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The Deterrent Effect of Whistleblowing on Insider Trading

One of the many significant reforms enacted in The Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 was the creation of a whistleblower bounty program within the SEC. The program increased monetary rewards for whistleblowing and provided protections from retaliation with the goal of encouraging more whistleblowers to report their information to the SEC. While there is a growing literature investigating the effects of many facets of Dodd-Frank, an unanswered question is whether the whistleblower program affected illegal insider trading – an activity that is traditionally hard for the SEC to detect and prosecute. In my recent paper, … Read more

Banking Bailout Law

Bank bailouts during periodic financial crises aim to stop financial panic and restore the stability of the financial system. Even if they are undesirable, future bank bailouts are unavoidable due to political and political economy reasons, whether or not they are regulated or economically efficient. In a new book, I build on existing literature to examine the different bank bailout and resolution techniques and tools through carefully selected case studies from the U.S., the E.U., the U.K., Spain, and Hungary. The pros and cons of the different legal and regulatory options are identified in order to reconstruct a regulatory framework … Read more

Kohn, Kohn & Colapinto Discusses Changes to SEC Whistleblower Rules

On September 23, 2020, the U.S. Securities and Exchange Commission approved changes to its highly successful Dodd-Frank Act whistleblower program in a 3-2 vote [1]. The program has resulted in over $2.5 billion in penalties against public companies, $750 million returned to investors, and $500 million paid in rewards.  Paying corporate whistleblowers mandatory monetary rewards of between 10-30 percent of all penalties obtained from commission enforcement proceedings triggered by their allegations has been a highly controversial law from the start.  These controversies all played out during the commission’s prolonged whistleblower rulemaking proceeding.

The whistleblower advocacy community strongly opposed the major … Read more

Public Disclosure and Consumer Financial Protection

The 2008 financial crisis triggered a surge of interest in regulating consumer financial markets. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created the Consumer Financial Protection Bureau (CFPB) to safeguard consumer interests. Since 2011, the CFPB has accepted complaints about the financial products and services provided by the depository institutions under its jurisdiction. Since 2013, the CFPB has released a complaint database to the public. The data include individual complaints, their submission dates, complainants’ 5-digit ZIP Codes, types of products and issues (without narratives), and the names and responses of the banks involved.

The purpose of … Read more

Why Financial Regulation Keeps Falling Short

Modern finance is fast moving, extremely complex, and contributes to pervasive unknowns. Yet the processes governing how finance is regulated are typically slow, highly deliberative, and often reflect deeply ingrained and incredibly optimistic assumptions about our ability to understand the financial system and the potential impact of regulatory intervention. In our new paper, “Why Financial Regulation Keeps Falling Short,” we identify the key drivers of this fundamental mismatch between finance and financial regulation, demonstrate how this mismatch contributes to undesirable policy outcomes, and lay the conceptual foundations for understanding how the processes governing the creation of financial regulations … Read more

SEC Chair Clayton on Proposed Amendments to Volcker Rule and Disclosure Items

Volcker Rule

Today, the Commission joined the Federal Reserve, OCC, FDIC and CFTC in proposing additional amendments to the implementing regulations under section 13 of the Bank Holding Company Act, commonly known as the “Volcker Rule.”[1]  The proposed amendments, which principally relate to the “covered funds” provisions of the Volcker Rule, represent the next step in the Agencies’ efforts to better tailor and clarify the implementing regulations while furthering the Volcker Rule’s important statutory objectives.[2]

Joint Agency Rulemaking and the Commission’s Three Part Mission

The Commission’s three part mission is to protect investors, maintain fair, orderly, and efficient

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Davis Polk Discusses FSOC’s Shift to an Activities-Based Approach

The Financial Stability Oversight Council’s (FSOC) recently revised guidelines (the 2019 Guidelines)[1] on how it will identify and address financial stability risks are a major shift from the guidelines it issued in the immediate aftermath of the Financial Crisis (the 2012 Guidelines).  The 2019 Guidelines draw upon lessons learned from FSOC’s ultimately fruitless attempts to designate nonbank financial companies as systematically important.  Instead, building on one of the original purposes of the Dodd-Frank Act,[2] which was then emphasized in one of the Treasury Reports, the 2019 Guidelines focus on identifying and regulating systemically important … Read more

Sullivan & Cromwell Discusses FSOC Changes to Nonbank SIFI-Designation Guidance

On December 4, 2019, the Financial Stability Oversight Council (the “Council”) voted unanimously to finalize amendments to its interpretive guidance (the “Final Guidance”) on designating nonbank financial companies as “systemically important financial institutions” (“SIFIs”).[1] The Final Guidance, which will replace the Council’s interpretive guidance on SIFI designations issued in April 2012 (the “Prior Guidance”),[2] implements an “activities-based” approach to identifying and addressing potential risks to financial stability, and is intended to enhance the “analytical rigor and transparency” of the Council’s process for designating SIFIs.

The Final Guidance, which adopts the … Read more

Too Many to Fail: Against Community Bank Deregulation

If there was one thing most people could agree on after the 2008 financial crisis, it was that “too-big-to-fail” banks were to blame for the market crash. This shared understanding was accompanied by a corollary: Small banks were not the problem. These so-called community banks were perceived to be innocent bystanders, overrun by market turmoil caused by much larger financial institutions.

Community banks have long been sympathetic figures in financial regulatory circles. Generally speaking, the term refers to banks with less than $10 billion in assets that focus on traditional financial products. Reasoning that such firms pose little risk, policymakers … Read more

The Effects of Mandatory Disclosure Rules on Hedge Fund Governance

In a new paper, I add to the debate over hedge fund regulation by introducing empirical evidence that hedge fund registration requirements reduce misreporting. Using three alternating changes in hedge fund regulation, my study finds consistent evidence that registration reduces hedge funds’ misreporting — and provides evidence on why this regulatory regime is effective. In particular, my analysis suggests that the disclosure requirements led funds to make changes in their internal governance, such as hiring or switching the fund’s auditor, and that these changes induced funds to report their financial performance more accurately.

It was initially unclear whether regulation would … Read more

Spinning the CEO Pay Ratio Disclosure

The growing compensation gap between CEOs and rank-and-file employees has generated considerable debate about potential adverse consequences at both the firm and societal levels. Despite interest in the topic, assessing vertical pay disparity has been difficult due to the lack of public disclosure about employee compensation.

While companies have long reported top-executive pay, transparency on employee compensation was recently enhanced when the SEC adopted the CEO Pay Ratio Rule requiring most reporting companies to provide new disclosures of the median employee’s pay and a ratio comparing the CEO’s compensation with this value.[1] For example, if the CEO and median … Read more

Calculating SEC Whistleblower Awards: A Theoretical Approach

On October 23, the Securities and Exchange Commission is scheduled to vote on whether to adopt proposed amendments to the rules governing its whistleblower bounty program.  The most controversial proposed amendments are to Rule 21F-6, which governs the way the SEC calculates the amount of an award. In a recent paper, available here, I analyze the wisdom of the proposed amendments to Rule 21F-6.  My take: They are wise, but incomplete.

Under the Dodd-Frank Act, SEC whistleblowers are entitled to between 10 and 30 percent of the money collected by the SEC in an enforcement action that the whistleblower’s … Read more

Gibson Dunn Discusses Volcker Rule Revisions

Since it was enacted in July 2010, the Dodd-Frank Act’s Volcker Rule has challenged banks and their regulators alike.  This is particularly the case with respect to its restrictions on proprietary trading.  It has been one thing for former Federal Reserve Chairman Volcker to state that “you know it when you see it,” quite another to formulate a regulation that accurately defines proprietary trading and implements a broad statutory directive across complex business operations.

On August 20, 2019, the Office of the Comptroller of the Currency and the Board of Directors of the Federal Deposit Insurance Corporation, Director Gruenberg dissenting, … Read more

Sullivan & Cromwell Discusses Amendments to Volcker Rule Regulations

On July 9, 2019, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”), the Federal Deposit Insurance Corporation (the “FDIC”), the Securities and Exchange Commission (the “SEC”) and the Commodity Futures Trading Commission (the “CFTC” and collectively, the “Agencies”) released final rules adopting their previously proposed amendments to the regulations implementing Section 13 of the Bank Holding Company Act of 1956 (the “BHC Act”),[1] known as the “Volcker Rule.”

The amendments modify the implementing regulations in a manner consistent with Sections 203 and 204 of the … Read more

The Future of Financial Institution Resolution

One of the principal lessons learned from the 2007-2009 financial crisis was the need for new legal regimes to facilitate the rapid and orderly resolution of systemically important financial institutions without a government bailout.  In the final part of a six-part article that has just been published, I trace the development of these new legal regimes.[1]  The United States was itself a first mover in this regard with the enactment in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).[2]

The Dodd-Frank Act contains two provisions of singular importance to the resolution of … Read more

Emergency Guarantee Authority: The Pros and Cons

Today, we present a debate among preeminent scholars about Columbia Law School Professor Kathryn Judge’s proposal for an emergency guarantee authority that could help contain the fallout from another financial crisis. The first piece is Professor Judge’s summary of her proposal. It is followed by responses from Professor Morgan Ricks at Vanderbilt Law School, Graham Steele at Stanford University’s Graduate School of Business, and Professor Stephen G. Cecchetti at the Brandeis International Business School and Kermit L. Schoenholtz at New York University’s Leonard N. Stern School of Business.… Read more

Guarantor of Last Resort: Is There a Better Alternative?

Larry Summers, who was one of President Obama’s key economic advisors when the Dodd-Frank Act of 2010 was enacted, recently decried what he called “excessive populism” in portions of that legislation. This might seem surprising; Dodd-Frank’s technocracy-on-steroids approach (848 pages! 390 separate rulemaking requirements!) might seem like the antithesis of bust-up-the-banks populism. “My administration is the only thing between you and the pitchforks,” President Obama once famously told the nation’s leading bankers.

But Summers was referring to several specific Dodd-Frank provisions that curtailed the federal government’s financial rescue powers. During the financial crisis of 2007-2008, the Federal Reserve, the … Read more

Emergency Guarantee Authority: A FEMA for Finance

“[I]t is a question of when, not if, a large-scale attack succeeds.” DTCC and Oliver Wyman, Large-scale Cyber-attacks on the Financial System, March 2018.

“The government cannot credibly commit to a no-bailout policy.” Kathryn Judge, “Guarantor of Last Resort,” 97 Texas Law Review, forthcoming.

Modern financial systems are inherently vulnerable. The conversion of savings into investment—a basic function of finance—involves substantial risk. Creditors often demand liquid, short-term, low-risk assets; and borrowers typically wish to finance projects that take time to generate their uncertain returns. Intermediaries that bridge this gap—transforming liquidity, maturity and credit between their

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The Impact of Banking Regulation on Voluntary Disclosures

Firms disclose a variety of information to the public, some because they are required to do so by law or regulations, and others voluntarily because they want, for example, to signal their creditworthiness to potential investors. The level and effectiveness of financial institutions’ regulatory oversight have been widely debated since the onset of the financial crisis of 2007-2009. Financial and banking regulators have responded by increasing regulatory requirements and oversight, and by mandating greater disclosure of information. However, these actions do not necessarily improve the information environment of firms if they discourage voluntary disclosures of other types of information. In Read more

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