Elasticity, Incompleteness, and Constitutive Rules

In A legal theory of finance, Katharina Pistor outlines a theory designed to deal with the law-finance paradox, that is, the observation that when “the full force of law is relaxed or suspended to take account of changes in circumstances” – precisely to avoid bringing down the financial system –, “the credibility law lends to finance in the first place is undermined” (Pistor, 2013: 323). In building her argument, Pistor advances the concept of law’s elasticity, which she defines as “the probability that ex ante legal commitments will be relaxed or suspended in the future” (2013: 320). The … Read more

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Editor's Tweet: Bruno Meyerhof Salama and Osny da Silva Filho on Elasticity, Incompleteness, and Constitutive Rules

Free Markets and the Legal Theory of Finance

Richard Shamos is an Associate in the Investment Management practice at Schulte Roth & Zabel LLP in New York.

The relationship between free markets and government is perhaps one of the most prominent economic issues of modern political economy.  In A Legal Theory of Finance, Katharina Pistor presents a powerful tool for analyzing this relationship by emphasizing the central role law plays in defining markets and market instruments.  This article examines Pistor’s mode of analysis and then explores how it may be applied within the investment fund context to draw on real world examples of the relationship between law … Read more

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Editor's Tweet: Richard Shamos of Schulte Roth discusses Free Markets and the Legal Theory of Finance

The Marketplace of Ideas: Professor Anna Gelpern and James P. Sweeney Weigh in on Pistor’s Legal Theory of Finance

The CLS Blue Sky Blog presents Part III of the second installment of our new series, entitled “The Marketplace of Ideas.”  Parts I and II can be found here and here.  Earlier installments are available here.  The intent is to present different perspectives on the same subject by two or more authors.

The subject is Professor Katharina Pistor’s Legal Theory of Finance (LTF).  For a short description of her theory and the format of the commentary we are releasing, please see here.

Our fourth and fifth releases comes to us from Professor Anna Gelpern of Georgetown Law … Read more

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Editor's Tweet: The Marketplace of Ideas: Professor Anna Gelpern and James P. Sweeney Weigh in on Pistor's Legal Theory of Finance

Rules, Institutions, and the Legal Theory of Finance

The International Monetary Fund (IMF) recently published its first major policy treatment of sovereign debt restructuring since 2003. It was prompted by the flawed restructuring in Greece, high profile litigation against Argentina, and recurring crises in smaller economies that failed to deliver needed relief in a timely way. The paper proposes a work program to bolster the Fund’s analytical and policy tools, as well as contract reform to expand countries’ restructuring capacity.

Taking initiative on sovereign debt is a risky move for the Fund. Between 2001 and 2003, IMF staff designed and lobbied for a treaty-based Sovereign Read more

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Editor's Tweet: Prof. Anna Gelpern discusses Rules, Institutions, and the Legal Theory of Finance

Evaluating Dodd-Frank and International Approaches to Clearinghouses, Central Banks, and Swap Lines

On June 26, in a House Committee on Financial Services hearing, “Examining How the Dodd-Frank Act Could Result in More Taxpayer-Funded Bailouts,” former FDIC Chair Shelia Bair testified to being “surprised at the lack of concern over the designation of “financial market utilities,” and particularly Section 806 which permits the Federal Reserve to provide safety net access to designated financial market utilities.”

Indeed, these reforms in Dodd-Frank’s Title VIII have received little attention.  Related provisions in Dodd-Frank’s Title XI mandating disclosure of the use of the Federal Reserve’s currency swap line authority with nongovernmental third parties have similarly been largely … Read more

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Editor's Tweet: Evaluating Dodd-Frank and International Approaches to Clearinghouses, Central Banks, and Swap Lines http://wp.me/p2Xx5U-1bx

Square Root Voting: A New Approach to Regulation of Chaebol, Keiretsu, and Other Conglomerate Organizations in Asia

The economies of several important Asian countries are dominated by large business groups. Many of them are family controlled, such as those in South Korea (known as “chaebol”), Israel and India. Others are not, the most notable example of which is the keiretsu of Japan. Whether family controlled or not, these business groups use highly complex webs of cross shareholdings and pyramidal structures to fend off hostile takeovers. Some American academics see them as an attractive model of corporate governance, but locals view them with concern. For example, the Korean families who control the chaebol through a tangled set of … Read more

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Editor's Tweet: Eric Posner and Others Discuss A New Approach to Regulation of Chaebol, Keiretsu, and Other Conglomerate Organizations in Asia

The Marketplace of Ideas: Cathy M. Kaplan and Jeremiah S. Pam Weigh in on Pistor’s Legal Theory of Finance

The CLS Blue Sky Blog presents Part II of the second installment of our new series, entitled “The Marketplace of Ideas.”  Part I can be found here.  Earlier installments are available here.  The intent is to present different perspectives on the same subject by two or more authors.

The subject is Professor Katharina Pistor’s Legal Theory of Finance (LTF).  For a short description of her theory and the format of the commentary we are releasing, please see here.

Our second and third releases comes to us from Cathy M. Kaplan of Sidley Austin and Jeremiah S. Pam … Read more

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Editor's Tweet: The Marketplace of Ideas: Cathy M. Kaplan and Jeremiah S. Pam Weigh in on Pistor's Legal Theory of Finance http://wp.me/p2Xx5U-1cD

The Marketplace of Ideas: Kathryn Judge takes on Katharina Pistor’s Legal Theory of Finance

The CLS Blue Sky Blog presents the second installment of our new series, entitled “The Marketplace of Ideas.”  Earlier installments are available here.  The intent is to present different perspectives on the same subject by two or more authors.

Today, the subject is Professor Katharina Pistor’s Legal Theory of Finance (LTF).  Her theory grew out of a two year research project – the Global Finance and Law Initiative (further described here) – that set out to critique existing theories in economics and sociology on the relation of law to finance and developed an alternative approach.  It was distilled … Read more

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Editor's Tweet: The Marketplace of Ideas: Kathryn Judge takes on Katharina Pistor's Legal Theory of Finance

Systemic Stability and Fairness: An Analysis of Pistor’s Legal Theory of Finance

In A Legal Theory of Finance, Katharina Pistor introduces a provocative new theory about the relationship between law and finance and the role of law in producing and addressing financial instability.   Pistor shows that law plays a constitutive role in the financial system; yet, because of irreducible uncertainty and uneven liquidity, legal obligations, fully enforced, “would inevitably bring down the financial system.”  Hence, the law-finance paradox.  Collapse is avoided, and predictably so, by the relaxation or suspension of legal obligations, revealing law to be inherently elastic.  Significantly, however, law’s elasticity is not uniform.  “Law tends to be relatively elastic … Read more

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Editor's Tweet: Prof. Kathryn Judge of Columbia Law School Evaluates Prof. Katharina Pistor's Legal Theory of Finance

Davis Polk discusses U.S. Basel III Final Rule

The U.S. Basel III final rule is the most complete overhaul of U.S. bank capital standards since the U.S. adoption of Basel I in 1989 – nearly a quarter of a century ago.  The final rule comprehensively revises the regulatory capital framework for the entire U.S. banking sector by implementing many aspects of Basel III as well as key provisions of the Dodd-Frank Act, including the Collins Amendment capital floor in Section 171 and the ban on references to credit ratings in Section 939A.  The U.S. Basel III final rule also makes significant changes to the 2012 U.S. Basel III … Read more

E.U. Managers of Non-E.U. Funds

The Alternative Investment Fund Managers Directive (Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers) (the “Directive”) entered into force on July 21, 2011 with E.U. Member States having until July 22, 2013 to implement it. The Directive broadly aims to create a single harmonized pan-European regulatory framework for E.U.-established managers (“Managers”) of alternative investment funds (“AIFs”). It also sets out a regime for the marketing in the E.U. of both E.U. and non-E.U. AIFs by non-E.U. Managers. Our memorandum focuses on the specific provisions of the Directive and the … Read more

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Editor's Tweet: Davis Polk's Richard Small discusses E.U. Managers of Non-E.U. Funds

Reed Smith on Next Steps in French Crowdfunding

Crowdfunding basically consists in the funding of a project by raising many small amounts of money from a large number of people, typically via the Internet. Primarily used in specific artistic sectors, such as the music or movie business, crowdfunding is booming as it may be considered as an interesting alternative to finance projects other than by bank loans and venture capital, in particular for small- to medium-sized companies.

Under French law, public offers, banking and financing activities are strictly regulated. Because of regulation of banking monopoly, only credit institutions may carry out banking and financing activities which are subject … Read more

Should Lex Americana be universal? FATCA turns foreign banks into tax informants

Over the last decades, a number of initiatives taken by various US administrations on both sides of the aisle have raised concerns about the actual legality of the extraterritoriality attached to laws imposed by the United States of America on other jurisdictions around the world, often using “persuasion” rather than legal due process.

In my first course on International Private Law at the Catholic University of Louvain, we were taught that tax laws could not extend beyond the borders of the taxation authorities. The territoriality of tax laws is confirmed by the literature.   The double taxation treaties confirm this principle … Read more

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Editor's Tweet: George Ugeux discuss whether the Lex Americana should be universal? How FATCA turns foreign banks into tax informants

Disclosure and Ratings Requirements in European Structured Finance

The newly amended credit rating agencies regulation coming into force on 20 June will expand the scope and application of disclosure requirements and other ratings related regulation for structured finance instruments – a concept wide enough to include many transactions not traditionally thought of as securitisations. It imposes potentially extensive disclosure requirements and rules requiring at least two ratings. It also promotes the use of smaller credit rating agencies. Previously it had been possible for parties to ignore most disclosure requirements provided that the transaction in question was not offered to the public or listed on a regulated market. Read

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Editor's Tweet: Clifford Chance discusses Disclosure and Ratings Requirements in European Structured Finance http://wp.me/p2Xx5U-151

We are the (National) Champions: Understanding the Mechanisms of State Capitalism in China

China now has the second-largest number of Fortune Global 500 companies in the world. Most of the Chinese companies on the list are state-owned enterprises (sometimes called “SOEs”) organized into massive corporate groups with a central government agency as their ultimate controlling shareholder. Despite these groups’ importance to China’s domestic economy and foreign investment strategy, many features of the SOE sector—particularly the organizational structure and governance characteristics of the SOE groups—remain a black box.

Unpacking the black box requires moving away from the standard focus on agency costs in listed firms that predominates in the corporate governance literature. Instead, in … Read more

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Editor's Tweet: Professors Curtis Milhaupt and Li-Wen Lin of Columbia discuss the mechanisms of state capitalism in China

In Strange Company: The Puzzle of Private Investment in State-Controlled Firms

The following post comes to us from Professor Mariana Pargendler of the Fundação Getulio Vargas School of Law at São Paulo, Brazil.  

Despite prior waves of privatization, state-owned enterprises (SOEs) remain a fixture of the variety of capitalism embraced by Brazil, Russia, India, and China as well as other emerging and developed economies. The state, however, is too often not alone in the companies it controls. Minority shareholdings in government-controlled firms are pervasive around the globe, and have been on the rise in a number of jurisdictions. As of 2010, publicly traded SOEs accounted for a startling one-fifth of the … Read more

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Editor's Tweet: Professor Mariana Pargendler discusses her new article on private investment in state-controlled firms

The Present and Future of Corporate Governance: Re-Examining the Role of the Board of Directors and Investor Relations in Listed Companies

In our new paper, The Present and Future of Corporate Governance: Re-Examining the Role of the Board of Directors and Investor Relations in Listed Companies, forthcoming in the European Company and Financial Law Review, we contribute a new perspective on corporate governance by examining the ‘ignored’ third dimension of the corporate governance debate: the prospect of business growth and value creation. A three-dimensional approach provides a better understanding of the dynamics of the corporate governance practices that we currently observe in listed corporations. Our analysis is supported by empirical evidence, derived from two hand-collected data sets, that consist … Read more

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Editor's Tweet: Joseph McCahery and others discuss the Role of the Board of Directors and Investor Relations in Listed Companies

Alston & Bird Discusses How Hedge Funds and Private Equity Firms Can Manage FCPA Risks

In recent years, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have aggressively investigated and enforced both the anti-bribery and accounting provisions of the Foreign Corrupt Practices Act (FCPA). Many of these matters have been the result of “industry sweeps,” which have included the oil and gas, pharmaceutical and medical device, and telecommunication industries.

DOJ and the SEC have also made clear that the banking and finance industry is a high priority for FCPA enforcement. In January 2011, the SEC initiated investigations into bank and private equity firm transactions involving sovereign wealth funds, national pension funds, … Read more

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Editor's Tweet: Alston & Bird Discusses How Hedge Funds and Private Equity Firms Can Manage FCPA Risks

Europe’s OTC Derivatives Regulation: An Overview of the New Framework

The “European Market Infrastructure Regulation,” known as EMIR, was adopted on July 4, 2012, as the Regulation on OTC Derivatives, Central Counterparties and Trade Repositories (EU 648/2012), and took effect in all EU Member States on August 16, 2012. As an EU Regulation, EMIR is effective in EU Member States without the need for national regulations or legislation.

The EMIR regulatory framework is made up of Regulation EU 648/2012 (the “Regulation”) and several European Commission Implementing Regulations and Delegated Regulations which set out technical standards addressing matters of detail under the Regulation. The Implementing Regulations and Delegated Regulations were published … Read more

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Editor's Tweet: Europe's OTC Derivatives Regulation: An Overview of the New Framework http://wp.me/p2Xx5U-T4

Wachtell Lipton Discusses the SEC and “Exceptional” Cooperation

Earlier this week, the SEC announced that it had entered into a non-prosecution agreement (NPA) with Ralph Lauren Corporation to resolve an investigation under the Foreign Corrupt Practices Act (FCPA).  While the Department of Justice also announced that it had entered into an NPA with Ralph Lauren, it is the SEC agreement that is most notable.  This agreement, only the fourth publicly reported NPA that the SEC has entered since it announced that it would begin using such agreements – and the first such agreement in an FCPA case – illustrates the potential benefits of cooperation.

The SEC’s press release … Read more

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Editor's Tweet: Wachtell Lipton Discusses the SEC and “Exceptional” Cooperation