Law Commons^™

Comment On 'Error And Regulatory Risk In Financial Institution Regulation', Keith N. Hylton

Faculty Scholarship

I agree with just about everything Jonathan Macey (2017) says in his symposium contribution. His claim that bureaucratic tendencies toward regularity—specifically, treating like cases alike—generate errors in categorization seems appropriate to me. His explanations of the pathologies in financial regulation should fall in the category of essential or required reading for anyone who chooses to write on the topic. Where I differ from Macey is in the choice of framework, or perspective from which to view the pathologies. Whereas Macey adopts an “error cost” framework, which is clearly appropriate for this symposium, I would build explicitly on a “public choice” …

Technology Regulation By Default: Platforms, Privacy, And The Cfpb, Rory Van Loo

Faculty Scholarship

In the absence of a technology-focused regulator, diverse administrative agencies have been forced to develop regulatory models for governing their sphere of the data economy. These largely uncoordinated efforts offer a laboratory of regulatory experimentation on governance architecture. This symposium essay explores what the Consumer Financial Protection Bureau (CFPB) has done in its first several years to regulate financial technology (“fintech”), in the context of broader technology-related concerns identified in the literature. It begins with a survey of what the CFPB has undertaken using more traditional administrative agency tools—enforcement and rulemaking—in areas such as privacy, consumer control over data, and …

A Story Of Three Bank-Regulatory Legal Systems: Contract, Financial Management Regulation, And Fiduciary Law, Tamar Frankel

Faculty Scholarship

How should banks be regulated to avoid their failure? Banks must control the risks they take with depositors' money. If depositors lose their trust in their banks, and demand their money, the banks will fail. This article describes three legal bank regulatory systems: Contract with depositors (U.S.); a mix of contract and trust law, but going towards trust (Japan), and a full trust-fiduciary law regulating banks (Israel). The article concludes that bank regulation, which limits the banks' risks and conflicts of interest, helps create trustworthy banks that serve their country best.

Paying Bank Examiners For Performance, Frederick Tung, M. Todd Henderson

Faculty Scholarship

Investigations into the recent financial crisis have found that banking regulators knew or should have known of many of the problems that would ultimately cripple the finance industry. We argue that their failure to address those problems prior to the crisis was at least partly due to misaligned incentives for bank examiners that encourage inadequate inspection and forbearance and discourage the curbing of ill-advised risk taking. We recommend changing examiners’ incentives to better align them with the public good. Specifically, banking regulators should be “paid for performance” — rewarded for nurturing long-term health for the banks they oversee as well …

The Problems Of Securitizing Sub-Prime Loans, Tamar Frankel

Faculty Scholarship

In October 2007, the board of directors of Merrill-Lynch, Smith & Fenner, one of the largest if not the largest brokerage houses in the United States, accepted the request for early retirement of its Chief Executive Officer. The brokerage firm disclosed that it has lost over $8 billion on its investments in sub-prime mortgage loans.¹ Merrill Lynch was not the only financial giant to sustain enormous losses. The losses caused market liquidity to dry up. The U.S. government took steps to ease the pressure.² But the high leverage of the system is still unravelling. The effect of these …

The Mysterious Ways Of Mutual Funds: Market Timing, Tamar Frankel

Faculty Scholarship

The term market timing was little known outside the arcane world of mutual funds until state attorneys general from across the country popularized it. The term's innocuous-sounding ring assumed a more pernicious note when the mysterious ways of mutual funds became more transparent. In its pernicious sense, market timing denominates mutual fund insiders using the inscrutable structures of mutual funds to provide benefits selectively to favored participants at the expense of less favored participants.

Mutual fund shares are not like common stocks; investments made using these vehicles are unlike those made through traditional securities markets. While the peculiar features of …

Regulation And Investors' Trust In The Securities Market, Tamar Frankel

Faculty Scholarship

The subject of investor confidence in the securities markets has received wide attention recently as details of fraud and avarice continue to emerge. Investors' trust in the securities markets is important for the reasons discussed in Professor Stout's marvelous paper.¹ This Comment focuses on the relationship between investors' trust and government regulation of the markets. By regulation I mean congressional legislation and actions by federal agencies. I exclude the courts mainly because their lawmaking is not primarily policy-based, and my aim is to sound the alarm for legislative and regulatory policy-directed actions. Many an economist and academic have argued …

The Pros And Cons Of A Self-Regulatory Organization For Advisers And Mutual Funds, Tamar Frankel

Faculty Scholarship

Congress is seriously considering bills to establish self-regulatory organizations (SROs) for investment advisers (advisers) and investment companies (Funds). These bills would require members of the investment management industry to regulate themselves under the watchful eye of the Securities and Exchange Commission, similar in approach to the regulation of broker-dealers by the National Association of Securities Dealers, Inc. (NASD) and the securities exchanges. Proposals to establish SRO for investment advisers have arisen before. However, those proposals did not cover Funds and their advisers,

The Dual State - Federal Regulation Of Financial Institutions - A Policy Proposal, Tamar Frankel

Faculty Scholarship

In 1983 South Dakota passed an Act permitting its chartered banks to sell and underwrite insurance.¹ The issue that I address is whether states should have the power to pass such a law. I am not concerned here with interpretation of positive law but with public policy implications.

The issue is a matter of congressional policy. Like most financial intermediaries banks are regulated by both state and federal laws,² but it is clear that the federal government has the power to preempt state laws that regulate banks. Therefore, whether South Dakota can pass the statute is not a …