There are two established explanations for bank runs: coordination problems among depositors and information asymmetries between bank managers and depositors. In a new paper, “Information Gaps and Shadow Banking,” forthcoming in the Virginia Law Review and available here, I offer a novel, complementary explanation for why short-term creditors run: information nobody possesses.
Both the banking and shadow banking systems use short-term debt to fund longer-term, less liquid assets. That short-term debt is designed to pose sufficiently minimal credit, liquidity, and duration risk that holders can treat the claims as close substitutes for money. This reduces funding costs and has … Read more
Regulatory agencies are created to act in the public interest but often end up acting in the interests of those regulated. This is known as regulatory capture. The theory of regulatory capture may be given both a broad and narrow interpretation. Under a broad interpretation, a group of entities seeking regulatory favor or “a special interest” affect state intervention in various areas, including taxation, monetary policy and legislation. Under a narrow interpretation, special interest groups manipulate regulators directly.
Mutual fund assets in the U.S. currently exceed $16 trillion, and these assets generate more than $100 billion per year in revenue … Read more
On October 26, 2016 the U.S. Securities and Exchange Commission proposed proxy rule amendments that would require, in a contested election of directors, the public company and the shareholder activist to each use a “universal” proxy card – i.e., a card that includes the names of both parties’ nominees. Under the proposal, shareholders would be able to vote by proxy for a mix of company and dissident nominees of their choosing (i.e., “splitting the vote”). Currently, split-ticket voting can be accomplished only by attending the shareholder meeting and voting by ballot. The proposed changes are an attempt by the SEC … Read more
Attempts by U.S. federal officials to regulate corporate governance have been criticized by prominent scholars as “quackery.” Major reforms like Sarbanes-Oxley and Dodd-Frank may in fact do far more harm than good. But what if these efforts at healing our financial system are more than just poorly designed and executed? What if, instead, they are achieving precisely what they were designed to achieve? What if they were designed not by quacks but by bootleggers?
In 1999, Bruce Yandle, emeritus dean and professor of economics at Clemson University, proposed a public-choice economics version of the old saying, “politics makes strange … Read more
On November 7, 2016, the U.S. Securities and Exchange Commission (the “Commission”) overturned an Administrative Law Judge’s (the “ALJ”) initial decision and issued an opinion In re The Robare Group, Ltd., Advisers Act Rel. No. 4566 (Nov. 7, 2016), finding that investment adviser The Robare Group, Ltd. (“TRG”) and its principals, Mark Robare and Jack Jones (collectively, the “Respondents”), negligently failed to fully and fairly disclose potential conflicts of interest arising from an arrangement with a mutual fund manager (the “Fund Manager”) pursuant to which the Fund Manager paid Robare for maintaining client assets in certain mutual funds … Read more
To date, nearly 300 companies have adopted proxy access bylaws, including over 40 percent of S&P 500 companies. Given the widespread adoption of proxy access by large U.S. companies, it was only a matter of time before a shareholder actually used proxy access. And, on November 10, 2016, activist investor firm, GAMCO Investors (“GAMCO”), became the first investor in the United States to use a company’s proxy access bylaw to nominate a director candidate for inclusion in a company’s proxy materials.
Separately, the staff of the SEC’s Division of Corporation Finance recently issued four no-action letters involving requests to exclude … Read more
Securities and Exchange Commission Chair Mary Jo White, after nearly four years as the agency’s head, today announced that she intends to leave at the end of the Obama Administration. Under Chair White’s leadership, the Commission strengthened protections for investors and the markets through transformative rulemakings that addressed major issues highlighted by the financial crisis. The Commission also instituted a new approach to enforcement that has resulted in greater accountability and record actions through, among other things, the use of admissions of wrongdoing and enhanced data analytics and technology.
Chair White, who became the 31st Chair of the SEC in … Read more
The financial services industry is watching the Supreme Court closely in anticipation of a decision in Salman v. United States, which will be the Court’s first insider trading case since United States v. O’Hagan in 1997. Salman concerns the tipping violation the Court recognized in Dirks v. SEC in 1983 and calls on the Court to consider the requirement that an insider receive a personal benefit in exchange for disclosing material, nonpublic information to a tippee. The meaning of the personal benefit requirement has been controversial and led to a difference between the Ninth Circuit in … Read more
The European Union (EU) enacted a series of regulations in the early 2000s to improve the financial markets of member states. While the new regulations were formally the same across the EU, member countries must individually implement, supervise, and enforce them. Our paper, recently published in the Review of Financial Studies and available here, uses this situation to estimate the causal effect of securities regulation on market liquidity and also to examine how prior conditions, implementation, and enforcement affect the results of new regulation.
In our study, we examined the liquidity effects of two EU directives on securities regulation. … Read more
The use of digital currencies, like Bitcoin, is becoming widespread. To date, much of the focus on digital currencies has been directed at their potential to substitute for or complement fiat currencies, but the true innovation lies in their underlying infrastructure – the decentralised ledger of transactions called the ‘blockchain’, which could have extensive effects in myriad applications.
By way of background, Bitcoin’s system is decentralised – no central authority tracks, approves or secures transactions on the Bitcoin network. To achieve security and usability, Bitcoin’s database (the Bitcoin blockchain) utilises cryptography. The Bitcoin blockchain is a publicly viewable ledger that … Read more
Thank you, Michael [Barr], for that kind introduction. Thank you also to the University of Michigan and the Office of Financial Research for organizing this important conference. I am pleased to be here with you today. This conference is a vital opportunity to discuss some of the forces shaping financial markets and regulation.
“What hath God wrought.” That message, sent from Washington to Baltimore in 1844, signaled the arrival of the telegraph. Originally an exclamation, but sometimes written as a question, it captures both the wonder and uncertainty that new technologies can inspire. The telegraph proved to be a transformative … Read more
On September 23, U.S. District Judge William Pauley refused to approve a settlement between the CFTC and Deutsche Bank covering the bank’s failure to report swaps properly. Instead of rubber-stamping the settlement, the judge asked the parties for additional briefing. With that move, Judge Pauley followed in the footsteps of two of his colleagues in the Southern District of New York, judges Jed Rakoff and Victor Marrero, and several other district court judges around the country.
As I describe in more detail in an essay recently published in the Yale Law Journal Forum, “Securities Settlements in the Shadows,” and available … Read more
“Nice merger you’ve got here. It would be a shame if anything was to happen to it.”
In antitrust and related areas of economic regulation, private leveraging is risky business. Large firms that use substantial market power in one product to distort competition for a second product are attractive targets for claims of illegal tying or monopolization.
What if the actor leveraging its power is not a private company, but a government agency? Leveraging enables a regulator to use its gatekeeping authority to secure concessions that it might not have been able to achieve otherwise. Should we applaud or … Read more
The Securities and Exchange Commission announced on October 11 that, in fiscal year 2016, it filed 868 enforcement actions exposing financial reporting-related misconduct by companies and their executives and misconduct by registrants and gatekeepers, as the agency continued to enhance its use of data to detect illegal conduct and expedite investigations.
The new single year high for SEC enforcement actions for the fiscal year that ended September 30 included the most-ever cases involving investment advisers or investment companies (160) and the most-ever independent or standalone cases involving investment advisers or investment companies (98). The agency also reached new highs for … Read more
Oral argument in the insider trading case, Salman v. United States, prompted dozens of questions related to the key issue before the U.S Supreme Court: whether an investment banker personally benefitted directly or indirectly when he disclosed to his brother confidential information about upcoming mergers and acquisitions involving Citigroup clients, knowing that his brother was using that information to trade securities. The brother also relayed the information to the petitioner, who was a close friend and later an in-law, and the two profited mightily by purchasing stock and options to buy stock in four acquisition targets on the basis of … Read more
Last week, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) announced its second whistleblower retaliation case since the enactment of Dodd-Frank’s anti-retaliation provisions in 2011. The In the Matter of International Game Technology  case is also the first enforcement action to allege retaliation based on whistleblower activity that did not lead to a settlement of a substantive violation of the securities laws. The case is a stark reminder of the importance of implementing robust anti-retaliation policies that are consistently applied to alleged whistleblowers, even in those cases where the claims raised by the whistleblowers turn out … Read more
On September 27, 2016, in related appeals arising from a long-pending securities fraud class action against Vivendi, the Second Circuit ruled on several important issues, including the proof necessary to both sustain and defeat the fraud-on-the-market presumption of reliance.
Most significantly, in In re Vivendi, S.A. Securities Litigation, Nos. 15-180-cv(L), 15-208-cv(XAP) (2d Cir.), the Second Circuit rejected defendants’ per se challenge to the so-called “price maintenance” theory, which posits that confirmatory misstatements can fraudulently maintain an artificially high stock price by preventing the stock price from declining. The Second Circuit held that misstatements that do not cause stock price … Read more
The U.S. Supreme Court heard oral arguments today — transcript here — in U.S. v. Salman, the first insider trading case to land before the justices in almost 20 years. The issue: What counts as the “personal benefit” to the insider required under Dirks v. SEC for there to be illegal insider trading? Is it “an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature,” as the Second Circuit said in U.S. v. Newman in 2014? Or is the satisfaction of helping a close relative enough, as the Ninth Circuit … Read more