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I’ve often been skeptical about how vigorously regulatory groups will police their members.   A recent membership revocation from the CFP Board showed little tolerance for one financial services professional’s failure “to treat fellow professionals and others with dignity, courtesy, and respect in violation of Standard A.7 of the Code of Ethics and Standards of Conduct (Code and Standards). ” 

That rule provides that “A CFP® professional must treat Clients, prospective Clients, fellow professionals, and others with dignity, courtesy, and respect.”  What does that mean?  Well, I can tell one thing the CFP Board thinks it requires you not to do.

The public release details how David R. Nute of Sequim, Washington responded to a client who asked about dropping some documents off in person: 

a former prospective Client, who submitted a written grievance to CFP Board, asked Mr. Nute if she could drop off copies of documents needed for a potential transaction in person at his office, rather than transmit them electronically. When Mr. Nute responded that his time was “too valuable” to make the trip to his office to pick up the documents, the former prospective Client sent him an email stating that she no longer desired

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I recently came across a letter sent by Kentucky State Treasurer Allison Ball to S&P Global Ratings back in June 2022 and thought the contents might be of interest to any of our readers who missed the letter when it was originally sent.  Below is an excerpt.  You can find the full letter here.

On behalf of the Commonwealth of Kentucky and those we serve, we firmly and collectively object to S&P Global Ratings’ (S&P) new plan to include ESG credit indicators in its credit ratings for states and state subdivisions….

These ESG credit indicators inject unnecessarily subjective and political judgments into a rating system that should be solely pecuniary in nature. Earlier this year, S&P wrote, “having a social mission and strong ESG characteristics does not necessarily correlate with strong credit worthiness and vice versa,” making it abundantly clear these factors are not relevant for determining state credit calculations. We thus agree with our friends in Utah who admonished these new scoring standards and exposed them as an exercise in political subjugation when they noted the following in a recent letter signed by every Utah statewide official and their entire federal delegation:

[there are] two layers of indeterminacy that make ESG an exercise in servitude: 1)

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I posted earlier this week with a plug for my new paper on the internal affairs doctrine and an update on the Lee v. Fisher forum selection bylaw litigation in the Ninth Circuit, so I’ve just got a quick hit for today.

Unless you’ve been living in a cave, you know that Musk closed his purchase of Twitter on Thursday night; as of Friday, the stock had been delisted.  The litigation over whether Twitter lied about its business has come to a halt….

….or has it?

You may recall that in August, a Twitter whistleblower – Peiter Zatko – came forward as a whistleblower about Twitter’s internal business operations.  Elon Musk amended his complaint in Chancery to incorporate Zatko’s claims, alleging that the problems Zatko identified – such as a failure to comply with an FTC settlement – represented additional fraudulent actions on Twitter’s part that allowed Musk to terminate the deal.

What you may have missed, though, is that shortly after Zatko went public, the Rosen Law Firm filed a securities class action, Baker v. Twitter, C.D. Cal. 22-cv-06525, based on Zatko’s allegations.  The complaint names several Twitter executives – including Jack Dorsey – and …

Two recent posts that might be related:

On Tuesday, Vivek Ramaswamy posted The ESG Fiduciary Gap on The Harvard Law School Forum on Corporate Governance.  In that post, he noted that:

BlackRock is currently under investigation for antitrust violations precisely because of its coordinated ESG activism through groups like Climate Action 100+, Net Zero Asset Managers, and Glasgow Financial Alliance for Net Zero. Vanguard and State Street are members of many of the same groups. In fact, until recently, as Arizona’s Attorney General has observed, “Wall Street banks and money managers [were] bragging about their coordinated efforts to choke off investment in energy.” U.S. antitrust statutes are broad by design. They forbid competitors from entering into any agreement with the purpose or likely effect of reducing supply in a relevant market. Here, through these groups, BlackRock is cooperating with its competitors to make concerted efforts to decrease marketwide output in fossil fuels. That is no secret; it is the very purpose of these organizations. Net Zero Asset Managers, for example, makes clear that it has an “expectation of signatories” like BlackRock to force a “rapid phase out of fossil fuel[s],” including by, for example, refusing to finance new coal projects. If the

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The SEC recently released a highly specific proposal for registered investment advisers with comments open until at least December 27th.  The proposal “would require advisers to conduct due diligence prior to engaging a service provider to perform certain services or functions. It would further require advisers to periodically monitor the performance and reassess the retention of the service provider in accordance with due diligence requirements to reasonably determine that it is appropriate to continue to outsource those services or functions to that service provider.”

My immediate reaction is that I’m generally in favor of RIAs performing appropriate due diligence, but that I’m a bit skeptical about the need for specific rules in a principles-based framework.  It’s certainly true that Advisers outsource a significant amount of work today.  And it is also true that, as the proposal details, problems at third party service providers have led to broader problems. 

It’s easy to see how concentration risk can grow in such an environment.  If a huge swath of the market outsources to a particular third-party firm, a failure at the third party could paralyze the market. 

It’ll be interesting to watch to see how RIAs react to this.

On Sunday, I posted a new paper to SSRN, forthcoming in the Wake Forest Law Review.  It’s called Inside Out (or, One State to Rule them All): New Challenges to the Internal Affairs Doctrine, and it covers a lot of territory I’ve touched on in blog posts, namely, litigation-limiting bylaws, the Salzberg decision, California’s board diversity law, and issues regarding the internal affairs doctrine and LLCs.  Here is the abstract:

The internal affairs doctrine provides that the law of the organizing state will apply to matters pertaining to a business entity’s internal governance, regardless of whether the entity has substantive ties to that jurisdiction. The internal affairs doctrine stands apart from other choice of law rules, which usually favor the jurisdiction with the greatest relationship to the dispute and limit parties’ ability to select another jurisdiction’s law. The doctrine is purportedly justified by business entities’ unique need for a single set of rules to apply to governance matters, and by the efficiency gains that flow from allowing investors and managers to select the law that will govern their relationship.

The contours of the internal affairs doctrine have never been defined with precision, but several recent developments have placed

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In prior posts, I’ve plugged a couple of legal history articles, essentially offering different accounts of how the corporation, with its distinctive features, came to be.  In particular, I highlighted Margaret Blair’s piece on how corporate law is inextricably tied to state recognition, and Taisu Zhang’s and John Morley’s paper on how modern corporate features are tied to a developed state capable of adjudicating the rights of far flung investors with consistency.

Into this mix I’ll introduce Robert Anderson’s new paper, The Sea Corporation, forthcoming in the Cornell Law Review, demonstrating that the features we think of as defining the corporate form – limited liability, tradeable shares, entity shielding, separate personality, and centralized management selected by the equity owners – were all associated with admiralty law for centuries before the development of the modern corporation, embodied in the form of the ship’s personality.  Anderson points out that, to some extent, these were necessary given the realities of maritime commerce: when a ship docked in a foreign port, identifying and litigating against its distant owners was nearly impossible.  Therefore, creditors necessarily could only bring an in rem action against the ship itself; if the claims were less than the…

Eight days ago, Scottsdale Capital Advisors and Alpine Securities Corp. filed a Complaint in the Middle District of Florida arguing that FINRA’s structure and operation violate the U.S. Constitution.  The firms argue that FINRA is unconstitutional under the Appointments Clause, separation of powers principles, and the nondelegation doctrine.  The case has attracted some coverage already.

The suit makes many of the arguments I previewed in Supreme Risk, which was recently published by the Florida Law Review.  When I foresaw this risk, I highlighted four doctrinal areas where the Supreme Court might invalidate or significantly limit SROs, including: (i) nondelegation doctrine; (ii) separation of powers doctrine; (iii) state action; and (iv) appointments clause issues.

While it’s still very early, this type of challenge now presents a colorable risk to self-regulatory organizations.  If these arguments succeed against FINRA, it’s likely to cause significant market disruption.  It also lowers the barrier to press the same arguments against any SRO with a similar structure.

I would expect a case like this to make its way through the courts and toward the Supreme Court eventually.  It would not surprise me if groups like the Pacific Legal Foundation seek to get involved as well.  As…

A lot of people are talking about this complaint against Meta, filed by James McRitchie, alleging that the Board violates its fiduciary duties to diversified shareholders because it seeks to maximize profits at Meta individually while externalizing costs that impact shareholders’ other investments.   The complaint further argues that the Board, whose personal holdings in Meta are undiversified, labors under a conflict with respect to diversified investors (seeking, apparently, to avoid the business judgment rule and obtain higher scrutiny of the Board’s actions).

The “universal ownership” theory of corporate shareholding has got a lot of traction recently; as I previously blogged, it’s appealing because it suggests that corporations can be forces for social good without actually changing anything about the structure of corporate law.

That said, academic champions of the theory do not necessarily argue in terms of fiduciary duty – that is, they aren’t claiming that either as a normative or descriptive matter, corporate boards are legally obligated to maximize wealth for shareholders at the portfolio level – instead, they tend to elide those kinds of claims and simply argue that as a matter of power, diversified investors have sufficient stakes and influence to control board…

I attended the BLPB “Connecting the Threads” symposium last week at the University of Tennessee and, as per usual, had an excellent time with the students, staff, and faculty associated with the Transactions journal.  Upon asking the regular bloggers in this space, I was assured that it was acceptable to “toot my own horn” about publications.  To that end, please allow me to mention that my article on Contracting Out of Partnership has (finally) come out in the most recent issue of the Journal of Corporation Law.  If interested, the abstract is as follows:

Can parties contract out of the general partnership form of business organization, even if their conduct would otherwise establish a partnership? Although a recent judicial decision suggests that they can, treating contractual disclaimers of partnership as dispositive is inconsistent with modern statutes. More importantly, permitting parties to contract out of partnership imposes substantial costs by undermining the protections of fiduciary duty, creating uncertainty about the operating rules for the business, and threatening to deny the rights of third parties. These costs outweigh the benefits of promoting freedom of contract and providing certainty on the partnership formation question, particularly because such benefits can largely be captured within…