Davis Polk Discusses Financial Action Task Force’s Virtual-Asset Guidance

The Financial Action Task Force (FATF), the inter-governmental body that sets international standards for anti-money laundering (AML) and countering the financing of terrorism (CFT), released a highly anticipated interpretive note and guidance on June 21, 2019, “Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers” (the Guidance), clarifying the application of its 40 Recommendations to virtual assets (VAs) and virtual asset service providers (VASPs).  The Guidance, which builds on steps FATF has taken over several years toward setting international AML/CFT standards for the virtual currency … Read more

Do Advisers Mitigate IPO Underpricing and Withdrawals in Europe?

Many issuers have doubts about the efficiency of the IPO market, despite post-2008 regulations designed to reduce conflicts of interests and the costs of going public.  As a result, fewer companies are choosing to be listed, and many of those that do go public hire independent advisers to gain peace of mind throughout the process[1].

In our new paper, we ask whether such advisers reduce IPO underpricing and whether issuing firms benefit from greater certainty of execution or lower total fees.  We concentrate our analysis on the three leading IPO advisers in Europe (Rothschild, Lazard and STJ Advisors), … Read more

Can Corporate Income Tax Cuts Stimulate Innovation?

There has been a growing debate among politicians and policy makers, both at the state and federal levels, about the impact of taxes on investment, growth, and firm value. The focus has been predominantly on corporate income tax cuts because, as the Congressional Budget Office (2017) reports, the U.S. has the highest top statutory corporate income tax rate among the G20 nations. Without a systematic examination, however, especially one that focuses on the long-term, it is difficult to evaluate the importance of corporate income taxes.

In our article forthcoming in the Journal of Financial and Quantitative Analysis, we contribute … Read more

Libra: The Regulatory Challenges Facebook Ignored

The announcement on June 18 by Facebook of what it calls “a simple global currency and financial infrastructure that empowers billions of people” was sure to receive immediate attention. Facebook founder and CEO Mark Zuckerberg is now on a global “mission.”[1] However, the Libra White Paper is long on Libra’s technology and short on the regulatory challenges it faces around the world.

  • The diagnostic

The need for Libra is based on a diagnostic: People lack access to a global, open, instant, and low-cost way to move money. The project focuses on international payments.

Why is cross-border payment expensive? First, … Read more

Why the New Tax Law Offers a Questionable Incentive to Incorporate

This spring, both Apollo and Blackstone announced that they would be converting from publicly traded partnerships to subchapter C corporations.   In changing their legal forms of organization, they will join two other prominent private equity firms, Ares and KKR, which had earlier announced their intentions to convert from partnerships to corporations.   The conversion of leading private equity firms to corporations has been seen as the vanguard of a mass conversion of businesses from pass-through entities and partnerships to corporations in response to tax rate changes that took effect in 2018.

The late-2017 tax reform, commonly knowns at the Tax Cuts … Read more

How Taxing Short-Term Share Profits Can Foster Innovation

If short-termism shackles innovation, how do we break the chains? Our evidence suggests that increasing capital gains taxes for investors on short-term share appreciation is one possible solution.

Research shows that myopic focus on short-term earnings hurts investments in research and development (R&D), and one key driver of this corporate myopia is the pressure from shareholders with short horizons. The issue is that short-horizon investors are likely to devote their research efforts toward forecasting quarterly profits instead of trying to understand the long-term prospects of a firm’s R&D and investment portfolio. As a result, corporate managers worry that short-horizon investors … Read more

ISS Discusses Why EVA Is a Better Measure of Investment Value Than EBITDA

There’s no doubting the popularity of EBITDA—earnings before interest taxes depreciation and amortization—as a measure of investment value. Analysts like EBITDA because it removes the vagaries of depreciation and taxes and is unaffected by company leverage ratios. EBITDA is certainly a useful indicator of the gross cash operating profit performance of a business. But is it a reliable way to measure the value of a company?

The short answer is, no, not at all. EBITDA is far less correlated to market value than is commonly thought, and it is riddled with omissions and distortions that make it a highly unreliable … Read more

Arnold & Porter Discusses the End of LIBOR

As alerted in our previous Advisories, LIBOR, the “world’s most important number,” is being phased out. Created almost 50 years ago on August 15, 1969—opening day of the Woodstock music festival—LIBOR began as a floating, market-determined interest rate for syndicated loans, but over time has become the benchmark interest rate for an estimated $350 trillion in outstanding financial arrangements around the world. These contracts include public and private loans and bonds; consumer financial products such as credit cards, mortgages and student loans, and some $200 trillion in interest rate derivatives.

Due in large part to concern that the determination of … Read more

Why We Shouldn’t Regulate Reputation Risk at Banks

What do payday lenders, firearms retailers, porn stars, churches, coal mines, and condom companies have in common? All have complained that regulators pressured financial institutions to close their accounts over reputation-risk concerns.  In a my article (available here), forthcoming in the Georgia Law Review, I explain that broad regulation of reputation risk does not reduce bank risk and unnecessarily politicizes bank regulators.

Financial regulators say reputation risk is the risk of negative public opinion or negative publicity. Wells Fargo, for example, hurt its reputation by opening millions of unauthorized customer accounts. Reputation is important to all businesses, but it … Read more

Network-Sensitive Financial Regulation

Shocks to only part of the financial system, such as the collapse of the subprime mortgage market in 2007, can spread and intensify through the complex interconnections among financial and non-financial institutions to become systemic threats. The consequences can be catastrophic, prompting economists and regulators to study and find ways to curtail such threats by using network theory. Legal scholars, however, have so far largely overlooked that approach, as have policymakers. Most financial regulation remains atomistic, in that it fails to account for the fact that each individual is part of, and plays a role in, a wider network.

In … Read more

The Imperative for Blockchain Accounting

For hundreds of years, the basic flowchart of accounting information has been the same.  A firm records its own transactions, maintains a record of those transactions, and reports those transactions (Soll, 2014, xiv).  Trends in technology make it inevitable that this basic information flowchart will end.  In the future, multiple parties will record each transaction, and many more parties will maintain encrypted copies of each transaction.  Anyone with the required keys to access a firm’s records will be able to generate financial reports for the firm.

For historical reasons, the move to blockchain is inevitable.  Over the centuries, information records … Read more

Venture Bearding

For founders of companies, appealing to funders can be everything – and that often means projecting a masculine image.  In a recent article, we coined the term “venture bearding” to describe this phenomenon, a tactic that can make the difference between raising capital and laying off employees.

To understand why, consider that investors  feel most comfortable with people like themselves, and that the vast majority of investing partners at venture capital firms are men. It’s no surprise, then, that in 2018, all-female startups took in only 2.2 percent of venture capital dollars.  Women-led startups that did close deals averaged only … Read more

Debevoise Discusses Guidance on Applying Bank Secrecy Act Framework to Convertible Virtual Currency

The Financial Crimes Enforcement Network (“FinCEN”) issued interpretive guidance on May 9, 2019 explaining how the agency intends to apply its existing regulatory framework to companies offering common types of convertible virtual currency (“CVC”) products and services (the “CVC Guidance”).1 Although FinCEN largely summarizes and distills existing guidance, participants in these emerging markets have welcomed additional clarity on the agency’s evolving approach.

This update summarizes the CVC Guidance, outlines its application to specific types of CVC activities and discusses its practical import for the market.


FinCEN explains that participants in … Read more

Regulatory Arbitrage, Unclear Terminologies: A Challenge to Global Cryptoasset Regulations

Few innovations in finance have emerged in recent years that are as controversial or present as many challenges to regulators and policymakers as cryptoassets. A key question for regulators and market participants is the extent to which the difference between cryptoassets and traditional financial assets is more form than substance? It is an important question since the answer defines the appropriateness of existing regulation for cryptoassets and related activities. In an inaugural research study on the global cryptoasset regulatory landscape, a team of researchers at the Cambridge Centre for Alternative Finance has aimed to shed light on this question by … 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

Why We Need a Guarantor of Last Resort

More than a decade has passed since the worst of the 2007-2009 financial crisis.  In that time, we have learned that some of the gravest consequences of the crisis were not the economic fallout, but the political backlash it triggered.  After the panic that followed the failure of Lehman Brothers, the Federal Reserve and other regulators understandably concluded that they needed to do everything in their power to prevent the failure of another systemically important financial institution. The very next day, the Federal Reserve stretched the bounds of its legal authority to provide a record amount of liquidity support to … 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: Not Letting a Crisis Go to Waste

Calming the panic in short-term funding markets was a significant part of the response to the 2008 financial crisis. While the TARP bailout programs received the most attention during the crisis, TARP never exceeded one-fifth of the government’s overall financial stability programs, which peaked at $2.4 trillion. These markets were abstract and esoteric to most Americans, but their preservation, it was argued, was crucial to preserving the financial well-being of workers, homeowners, and small businesses. As Professor Judge notes, however, the “perception that the Fed’s interventions looked out for Wall Street over Main Street has been an ongoing source of … 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

Read more

Will Putting Title III of Helms-Burton Into Effect Open the Litigation Floodgates?

On April 17, 2019, U.S. Secretary of State Mike Pompeo announced that President Trump would not suspend for any additional periods of time Title III of the Cuban Liberty and Democratic Solidarity Act – better known as “Helms-Burton.”[1]  Title III of Helms-Burton allows U.S. nationals whose property was expropriated by the Cuban government on or after January 1, 1959, to sue in U.S. courts anyone – regardless of nationality – who knowingly and intentionally “traffics” in that property.  But, in response to strong opposition from many of the United States’ close allies and trading partners and to concerns about … Read more