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. 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
Promoting public confidence in securities markets is a policy goal that is frequently cited by commentators, Congress, the courts, regulators, and prosecutors for the adoption and vigorous enforcement of insider trading laws.
For example, in the seminal insider trading case United States v. O’Hagan, the U.S. Supreme Court explained that “investors likely would hesitate to venture their capital in a market where [insider trading] is unchecked by law.” More recently, Preet Bharara, who earned the title of “Wall Street Sheriff” by successfully prosecuting scores of insider trading cases in the wake of the 2008 financial crisis, emphasized that … Read more
Financial misconduct can lead to significant financial and reputational penalties for a firm and its managers, including hefty fines from regulators and steep drops in stock price. In fact, recent research finds that firms accused of fraud lose an average of 38 percent of their value when the news is announced, two-thirds of which is attributed to lost reputation (Karpoff, Lee, and Martin 2008). How, then, can managers best mitigate this financial and reputational damage? Prior research points to a few solutions: firing guilty parties, improving corporate governance, and cooperating with regulators. While these are undeniably important, there may be … Read more
As private equity funds approach the end of their lives, a fund’s general partner is often encouraged by the fund’s limited partners and third-party buyers to consider secondary liquidity solutions. Liquidity solutions can involve fund extensions, asset sales to third-party buyers, tender offers to limited partners, or other creative structures to maximize value in remaining fund assets. When properly executed, these structures can satisfy all stakeholders by allowing some to realize value while others remain invested in the assets. These structures, however, can be rife with conflicts of interest. A vivid example of the possible pitfalls—and the vigilance of the … Read more
Elon Musk came close to doing something truly unique. No, not his electric car. Rather, he was about to roll the dice with his shareholders’ equity.
Securities analysts estimate that somewhere between 25 and 35 percent of the value of Tesla would be sacrificed if Musk were no longer its CEO. No one else in Tesla’s management can credibly run the company, and Musk alone appears to be the visionary that can maintain its technological superiority. Yet, he placed this value at risk by rejecting a relatively generous (even soft) settlement offered by the SEC to resolve his notorious tweet … Read more
There’s a contradiction at the core of securities crowdfunding, a form of Internet-based public stock market modelled on Kickstarter and its ilk. On the one hand, crowdfunding seeks to create an inclusive system where entrepreneurs, regardless of where they are or whom they know, are invited to pitch their company directly to “the crowd” (the broad public). On the other hand, crowdfunding is supposed to be an efficient system that allows startups and small businesses to be financed so that they can grow, create jobs, and contribute to the economy. Unfortunately, these policy goals of inclusivity and efficiency are in … Read more
The Financial Industry Regulatory Authority (FINRA) relies on a framework of core principles in deciding whether to bring an Enforcement action in response to a given set of facts, and the key consideration is an assessment of “risk.” These core principles were designed to promote consistent, foreseeable outcomes to effect change in member firms, if appropriate. Susan Schroeder, Head of Enforcement at FINRA, has been conveying this message during several appearances, in conjunction with addressing the merging of two previously distinct FINRA enforcement branches into a unified Enforcement group. Member firms may find this message helps them to better understand … Read more
On Tuesday, September 11, 2018, Judge Raymond J. Dearie of the Eastern District of New York issued a decision holding that Initial Coin Offerings (“ICO”) may qualify as securities offerings and therefore be subject to the criminal federal securities laws. This ruling came as two U.S. regulators—the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”)—announced separate actions under securities laws against companies engaged in the cryptocurrency marketplace, including the sale of digital tokens. As the popularity of cryptocurrencies grows and businesses and entrepreneurs increasingly turn to ICOs to raise capital, these developments may serve as guideposts … Read more
A drama is playing out in Boston federal court before a respected judge that could prove to be a legal “Watergate,” one that could reshape class action practice. Combining elements that are both sordid and comic, this litigation has already shown that the leading experts on legal ethics disagree significantly over what must be disclosed to the court approving a class action settlement. More importantly, although this episode could prove to be an isolated aberration, the other possibility is that the behavior at issue in this case may occur regularly. As all New York City tenants know when they … Read more
On September 13, the SEC’s Division of Investment Management withdrew two interpretive letters issued in 2004 to Egan-Jones Proxy Services (“Egan-Jones”) and Institutional Shareholder Services, Inc. (“ISS”). The letters described some of the guidelines under which an investment adviser could rely on a proxy advisory firm as an independent third party for purposes of making proxy voting recommendations. In particular, the letters focused on the steps an investment adviser should take to ensure that voting recommendations were made in an impartial manner and that the proxy advisory firm’s potential conflicts of interest were addressed. The SEC staff stated that it … Read more
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
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.
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
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
Credit Default Swaps (CDSs) enable lenders to distribute credit risk to parties more willing and able to bear it, thereby enhancing the liquidity and flexibility of individual lenders and the financial system (Greenspan 2004). However, empirical evidence suggests that CDSs lead to a significant decline in the rigor and efficiency of monitoring by lenders (e.g., Ashcraft and Santos, 2009; Parlour and Winton 2013; Subrahmanyam, Tang, and Wang 2014). In our paper, “Credit Default Swaps and Managers’ Voluntary Disclosure,” we predict and find that CDS reference firms enhance their voluntary disclosure to offset the negative effect of reduced lender … Read more
Today, the Office of the Chairman and the Division of Investment Management at the Securities and Exchange Commission suddenly raised questions about long-resolved issues regarding shareholder voting. Because the Investor Advisory Committee’s critical work in this area is ongoing, it’s important to clarify the path ahead for those interested in giving shareholders real access to the levers of corporate democracy.
First, the law governing investor use of proxy advisors is no different today than it was yesterday. The Commission has long recognized that proxy advisors—the companies that develop recommendations regarding how investors should vote on corporate questions—serve an important … Read more