Securities Law Commons^™

From Equality To Duty: On Altering The Reach, Impact, And Meaning Of The Texas Gulf Legacy, Lisa Fairfax

All Faculty Scholarship

As the first federal court decision to hold that insider trading represented a violation of the federal securities laws, the historical importance of SEC v. Texas Gulf Sulphur Co. is clear. However, its current relevance may not be so clear. This is because while there are some aspects of Texas Gulf that have endured and remain a fixture of federal insider trading jurisprudence, the Supreme Court has firmly repudiated the normative rationale for insider trading articulated by Texas Gulf. This essay contends that this repudiation has important descriptive and normative implications. Perhaps most importantly, this essay contends that Texas Gulf …

Breaking Bucks In Money Market Funds, William A. Birdthistle

All Faculty Scholarship

This Article argues that the Securities and Exchange Commission’s first and most significant response to the economic crisis increases rather than decreases the likelihood of future failures in money market funds and the broader capital markets. In newly promulgated regulations addressing the "breaking of the buck" in the $3 trillion money market - a debacle at the fulcrum of the 2008 financial meltdown - the SEC endorses practices that obfuscate rather than illuminate the capital markets, including fixed pricing for money market funds, potentially riskier portfolio requirements, and the continued use of discredited ratings agencies. These policies, premised implicitly upon …

Breaking Bucks: Sec Regulation By Obfuscation, William A. Birdthistle

All Faculty Scholarship

This Article argues that the Securities and Exchange Commission’s first and most significant response to the economic crisis profoundly contradicts widely accepted theoretical and regulatory approaches to financial oversight. More alarmingly, the SEC’s newest rules increase rather than decrease the likelihood of future failures in money market funds and the broader capital markets.

Scholars – of both neoclassical and behavioral economic theory – have long insisted that transparency and disclosure play essential roles in ensuring efficient capital markets and sound financial regulation. Professors Gilson and Kraakman notably argued that the efficient capital market hypothesis, and its reliance on a market …

Investment Indiscipline: A Behavioral Approach To Mutual Fund Jurisprudence, William A. Birdthistle

All Faculty Scholarship

Next Term, in Jones v. Harris, the Supreme Court will be called upon to resolve philosophical divergences on a massive, critical, yet academically slighted subject: the dysfunctional system through which almost one hundred million Americans attempt to save more than ten trillion dollars for their retirement. When this case was in the Seventh Circuit, two of the foremost theorists of law and economics, Chief Judge Frank Easterbrook and Judge Richard Posner, disagreed vociferously on competing analyses of the investment industry. The Supreme Court’s ruling will not only resolve the intricate fiduciary and doctrinal issues of this dispute but also have …

Heedless Globalism: The Sec's Roadmap To Accounting Convergence, William W. Bratton

All Faculty Scholarship

The Securities Exchange Commission (SEC) has introduced a "Roadmap" that describes a process leading to mandatory use of International Financial Reporting Standards (IFRS) by domestic issuers by 2014. The SEC justifies this initiative on the grounds that global standardization yields cost savings and an ultimate gain in comparability, facilitating the search for global opportunities by u.s. investors and making u.s. capital markets more attractive to foreign issuers. This Article shows that the offered justification is inadequate. The SEC frames the matter as a choice between two institutional frameworks for standard setting, holding out high quality sets of standards, asking which …

One Hat Too Many? Investment Desegregation In Private Equity (Symposium) (With M. Henderson), William A. Birdthistle

All Faculty Scholarship

The nature of private equity investing has changed significantly as two dynamics have evolved in recent years: portfolio companies have begun to experience serious financial distress, and general partners have started to diversify and desegregate their investment strategies. Both developments have led private equity shops - once exclusively interested in acquiring equity positions through leveraged buyouts - to invest in other tranches of the investment spectrum, most particularly public debt. By investing now in both private equity and public debt of the same issuer, general partners are generating a host of new conflicts of interest between themselves and their limited …

Top Cop Or Regulatory Flop? The Sec At 75, Jill E. Fisch

All Faculty Scholarship

In their forthcoming article, Redesigning the SEC: Does the Treasury Have a Better Idea?, Professors John C. Coffee, Jr., and Hillary Sale offer compelling reasons to rethink the SEC’s role. This article extends that analysis, evaluating the SEC’s responsibility for the current financial crisis and its potential future role in regulation of the capital markets. In particular, the article identifies critical failures in the SEC’s performance in its core competencies of enforcement, financial transparency, and investor protection. The article argues that these failures are not the result, as suggested by the Treasury Department Blueprint, of a balkanized regulatory system. Rather, …

The Fortunes And Foibles Of Exchange-Traded Funds: A Positive Market Response To The Problems Of Mutual Funds, William A. Birdthistle

All Faculty Scholarship

One of the most dynamic and complex new investment vehicles on the market today is the exchange-traded fund (ETF), a security that provides the diversification of a mutual fund but trades on a securities exchange like a stock. In just fifteen years, the number of ETFs has proliferated to well over 600, attracting more than half a trillion dollars in investment. The majority of that expansion has occurred in just the past two years, largely as a consequence of recent difficulties in the mutual fund industry. With ETF sponsors aggressively seeking to create novel kinds of ETFs and to add …

Shareholder Primacy's Corporatist Origins: Adolf Berle And The Modern Corporation, William W. Bratton, Michael L. Wachter

All Faculty Scholarship

No abstract provided.

The Missing Monitor In Corporate Governance: The Directors' And Officers' Liability Insurer, Tom Baker, Sean J. Griffith

All Faculty Scholarship

This article reports the results of empirical research on the monitoring role of directors’ and officers’ liability insurance (D&O insurance) companies in American corporate governance. Economic theory provides three reasons to expect D&O insurers to serve as corporate governance monitors: first, monitoring provides insurers with a way to manage moral hazard; second, monitoring provides benefits to shareholders who might not otherwise need the risk distribution that D&O insurance provides; and third, the “bonding” provided by risk distribution gives insurers a comparative advantage in monitoring. Nevertheless, we find that D&O insurers neither monitor corporate governance during the life of the insurance …

Does Analyst Independence Sell Investors Short?, Jill E. Fisch

All Faculty Scholarship

Regulators responded to the analyst scandals of the late 1990s by imposing extensive new rules on the research industry. These rules include a requirement forcing financial firms to separate investment banking operations from research. Regulators argued, with questionable empirical support, that the reforms were necessary to eliminate analyst conflicts of interest and ensure the integrity of sell-side research.

By eliminating investment banking revenues as a source for funding research, the reforms have had substantial effects. Research coverage of small issuers has been dramatically reduced—the vast majority of small capitalization firms now have no coverage at all. The market for research …

Criminalization Of Corporate Law: The Impact On Shareholders And Other Constituents, Jill E. Fisch

All Faculty Scholarship

No abstract provided.

Measuring Efficiency In Corporate Law: The Role Of Shareholder Primacy, Jill E. Fisch

All Faculty Scholarship

The shareholder primacy norm defines the objective of the corporation as maximization of shareholder wealth. Law and economics scholars have incorporated the shareholder primacy norm into their empirical analyses of regulatory efficiency. An increasingly influential body of scholarship uses empirical methodology to evaluate legal rules that allocate power within the corporation. By embracing the shareholder primacy norm, empirical scholars offer normative assessments about regulatory choices based on the effect of legal rules on measures of shareholder value such as stock price, net profits, and Tobin’s Q.

This Article challenges the foundations of using the shareholder primacy norm to judge corporate …

Compensating Power: An Analysis Of Rents And Rewards In The Mutual Fund Industry, William A. Birdthistle

All Faculty Scholarship

The allegations of malfeasance in the investment management industry - market timing, late trading, revenue sharing, and several others - involve a broad range of mutual fund operations. This Article seeks to explain the common source of these irregularities by focusing upon a trait they share: the practice of investment advisers' capitalizing upon their managerial influence to increase assets under management in order to generate greater fees from those assets. This Article extends theories of executive compensation into the context of investment management to understand the extraction of rents by mutual fund advisers. Investment advisers, as collective groups of portfolio …

Regulatory Responses To Investor Irrationality: The Case Of The Research Analyst, Jill E. Fisch

All Faculty Scholarship

An extensive body of behavioral economics literature suggests that investors do not behave with perfect rationality. Instead, investors are subject to a variety of biases that may cause them to react inappropriately to information. The policy challenge posed by this observation is to identify the appropriate response to investor irrationality. In particular, should regulators attempt to protect investors from bad investment decisions that may be the result of irrational behavior?

This Article considers the appropriate regulatory response to investor irrationality within the concrete context of the research analyst. Many commentators have argued that analyst conflicts of interest led to biased …

Supersize Pay, Incentive Compatibility, And The Volatile Shareholder Interest, William W. Bratton

All Faculty Scholarship

No abstract provided.

The New Dividend Puzzle, William W. Bratton

All Faculty Scholarship

No abstract provided.

Do Institutions Matter? The Impact Of The Lead Plaintiff Provision Of The Private Securities Litigation Reform Act, Stephen Choi, Jill E. Fisch, A. C. Pritchard

All Faculty Scholarship

When Congress enacted the Private Securities Litigation Reform Act in 1995 (“PSLRA”), the Act’s “lead plaintiff” provision was the centerpiece of its efforts to increase investor control over securities fraud class actions. The lead plaintiff provision alters the balance of power between investors and class counsel by creating a presumption that the investor with the largest financial stake in the case will serve as lead plaintiff. The lead plaintiff then chooses class counsel and, at least in theory, negotiates the terms of counsel’s compensation.

Congress’s stated purpose in enacting the lead plaintiff provision was to encourage institutional investors—pension funds, mutual …

The Qualified Legal Compliance Committee: Using The Attorney Conduct Rules To Restructure The Board Of Directors, Jill E. Fisch, Caroline M. Gentile

All Faculty Scholarship

The Securities and Exchange Commission introduced a new corporate governance structure, the qualified legal compliance committee, as part of the professional standards of conduct for attorneys mandated by the Sarbanes-Oxley Act of 2002. QLCCs are consistent with the Commission’s general approach to improving corporate governance through specialized committees of independent directors. This Article suggests, however, that assessing the benefits and costs of creating QLCCs may be more complex than is initially apparent. Importantly, QLCCs are unlikely to be effective in the absence of incentives for active director monitoring. This Article concludes by considering three ways of increasing these incentives.

How To Fix Wall Street: A Voucher Financing Proposal For Securities Intermediaries, Stephen Choi, Jill E. Fisch

All Faculty Scholarship

No abstract provided.

Enron, Sarbanes-Oxley And Accounting: Rules Versus Principles Versus Rents, William W. Bratton

All Faculty Scholarship

No abstract provided.

Shareholder Value And Auditor Independence, William W. Bratton

All Faculty Scholarship

This Article questions the practice of framing problems concerning auditors’ professional responsibility inside a principal-agent paradigm. If professional independence is to be achieved, auditors cannot be enmeshed in agency relationships with the shareholders of their audit clients. As agents, the auditors by definition become subject to the principal’s control and cannot act independently. For the same reason, auditors’ duties should be neither articulated in the framework of corporate law fiduciary duty, nor conceived relationally at all. These assertions follow from an inquiry into the operative notion of the shareholder-beneficiary. The Article unpacks the notion of the shareholder and tells a …

The Securities Analyst As Agent: Rethinking The Regulation Of Analysts, Jill E. Fisch, Hillary A. Sale

All Faculty Scholarship

Recent press has highlighted shocking examples of bias, self-dealing, and inaccuracy in the behavior of the securities analyst. Critics have attributed the bubble and subsequent crash in the technology sector to analyst hype and posited that undue analyst optimism contributed to scandals such as Enron. After many years of minimal regulator oversight analysts are now the subject of extensive regulatory reform proposals, including a mandate in the Sarbanes-Oxley Act of 2002 requiring that the Securities and Exchange Commission adopt a variety of restrictions on analyst behavior.

Despite the media attention, there have been few attempts to conceptualize carefully the analyst's …

Berle And Means Reconsidered At The Century's Turn, William W. Bratton

All Faculty Scholarship

No abstract provided.

Teaching Corporate Governance Through Shareholder Litigation, Jill E. Fisch

All Faculty Scholarship

No abstract provided.

The Scope Of Private Securities Litigation: In Search Of Liability Standards For Secondary Defendants, Jill E. Fisch

All Faculty Scholarship

Recent federal court decisions have struggled to apply the Supreme Court's decision in Central Bank v. First Interstate to determine when outside professionals should be held liable as primary violators under section IO(b) of the Securities Exchange Act. In keeping with the Court's current interpretive methodology, Central Bank and its progeny employ a textualist approach. In this Article, Professor Fisch argues that literal textualism is an inappropriate approach for interpreting the federal securities laws generally and misguided in light of legislative developments post-dating the Central Bank decision. Instead, Professor Fisch advocates an approach that weighs Congress 's recent endorsement of …

Comparative Corporate Governance And The Theory Of The Firm: The Case Against Global Cross Reference, William W. Bratton, Joseph A. Mccahery

All Faculty Scholarship

Professors Bratton and McCahery take up the main questions addressed by the literature on comparative corporate governance: whether national governance systems can be expected to converge in the near future, and whether the focal point of that convergence will be a new, hybrid governance system comprised of the best practices drawn from different systems. This Article advances the view that neither global convergence that eliminates systemic differences nor the emergence of a hybrid best practice safely can be projected because each national governance system is a system to a significant extent. Each system, rather than consisting of a loose collection …

Dividends, Noncontractibility, And Corporate Law, William W. Bratton

All Faculty Scholarship

No abstract provided.

From Legitimacy To Logic: Reconstructing Proxy Regulation, Jill E. Fisch

All Faculty Scholarship

On October 16, 1992, after a comprehensive review of its system of proxy regulation and after two separate amendment proposals that drew more than 1700 letters of comment from the public, the Securities and Exchange Commission (the "Commission" or the "SEC") voted to reform the federal proxy rules. The reforms were "intended to facilitate shareholder communications and to enhance informed proxy voting, and to reduce the cost of compliance with the proxy rules for all persons engaged in a proxy solicitation.' The SEC explained the amendments by stating that the rules were "impeding shareholder communication and participation in the corporate …

As Time Goes By: New Questions About The Statute Of Limitations For Rule 10b-5, Jill E. Fisch

All Faculty Scholarship

In this Article. Professor Fisch examines the history and legacy of Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilberston, the controversial 1991 Supreme Court decision that established a federal statute of limitations for private causes of action brought under Rule 10b-5. In Part I Professor Fisch reviews the history of the 10b-5 statute of limitations prior to LampE Part II then analyzes both the issues resolved and questions raised by Lampf. Part III traces the congressional reaction to Lampf that culminated in the addition of section 27A to the Securities Act of 1934. In Part IV, Professor Fisch concludes by …