of index funds and ETFs, and targets of SEC liquidity regulations.
  • The role and regulation of private equity and hedge funds in U.S. capital markets looking at regulatory efforts, shadow banking concerns, influences in M&A trends, and other sector trends.

This workshop targets works-in-progress and is intended to jump-start your thinking and writing for the 2018 summer.  Our goal is to provide comments, direction, and connections early in the writing and research phase rather than polishing completed or nearly completed pieces.  Bring your early ideas and your next phase projects.  We ask for a 10-15 page treatment of your thesis (three weeks before the workshop) and initial ideas to facilitate feedback, collaboration, and direction from participating in the workshop. Interested parties should email amtucker@gsu.edu on or before November 15th with a short abstract (no more than 500 words) of your proposed contribution that is responsive to the description below. Please include your name, school, and whether you will require airfare, miles reimbursement and/or hotel. We will notify interested parties in late December regarding the funding of the workshop and acceptance of proposals.  Please direct all inquiries to Rob Weber (rweber@gsu.edu) or Anne Tucker (amtucker@gsu.edu).

Thank you!

Anne & Rob

October 11, 2017 in Anne Tucker, Call for Papers, Corporate Finance, Financial Markets, Joshua P. Fershee, Law School, M&A, Research/Scholarhip, Securities Regulation, Writing | Permalink | Comments (0)

Do We Need Universal Proxies?

Earlier this week, I had the pleasure of hearing a talk about universal proxies from Scott Hirst, Research Director of Harvard’s Program on Institutional Investors.

By way of background, last Fall under the Obama Administration, the SEC proposed a requirement for universal proxies noting:

Today’s proposal recognizes that few shareholders can dedicate the time and resources necessary to attend a company’s meeting in person and that, in the modern marketplace, most voting is done by proxy.  This proposal requires a modest change to address this reality.  As proposed, each party in a contest still would bear the costs associated with filing its own proxy statement, and with conducting its own independent solicitation.  The main difference would be in the form of the proxy card attached to the proxy statement.  Subject to certain notice, filing, form, and content requirements, today’s proposal would require each side in a contest for the first time to provide a universal proxy card listing all the candidates up for election.

The Council of Institutional Investors favors their use explaining, “"Universal" proxy cards would let shareowners vote for the nominees they wish to represent them on corporate boards. This is vitally important in proxy contests, when board seats (and in some cases, board control) are at stake. Universal proxy cards would make for a fairer, less cumbersome voting process.” 

The U.S. Chamber of Commerce has historically spoken out against them, arguing:

Mandating a universal ballot, also known as a universal proxy card, at all public companies would inevitably increase the frequency and ease of proxy fights. Such a development has no clear benefit to public companies, their shareholders, or other stakeholders. The SEC has historically sought to remain neutral with respect to interactions between public companies and their investors, and has always taken great care not to implement any rule that would favor one side over the other. We do not understand why the SEC would now pursue a policy that would increase the regularity of contested elections or cause greater turnover in the boardroom.

I can't speak for the Chamber, but I imagine one big concern would be whether universal proxies would provide proxy advisors such as ISS and Glass Lewis even more power than they already have with institutional investors. When I asked Hirst about this, he did not believe that the level of influence would rise significantly.

Hirst’s paper provides an empirical study that supports his contention that reform would help mitigate some of the distortions from the current system. It’s worth a read, although he acknowledges that in the current political climate, his proposal will not likely gain much traction. The abstract is below:

Contested director elections are a central feature of the corporate landscape, and underlie shareholder activism. Shareholders vote by unilateral proxies, which prevent them from “mixing and matching” among nominees from either side. The solution is universal proxies. The Securities and Exchange Commission has proposed a universal proxy rule, which has been the subject of heated debate and conflicting claims. This paper provides the first empirical analysis of universal proxies, allowing evaluation of these claims.

The paper’s analysis shows that unilateral proxies can lead to distorted proxy contest outcomes, which disenfranchise shareholders. By removing these distortions, universal proxies would improve corporate suffrage. Empirical analysis shows that distorted proxy contests are a significant problem: 11% of proxy contests at large U.S. corporations between 2001 and 2016 can be expected to have had distorted outcomes. Contrary to the claims of most commentators, removing distortions can most often be expected to favor management nominees, by a significant margin (two-thirds of distorted contests, versus one-third for dissident nominees). A universal proxy rule is therefore unlikely to lead to more proxy contests, or to greater success by special interest groups.

Given that the arguments made against a universal proxy rule are not valid, the SEC should implement proxy regulation. A rule permitting corporations to opt-out of universal proxies would be superior to the SEC’s proposed mandatory rule. If the SEC chooses not to implement a universal proxy regulation, investors could implement universal proxies through private ordering to adopt “nominee consent policies.

October 11, 2017 in Corporate Governance, Corporate Personality, Corporations, Financial Markets, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)

Wednesday, October 4, 2017

Revising How to Handle Derivative Claims (or Not)

Yesterday, Professor Bainbridge posted "Is there a case for abolishing derivative litigation? He makes the case as follows: 

A radical solution would be elimination of derivative litigation. For lawyers, the idea of a wrong without a legal remedy is so counter-intuitive that it scarcely can be contemplated. Yet, derivative litigation appears to have little if any beneficial accountability effects. On the other side of the equation, derivative litigation is a high cost constraint and infringement upon the board’s authority. If making corporate law consists mainly of balancing the competing claims of accountability and authority, the balance arguably tips against derivative litigation. Note, moreover, that eliminating derivative litigation does not eliminate director accountability. Directors would remain subject to various forms of market discipline, including the important markets for corporate control and employment, proxy contests, and shareholder litigation where the challenged misconduct gives rise to a direct cause of action.

If eliminating derivative litigation seems too extreme, why not allow firms to opt out of the derivative suit process by charter amendment? Virtually all states now allow corporations to adopt charter provisions limiting director and officer liability. If corporate law consists of a set of default rules the parties generally should be free to amend, as we claim, there seems little reason not to expand the liability limitation statutes to allow corporations to opt out of derivative litigation.

I think he makes a good point.  And included in the market discipline and other measures that Bainbridge notes would remain in place to maintain director accountability, there would be the shareholder response to the market.  That is, if shareholders value derivative litigation as an option ex ante, the entity can choose to include derivative litigation at the outset or to add it later if the directors determine the lack of a derivative suit option is impacting the entity's value.  

Professor Bainbridge's post also reminded me of another option: arbitrating derivative suits.  A friend of mine made just such a proposal several years ago while we were in law school: 

There are a number of factors that make the arbitration of derivative suits desirable. First, the costs of an arbitration proceeding are usually lower than that of a judicial proceeding, due to the reduced discovery costs. By alleviating some of the concern that any D & O insurance coverage will be eaten-up by litigation costs, a corporation should have incentive to defend “frivolous” or “marginal” derivative claims more aggressively. Second, and directly related to litigation costs, attorneys' fees should be cut significantly via the use of arbitration, thus preserving a larger part of any pecuniary award that the corporation is awarded. Third, the reduced incentive of corporations to settle should discourage the initiation of “frivolous” or “marginal” derivative suits.

Andrew J. Sockol, A Natural Evolution: Compulsory Arbitration of Shareholder Derivative Suits in Publicly Traded Corporations, 77 Tul. L. Rev. 1095, 1114 (2003) (footnote omitted). 

Given the usually modest benefit of derivative suits, early settlement of meritorious suits, and the ever-present risk of strike suits, these alternatives are well worth considering.  

October 4, 2017 in ADR, Corporate Finance, Corporate Governance, Corporations, Delaware, Financial Markets, Joshua P. Fershee, Litigation, Securities Regulation | Permalink | Comments (3)

Thursday, August 10, 2017

University of Nebraska College of Law - Tenured/Chaired Position in International Trade and Finance

From an e-mail I received this week:

----------

The UNIVERSITY OF NEBRASKA COLLEGE OF LAW invites applications for lateral candidates for a tenured faculty position to hold the Clayton K. Yeutter Chair at the College of Law. This chaired faculty position will be one of four faculty members to form the core of the newly-formed, interdisciplinary Clayton K. Yeutter Institute for International Trade and Finance. The Institute also will include the Duane Acklie Chair at the College of Business, the Michael Yanney Chair at the College of Agriculture and Natural Resources, and the Haggart/Works Professorship for International Trade at the College of Law. The Yeutter Chair, along with the other three professors, will be expected to support the work and objectives and ensure the success of the Yeutter Institute. The Yeutter Chair will teach courses at the College of Law, including International Finance. Other courses may include Corporate Finance and/or other classes related to business and finance. More on the Yeutter Institute can be found at http://news.unl.edu/free-tags/clayton-k-yeutter-institute-of-international-trade-and-finance/.

Minimum Required Qualifications: J.D Degree or Equivalent; Superior Academic Record; Outstanding Record of Scholarship in International Finance and/or other areas related to international business; and Receipt of Tenure at an Accredited Law School. General information about the Law College is available at http://law.unl.edu/. Please fill out the University application, which can be found at https://employment.unl.edu/postings/51633, and upload a CV, a cover letter, and a list of references. The University of Nebraska-Lincoln is committed to a pluralistic campus community through affirmative action, equal opportunity, work-life balance, and dual careers. See http://www.unl.edu/equity/notice-nondiscrimination. Review of applications will begin on September 15, 2017 and continue until the position is filled. If you have questions, please contact Associate Dean Eric Berger or Professor Matt Schaefer at lawappointments@unl.edu.

August 10, 2017 in Financial Markets, Haskell Murray, International Business, International Law, Jobs, Law School | Permalink | Comments (0)

Sunday, August 6, 2017

The Inclusive Capitalism Shareholder Proposal

My latest paper, The Inclusive Capitalism Shareholder Proposal, 17 U.C. Davis Bus. L.J. 147 (2017), is now available on Westlaw. Here is the abstract:

When it comes to the long-term well being of our society, it is difficult to overstate the importance of addressing poverty and economic inequality. In Capital in the Twenty-First Century, Thomas Piketty famously argued that growing economic inequality is inherent in capitalist systems because the return to capital inevitably exceeds the national growth rate. Proponents of “Inclusive Capitalism” can be understood to respond to this issue by advocating for broadening the distribution of the acquisition of capital with the earnings of capital. This paper advances the relevant discussion by explaining how shareholder proposals may be used to increase understanding of Inclusive Capitalism, and thereby further the likelihood that Inclusive Capitalism will be implemented. In addition, even if the suggested proposals are rejected, the shareholder proposal process can be expected to facilitate a better understanding of the strengths and weaknesses of Inclusive Capitalism, as well as foster useful new lines of communication for addressing both poverty and economic inequality.

August 6, 2017 in Corporate Finance, Corporate Governance, CSR, Financial Markets, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Stefan J. Padfield | Permalink | Comments (0)

Monday, July 17, 2017

Yale Private Equity Conference - Save the Date

Save the Date!

The Yale Law School Center for Private Law will host a Private Equity Conference on November 17, 2017. The conference will bring leading theorists from law, economics, finance, and sociology into dialogue with people with experience at the highest levels of private equity, including from law practice, financial firms, and institutional investors.

Oliver Hart, winner of the 2016 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, will give the keynote address.

Other speakers include:

Jon Ballis, Kirkland & Ellis
Rosemary Batt, Cornell University, ILR School
Neil Fligstein, UC Berkeley Sociology Department
Stephen Fraidin, Pershing Square Capital Management
Will Gaybrick, Stripe
Adam Goldstein, Princeton University Department of Sociology
Victoria Ivashina, Harvard Business School
Andrew Metrick, Yale School of Management
Meridee Moore, Watershed Asset Management
John Morley, Yale Law School
Alan Schwartz, Yale Law School
David Swensen, Chief Investment Officer, Yale University

Location: Yale Law School, 127 Wall St., New Haven, CT

Time: Approximately 9:45 a.m.-4:00 p.m.

Cost: There is no cost associated with this event, though pre-registration is required. Registration information will be available soon at this link.

The conference is sponsored by the Kirkland & Ellis Fund for the Study of Private Law.

July 17, 2017 in Conferences, Corporate Finance, Financial Markets, Joan Heminway, Private Equity | Permalink | Comments (0)