Banking and Finance Law Commons^™

Evolving Networks: Information Exchanges Reshaping Of Global Finance, Andrew P. Morriss, Charlotte Ku

Faculty Scholarship

This article challenges the characterization of international financial centers (IFCs), often called "tax havens," as enablers of tax evasion and money laundering. Drawing on an extensive analysis of tax treaties, regulatory statutes, and historical literature, we explore the evolution of the global information exchange network, its impact on integrating IFCs into the global financial system, and the resulting curtailment of their use for illicit purposes. The expansion of treaties, from Mutual Legal Assistance Treaties (MLATs) to Tax Information Exchange Agreements (TIEAs) and multilateral frameworks like the OECD's Common Reporting Standard (CRS), has significantly limited the potential for secrecy-driven financial activities …

The Unitary Executive And The Federal Reserve, Lev Menand

Faculty Scholarship

The U.S. Supreme Court may soon embrace an interpretation of the U.S. Constitution that would significantly expand the power of the president over federal administrators and invalidate key provisions in dozens of federal statutes. A critical question is whether this interpretation — known as the unitary executive theory (UET) — would also render unconstitutional central bank independence (CBI), an arrangement where a country’s monetary policy is formulated by a semiautonomous body of experts insulated from partisan political pressure. Several justices have suggested that it would not, and a growing scholarly literature has proposed ways for the Court to distinguish the …

The Federal Reserve’S Fiscal Agent Mandate And The Problem For Central Bank Independence, Lev Menand, Joshua Younger

Faculty Scholarship

The Federal Reserve is among the most powerful organs of government. It is tasked primarily with maintaining the growth of monetary and credit aggregates consistent with long-run maximum employment and price stability. This mandate is widely known and the subject of extensive public debate. But another mandate lies within the statute that is largely overlooked — to serve as fiscal agent of the United States. This distinct responsibility is older, and also important. This Article offers a comprehensive assessment of where the Fed’s two mandates overlap and occasionally sharply conflict: in the market for U.S. government debt. First, it identifies …

Tokenized Real Estate: The Law And Tech Of Digital Deeds, Christopher K. Odinet, Andrea Tosato

Faculty Scholarship

The advent of blockchain technology has generated bold claims that non-fungible tokens (NFTs) can fundamentally transform real estate. Proponents assert that digital assets can tokenize real property interests: the concept of using digital tokens to represent ownership rights in physical property. Their goal is to allow buyers and sellers to transfer real estate through simple blockchain transactions, thereby eliminating traditional intermediaries, reducing costs, and accelerating deal velocity. This Essay provides the first comprehensive legal analysis examining whether American law actually supports such a direct tokenization of real estate rights.

Our investigation reveals a stark disconnect between technological capability and legal …

Zombie Litigation: Claim Aggregation, Litigant Autonomy And Funders' Intermeddling, Maya Steinitz

Faculty Scholarship

The main debate surrounding litigation funding in recent years has focused on the question of disclosure of funding agreements.  While the issue is important, predominantly because of its effects on the course and outcome of individual cases, far more important are bigger, interrelated questions that have systemic effects on the civil justice system, the legal profession, and the nature of the attorney-client relationship.  The rise of litigation funding has had profound effects.  The subsequent rise of portfolio funding—which I here propose to  view as a new form of undisclosed and unregulated claim  aggregation—has broader-still effects including clients’ potential, and at …

Bankrupt Crypto Organizations, Kara Bruce, Christopher K. Odinet, Andrea Tosato

Faculty Scholarship

This Article provides the first comprehensive analysis of the intersection between decentralized autonomous organizations (DAOs) and American bankruptcy law. DAOs are blockchain-based entities that enable individuals to pursue common goals using decentralized decision-making and automated governance. Since their recent emergence, DAOs have proliferated dramatically—with over 20,000 organizations managing over $20 billion in assets and engaging in activities ranging from investment management to real estate and even attempting to purchase historic copies of the U.S. Constitution. Yet like any other organization, DAOs can fail, creating an urgent need to understand what happens when unstoppable code meets immovable bankruptcy law.

Our investigation …

"Activist" Versus "Passive" Investors: A Closer Look At Proxy Contests And The Contemporary Balance Of Advantage, John C. Coffee Jr.

Faculty Scholarship

The era of the hostile takeover has clearly given way to the era of the proxy contest led by an activist hedge fund. Today, a record number of such contests are underway, and they have changed the board composition at many U.S. companies and caused a record number of CEO resignations. But there is a mystery here: when activist funds negotiate for changes with target managements, they often obtain meaningful changes in the board of directors and corporate policies. However, when activists attempt a proxy contest, they have generally been unsuccessful, winning only a small number of seats in a …

Purpose-Driven Compliance, Veronica Root Martinez

Faculty Scholarship

Whether it is a small brokerage firm in Ann Arbor, Michigan, a private university in Cambridge, Massachusetts, or a multinational conglomerate head-quartered in New York City, organizations understand that they are required to fulfill a range of compliance obligations. Compliance programs today tend to have two important characteristics in common. First, the notion that perfect compliance is an impossible goal is a key component of the understandings and expectations of many firms’ compliance programs. Second, organizations have almost uniformly adopted compliance programs in areas where enforcement activity has been significant—like in the areas of antibribery and anticorruption, anti-money laundering, antitrust, …

Crypto Litigation And Market Efficiency, Robert E. Bishop, Bradford Levy, Frank Partnoy, Daniel Taylor, Andrew Yeh

Faculty Scholarship

This paper investigates, for the first time in the literature, the factors that should matter to courts in determining whether a crypto  market is “efficient,” meaning that prices are sufficiently responsive to information. Based on new empirical evidence and a series of event studies, we recommend a new judicial framework for assessing market  efficiency in crypto litigation.

Market efficiency tests based on event studies have played an important role in other areas of litigation, particularly securities litigation, where courts frequently rely on what have become known as the “Cammer factors.” Academics have not yet assessed the extent to which market …

Emergency Lending By The Federal Reserve, Kathryn Judge, Richard Clarida

Faculty Scholarship

The Federal Reserve established an array of innovative emergency lending facilities during the Great Financial Crisis and expanded the scope of its emergency lending yet further in response to the Covid-19 pandemic. This Article provides a retrospective of how the Federal Reserve used its emergency lending authority across these two episodes, identifying patterns and revealing some differences. It sheds light on the conditions that enabled the Federal Reserve to establish the facilities that it did, including the roles played by Congress and Treasury in providing the equity funding that made certain facilities possible. It shows how in each episode, the …

Bridging The Expectations Gaap In Financial Reporting, Neal F. Newman

Faculty Scholarship

The true nature of auditing publicly traded companies’ financial statements has been somewhat of an enigma to the general public. Due to this mystery, an “expectations gap” has formed between the public expectations of auditors’ roles and what the auditor actually does in their analysis of financial statements. Auditors are an extremely important piece of the financial reporting puzzle because they determine whether or not a company’s financial statements are a fair and accurate reflection of the company’s financial position, a determination that can be a major influence on how the financial strength of a company is perceived. Newman’s Article …

The Gamification Of Banking, Colleen Baker, Christopher K. Odinet

Faculty Scholarship

Gamification is coming to banking. This phenomenon is already gain-ing ground in advertising, healthcare, manufacturing, and, more recently, with the GameStop and AMC meme stock saga in securities trading. The idea behind gamification is to make transactions seem fun, playful, and even casino-like in order to elicit habit-forming, addictive-like effects with consumers. This Article argues that the rise of financial technology (“fintech”) firms and their ever-growing business relationships with incumbent financial institutions has created the necessary conditions for gamification to take hold in the banking sector. In order to explore this observation, we undertake a study of current examples of …

The Sec Proposed Cybersecurity Infrastructure Rules And New Disclosure Requirements, Neal F. Newman, Lawrence J. Trautman, Brian Elzweig

Faculty Scholarship

In addition to regulation of securities market issuers, the Securities & Exchange Commission (SEC) is also responsible for regulation of those entities that provide the networks, either electronic or physical, that enable the functioning of our securities markets. On February 9, 2022, the Commission published a Release for Cybersecurity Risk Management for Investment Advisers, Registered Investment Companies, and Business Development Companies containing proposals that, if adopted, would establish a new cybersecurity incident reporting and disclosure regime and require registered investment advisers (“advisers”) and investment companies (“funds”) to implement policies and procedures designed to address cyber risks. The comment period for …

Competition In The Global Law Market: Offshore Development Of The Statutory "Rule In Hastings-Bass", Andrew P. Morriss

Faculty Scholarship

This Article examines the competitive dynamics in the global law market through the lens of the statutory evolution of the Rule in Hastings-Bass across various International Financial Centers (IFCs). Following the UK Supreme Court's 2013 decision in Pitt v Holt and Futter v Futter, which significantly restricted the judiciary's ability to void trustee decisions under the Rule, seven IFCs (Jersey, Bermuda, The Bahamas, the Dubai International Financial Center, the Cayman Islands, and the British Virgin Islands) enacted statutes to preserve and clarify the Rule within their jurisdictions. These legislative actions highlight the strategic adaptations by IFCs to enhance their legal …

The Financial Sector And Global Dollar System, Gary Gensler, Lev Menand, Joshua Younger

Faculty Scholarship

The second Trump administration’s approach to financial markets and institutions mixes familiar deregulatory policies with a range of other policies (financial and non-financial) that are largely without precedent and may lead to significant structural change in the long term. Combined, these policies have the potential to affect the financial sector in at least four ways. First, they could threaten the foundations of the global dollar system – mutual cooperation, trust, and interdependency, both between the producers and consumers of financial instruments and among the nations that constitute the dollar bloc. Second, they may undermine financial stability by loosening prudential standards, …

The Changing Architecture Of Trust, Kathryn Judge

Faculty Scholarship

Trust has always been vital to the healthy functioning of financial markets and the stability of the financial institutions. The mix of public and private institutions that undergird this trust, however, can vary. Often these forces are ignored or taken for granted until something goes wrong. With a marked turn toward deregulation taking hold on both sides of the Atlantic, against a backdrop of central banks having played a very active role intervening to allay distress, it is a good time to revisit these fundamentals. This essay examines the importance of trust, how it is created, how it can be …

The "Not Seen" Effect Of International Financial Centers: Innovation In The Global Financial Ecosystem, Charlotte Ku, Andrew P. Morriss

Faculty Scholarship

International Financial Centers (IFCs) are hubs of legal and financial innovation, developing specialized frameworks that facilitate cross-border investment, enhance global capital mobility, and support economic growth. Through jurisdictional competition, professional clustering, and adaptive regulatory frameworks, IFCs have pioneered legal structures that enable enterprises of all sizes to participate in the global economy. Using case studies of the International Business Company, the Limited Liability Company, the Protected Cell Company, and advances in trust law and applying the theoretical frameworks of social scientist Richard Florida and psychologist Mihalyi Csikszentmihalyi, this Article illustrates how IFCs serve as laboratories for financial experimentation, generating widely …

The Sec, Fraud, And Cryptocurrencies, Lawrence J. Trautman, Brian Elzweig, Neal F. Newman

Faculty Scholarship

The SEC’s Strategic Plan for Fiscal Years 2022–2026 is focused on the impact of the rapidly developing rate of change in new technologies that provide for markets to be more interconnected and interdependent than ever. Because Congress has yet to give the SEC, or any other agency, express authority to regulate cryptocurrency, the SEC has taken a regulation-by-enforcement approach. The SEC’s recent enforcement efforts relating to crypto asset securities were substantial, with enforcement actions addressing a range of alleged misconduct in the crypto asset securities space, including billion- dollar crypto fraud schemes; unregistered crypto asset offerings, platforms, and intermediaries; and …

Legal Market Decartelization, Milan Markovic, Nuno Garoupa

Faculty Scholarship

American lawyers’ grip on the legal market is receding. Scholars and policymakers increasingly agree that the public has little to lose and potentially much to gain from legal market decartelization - the weakening of the lawyers’ monopoly over the legal services market. Harkening to deregulatory initiatives abroad and in Arizona and Utah, reformers contend that removing restrictions on the corporate delivery of legal services and unauthorized practice of law will slash costs and expand access to justice.

Drawing on economic theory and recent market developments, this Article offers a cautionary rejoinder. Understandable concerns about cartelization and lawyer rent-seeking have led …

Debt Tokens, Andrea Tosato, Diane Lourdes Dick, Christopher K. Odinet

Faculty Scholarship

The worlds of crypto and bankruptcy have collided. Once-prominent, fast-growing, and even politically influential platforms for trading cryptocurrencies have imploded spectacularly. Gone are the glossy advertisements, celebrity endorsements, and proclamations that blockchain operates as a law unto itself. Instead, insolvent crypto businesses—including the crypto exchange giant FTX—find themselves in bankruptcy court, no different from any other failed enterprise. These bankruptcies reveal a startling reality: individual investors who placed their trust in these platforms have been stripped of their digital assets. In their stead, they hold hard-to-collect claims against these defunct platforms.

Amid the chill of the crypto winter, bankruptcy has …

Against Monetary Primacy, Yair Listokin, Rory Van Loo

Faculty Scholarship

To reduce inflation, the Federal Reserve (Fed) raises interest rates. But every month with high interest rates increases the risk of a devastating recession. Recessions impose not only short-term pain in the form of widespread unemployment but also lifelong harm for many, as vulnerable workers and those who start their careers during a downturn never fully recover. Yet hiking interest rates is the centerpiece of U.S. inflation-fighting policy. When inflation is high, the Fed raises interest rates until inflation is tamed, regardless of the consequent sacrifices. We call this inflation-fighting paradigm “monetary primacy.” Despite its great risks, monetary primacy has …

Shadow Investment Companies, William A. Birdthistle, Gabriel Rauterberg, Jeffery Y. Zhang

Faculty Scholarship

Stablecoins are cryptocurrencies designed to track the value of fiat currency, most commonly the U.S. dollar. Over the past decade, they have grown from a niche innovation into the primary gateway between crypto markets and the traditional financial system, with daily trading volumes exceeding $100 billion. Despite their scale and centrality, stablecoin issuers occupy an uncertain and increasingly contested regulatory space.

This Article argues that the largest stablecoin issuers — such as Circle and Tether— are best understood not as banks or payments firms, but as investment companies under the Investment Company Act of 1940. As a matter of statutory …

Regionalism And The Federal Reserve Banks, Kathryn Judge, Lev Menand

Faculty Scholarship

Regionalism is central to our country’s central banking system. Rather than rely on a single organization to set monetary policy and oversee banks, Congress created a multiplicity of bodies including twelve Federal Reserve Banks (FRBs), each designed to operate in a different part of the country. These FRBs are an early and undertheorized example of how the federal government uses regional bodies to formulate and administer federal policy. When they were first authorized in 1913, their regional character assuaged concerns about centralizing power over the economy. Today, the FRBs continue to play a number of important roles, helping to shape …

Shadow Banking And Securities Law, Gabriel Rauterberg, Jeffery Y. Zhang

Faculty Scholarship

Shadow banking may be the single greatest challenge facing financial regulation. Financial institutions that function like banks, but fall outside the scope of banking regulation — aptly termed “shadow banks” — were at the heart of the Global Financial Crisis and most episodes of serious financial stress since then. Scholars have largely focused on one response to this problem: extending traditional banking regulation to shadow banks. Yet more than fifteen years after the crisis, major regulatory efforts along this route have stalled.

In this Article, we explore the uneasy case for greater regulation of shadow banking through a different route …

Money: A Functional Analysis, Steven L. Schwarcz

Faculty Scholarship

Most people currently think of money as government-issued paper certificates or coins that specify units of currency, such as dollars or euros. The advent of digital currencies, which appear abstract because of their intangibility, is therefore confounding almost everyone.

This Article argues that money should also be viewed functionally—as a “right” that serves one or more of the generally accepted functions of money. The Article focuses on two of money’s most generally accepted functions: to serve as a medium of exchange to facilitate the sale of goods and services, and to serve as a store of value. To perform these …

Promoting Financial Empowerment Via 401(K) Plan Domestic Abuse Victim Distributions, Samantha Prince

Faculty Scholarship

Domestic violence is sadly and shockingly all too prevalent in the United States. According to the U.S. Centers for Disease Control, more than one in four women and one in seven men in this country are subject to domestic abuse “affecting an estimated 10 million people every year.”

Finances and financial abuse play a significant role in 99% of domestic abuse cases. “[L]acking financial knowledge or resources is the number one indicator of whether a domestic violence victim will stay, leave, or return to an abusive relationship.”When abusers have control over financial assets, victims are monetarily paralyzed and have little …

The Politics Of Bank Supervision: From Eccles To Bessent, Kathryn Judge

Faculty Scholarship

Throughout his tenure as chair of the Federal Reserve Board, Marriner Eccles pressed President Franklin D. Roosevelt to over­haul bank supervision. Eccles eventually made his ongoing service as chair contingent on FDR agreeing to support the effort. This initiative is commonly depicted as a power grab. Federal bank regulation and supervision, then and now, is divvied up among three agencies, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency. Eccles wanted the Fed, and the Fed alone, to be the federal bank supervisor. Having already succeeded in enhancing his power once, by spearheading reforms that …

Giant Asset Managers, The Big Three, And Index Investing, Dorothy S. Lund, Adriana Z. Robertson

Faculty Scholarship

A robust literature describes the incentives and stewardship practices of the “Big Three” asset managers (BlackRock, Vanguard, and State Street Global Advisors), often referring to these asset managers as “passive.” This is so common that the “Big Three,” “index fund,” and “passive manager” are used almost interchangeably by both academics and practitioners. This shorthand emerged in the foundational scholarship in this area, and while it may remain useful in certain contexts, its casual use obscures important features of the market and contributes to misperceptions. In this chapter, we demonstrate that it is a mistake to equate passive investing with index …

The Hidden Monetary State, Gabriel Rauterberg, Joshua Younger

Faculty Scholarship

Money is a motley. While the state enjoys a monopoly on issuing new physical currency, a variety of instruments serve money-like roles in the financial system. The commercial banking system significantly augments the money supply through issuing deposits. Alongside it, a shadow banking system has also developed, offering a range of deposit substitutes.

This Article seeks to cast new light on the U.S. financial system by exploring how, over the course of the twentieth century, federal policymakers engaged in a series of distinct and largely uncoordinated monetary experiments. As we show through historical case studies, federal authorities designed, promoted, and …

The Unraveling Of The Federal Home Loan Banks, Kathryn Judge

Faculty Scholarship

The Federal Home Loan Bank system is a $1.3 trillion government-sponsored enterprise that operates primarily for the benefit of member financial institutions. Federal Home Loan Bank members enjoy generous dividends and ready access to fresh liquidity. The biggest beneficiaries are the biggest users of the system, including the largest banks and insurance companies in the country and banks facing financial distress. This essay explains the original aims of the Federal Home Loan Bank system, how the system fulfilled those aims quite successfully for decades following its creation in 1932 and how the system evolved to serve primarily private aims. By …