Monday, April 8, 2024

Trial Court Blesses Shadow Insider Trading

A federal jury found Matthew Panuwat liable for insider trading late last week.  As you may recall, the U.S. Securities and Exchange Commission (SEC) brought an enforcement action against Mr. Panuwat in the U.S. District Court for the Northern District of California back in August 2021.  In that legal action, the SEC alleged that Mr Panuwat violated Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5, seeking a permanent injunction, a civil penalty, and an officer and director bar. The theory of the case, as described by the SEC in a litigation release, was founded on Mr. Panuwat's deception of his employer, Medivation, Inc., by using information obtained through his employment to trade in the securities of another firm in the same industry.

Matthew Panuwat, the then-head of business development at Medivation, a mid-sized, oncology-focused biopharmaceutical company, purchased short-term, out-of-the-money stock options in Incyte Corporation, another mid-cap oncology-focused biopharmaceutical company, just days before the August 22, 2016 announcement that Pfizer would acquire Medivation at a significant premium. Panuwat allegedly purchased the options within minutes of learning highly confidential information concerning the merger. According to the complaint, 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. The complaint alleges that Medivation's insider trading policy expressly forbade Panuwat from using confidential information he acquired at Medivation to trade in the securities of any other publicly-traded company. Following the announcement of Medivation's acquisition, Incyte's stock price increased by approximately 8%. The complaint alleges that, by trading ahead of the announcement, Panuwat generated illicit profits of $107,066.

The SEC's theory of liability, an application of insider trading's misappropriation doctrine as endorsed by the U.S. Supreme Court in U.S. v. O'Hagan, has been labeled "shadow trading."

The Director of the SEC's Division of Enforcement, Gurbir S. Grewal, put it plainly in responding to the jury verdict in the Panuwat case on Friday:

As we’ve said all along, there was nothing novel about this matter, and the jury agreed: this was insider trading, pure and simple. Defendant used highly confidential information about an impending announcement of the acquisition of biopharmaceutical company Medivation, Inc., the company where he worked, by Pfizer Inc. to trade ahead of the news for his own enrichment. Rather than buying the securities of Medivation, however, Panuwat used his employer’s confidential information to acquire a large stake in call options of another comparable public company, Incyte Corporation, whose share price increased materially on the important news.

Yet, many assert that the SEC's theory in Panuwat broadens the potential for SEC insider trading violations and enforcement.  See, e.g., here, here, and here. They include:

  • a wide class of nonpublic information that may be determined to be material and give rise to an insider trading claim;
  • the expansive scope of insider trading's requisite duty of trust and confidence (and the potential importance of language in an insider trading compliance policy or confidentiality agreement in defining that duty); and
  • the potentially large number of circumstances in which employees may be exposed to confidential information about their employer that represents a value proposition in another firm's securities.

Three of us on the BLPB have held some fascination regarding the Panuwat case over the past three years.  Ann put the case on the blog's radar screen; John later offered perspectives based on the language of Medivation's insider trading compliance policy; and I offered comments on John's post (and now offer this post of my own).  I am thinking we all may have more to say on shadow trading as additional cases are brought or as this case further develops on appeal (should there be one).  But in the interim, we at least know that one jury has agreed with the SEC's shadow trading theory of liability.

April 8, 2024 in Ann Lipton, Current Affairs, Financial Markets, Joan Heminway, John Anderson, Securities Regulation | Permalink | Comments (0)

Wednesday, February 7, 2024

Professors Baker and Coleman on Metals Derivatives Markets and the Energy Transition

My coauthor, SMU Law Professor James W. Coleman, recently posted a draft of our article, Metals Derivatives Markets and the Energy Transition, on SSRN.  It's forthcoming in Transactions: The Tennessee Journal of Business Law, and was written in connection with Business Transactions: Connecting the Threads VII, the BLPB-related conference at the University of Tennessee Law School.  I had a wonderful time at the event, which has become one of my yearly favorites, and am truly grateful for UT Law School's consistently outstanding hospitality! 

Here's the abstract of our article:

Despite their escalating importance, thus far, there has been minimal legal scholarship on metals derivatives markets. Given the key role of these markets in the transition to a clean energy future, increased focus on them is imperative. Hence, it is not surprising that the agendas for the last four meetings of the Commodity Futures Trading Commission’s Energy and Environmental Markets Advisory Committee each dedicated a significant portion of the meeting to metals derivatives markets and their role in the transition to a clean energy future.

Fundamentally, the United States and the world are moving from their long-term dependence on the fossil fuels that built the modern world, to dependence on new commodities such as copper and lithium. Coal and then natural gas made the modern economy possible by providing heat, power, and electricity to growing industries and populations in the world’s growing urban centers. Then oil made globalization possible by powering international sea and air travel as well as overland vehicles. As electric vehicles increasingly displace fossil fuel vehicles and renewable energy sources increasingly replace fuels in heating and industry, the economic and geopolitical stakes of metals markets will grow higher and higher. The criticality of metals derivatives markets, such as the dysfunctional market for nickel, will also escalate as governments, businesses, and others seek to hedge risks related to the increasing global dependency on metals.

Our article makes at least two contributions. First, it expands the minimal analysis of metals derivatives markets in the legal scholarship. Indeed, to the best of the authors’ knowledge, this is the first law review article to focus primarily on these markets. Second, it explores the role of metals derivatives in preparing for the transition to a clean energy future. We provide a brief overview of metals derivatives, including new markets in development, and their regulation in Parts I and II, respectively. In Part III, we explore the central role of metals derivatives markets in securing a clean energy future.  

February 7, 2024 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, September 13, 2023

Professors Baker and Odinet on The Gamification of Banking

Dear BLPB Readers:

I'm delighted to share that Professor Christopher Odinet has posted our new article, The Gamification of Banking, to SSRN!  This was such a fun article to write and I'm so grateful for the opportunity to coauthor with such an amazing scholar!  Here's the abstract:

"Gamification is coming to banking. This phenomenon is already gaining ground in advertising, healthcare, manufacturing, and, more recently, with the GameStop and AMC meme stock saga in securities trading. The idea behind gamification is to make transactions seem fun, playful, and even casino-like in order to elicit habit-forming, addictive-like effects with consumers. We argue that the rise of financial technology (fintech) firms and their ever-growing business relationships with incumbent financial institutions has created the necessary conditions for gamification to take hold in the banking sector. In order to explore this observation, we undertake a study of current examples of banking gamification and create a novel taxonomy of instances where fintech firms and banks offer financial products and services using business models that rely upon on high levels of customers, transaction activity and engagement, and that frequently use the power of social media and online communities. Through our discussion of the nascent gamification of banking, we also explore the tension between consumer protection and various regulatory approaches when it comes to thinking about how to regulate the gamification in the banking sector. Lastly, we theorize banking gamification as coming in three distinct waves, with the final, yet-to-be realized wave being the advent of one-stop-shop, mega financial platforms. We conclude the paper by offering some thoughts on the benefits and costs of gamification in banking."


September 13, 2023 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, June 14, 2023

Baker on Trading in the Clouds

This week, Nasdaq, “the second-largest stock exchange in the US,” announced its biggest deal yet: the $10.5 billion acquisition of Adenza, a software company focused on financial risk.  As I note in Derivatives and ESG, trading exchanges’ traditional business models have undergone a metamorphosis.  The largest global exchanges are increasingly becoming financial data and technology juggernauts.  Indeed, Nasdaq’s press release about the deal states: “Nasdaq Accelerates Its Transformation as a Leading Technology Provider to the Global Financial System with the Acquisition of Adenza from Thoma Bravo.” 

As I write about in Trading in the Clouds, a short piece for our 2022 BLPB Symposium Connecting the Threads VI hosted by the University of Tennessee College of Law, the continuing transformation of exchanges’ business models has also recently included significant partnerships between some of the world's largest trading exchange groups and the biggest cloud service providers, including Microsoft's partnership with the London Stock Exchange Group, Nasdaq's partnership with Amazon Webservices, and the Chicago Mercantile Exchange's partnership with Google Cloud.     

Here's the abstract for Trading in the Clouds:     

"Today, countless organizations rely upon cloud computing for operational and strategic reasons. Trading exchanges are no different. This article explores trading exchanges’ increasing migration to the cloud, related regulatory frameworks, and potential costs and benefits accompanying this transition. It concludes by positing that this migratory trend is likely to culminate in the rise of a new type of financial intermediary platform and highlights that issues in this area are ripe for additional research."

Also, check out the commentaries to this article: Professor Gary Pulsinelli's Commentary on Trading in the Clouds and Virginia Saylor's Student Commentary on Trading in the Clouds

June 14, 2023 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, May 24, 2023

New Paper - Flight to Safety in the Regional Bank Crisis of 2023

Yesterday, a new paper by Cecilia Caglio, Jennifer Dlugosz, and Marcelo Rezende - all affiliated with the Board of Governors of the Federal Reserve System - posted on SSRN, Flight to Safety in the Regional Bank Crisis of 2023.  It's obviously an incredibly timely piece.  Here's the Abstract:

"Using weekly confidential data from U.S. banks, we document an unprecedented flight to safety of deposits from regional banks towards large banks in the early 2023. We show that large banks experienced large deposit inflows relative to small and regional banks and that these differences remain substantial if we account for bank characteristics associated with bank failures over this crisis, including liquidation values and shares of uninsured deposits. Large banks lowered deposit rates relative to other banks during the crisis, supporting the hypothesis that deposits flew to these banks because they are considered safer."   

May 24, 2023 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Friday, May 5, 2023

Ten Questions Lawyers Should Ask Themselves about AI

A few months ago, I asked whether people in the tech industry were the most powerful people in the world. This is part II of that post.

I posed that question after speaking at a tech conference in Lisbon sponsored by Microsoft. They asked me to touch on business and human rights and I presented the day after the company announced a ten billion dollar investment in OpenAI, the creator of ChatGPT. Back then, we were amazed at what ChatGPT 3.5 could do. Members of the audience were excited and terrified- and these were tech people. 

And that was before the explosion of ChatGPT4. 

I've since made a similar presentation about AI, surveillance, social media companies to law students, engineering students, and business people. In the last few weeks, over 10,000 people including Elon Musk, have called for a 6-month pause in AI training systems. If you don't trust Musk's judgment (and the other scientists and futurists), trust the "Godfather of AI," who recently quit Google so he could speak out on the dangers, even though Google has put out its own whitepaper on AI development. Watch the 60 Minutes interview with the CEO of Google.

Just yesterday, the White House held a summit with key AI stakeholders to talk about AI governance

Between AI-generated photos winning competitions, musicians creating songs simulating real artists' voices, students using generative AI to turn in essays that fool professors, and generative AI's ability to hallucinate (come up with completely wrong answers that look correct), what can we as lawyers do? Are our jobs at risk? Barrons has put out a list.  IBM has paused hiring because it believes it can gain efficiencies though AI.  Goldman Sachs has said that 300 million jobs might be affected by this technology. I'm at a conference for entrepreneurs and the CEO of a 100-million dollar company said that he has reassigned and is re-skilling 90% of his marketing team because he can use AI for most of what they do. 

Should we be excited or terrified? I've been stressing to lawyers and my students that we need to understand this technology to help develop the regulations around it as well to wrestle with the thorny legal and ethical issues that arise. Here are ten questions, courtesy of ChatGPT4, that lawyers should ask themselves:

  1. Do I understand the basic principles and mechanics of AI, including machine learning, deep learning, and natural language processing, to make informed decisions about its use in my legal practice?
  2. How can AI tools be used effectively and ethically to enhance my practice, whether in legal research, document review, contract drafting, or litigation support, while maintaining high professional standards?
  3. Are the AI tools and technologies I use compliant with relevant data protection and privacy regulations, such as GDPR and CCPA, and do they adequately protect client confidentiality and sensitive information?
  4. How can I ensure that the AI-driven tools I utilize are unbiased, transparent, and fair, and what steps can I take to mitigate potential algorithmic biases that may compromise the objectivity and fairness of my legal work?
  5. How can I obtain and document informed consent from clients when using AI tools in my practice, ensuring that they understand the risks, benefits, and alternatives associated with these technologies?
  6. What are the intellectual property implications of using AI, particularly concerning AI-generated content, inventions, and potential copyright or trademark issues that may arise?
  7. How can I assess and manage potential liability and accountability issues stemming from the use of AI tools, including understanding the legal and ethical ramifications of AI-generated outputs in my practice?
  8. How can I effectively explain and defend the use of AI-generated evidence, analysis, or insights in court, demonstrating the validity and reliability of the methods and results to judges and opposing counsel?
  9. What measures should I implement to supervise and train my staff, including paralegals and support personnel, in the responsible use of AI tools, ensuring that ethical and professional standards are maintained throughout the practice?
  10. How can I stay up-to-date with the latest advancements in AI technology and best practices, ensuring that I continue to adapt and evolve as a legal professional in an increasingly technology-driven world?

Do you use ChatGPT or any other other generative AI in your work? Can you answer these questions? I'll be talking about many of these issues at the Connecting the Threads symposium and would love to get your insights as I develop my paper. 

May 5, 2023 in Compliance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, Jobs, Lawyering, Legislation, Management, Marcia Narine Weldon, Teaching, Technology, Web/Tech | Permalink | Comments (0)

Wednesday, April 26, 2023

More on Central Bank Digital Currencies (CBDCs)

My last post (here) addressed central bank digital currencies (CBDC).  I wanted to address this topic again today (and will do so again in the future!).  Michelle W. Bowman, a Member of the Board of Governors of the Federal Reserve System, recently gave a speech entitled, Considerations for a Central Bank Digital Currency.  She states “There are two threshold questions that a policymaker needs to ask before any decision to move forward with a CBDC. First, what problem is the policymaker trying to solve, and is a CBDC a potential solution? Second, what features and considerations--including unintended consequences--may a policymaker want to consider in deciding to design and adopt a CBDC?” 

Governor Bowman notes that “a CBDC is simply a new form of digital liability of a central bank…Beyond this baseline definition though, “what is a CBDC" defies a simple definition.”  There is “an array of CBDC design choices” and “policy tradeoffs that this multitude of choices presents.”

One of the policy tradeoffs related to design features that Governor Bowman addresses is privacy considerations. She states that “In thinking about the implications of CBDC and privacy, we must also consider the central role that money plays in our daily lives, and the risk that a CBDC would provide not only a window into, but potentially an impediment to, the freedom Americans enjoy in choosing how money and resources are used and invested. So, a central consideration must be how a potential U.S. CBDC could incorporate privacy considerations into its design, and what technology and policy options could support a robust privacy framework.”

In a prior post (here), I linked to an excellent article by Professors Morgan Ricks, Lev Menand, and John Crawford, FedAccounts: Digital Dollars.  In their article, focused on a potential FedAccount CBDC, the authors address “privacy and civil liberties,” stating that “Although these concerns are legitimate, some perspective is in order for four reasons.” (p. 164) I hope interested BLPB readers read the article for the authors’ explanation of these reasons. 

I also hope interested BLPB readers read Governor Bowman’s speech.  I recently stated (here) and will continue to reiterate that I think widespread education about CBDCs and extensive public debate about the potential adoption of a U.S.-dollar CBDC is tremendously important.      

April 26, 2023 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, April 12, 2023

Professor Skinner on Central Bank Digital Currency as New Public Money

Last week, I posted (here) about an important new article on the Fed and I’m doing that again this week.  Wharton Professor Christina Parajon Skinner’s Central Bank Digital Currency as New Public Money (forthcoming, University of Pennsylvania Law Review) is also a critical piece.  As the Introduction explains: “nearly every central bank around the world” is considering whether to create a central bank digital currency (CBDC).  Most payments are already digital.  Hence, it is important to realize that the impact of a central bank digital currency would be more than just payment digitization. 

Skinner states that “At least in the case of a U.S.-dollar CBDC, issued by the Federal Reserve, not only is a CBDC a fundamentally new monetary instrument, it also fundamentally alters – by weakening – the bundle of rights that State-issued money has heretofore conveyed to individuals holding public money.” (p. 9-10) And that “In many ways, as this Article will suggest, the nature of money implicates the very relationship between people and the State. In that sense, each nation’s decision about whether to pursue a CBDC will be highly dependent on its legal framework but also its political-economy values. Some States may well proceed with a CBDC while others might find it inconsistent with their political and legal mores and traditions. But in that case, the question of how to preserve a well-functioning monetary order will need to be addressed within the framework of international monetary law.” (p.11)  

Even more than with the question of who has access to a master account at the Fed (see here, here and here), widespread understanding of and debate about the potential adoption of a U.S.-dollar CBDC is tremendously important.  Such conversations are also incredibly timely. 

In fall 2022, the Federal Reserve Bank of New York (FRBNY) released its Phase One Report on “Project Cedar.”  As the FRBNY explains: “Project Cedar is the inaugural project of the New York Innovation Center (NYIC). It is a multiphase research effort to develop a technical framework for a theoretical wholesale central bank digital currency (wCBDC) in the Federal Reserve context.”  The Report “aims to contribute to a broad and transparent public dialogue about CBDC from a technical perspective. The report is not intended to advance any specific policy outcome, nor to signal that the Federal Reserve will make any imminent decisions about the appropriateness of issuing a retail or wholesale CBDC, nor to offer an indication of how one would necessarily be designed.” (p.3-4)

Here’s the abstract for Skinner's article:

Today, nearly every central bank around the world is considering whether to create a new form of digital public money, referred to as central bank digital currency, “CBDC.” Although CBDC is often discussed as a way to make payments more efficient, enhance financial inclusion, or reduce the risk of financial instability posed by stablecoins, the legal rights attached to CBDC remain poorly understood. This Article theorizes American public money as a bundle of distinct economic rights—namely, rights to popular monetary sovereignty; to property in value; and to qualified privacy. It then measures CBDC against the legal and conventional status quo to discern where CBDC adds to the monetary bundle-of-rights or takes a stick away. The Article argues that CBDC transfers significant monetary power to the State by weakening the individual right of issuance, conditioning the individual right to monetary property, and rendering monetary privacy rights scarce. It also, in so doing, empowers the central bank while weakening its independence.”    

April 12, 2023 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, April 5, 2023

Professor Hill on Federal Reserve Discretion in Payments

I've often blogged (for example, here and here) about the monumental importance of a seemingly mundane topic: access to a master account at the Federal Reserve.  So, I was delighted to read Professor Julie Anderson Hill's new article, From Cannabis to Crypto: Federal Reserve Discretion in Payments (forthcoming, Iowa Law Review).  It's an important piece about a critical issue.  Here's the abstract:

"From its inception, the Federal Reserve has operated payment systems that let banks move money for their customers. Checks, wire transfers, and electronic consumer payments all happen thanks to the Federal Reserve. Congress by statute specified which banks get access to the Fed’s payment services. For more than a century, the Federal Reserve provided services to all legally eligible banks. But when the Federal Reserve received requests for payments access from a cannabis-focused credit union and a cryptocurrency custody bank (both of whom are legally eligible), it denied them. The Fed also issued sweeping guidelines claiming discretion to conduct risk-vetting and deny bank requests. These guidelines apply to all banks and reverberate far beyond cannabis and crypto.

This Article examines whether the Federal Reserve’s payments discretion is as great as it now claims—a question that has been raised in three recent cases, but never answered. It concludes the Fed has overstepped. The language and structure of the Federal Reserve Act require that the Federal Reserve provide payment services to all eligible banks. In support of this statutory interpretation, the Article excavates long forgotten legislative history and more than a century of sometimes hidden Federal Reserve payments practices. It shows that while the Federal Reserve has some discretion over the payments it processes and terms under which it offers it payments services, the Fed’s discretion is not so broad as to allow it to reject access requests from legally eligible banks. If the Fed wants to exclude banks, it should ask Congress to change the law."

April 5, 2023 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Wednesday, February 22, 2023

Professor Wilmarth's We Must Protect Investors and Our Banking System from the Crypto Industry

Professor Emeritus Arthur E. Wilmarth recently posted a new article, We Must Protect Investors and Our Banking System from the Crypto Industry.  I always learn a ton in reading his work, so I'm looking forward to the opportunity to review this paper.  Here's the abstract:

"The crypto boom and crash of 2020-22 demonstrated that (i) cryptocurrencies with fluctuating values are extremely risky and highly volatile assets, and (ii) cryptocurrencies known as “stablecoins” are vulnerable to systemic runs whenever there are serious doubts about the adequacy of reserves backing those stablecoins. Crypto firms amplified the crypto boom with aggressive and deceptive marketing campaigns that targeted unsophisticated retail investors. Scandalous failures of prominent crypto firms accelerated the crypto crash by inflicting devastating losses on investors and undermining public confidence in crypto-assets.

Federal and state regulators have allowed banks to become significantly involved in crypto-related activities. Several FDIC-insured banks that provided financial services to crypto firms suffered substantial losses and incurred extensive legal, operational, and reputational risks during the crypto crash. Meanwhile, stablecoins issued by nonbanks and uninsured depository institutions threaten to become a new form of “shadow deposits” that could undermine the integrity of our banking system and require costly future bailouts.

This article presents a three-part plan for responding to the risks posed by fluctuating- value cryptocurrencies and stablecoins. First, policymakers must protect investors by recognizing the Securities and Exchange Commission (SEC) as the primary federal regulator of most fluctuating-value cryptocurrencies. Federal securities laws provide a superior regime for regulating such cryptocurrencies. In particular, the SEC has broader powers (including a more robust investor protection mandate) and a stronger enforcement record than the Commodity Futures Trading Commission (CFTC).

Second, federal bank regulators must protect the banking system by prohibiting all FDIC- insured banks and their affiliates from investing and trading in fluctuating-value cryptocurrencies, either on their own behalf or on behalf of others. In addition, federal bank regulators should bar FDIC-insured banks and their affiliates from providing financial services to crypto firms unless those firms are registered with and regulated by the SEC and/or the CFTC.

Third, Congress should mandate that all issuers and distributors of stablecoins must be FDIC-insured banks. That mandate would ensure that all providers of stablecoins must comply with the regulatory safeguards governing FDIC-insured banks and their parent companies and affiliates. Those safeguards provide crucial protections for our banking system, our economy, and our society."



February 22, 2023 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Saturday, January 14, 2023

Can The Next Generation of Lawyers Save the World?

An ambitious question, yes, but it was the title of the presentation I gave at the Society for Socio-Economists Annual Meeting, which closed yesterday. Thanks to Stefan Padfield for inviting me.

In addition to teaching Business Associations to 1Ls this semester and running our Transactional Skills program, I'm also teaching Business and Human Rights. I had originally planned the class for 25 students, but now have 60 students enrolled, which is a testament to the interest in the topic. My pre-course surveys show that the students fall into two distinct camps. Most are interested in corporate law but didn't know even know there was a connection to human rights. The minority are human rights die hards who haven't even taken business associations (and may only learn about it for bar prep), but are curious about the combination of the two topics. I fell in love with this relatively new legal  field twelve years ago and it's my mission to ensure that future transactional lawyers have some exposure to it.

It's not just a feel-good way of looking at the world. Whether you love or hate ESG, business and human rights shows up in every factor and many firms have built practice areas around it. Just last week, the EU Corporate Sustainability Reporting Directive came into force. Like it or not, business lawyers must know something about human rights if they deal with any company that has or is part of a supply or value chain or has disclosure requirements. 

At the beginning of the semester, we discuss the role of the corporation in society. In many classes, we conduct simulations where students serve as board members, government officials, institutional investors, NGO leaders, consumers, and others who may or may not believe that the role of business is business. Every year, I also require the class to examine the top 10 business and human rights topics as determined by the Institute of Human Rights and Business (IHRB). In 2022, the top issues focused on climate change:

  1. State Leadership-Placing people at the center of government strategies in confronting the climate crisis
  2. Accountable Finance- Scaling up efforts to hold financial actors to their human rights and environmental responsibilities
  3. Dissenting Voices- Ensuring developmental and environmental priorities do not silence land rights defenders and other critical voices
  4. Critical Commodities- Addressing human rights risks in mining to meet clean energy needs
  5. Purchasing Power- Using the leverage of renewable energy buyers to accelerate a just transition
  6. Responsible Exits- Constructing rights-based approaches to buildings and infrastructure mitigation and resilience
  7. Green Building- Building and construction industries must mitigate impacts while avoiding corruption, reducing inequality, preventing harm to communities, and providing economic opportunities
  8. Agricultural Transitions- Decarbonising the agriculture sector is critical to maintaining a path toward limiting global warming to 1.5 degrees
  9. Transforming Transport- The transport sector, including passenger and freight activity, remains largely carbon-based and currently accounts for approximately 23% total energy-related CO2 global greenhouse gas emissions
  10. Circular Economy- Ensure “green economy” is creating sustainable jobs and protecting workers

The 2023 list departs from the traditional type of list and looks at the people who influence the decisionmakers in business. That's the basis of the title of this post and yesterday's presentation. The 2023 Top Ten are:

  1. Strategic Enablers- Scrutinizing the role of management consultants in business decisions that harm communities and wider society. Many of our students work outside of the law as consultants or will work alongside consultants. With economic headwinds and recessionary fears dominating the headlines, companies and law firms are in full layoff season. What factors should advisors consider beyond financial ones, especially if the work force consists of primarily lower-paid, low-skilled labor, who may not be able to find new employment quickly? Or should financial considerations prevail?
  2. Capital Providers- Holding investors to account for adverse impacts on people- More than 220 investors collectively representing US$30 trillion in assets under management  have signed a public statement acknowledging the importance of human rights impacts in investment and global prosperity. Many financial firms also abide by the Equator Principles, a benchmark that helps those involved in project finance to determine environmental and social impacts from financing. Our students will serve as counsel to banks,  financial firms, private equity, and venture capitalists. Many financial institutions traditionally focus on shareholder maximization but this could be an important step in changing that narrative. 
  3. Legal Advisors- Establishing norms and responsible performance standards for lawyers and others who advise companies. ABA Model Rule 2.1 guides lawyers to have candid conversations that "may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client's situation." Business and human rights falls squarely in that category. Additionally, the ABA endorsed the United Nations Guiding Principles on Business and Human Rights ten years ago and released model supply chain contractual clauses related to human rights in 2021. Last Fall, the International Bar Association's Annual Meeting had a whole track directed to business and human rights issues. Our students advise on sanctions, bribery, money laundering, labor relations, and a host of other issues that directly impact human rights. I'm glad to see this item on the Top 10 list. 
  4. Risk Evaluators- Reforming the role of credit rating agencies and those who determine investment worthiness of states and companies. Our students may have heard of S&P, Moody's, & Fitch but may not know of the role those entities played in the 2008 financial crisis and the role they play now when looking at sovereign debt.  If the analysis from those entities  are flawed or laden with conflicts of interest or lack of accountability, those ratings can indirectly impact the government's ability to provide goods and services for the most vulnerable citizens.
  5. Systems Builders- Embedding human rights considerations in all stages of computer technology. If our students work in house or for governments, how can they advise tech companies working with AI, surveillance, social media, search engines and the spread of (mis)nformation? What ethical responsibilities do tech companies have and how can lawyers help them wrestle with these difficult issues?
  6. City Shapers-  Strengthening accountability and transformation in real estate finance and construction. Real estate constitutes 60% of global assets. Our students need to learn about green finance, infrastructure spending, and affordable housing and to speak up when there could be human rights impacts in the projects they are advising on. 
  7. Public Persuaders- Upholding standards so that advertising and PR companies do not undermine human rights. There are several legal issues related to advertising and marketing. Our students can also play a role in advising companies, in accordance with ethical rule 2.1, about persuaders presenting human rights issues and portraying controversial topics related to gender, race, indigenous peoples, climate change in a respectful and honest manner. 
  8. Corporate Givers- Aligning philanthropic priorities with international standards and the realities of the most vulnerable. Many large philanthropists look at charitable giving as investments (which they are) and as a way to tackle intractable social problems. Our students can add a human rights perspective as advisors, counsel, and board members to ensure that organizations give to lesser known organizations that help some of the forgotten members of society. Additionally, Michael Porter and Mark Kramer note that a shared-value approach, "generat[es] economic value in a way that also produces value for society by addressing its challenges. A shared value approach reconnects company success with social progress. Firms can do this in three distinct ways: by reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company's locations." Lawyers can and should play a role in this. 
  9. Business Educators- Mainstreaming human rights due diligence into management, legal, and other areas of academic training. Our readers teaching in business and law schools and focusing on ESG can discuss business and human rights under any of the ESG factors. If you don't know where to start, the ILO has begun signing MOUs with business schools around the world to increase the inclusion of labor rights in business school curricula. If you're worried that it's too touchy feely to discuss or that these topics put you in the middle of the ESG/anti-woke debate, remember that many of these issues relate directly to enterprise risk management- a more palatable topic for most business and legal leaders. 
  10. Information Disseminators- Ensuring that journalists, media, and social media uphold truth and public interest. A couple of years ago, "fake news" was on the Top 10 and with all that's going on in the world with lack of trust in the media and political institutions, lawyers can play a role in representing reporters and media outlets. Similarly, lawyers can explain the news objectively and help serve as fact checkers when appearing in news outlets.

If you've made it to the end of this post, you're either nodding in agreement or shaking your head violently in disagreement. I expect many of my students will feel the same, and I encourage that disagreement. But it's my job to expose students to these issues. As they learn about ESG from me and the press, it's critical that they disagree armed with information from all sides.

So can the next generation of lawyers save the world? Absolutely yes, if they choose to. 

January 14, 2023 in Business Associations, Business School, Compliance, Conferences, Consulting, Contracts, Corporate Finance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Business, International Law, Law Firms, Law School, Lawyering, Management, Marcia Narine Weldon, Private Equity, Shareholders, Stefan J. Padfield, Teaching, Technology, Venture Capital | Permalink | Comments (0)

Wednesday, January 11, 2023

Newly Released - Independent Review of Events in the Nickel Market in March 2022

For those readers interested in exchanges and clearing, I wanted to highlight that Oliver Wyman's "Independent Review of Events in the Nickel Market in March 2022" was released yesterday.  As I noted in an earlier post (here), in March 2022, the price of nickel on the LME rose over 270%, and the exchange not only halted nickel trading, but also canceled trades.  Additionally, the LME, who engaged Oliver Wyman to produce this Review, released "LME Group Response to Oliver Wyman Independent Review."  The Executive Summary - which is all I've had time to read thus far - notes that:

"The primary objectives of the review were to identify the factors that contributed to market conditions in the
nickel market in the period leading up to, and including, March 8, 2022, and make recommendations for how the
LME Group could reduce the likelihood of similar events occurring again"   

January 11, 2023 in Colleen Baker, Financial Markets | Permalink | Comments (1)

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)