Finance & Economics

Sullivan & Cromwell Discusses New York Legislation on End of U.S. Dollar LIBOR

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On April 6, 2021, the State of New York adopted long-anticipated legislation addressing the cessation of  U.S. Dollar LIBOR (“LIBOR”).  The legislation provides a statutory approach to so-called “tough legacy” contracts (contracts that (1) reference LIBOR as a benchmark interest rate but do not include effective fallback provisions in the event LIBOR is no longer published or is no longer representative, and that (2), in the case of overnight, 1-month, 3-month, 6-month and 12-month LIBOR, will remain in existence beyond June 30, 2023, or, in the case of the 1-week and 2-month LIBOR, will remain in existence beyond December 31, … Read more

Shearman & Sterling Discusses How UK Banking Is Affecting Global FinTech

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In an increasingly virtual world, law and regulation act as a vital safety net for businesses. The nature of that safety net varies, depending on the particular legal jurisdiction where the businesses are located. Global providers in the FinTech arena can be mobile and nimble and must choose their home country for these purposes carefully. The U.K. has leading-edge regulators, world class courts, a liberal regulatory landscape and a predictable legal system, based on the “common law” precedent-based method which is preferred globally. As such, the U.K. is uniquely positioned to develop reliable and trustworthy FinTech services and to build … Read more

O’Melveny & Myers Discusses the Legal Challenges of NFTs

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Non-Fungible Tokens, or NFTs, are big news these days. After an NFT for a piece of digital art by the artist Beeple (Mike Winkelmann) sold for $69 million in March 2021―making it the third-most expensive artwork by a living artist―businesses and their lawyers have been scrambling to understand the legal issues surrounding NFTs, not to mention the meaning and value proposition of this novel class of digital assets for online marketplaces and digital content developers.

An NFT is a unique digital asset. For example, NFTs can be associated with a blog post, a sports highlight, or in the … Read more

Shearman & Sterling Discusses Financial Regulators’ Request on How Firms Use AI

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On March 29, the Federal Reserve Board, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the National Credit Union Administration (the “Federal Agencies”) issued a request for information (“RFI”) from financial institutions, trade associations, consumer groups, and other stakeholders on the financial industry’s use of artificial intelligence (“AI”). The RFI broadly seeks insight into the industry’s use of AI in the provision of financial services to customers and appropriate AI governance, risk management, and controls. While the RFI should not come as a surprise (for several years, regulators have … Read more

Latham & Watkins Provides Beginner’s Guide to NFTs

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Earlier this month, a blockchain firm bought a US$95,000 print by the British street artist Banksy, only to burn it in a livestreamed video and re-sell it for US$380,000 as a virtual asset called a non-fungible token (NFT) — sparking a flurry of news around what may prove to be this year’s hottest crypto craze.

How did the Banksy sale work? The group explained that by removing the physical piece from existence and releasing the NFT as digital art, the value of the physical piece will be moved onto the NFT. This trend isn’t just setting the art world ablaze; … Read more

How Blockchain-Based Financial Markets Can Create Systemic Risks That Harm Lower-Income People

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Blockchain-based platforms create exciting possibilities for financial inclusion: widespread ownership of deposit accounts and access to payments services. From a macro-level perspective, however, these platforms can aggravate systemic risks. Systemic instability, in turn, threatens financial inclusion and sustainability.

Sustainable finance, as used here, means continuously providing financial inclusion and access to credit. Emerging financial technologies, or fintech, such as cryptocurrencies and blockchain-based financing platforms, have potential to create access to banking services, investment possibilities, and capital for those currently underserved in these areas.

Yet blockchain-based financial activity has the potential to threaten market stability in two different ways. First, it … Read more

How the Covid-19 Pandemic Affected the Cryptocurrency Market

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In our recent paper, we conducted an empirical analysis to test how the outbreak of the Covid-19 pandemic affected the market for cryptocurrencies (“cryptomarket”). One year into the pandemic, this market seems to have boomed. For instance, when the pandemic erupted, Bitcoin – the world’s first cryptocurrency – could be purchased for about $7,300. Today, the very same token costs more than $46,800 – a staggering 640 percent rise. Other leading cryptocurrencies (e.g. Ether), showed similar (or even greater) increases. However, this upward trend is not necessarily obvious from a theoretical standpoint, as there are several forces that might drive … Read more

Regulating Digital Currencies: Towards an Analytical Framework

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In a new article, I examine the development and regulation of digital currencies, which are monetary currencies that are evidenced electronically. Large “wholesale” payments among businesses and financial institutions already occur electronically, and bitcoin has been with us for more than a decade. Three recent events, though, are prompting the development of a “retail” digital currency – one used by consumers as an alternative to cash.

First, the People’s Bank of China has been working on a retail digital currency since 2014. It now has trial runs going in four cities. Second, Facebook announced in 2019 that it will … Read more

Cleary Gottlieb Discusses DOL’s Declining to Enforce Rules on ERISA Plan Investments and Proxy Voting

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On Wednesday, March 10, after engaging in conversations with stakeholders, the U.S. Department of Labor’s Employee Benefits Security Administration issued an enforcement policy statement in which it declined to enforce two DOL rules put in place by the Trump administration in 2020.

The first of these rules placed limitations on the ability of plans subject to ERISA to invest in environmental, social and governance (“ESG”) funds. In particular, it provided that a fiduciary’s duty of loyalty and prudence under ERISA would only be satisfied if investments were selected solely on the basis of pecuniary factors (defined as factors that have … Read more

Kirkland & Ellis Discusses ESG and Climate Regulatory Developments Affecting Private Equity

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In the second half of 2020, demand for ESG-focused investments continued to accelerate, and data showing the outperformance of those investments during the COVID-19 pandemic has set the stage for robust demand to continue in 2021. In his recent letter to CEOs, BlackRock CEO Larry Fink highlighted that during 2020, 81% of a globally representative selection of sustainable indexes outperformed their parent benchmarks, indicating companies with better ESG profiles perform better than their peers. Private equity managers seem to agree: in a 2020 survey of over 50 private equity executives, 93% indicated that focusing on ESG themes generates good … Read more

Market Myopia’s Climate Bubble

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A growing number of financial institutions, from BlackRock to the Bank of England, have reached the conclusion that markets are not accurately assessing climate change-related risks. European Central Bank President Christine Lagarde recently warned that central bankers “will have to ask themselves” if they are “taking excessive risk by simply trusting mechanisms that have not priced in the massive risk that is out there.”[1] According to one survey, 93 percent of institutional investors agree with her that climate risk “has yet to be priced in by all the key financial markets globally.”[2]

Yet while the consensus (and evidence) … Read more

Corporate Venture Capital

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Why are venture capitalists the winners in the startup funding game?  VCs have funded most of the big-name startups that now dominate the NASDAQ and, in a sense, have been the only game in town for high-growth startups needing millions to grow as private companies.  Entrepreneurial finance’s ancillary players – angel investors, venture lenders, and now crowdfunding investors – all depend on VCs to fund and advise startups as they grow and either exit via IPO or sale to a larger company.

But there is one player whose entry into this space can significantly alter that dynamic: the large corporation.  … Read more

Liquidity, Pledgeability, and the Nature of Lending

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In a new paper, we explain that variation in prospective liquidity in an industry or economy prompts changes in corporate lending and banking, including changes in the level of corporate borrowing, the type of debt contracts issued, the covenants contained in them, and the role and leverage of banks.

We start with the basic principle that the nature of business lending in an economy changes over a financial cycle. This includes the amount of debt that a borrower can take on and the extent to which banks play an important role or become dominated by non-bank lenders issuing arm’s length … Read more

How the Litigious Bird Caught the (Banque) Worm

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The transactional plumbing of corporate debt payment systems is hardly where one expects to find watershed legal moments; and it usually lives up to that mundane reputation. But every so often, real disputes emerge, and they are often doozies. Such was the case with a $1.8 billion loan facility that Revlon Inc. entered into with a syndicate of lenders half a decade ago. This particular loan, in fact, had the honor of being embroiled in controversy not once, but twice within a single year. And the second of these imbroglios seems destined to cast a long shadow on the law, … Read more

How Regulatory Stress Tests Affect Bank Lending

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The Dodd-Frank Act, enacted in 2010 in the wake of the Great Recession, introduced mandatory stress-testing for the largest U.S. banks. Dodd-Frank Act Stress Testing (DFAST) was intended to ensure that banks have sufficient capitalization to absorb the losses they may experience in an economic downturn and, more importantly, continue providing credit to the economy. The stress-testing exercise, which is conducted by the Federal Reserve, uses hypothetical macroeconomic scenarios to predict a bank’s portfolio return under stress and its implied equity values. Thus, the exercise indicates whether a bank, given its current equity position and portfolio allocation, could withstand a … Read more

States Should Still Be Prepared to Borrow

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The pandemic has blown huge holes in most state budgets.  Now, with the advent of the Biden Administration and a Democratic Congress, there is a reasonable chance that substantial federal aid is coming – finally.

Given this turn of events, states may conclude that it no longer makes sense to borrow to handle budget shortfalls.  This would be a mistake.  The new round of relief has not yet passed, and it is unclear whether it will be sufficient either in general or as to particular states.  It is also unclear whether it will be enough as the crisis unfolds… Read more

Fried Frank Discusses U.S. Treasury’s Carried Interest Regulations

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Section 1061 of the Internal Revenue Code was enacted as part of the 2017 Tax Cuts and Jobs Act to create greater parity between the tax treatment of ordinary income and capital gains attributable to carried interest. The basic statutory framework applies by recharacterizing certain long-term capital gain (“LTCG”) as short-term capital gain (“STCG”), unless either an extended holding period is satisfied (three years, as compared to one year) or an exception applies. In August, 2020, the Treasury Department and the IRS issued proposed regulations (the “Proposed Regulations”) interpreting Section 1061, which were complex and restrictive in many respects, and … Read more

How Scrutinizing Honest Managers Encourages Earnings Management

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Research in finance and accounting consistently documents that a significant number of managers overstate reported earnings when true earnings miss a benchmark [1]. Managers face strong incentives to meet and beat important earnings thresholds, such as the analyst consensus forecast of a corporation’s next period future earnings per share (EPS), because capital markets react negatively to firms falling short of earnings expectations [2]. Hence, there is a widespread belief that managers “cook the books” in order to meet these benchmarks.

The accounting and corporate governance literature offers at least two ways to curb earnings management: carefully scrutinizing managers [3] and … Read more

Exploring the Shadows of Litigation Finance

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Here’s a familiar story for litigators. A client calls you with a strong legal claim, but she can’t afford to pay your hourly rates. And your firm won’t let you take the case on contingency. You feel hard-pressed to tell your client to look elsewhere.

Enter litigation finance: the practice where a third party provides capital to a litigant or law firm in connection with a legal claim, frequently to help claimholders finance their lawsuits – in return for a share of the proceeds from a winning case. Ten or even five years ago, most lawyers and regulators had barely … Read more

Skadden Discusses Supreme Court Review of FTC Monetary Relief Authority

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On January 13, 2021, the U.S. Supreme Court heard a case, AMG Capital Management, LLC v. FTC, that could substantially curtail the primary authority the Federal Trade Commission (FTC) relies on to seek monetary relief from defendants in federal court. For decades, the FTC has used Section 13(b) of the Federal Trade Commission Act of 1914 (FTC Act) to seek billions in restitution and disgorgement in a wide range of actions, including cases concerning telemarketing and online frauds, deceptive business practices, data security and privacy breaches, and conspiracies to monopolize in pharmaceutical markets.

Section 13(b) authorizes the FTC to seek … Read more