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Securities Disclosure As Soundbite: The Case of CEO Pay Ratios

Since 2018, U.S. public companies have had to calculate and report a new, unconventional statistic—a CEO pay ratio—which links CEO pay to the pay of rank-and-file workers. Based on a last-minute addition to the Dodd-Frank Act of 2010, the disclosure requirement generated significant controversy during the lengthy SEC rulemaking process. Companies and their executive compensation consultants spent years and considerable resources preparing to comply with the rule. Once the pay ratio figures started arriving in 2018, they captured public imagination in ways that the typically long and technical corporate disclosure documents never do. The sizeable pay gaps highlighted by the … Read more

Sullivan & Cromwell Discusses Resolution-Planning Guidance for U.S. Global Systemically Important Banks

On December 20, 2018, the Federal Reserve and the Federal Deposit Insurance Corporation (together, the “Agencies”) issued final guidance (the “Final Guidance”)[1] with respect to future resolution plan submissions under Title I of the Dodd-Frank Act by the eight U.S. Global Systemically Important Banks (U.S. G‑SIBs), including the plan submissions that are due July 1, 2019.[2]  The Final Guidance adopts, and addresses comments provided in response to, the proposed resolution planning guidance the Agencies issued for comment on June 29, 2018 (the “Proposed Guidance”).[3]  Like the Proposed Guidance and the foundational guidance issued by the Agencies in … Read more

Why Dismantling Nonbank SIFI Regulation Is a Serious Mistake

The unnerving events of fall 2008 removed all doubt that investment banks and other nonbank financial firms can propagate systemic risk and endanger the world’s financial system.  In response, Congress instituted a robust system for regulating systemic risk posed by nonbanks.  The Dodd-Frank Act created two approaches to nonbank systemic risk regulation.  The first, known as entity-based regulation, authorized the new Financial Stability Oversight Council (FSOC) to designate individual nonbank financial firms as systemically important financial institutions (SIFIs) for heightened regulation and oversight by the Federal Reserve.  The second, dubbed activities-based regulation, gave FSOC the power to make … Read more

Transparency and the (E)valuation of Asset-Backed Securities

In 2011, the commission appointed by Congress to investigate the causes of the financial crisis concluded that “a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis” (The Financial Crisis Inquiry Report, 2011, p. xix).  In particular, the opacity of asset-backed securities (ABS) greatly inhibited the ability of investors and regulators to fully understand the risks held by institutions that owned these products.  As part of the post-financial crisis effort to reform the securitization process, the Dodd-Frank Act directed the SEC to “require issuers of asset-backed securities, … Read more

The Unwise and Illegal Deregulation of Prudential Financial

On October 18, federal regulators released the largest U.S. insurance group, Prudential Financial, Inc., from enhanced government oversight.  Prudential had been the last remaining systemically important financial institution (SIFI)—a designation Congress created in the Dodd-Frank Act for nonbank financial companies that could threaten U.S. financial stability.  Prudential’s deregulation fulfills a years-long effort by Dodd-Frank critics to weaken a crucial post-crisis regulatory reform.

In my new essay, “The Last SIFI: The Unwise and Illegal Deregulation of Prudential Financial, Inc.,” I contend that overturning Prudential’s “systemically important” status was not only misguided, it was also against the law.  By illegally … Read more

The Underappreciated Dilemmas of Overlapping Financial Regulations

Calls to dismantle the legal framework that was developed in response to the financial crisis have begun to multiply and gain momentum. Pursuant to a Trump Administration executive order, the Treasury Department has released a series of reports that undertakes a comprehensive review of existing financial regulations. And in Congress, the proposed Financial CHOICE Act sets forth a roadmap for replacing the Dodd-Frank Act in full. Some of that roadmap was enacted earlier this year with the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act.

The recent wave of reforms is as much about a change in … Read more

The Real but Exaggerated Threat of Financial Institution Mobility to Financial Regulation

Where jurisdictions differ in how they regulate an activity, migration allows private parties to choose between regulatory regimes.  In the context of financial regulation, scholars assert that harmonization of regulation across jurisdictions is necessary to prevent institutions from opting into the laxest regulatory regime through relocation.[1]  This assertion relies on two assumptions: (1) financial institutions indeed move in response to burdensome regulations, and (2) unilateral regulation is insufficient to achieve regulatory objectives with respect to offshore institutions.  My recent project provides the first empirical evidence supporting that financial institutions relocate activities in response to derivatives regulation.  Charges that unilateral … Read more

Did Deregulation End the “Quiet Period” of Low-Risk Banking?

From the New Deal until the 1970s, banks were on a tight leash. Regulators controlled the rate of interest they could pay on deposits. Banks could not underwrite or deal in corporate securities. With some exceptions, they could not expand geographically.

These restrictions were gradually eliminated beginning in the 1970s. Simultaneously, banking grew riskier. From the end of World War II to 1970, bank failures were virtually nonexistent. From that time on, the U.S. experienced waves of bank distress culminating in the financial crisis of 2007-09.

It is tempting to conclude that the deregulation caused the instability. I believe, however, … Read more

Was Glass-Steagall’s Demise Both Inevitable and Unimportant?

The financial crisis of 2007-09 caused the Great Recession, the most severe global economic downturn since the Great Depression.  The financial crisis began with the collapse of the subprime mortgage market in the U.S. and spread to financial markets around the world.  Similarly, the disastrous financial events of the Great Depression began with the Great Crash on Wall Street in October 1929 and spread throughout the U.S. and Europe during the early 1930s.[1]

Congress responded to the Great Depression by passing the Glass-Steagall Banking Act of 1933.  Two of Glass-Steagall’s key provisions – Sections 20 and 32 – separated … Read more

The Deregulation Debate: The Challenge of Using Static Rules to Govern a Dynamic System

In their lively disagreement about the role of deregulation in contributing to the 2007-2009 financial crisis, professors Arthur Wilmarth and Paul Mahoney inadvertently illuminate why the processes through which finance is regulated are so ill-suited to that purpose.  Finance is dynamic.  Today’s financial system bears only a coarse resemblance to the financial system of the 1950s.  Tomorrow, the system will evolve yet further and in ways we may not be able to imagine today.   In contrast, the legal regime is designed to stagnate. Frictions make statutes and regulations difficult to change, even when market changes have already altered the substantive … Read more

How Private Equity Enhances the Market for Corporate Control and Capitalism

In this age of firebrand political rhetoric and sniping from the right and the left, Wall Street has taken more than its fair share of criticism. One of the most significantly misplaced criticisms, however, derives from a gross misunderstanding of how the invisible hand of the market works and how certain mechanisms improve the health of firms and the market overall, delivering value for a broad swath of stakeholders—managers, investors, and employees alike.

In his 1965 “Mergers and the Market for Corporate Control,” Henry Manne describes how market competition helps regulate the behavior of managers. Managers that pursue objectives counter … Read more

Disclosure Regulation in the Commercial Banking Industry: Lessons from the National Banking Era

In the aftermath of the 2007—2009 financial crisis, policymakers around the globe responded to calls for greater transparency in the financial system by adopting new rules and institutions that required more and better information disclosure by financial institutions. For example, the Dodd-Frank Act required the Federal Reserve Board to publish the results of periodic stress tests administered to the largest financial institutions. In spite of the recent flurry of regulations, the jury is still out on whether they enhance the stability and development of the financial system.

The lack of consensus is largely based on conflicting predictions from the theoretical … Read more

Lehman Brothers: How Good Policy Can Make Bad Law

As we approach the 10-year anniversary of the failure of Lehman Brothers, the news is again awash in a debate about whether policymakers could have saved the investment bank.  That the issue remains so deeply contested reflects how fundamentally flawed the current legal regime is.  Although embodying ideas that are sensible in the abstract, the regime makes the authority to act contingent on facts that policy makers cannot readily discern during periods of systemic distress.  Making matters worse, subsequent events, including other actions by those same policy makers, can further skew the critical facts on which legal authority rests.  This … Read more

A Retrospective on the Demise of Long-Term Capital Management

The 10th anniversary of the harrowing financial events of September 2008 is nearly upon us.  The anniversary will undoubtedly be marked by various retrospectives analyzing those events.  For a longer-term perspective, though, it may be helpful to consider another anniversary that will be observed in September 2018:  the near failure of Long-Term Capital Management, L.P. and its fund, Long-Term Capital Portfolio, L.P. (collectively “LTCM”) 20 years ago.  LTCM was the largest hedge fund operating in the United States and its brush with death provided a preview of some of the forces that would contribute to the near collapse of the … Read more

Why Firms Disclose a Supplemental CEO-to-Median Worker Pay Ratio

Pay disparity between executives and employees has been criticized as evidence of corporate greed. It can also create perceptions of unfairness and dissatisfaction among employees, weakening their commitment and performance. To provide more information about pay disparity, the U.S. Congress enacted Section 953 (b) of Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which requires all publicly listed firms to disclose a Pay Ratio comparing annual CEO compensation with median annual employee compensation, excluding the CEO. Proponents of Section 953 (b) assert that the information helps investors understand and evaluate CEO compensation within a specific firm. However, critics … Read more

Measuring Regulation Based on Industry Response

Despite the central role of government regulation in academic inquiry and policy evaluation, there is no universally accepted way to measure how changes in regulatory complexity and intensity affect private industry at different times.  This lack of a standard methodological approach to measuring regulatory burdens on companies has limited the extent to which researchers can generalize and compare results of studies that consider particular regulations, industries, or time periods.  There is a strong need for a standard approach that is theoretically and empirically grounded and difficult to manipulate.

In Measuring Regulation, Miao Ben Zhang and I develop a novel … Read more

The Consequences of Strong v. Weak Clawback Provisions

Clawback provisions authorize firms to recoup compensation from executives upon the occurrence of financial restatements or executive misbehavior. The first clawback provision in U.S. federal law was Section 304 of the Sarbanes-Oxley Act of 2002 (SOX 304). SOX 304 requires CEOs and CFOs to return any earned incentive compensation following a financial restatement due to misconduct and puts the burden of enforcement on the Securities and Exchange Commission (SEC). After SOX 304, Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act introduced clawback rules in 2010 requiring firms to adopt and enforce clawback provisions themselves. While Section … Read more

How External Whistleblower Rewards Affect Internal Reporting

Does paying employees for blowing the whistle on corporate crime to regulators discourage internal reporting and undermine corporate governance? The answer is not as simple as it might seem. My research shows that, as the amount of reward increases, the probability of internal reporting rises at first but then falls.

The question has been discussed in countries that have introduced or contemplated the introduction of legislation to reward whistleblowers but has not yet been fully analyzed. One of the overlooked obstacles is that the standard of proof for external whistleblowing cases is higher than for cases of internal reporting, and … Read more

SEC’s Jackson Calls for Curbing Executives’ Ability to Cash Out on Buybacks

Thank you so much, Neera [Tanden], for that very kind introduction. I’ve long admired all that you and everyone here at the Center for American Progress do to promote a progressive economic agenda. And I share your commitment to making sure our markets are safe and efficient—and fair for all Americans. So it’s a real honor to be with you here today.[1]

I also want to thank my friend Andy Green, who in addition to being Managing Director of Economic Policy here at CAP, has been a critical source of wisdom for me since my swearing in at the

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