The Cayman Islands, Bermuda, and the British Virgin Islands are famous as “tax havens” that facilitate the evasion or avoidance of domestic tax. They and a growing number of other offshore jurisdictions in the Caribbean and elsewhere are emerging hubs of modern financial transactions. While offshore jurisdictions tend to attract foreign capital with low tax rates, they may be doing much more than shortchanging the Internal Revenue Service.
In my article, “Regulating Offshore Finance,” I explore how offshore incorporation can enable commercial entities to evade federal regulatory statutes. The applicability of federal statutes and where a commercial entity chooses to … Read more
Investments in private equity are typically structured as 10 year limited partnerships in which fund managers act as general partners (GPs) and investors act as limited partners (LPs). Since the fund life is broken down into an investment and a liquidation period, GPs can only make new investments after the investment period has expired by raising a new fund. At that time, existing investments are not necessarily liquidated, so that current fund returns rely heavily on subjective performance estimates of their investments. This fact, stemming from a market setting of information asymmetries, has led many investors, industry observers, and academics … Read more
On April 3, 2018, the U.S. Treasury Department issued a report detailing a number of recommendations for reforming and modernizing the Community Reinvestment Act of 1977 (“CRA”) framework. The report, which follows through on the commitment made by Treasury in its June 2017 report to the President to review the current CRA framework, includes recommendations for (i) changing the way CRA geographic assessment areas are defined to reflect the changing nature of banking arising from changing technology, customer behavior, and other factors; (ii) improving the CRA performance evaluation criteria to increase the transparency and effectiveness of CRA rating determinations; (iii) … Read more
On April 3, 2018, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued long-awaited frequently asked questions (“FAQs”) regarding its new customer due diligence requirements (“CDD Rule”) that become effective on May 11, 2018.1 As a reminder, on May 11, 2018, the CDD Rule will require covered financial institutions (1) to establish procedures to identify and verify the identity of the beneficial owners of legal entity customers that open new accounts unless an exception applies and (2) ensure their anti-money laundering (“AML”) compliance programs include appropriate risk-based procedures for ongoing CDD efforts, including developing customer risk profiles and periodically … Read more
On March 19, 2018, President Trump issued an Executive Order “Taking Additional Steps to Address the Situation in Venezuela” (“Executive Order”) that prohibits U.S. persons from engaging in dealings in any digital currency, digital coin, or digital token issued by, for, or on behalf of the government of Venezuela.[i] The same day, the U.S. Department of the Treasury Office of Foreign Assets Control (“OFAC”) issued corresponding guidance that lays the groundwork for potential sanctions related to digital currency transactions more generally. Taken together, these actions reflect tightening sanctions on Venezuela, and may foreshadow OFAC asserting jurisdiction over cryptocurrency in … Read more
In response to the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was enacted on July 21, 2010 to overhaul the U.S. financial regulatory system. Dodd-Frank contains 390 rulemaking requirements, of which 274 (70.3 percent) were satisfied as of July 2016. Although implementation has been slow, Dodd-Frank has wrought many changes in the financial system. One of the most visible is the increased levels of capital at bank holding companies (BHCs).
The common equity tier 1 ratio of the 31 large and interconnected BHCs decreased from 7.07 percent in the fourth quarter of 2005 … Read more
The role of institutional investors in modern society often goes underappreciated. In fact, the viability of many socio-economic systems is premised on institutional investors succeeding in their missions. Sovereign wealth funds help stabilize the macro-economy and currency prices, finance critical infrastructure, and invest for citizens’ long-term future. Pension schemes provide transfer mechanisms that permit billions of people to have financial security in later life. And endowments and foundations fund scientific research and education, as well as sustain the arts.
To execute these crucial functions, institutional investors must remain competitive within today’s global financial ecosystem. And this means adopting advanced technologies, … Read more
Central bank law is an unloved part of public law. Maybe that’s because commercial litigators cannot sue central banks, advise the people that sell bonds to them, or argue cases in front of the U.S. Supreme Court to create new doctrines of central bank policy. Yet, new empirical studies may cast light on this unloved sector while pleasing economists eager to put in place something called nominal GDP targeting.
In our recent article, we discuss how to legally authorize central banks to buy private securities like corporate stocks and bonds. We find that the easiest way is to make … Read more
One of the most disputed policy initiatives of the Obama administration was the Department of Labor’s fiduciary rule, which subjects brokers and other financial professionals managing retirement accounts to a fiduciary duty to avoid conflicts and act in the best interest of investors. Functionally, the rule mandates a drastic change to how brokers are compensated. The rule has been enormously controversial, garnering thousands of comments, subjected to days of hearings, and spawning hundreds of pages of news articles and commentaries. The Trump administration has halted enforcement of the rule for 18 months to review its effects, and its future remains … Read more
An important and long-standing question in the economics of information is whether voluntary disclosure leads to full disclosure. A compelling and intuitive argument, often described as the “unraveling” argument (see Milgrom, 1981), suggests that the answer is, yes. In brief, the argument is that the firm, or more generally the “sender,” with the most favorable information will voluntarily disclose. So the audience for the disclosure—the “receiver”—will interpret non-disclosure as indicating that the firm does not have the most favorable information. But given this, the firm with the second most favorable information will disclose, and so on. All the firms thus … Read more
We investigate Chinese firms’ use of variable interest entities (VIEs) to evade Chinese regulation on foreign ownership and list in the U.S. We find that the use of VIEs for such ends is widespread, growing, and associated with valuation discounts of as much as 30 percent relative to Chinese non-VIE firms listed in the U.S. The discount varies predictably with events that change the risk of government intervention and managerial malfeasance, and is tempered by better oversight and lower regulatory risk. To protect shareholders, VIE firms are more likely to have these characteristics as well as to curry government favor … Read more
Investigations into potential violations of U.S. and non-U.S. securities laws are often resolved by a settlement requiring the business to make one or more large settlement payments. We have seen settlements paid to the DOJ, the SEC, other U.S. and non-U.S. regulators, and private plaintiffs. An important question is whether the payment will be deductible for tax purposes. Since 1969, the U.S. tax law has denied a deduction for “any fine or similar penalty paid to a government for the violation of any law.” This limitation was significantly changed by the U.S. tax reform law enacted in December of … Read more
The U.S. high-yield and investment-grade debt markets saw significant increases in 2017 over 2016 in dollar volume and number of issuances. The U.S. equity indices reached new highs throughout the year, with the Standard & Poor’s 500 index ending the year up 19.4 percent.
The slow, steady expansion of the economy (one of the longest expansion cycles on record) and the current favorable market conditions, along with the recently enacted reduction in corporate taxes — which could drive earnings expansion — have fueled optimism for robust capital markets activity in 2018. Questions linger, however, about the sustainability of the … Read more
Columbia Law School and Columbia Business School’s Program in the Law and Economics of Capital Markets is now accepting applications for their Post-Doctoral Research Fellow. This position is intended for a person who expects to begin a law school teaching career at the start of the 2020-21 academic year and who desires an interim position that would help the person prepare for such a career by offering the time and facilities needed to do serious research and to develop further expertise. A candidate should have an exceptional academic record from a major law school and have at least three years … Read more
Economic sanctions and anti-money laundering (“AML”) remain at the forefront of U.S. regulatory priorities. Indeed, in 2017, federal and state agencies imposed over $2.5 billion in penalties for sanctions/AML violations. And, despite its generally deregulatory agenda, the Trump administration has taken a rigorous approach in this area, particularly with respect to sanctions. At the state level, the New York Department of Financial Services (“DFS”) continues to take aggressive action on both the regulatory and enforcement fronts. This memorandum surveys major developments and trends in 2017 and provides an outlook for the year ahead. We also provide some practical advice for … Read more
It has become common in Britain to argue about whether those who forcefully suggested that a vote to leave the EU would have a very negative effect on the UK economy were wide of the mark. This argument may be rather pointless and, since the UK has not actually left yet, somewhat premature. It is also an argument that will be very hard to settle, because measurable economic impacts have a wide variety of underlying causes, and to identify an effect is to beg the question, rather than answer it. So this week, when Lord O’Neill – prominent pro-EU campaigner … Read more
Innovation is perhaps the single most important driver of productivity and growth. However, firms do not innovate in isolation but rather within an ecosystem of their technological peers, as many classic studies show. More recent work finds that a given firm’s innovation, productivity, and value increase as a result of technology spillovers from other firms.
Like knowledge spillovers generally, inventions have social value that can far exceed their private value to the inventor. Technological progress can create technologies not just for the inventor firm, but also for its peers. In a virtuous circle, the resulting technological progress of the peer … Read more
June 2018 will mark the 60th anniversary of the publication of Franco Modigliani and Merton Miller’s classic article, The Cost of Capital, Corporation Finance, and the Theory of Investment. Widely hailed as the foundation of modern finance, their article, which purports to demonstrate that a firm’s value is independent of its capital structure, is little known by lawyers, including legal academics. That is unfortunate, because the Modigliani-Miller capital structure irrelevancy proposition (when inverted) provides a simple, but powerful framework that can be extremely useful to legal academics, practicing attorneys, and judges.
Sixty years ago, the field of finance … Read more
In recent years, there has been an increase in the number of firms opting to either forgo the public equity market or exit the market in favor of private financing. Increasingly, financing for private firms comes from private funds, such as private equity, venture capital, and hedge funds. In 2015, private funds owned stakes in over 7,500 firms and had over $4 trillion in capital under management. This amounts to a significant portion of the overall economy relative to the total U.S. market capitalization of $25 trillion.
As the privately-held sector of the economy grows, the financial … Read more