Securities Law Commons^™

Criminal Subsidiaries, Andrew K. Jennings

Faculty Articles

Corporate groups comprise parent companies and one or more subsidiaries, which parents use to manage liabilities, transactions, operations, and regulation. Those subsidiaries can also be used to manage criminal accountability when multiple entities within a corporate group share responsibility for a common offense. A parent, for instance, might reach a settlement with prosecutors that requires its subsidiary to plead guilty to a crime, without conviction of the parent itself—a subsidiary-only conviction (SOC). The parent will thus avoid bearing collateral consequences—such as contracting or industry bars—that would follow its own conviction. For the prosecutor, such settlements can respond to criminal law’s …

Bearer Negotiable Instruments: Addressing A Financial Intelligence Gap And Identifying Criminogenic Weaknesses, Hollis B. Kegg

Dissertations, Theses, and Capstone Projects

Bearer Negotiable Instruments (BNI) are a long-standing category of financial instruments used to transfer large amounts of money in ways that may not be subject to regulation, reporting, tracking, review, or oversight. There is limited information available on BNIs, and no evidence that any studies have been undertaken on BNIs alone, much less reported. Increasingly, BNIs are being used for illegal purposes including money laundering. This study gathers information about their characteristics, nature, purpose, legal status, and numbers. It also focuses on the crime risks associated with BNIs, the crime opportunities they facilitate, and the criminal weaknesses in the financial …

Dynamic Disclosure: An Exposé On The Mythical Divide Between Voluntary And Mandatory Esg Disclosure, Lisa Fairfax

All Faculty Scholarship

In March 2022, for the first time in its history, the Securities and Exchange Commission (the “SEC”) proposed rules mandating disclosure related to climate change. The proposed rules are remarkable because heretofore many in the business community, including the SEC, vehemently resisted climate-related disclosure, based primarily on the argument that such disclosure is not material to investors. This resistance is exemplified by the current lack of any SEC disclosure mandates for climate change. The proposed rules have sparked considerable pushback including allegations that the rules violate the First Amendment, would be too costly, and focus on “social” or “political” issues …

Gamestop And The Reemergence Of The Retail Investor, Jill E. Fisch

All Faculty Scholarship

The GameStop trading frenzy in January 2021 was perhaps the highest profile example of the reemergence of capital market participation by retail investors, a marked shift from the growing domination of those markets by large institutional investors. Some commentators have greeted retail investing, which has been fueled by app-based brokerage accounts and social media, with alarm and called for regulatory reform. The goals of such reforms are twofold. First, critics argue that retail investors need greater protection from the risks of investing in the stock market. Second, they argue that the stock market, in term, needs protection from retail investors. …

A Lesson From Startups: Contracting Out Of Shareholder Appraisal, Jill E. Fisch

All Faculty Scholarship

Appraisal is a controversial topic. Policymakers have debated the goals served by the appraisal remedy, and legislatures have repeatedly revised appraisal statutes in an effort to meet those goals while minimizing the cost and potential abuse associated with appraisal litigation. Courts have struggled to determine the most appropriate valuation methodology and the extent to which that methodology should depend on case-specific factors. These difficulties are exacerbated by variation in the procedures by which mergers are negotiated and the potential for conflict-of-interest transactions.

Private ordering offers a market-based alternative to continued legislative or judicial efforts to refine the appraisal remedy. Through …

The Sec’S Climate Disclosure Rule: Critiquing The Critics, George S. Georgiev

Faculty Articles

Climate change is an existential phenomenon, which entails a wide variety of physical risks as well as sizeable but underappreciated economic risks. In March 2022, the U.S. Securities and Exchange Commission (SEC) moved to address some of the information gaps related to the effects of climate change on firms by proposing a rule that requires public companies to report detailed and standardized information about important climate-related matters for the benefit of investors and markets. Though the rule proposal was welcomed by many market participants, it was also met with a level of opposition that was unusual in both its intensity …

Do Esg Funds Deliver On Their Promises?, Quinn Curtis, Jill E. Fisch, Adriana Z. Robertson

All Faculty Scholarship

Corporations have received growing criticism for their role in climate change, perpetuating racial and gender inequality, and other pressing social issues. In response to these concerns, shareholders are increasingly focusing on environmental, social, and corporate governance (ESG) criteria in selecting investments, and asset managers are responding by offering a growing number of ESG mutual funds. The flow of assets into ESG is one of the most dramatic trends in asset management.

But are these funds giving investors what they promise? This question has attracted the attention of regulators, with the Department of Labor and the Securities and Exchange Commission (SEC) …

Mutual Fund Stewardship And The Empty Voting Problem, Jill E. Fisch

All Faculty Scholarship

When Roberta Karmel wrote the articles that are the subject of this symposium, she was skeptical of both the potential value of shareholder voting and the emerging involvement of institutional investors in corporate governance. In the ensuing years, both the increased role and engagement of institutional investors and the heightened importance of shareholder voting offer new reasons to take Professor Karmel’s concerns seriously. Institutional investors have taken on a broader range of issues ranging from diversity and political spending to climate change and human capital management, and their ability to influence corporate policy on these issues has become more significant. …

The Rescue Of Fannie Mae And Freddie Mac – Module A: The Conservatorships, Daniel Thompson, Rosalind Z. Wiggins

Journal of Financial Crises

Two government-sponsored enterprises (GSEs), the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), dominated the secondary mortgage market during the US housing crisis, collectively holding or guaranteeing $5.3 trillion in mortgage assets by late 2007. As the crisis escalated, the two GSEs began to report substantial losses and their survival became uncertain. On September 6, 2008, the GSEs’ new regulator, the Federal Housing Finance Agency (FHFA), placed the firms into indefinite conservatorships, one step of a four-part government intervention to stabilize the enterprises. This case study evaluates the purpose and efficacy of the …

Synthetic Governance, Byung Hyun Anh, Jill E. Fisch, Panos N. Patatoukas, Steven Davidoff Solomon

All Faculty Scholarship

Although securities regulation is distinct from corporate governance, the two fields have considerable substantive overlap. By increasing the transparency and efficiency of the capital markets, securities regulation can also enhance the capacity of those markets to discipline governance decisions. The importance of market discipline is heightened by the increasingly vocal debate over what constitutes “good” corporate governance.

Securities product innovation offers new tools to address this debate. The rise of index-based investing provides a market-based mechanism for selecting among governance options and evaluating their effects. Through the creation of bespoke governance index funds, asset managers can create indexes that correspond …

Reversing The Fortunes Of Active Funds, Adi Libson, Gideon Parchomovsky

All Faculty Scholarship

In 2019, for the first time in the history of U.S. capital markets, passive funds surpassed active funds in terms of total assets under management. The continuous growth of passive funds at the expense of active funds is a genuine cause for concern. Active funds monitor the management and partake of decision-making in their portfolio companies. Furthermore, they improve price efficiency and managerial performance by engaging in informed trading. The buy/sell decisions of active funds provide other market participants reliable information about the quality of firms. The cost of active investing is significant and it is exclusively borne by active …

Compliance Management Systems: Do They Make A Difference?, Cary Coglianese, Jennifer Nash

All Faculty Scholarship

Regulatory compliance is vital for promoting the public values served by regulation. Yet many businesses remain out of compliance with some of the regulations that apply to them—presenting not only possible dangers to the public but also exposing themselves to potentially significant liability risk. Compliance management systems (CMSs) may help reduce the likelihood of noncompliance. In recent years, managers have begun using CMSs in an effort to address compliance issues in a variety of domains: environment, workplace health and safety, finance, health care, and aviation, among others. CMSs establish systematic, checklist-like processes by which managers seek to improve their organizations’ …

Whitman And The Fiduciary Relationship Conundrum, Lisa Fairfax

All Faculty Scholarship

While the law on insider trading has been convoluted and, in Judge Jed S. Rakoff’s words, “topsy turvy,” the law on insider trading is supposedly clear on at least one point: insider trading liability is premised upon a fiduciary relationship. Thus, all three seminal U.S. Supreme Court cases articulating the necessary elements for demonstrating any form of insider trading liability under § 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 made crystal clear that a fiduciary relationship represented the lynchpin for such liability.

Alas, insider trading law is not clear about the source from which the fiduciary …

The Case For Preempting State Money Transmission Laws For Crypto-Based Businesses, Carol R. Goforth

Arkansas Law Review

Few industries are evolving as rapidly or as dramatically as those involving payment systems. The recent advent and spread of cryptocurrencies and associated trading platforms and exchanges, as well as ongoing improvements and innovations in FinTech generally, ensure that this is going to continue for the foreseeable future. Along with this rapid change has come a dynamic increase in the number and range of payment startups, a development that has been recognized as likely to redound to the benefit of consumers and the broader economy. The problem is simply that regulation is not keeping up with innovation.

Basel Iii F: Callable Commercial Paper, Christian M. Mcnamara, Rosalind Bennett, Andrew Metrick

Journal of Financial Crises

One of the Basel Committee on Banking Supervision’s responses to the global financial crisis of 2007-09 was to introduce the Liquidity Coverage Ratio (LCR), a short-term measure that evaluates whether a bank has enough liquidity to meet expected cash outflows during a 30-day stress scenario. One area in which this incentive has already resulted in changed practices is in the market for commercial paper. Banks often provide backup liquidity facilities to the issuers of commercial paper that the issuers can draw upon to repay a maturing issue of commercial paper if they are unable to sell a new issue to …

Basel Iii E: Synthetic Financing By Prime Brokers, Christian M. Mcnamara, Andrew Metrick

Journal of Financial Crises

Hedge funds rely on “prime brokerage” units within banks to provide leverage. With the enhanced capital requirements and new liquidity standards introduced by Basel III driving up the cost to banks of engaging in such financing, prime brokers have begun to offer an alternative means of providing hedge fund clients with leveraged exposure to securities. Known as synthetic financing, this alternative requires the prime broker to enter into derivatives contracts with the clients. Under the Basel III framework, the ability of banks to hedge and net such derivative positions results in capital and liquidity costs for synthetic financing that are …

Basel Iii B: Basel Iii Overview, Christian M. Mcnamara, Michael Wedow, Andrew Metrick

Journal of Financial Crises

In the wake of the financial crisis of 2007-09, the Basel Committee on Banking Supervision (BCBS) faced the critical task of diagnosing what went wrong and then updating regulatory standards aimed at preventing it from occurring again. In seeking to strengthen the microprudential regulation associated with the earlier Basel Accords while also adding a macroprudential overlay, Basel III consists of proposals in three main areas intended to address 1) capital reform, 2) liquidity standards, and 3) systemic risk and interconnectedness. This case considers the causes of the 2007-09 financial crisis and what they suggest about weaknesses in the Basel regime …

Taxing Bitcoin And Blockchains—What The Irs Told Us (And What It Didn’T), David J. Shakow

All Faculty Scholarship

The IRS recently issued its second description of how it will treat Bitcoin and other blockchain assets. Some of its analysis leaves open questions that invite further consideration, and important issues remain unresolved. Moreover, because the popular Bitcoin blockchain uses a "proof of work" consensus procedure, issues relating to the alternative "proof of stake" procedure have been neglected.

Private Company Lies, Elizabeth Pollman

All Faculty Scholarship

Rule 10b-5’s antifraud catch-all is one of the most consequential pieces of American administrative law and most highly developed areas of judicially-created federal law. Although the rule broadly prohibits securities fraud in both public and private company stock, the vast majority of jurisprudence, and the voluminous academic literature that accompanies it, has developed through a public company lens.

This Article illuminates how the explosive growth of private markets has left huge portions of U.S. capital markets with relatively light securities fraud scrutiny and enforcement. Some of the largest private companies by valuation grow in an environment of extreme information asymmetry …

A Tale Of Two Markets: Regulation And Innovation In Post-Crisis Mortgage And Structured Finance Markets, William W. Bratton, Adam J. Levitin

All Faculty Scholarship

This Article takes the occasion of the tenth anniversary of the financial crisis to review recent developments in the structured products market, connecting the emergent pattern to post-crisis regulation.

The Article tells a tale of two markets. The financial crisis stemmed from excessive risk-taking and shabby practice in the subprime home mortgage market, a market that owed its existence to the private-label, originate to securitize model. But the pre-crisis boom in private label subprime mortgage-backed securities could never have happened absent back up financing from an array of structured products and vehicles created in the capital markets—the CDOs that found …

The Lehman Brothers Bankruptcy F: Introduction To The Isda Master Agreement, Christian M. Mcnamara, Andrew Metrick

Journal of Financial Crises

When Lehman Brothers Holdings, Inc. (LBHI) sought Chapter 11 protection, the more than 6,000 counterparties with which its subsidiaries had entered into over 900,000 over-the-counter (OTC) derivatives transactions faced the question of how best to respond to protect their interests. The existence of standardized documentation developed by the International Swaps and Derivatives Association (ISDA) for entering into such transactions meant that the counterparties likely thought that they were dealing with a well-defined and robust set of options in answering this question. Yet, in practice, the resolution of Lehman’s OTC derivatives portfolio ended up being less orderly than the existence of …

The Lehman Brothers Bankruptcy E: The Effects On Lehman’S U.S. Broker-Dealer, Rosalind Z. Wiggins, Andrew Metrick

Journal of Financial Crises

Lehman’s U.S. broker-dealer, Lehman Brothers Inc. (LBI), was excluded from the parent company’s bankruptcy filing on September 15, 2008, because it was thought that the solvent subsidiary might be able to wind down its affairs in a normal fashion. However, the force of the parent’s demise proved too strong, and within days, LBI and dozens of Lehman subsidiaries around the world were also in liquidation. As a regulated broker-dealer, LBI was required to comply with the Securities and Exchange Commission financial-responsibility rules for broker-dealers, including maintaining customer assets separately. However, the corporate complexity and enterprise integration that characterized the Lehman …

Class Actions, Statutes Of Limitations And Repose, And Federal Common Law, Stephen B. Burbank, Tobias Barrington Wolff

All Faculty Scholarship

After more than three decades during which it gave the issue scant attention, the Supreme Court has again made the American Pipe doctrine an active part of its docket. American Pipe addresses the tolling of statutes of limitations in federal class action litigation. When plaintiffs file a putative class action in federal court and class certification is denied, absent members of the putative class may wish to pursue their claims in some kind of further proceeding. If the statute of limitations would otherwise have expired while the class certification issue was being resolved, these claimants may need the benefit of …

The Securities Law Implications Of Financial Illiteracy, Lisa Fairfax

All Faculty Scholarship

Every financial literacy study conducted over the last few decades concurs: Americans, including American investors, are financially illiterate. This Article argues that America’s financial illiteracy poses a significant, widespread, and long-term challenge for our federal securities regime because that regime is premised almost entirely on disclosure as the best form of investor protection and, by extension, on investors’ ability to understand disclosure. By advancing a typology of investors and their disclosure needs, this Article further argues that we may have significantly underestimated the extent of the financial illiteracy problem based on at least two flawed assumptions. First, we have presumed …

Reading Reflection Privacy And Security, Paul Sujith Rayi

School of Information Studies - Post-doc and Student Scholarship

No abstract provided.

Murky Skies Ahead! Analyzing Executive Authority And Future Policies Regarding Corporate Disclosure Of Greenhouse Gases, Chandler Crenshaw

William & Mary Environmental Law and Policy Review

No abstract provided.

Dictation And Delegation In Securities Regulation, Usha Rodrigues

Indiana Law Journal

When Congress undertakes major financial reform, either it dictates the precise con-tours of the law itself or it delegates the bulk of the rule making to an administrative agency. This choice has critical consequences. Making the law self-executing in federal legislation is swift, not subject to administrative tinkering, and less vulnerable than rule making to judicial second-guessing. Agency action is, in contrast, deliberate, subject to ongoing bureaucratic fiddling, and more vulnerable than statutes to judicial challenge.

This Article offers the first empirical analysis of the extent of congressional delegation in securities law from 1970 to the present day, examining nine …

Who Bleeds When The Wolves Bite? A Flesh-And-Blood Perspective On Hedge Fund Activism And Our Strange Corporate Governance System, Leo E. Strine Jr.

All Faculty Scholarship

This paper examines the effects of hedge fund activism and so-called wolf pack activity on the ordinary human beings—the human investors—who fund our capital markets but who, as indirect of owners of corporate equity, have only limited direct power to ensure that the capital they contribute is deployed to serve their welfare and in turn the broader social good.

Most human investors in fact depend much more on their labor than on their equity for their wealth and therefore care deeply about whether our corporate governance system creates incentives for corporations to create and sustain jobs for them. And because …

Federal Securities Fraud Litigation As A Lawmaking Partnership, Jill E. Fisch

All Faculty Scholarship

In its most recent Halliburton II decision, the Supreme Court rejected an effort to overrule its prior decision in Basic Inc. v. Levinson. The Court reasoned that adherence to Basic was warranted by principles of stare decisis that operate with “special force” in the context of statutory interpretation. This Article offers an alternative justification for adhering to Basic—the collaboration between the Court and Congress that has led to the development of the private class action for federal securities fraud. The Article characterizes this collaboration as a lawmaking partnership and argues that such a partnership offers distinctive lawmaking advantages. …

Introduction To Institutional Investor Activism: Hedge Funds And Private Equity, Economics And Regulation, William W. Bratton, Joseph A. Mccahery

All Faculty Scholarship

The increase in institutional ownership of recent decades has been accompanied by an enhanced role played by institutions in monitoring companies’ corporate governance behaviour. Activist hedge funds and private equity firms have achieved a degree of success in actively shaping the business plans of target firms. They may be characterized as pursuing a common goal – in the words used in the OECD Steering Group on Corporate Governance, both seek ‘to increase the market value of their pooled capital through active engagement with individual public companies. This engagement may include demands for changes in management, the composition of the board, …