The work of Columbia Law School Professor Kate Judge appears in the list of twelve best corporate and securities law articles in 2015, based on a poll conducted by the Corporate Practice Commentator. Teachers in corporate and securities law were asked to select the best corporate and securities articles from a list of articles published and indexed in legal journals during 2015. More than 540 articles were on the list. Professor Judge was selected for her article Intermediary Influence appearing in the University of Chicago Law Review.… Read more
Last week, the Basel Committee on Banking Supervision (Basel) proposed floors and other constraints on the use of internal models for calculating credit risk capital. The proposal aims to reduce complexity and variation in the calculation of regulatory capital among banking institutions, thus improving comparability. To that end, the proposal generally discourages (and in some instances prohibits) the use of internal ratings-based (IRB) approaches in calculating risk weighted assets (RWA) related to credit risk. The proposal’s objective is consistent with Basel’s other recent issuances, i.e., the re-proposed standardized approach for credit risk (issued last December),1 revised final capital requirements … Read more
Congress expanded the SEC’s ability to pursue enforcement actions in administrative proceedings in the Dodd Frank Act, bringing the agency’s use of proceedings before its own administrative law judges (ALJs) into the spotlight. A number of respondents have challenged the constitutionality of these proceedings, relying principally on arguments arising out of the Appointments Clause of the Constitution. Those disputes are currently being played out both before the SEC and in the courts, but they are unlikely to be a long-term obstacle to the SEC’s use of administrative proceedings.
The ‘Twin Peaks’ method of financial system regulation is widely regarded as the leading model for the regulation of a country’s financial system. Australia was the first to adopt the model in 1997, has been using it the longest, and fared the best among the G20 during the global financial crisis. As a result, Australia’s Twin Peaks model is being exported around the globe.
The model was first proposed by an Englishman, Dr Michael Taylor, in 1994. So-called because it proposes two, specialist, mega-regulators: one charged with the maintenance of financial system stability (ensuring banks don’t end-up bankrupt), and … Read more
Columbia Law School is looking for an Editor-at-Large to oversee and administer the Columbia Law School Blue Sky Blog. The Blog, now completing its third year, has grown rapidly and become one of the most read sources of current information and opinion on corporate law, securities law, and financial regulatory issues, including white collar crime, enforcement, antitrust, restructuring and kindred topics. The Blog’s content presents legal developments and insights from a range of sources, including practitioners, academics and regulatory bodies. A new post is generally published at least once every weekday and the Blog also highlights important news developments in … Read more
Herd behavior is a widely used notion met in different contexts and disciplines, from neurology and zoology to sociology, psychology, economics and finance. In economics and finance the term herd behavior usually suggests the process where agents tend to imitate each other’s actions and/or base their decisions upon the actions of others. This behavior may not always indicate irrational agents. For instance, market participants may infer information from actions of previous participants, investors may react to the arrival of fundamental information or analysts and institutional investors may herd in order to protect their reputation. For example, Bikhchandani and Sharma (2001) … Read more
With the passage of Section 929P(a) of the Dodd-Frank Act in 2010, the SEC saw the largest expansion of its administrative enforcement power to date. Prior to that, SEC administrative proceedings were limited to obtaining an order enjoining violations of the Exchange Act. Section 929P(a) amended this, authorizing the SEC to seek civil monetary penalties from “any person” in an administrative hearing.
While the SEC still brings a majority of its cases in federal courts—roughly 63 percent this fiscal year through June—a growing proportion of cases have been tried in its internal administrative tribunals, a trend the agency … Read more
Many would describe the era we are living in as a “startup bubble.” Not only has the number of startup companies increased dramatically, but many startups have also achieved record-breaking valuations. Alibaba, an e-commerce site, recently went public at a valuation of $21 billion, while Facebook’s IPO raised $16 billion. Yet experts say that 90% of startups fail, and even startups that do succeed often do so only after many years.
Many early startups don’t have enough capital to pay market rate salaries. To incentivize employees, many startup businesses give their employee “options” to receive shares in … Read more
A core focus of the activities of the International Organization of Securities Commissions (IOSCO) is to develop and work towards implementing consistent standards of securities regulation throughout the world. Another of its important goals is to enhance the enforcement capabilities of its members. To this end in 2002 IOSCO formulated its Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU). This MMoU simplifies the process by which securities regulators can obtain information from each other for enforcement purposes. IOSCO has 124 members comprising the securities regulators from countries representing almost all of the world’s capital … Read more
This post provides a 5 year review and evaluation of the Consumer Financial Protection Bureau (CFPB) which was established under the Dodd-Frank Act. The Dodd-Frank Act and the CFPB were a response to the financial and economic crisis that began in 2007. The length and depth of the ensuing recession was only exceeded by the Great Depression of the 1930’s. Researchers at the Federal Reserve Bank of Dallas put the cumulative loss (up to 2012) of real GDP as somewhere between $6 and $14 trillion.
Our evaluation of the CFPB is centered on two issues. The first is the philosophy … Read more
The hedge fund industry in the United States has evolved from a niche market participant in the early 1950s to a major industry operating in international financial markets today. Hedge funds in the United States were originally privately-held, privately-managed investment funds, unregistered and exempt from federal securities regulation. With increasing investor demand for hedge funds and significant growth of the hedge fund industry came a tectonic shift in the regulatory framework applicable to the industry.
Several core features characterize the hedge fund industry. A hedge fund’s goal is to earn for its investors a high rate of return on their … Read more
It has been three years since the first wave of registrants applied to be swap dealers (SDs) with the Commodity Futures Trading Commission (CFTC). Since then, SDs have focused on modifying their operations and building compliance programs that accommodate the flurry of new rules issued by the agency. Despite these efforts, SDs continue to struggle with a lack of clarity in the rules and with a multitude of no-action letters that delay compliance with certain requirements (e.g., related to reporting and inter-affiliate clearing).
Further complicating matters for SDs, global coordination has been a challenge. Pulling back somewhat from previous … Read more
Last year, the Securities and Exchange Commission (SEC) made major progress in completing its rulemaking mandates under the Jumpstart Our Business Startups Act (JOBS Act) and the Dodd-Frank Act. Additionally, Congress enacted the Fixing America’s Surface Transportation Act (FAST Act), which made a number of key changes to federal securities laws, including creating new accommodations for initial public offerings (IPOs) by emerging growth companies (EGCs), private resales of securities and reduced or streamlined disclosures for public companies.
Many of these changes became effective in 2015 or are expected to become effective in 2016, leading to the prospect of both new … Read more
One of the most far-reaching legacies of twentieth century law is the establishment of comprehensive public regulation as the norm for governance of vast swaths of commerce. The reality of persistent and rapid technological change is, however, proving fatal for this paradigm in the field of payment systems.
Non-cash payment systems in the United States have been dominated by public-law regulatory schemes for well over a century, ranging from the 1896 Uniform Negotiable Instruments Law to the payment articles in today’s Uniform Commercial Code. The law of checks—long the dominant form of non-cash payments—was comprehensively codified in the UCC. By … Read more
On January 14th, the Basel Committee on Banking Supervision (BCBS) published its revised capital requirements for market risk. The final standard, also known as the Fundamental Review of the Trading Book (FRTB), is intended to harmonize the treatment of market risk across national jurisdictions and will generally result in higher global capital requirements. BCBS estimates a median capital increase of 22% and a weighted-average capital increase of 40%. However, we believe this impact can be somewhat mitigated by portfolio re-optimization.
- Standardized approaches continue to gain regulatory favor. The final framework allows banks to calculate their capital requirements using
Mutual funds are becoming more like hedge funds as a matter of investment strategy while hedge funds are becoming more like mutual funds as a matter of the regulatory framework. The growth of the private fund industry and the proliferation of retail alternative funds in combination with the fundamental regulatory reform of the private fund industry through the Dodd-Frank Act and the JOBS Act make the convergence of mutual and private funds possible. Such convergence has large implications for the evolution of the private fund industry and the growth of the retail alternative fund market.
For most of their history, … Read more
The year 2015 marked the fifth anniversary of passage of the Dodd-Frank Act and, for many private fund managers, the third anniversary of SEC registration under the Investment Advisers Act. The past year also saw a number of notable SEC regulatory trends and developments affecting private fund managers. Here are the highlights.
Undisclosed Conflicts of Interest
Throughout 2015, the SEC focused on undisclosed conflicts of interest, noting that it would make finding such conflicts an examination priority and that it would follow through with enforcement actions when it found such conflicts. In particular, the SEC keyed in on the following … Read more
In September 2007, Northern Rock, a British bank, sought and received liquidity support from the Bank of England because of financial difficulties resulting from the global financial crisis. As a result of mounting political pressure that Northern Rock was exploiting taxpayers’ money to pay its shareholders, the bank decided to scrap a £59m interim dividend payout, which had been announced before the beginning of the crisis (Financial Times, 2007).
Recent academic literature (Acharya et al., 2011; Onali, 2014) shows that banks in financial distress pay dividends to exploit government support, and this results in a transfer of bank default risk … Read more
There are few types of debt as internationally issued and traded as the debt securities issued in securitisation (in the United States, spelled securitization) transactions. European investors commonly invest in securities issued in U.S. securitisation transactions, and vice versa.
It is generally agreed that securitisation’s abuses contributed to the global financial crisis. Repayment of securities issued in certain highly leveraged securitisation transactions was so sensitive to cash-flow variations that, when the cash-flow assumptions turned out to be wrong, many of these highly rated securities defaulted or were downgraded. That, in turn, sparked a loss of confidence in the value of … Read more
My recent paper explains why, from a bank supervisory perspective, the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) program is arguably the single most significant and innovative post-crisis regulatory reform. Established in 2011, the CCAR is an annual Federal Reserve exercise to evaluate the capital planning processes and capital adequacy of the largest bank holding companies and other financial institutions designated as systemically important by the Financial Stability Oversight Council.
In this blog post, I will highlight three observations concerning the CCAR program. First, I will explain the significant practical implications of the CCAR for large U.S.-domiciled banks. Second, … Read more