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As a historical matter, the U.S. has twice successfully restructured its finances: “once in the 1790’s under Alexander Hamilton’s debt repayment scheme and again at the start of the New Deal when it abrogated the gold clauses in its debt instruments.” (p.6)  Could the U.S. restructure its debt again?  Would it be constitutional?  Might the U.S. constitutional framework even facilitate this?  These are important, timely issues explored in a fascinating new essay, Restructuring United States Government Debt: Private Rights, Public Values, and the Constitution (here), by Edmund W. Kitch & Julia D. Mahoney.  

ABSTRACT. Mainstream policy discussions take as given that the United States will and must pay its debts in full and on time, and that “restructuring” is legally and politically impossible. In our judgment, this assumption is unwarranted. Far from being unthinkable, under some circumstances restructuring the debt of the United States would merit serious consideration, and these circumstances may well be fast approaching. We diverge from the standard wisdom for two reasons. First, we doubt that payments on treasury obligations will necessarily take precedence over what the electorate sees as more pressing needs, including national security and price stability. In particular, we…

Alon Brav, Matthew Cain, and Jonathan Zytnick have a fascinating new paper analyzing the voting behavior of retail shareholders (and I linked to it once before but I’m pretty sure since then it’s been updated with a lot of new data).  Bottom line: They got access to the votes cast by retail shareholders from 2015 and 2017 and made a lot of interesting findings, including:

Retail votes matter. Collectively, they have as much influence on outcomes as the Big Three (Vanguard, BlackRock, and State Street).

Expressed as a proportion of the shareholder base, retail shareholders hold a higher percentage of small firms than large ones, and their participation in voting is higher in small firms.

Retail shareholders are more sensitive to management performance than the Big Three; they are more likely to turn out, and more likely to vote against management, when companies have underperformed.  The Big Three, by contrast, are less sensitive to performance in terms of voting behavior.

Retail shareholder voting has an observable cost/benefit component.  Retail shareholders vote more often when their economic stake is greater; when management has underperformed; in controversial votes; and when they live in a zip code less associated with labor income (suggesting…

Brian Frye has released a new paper including an SEC No-Action Letter request.  His abstract describes the piece:

This article is a work of conceptual art in the form of a law review article. It argues that the sale of conceptual art violates the Securities Act of 1933. And it proposes to prove itself by requesting an SEC no-action letter holding that the sale of a work of conceptual art titled “SEC No-Action Letter Request” does not violate the securities laws.

Essentially, Frye argues that conceptual artwork meets the Howey test’s four elements:

  1. The investment of money
  2. In a common enterprise
  3. With the expectation of profits
  4. From the efforts of others.   

It’ll be interesting to see if the SEC responds to Frye’s request.  Frye has also agreed to issue “ownership certificates” to the first 50 persons to email him with a request for a certified copy of the work.  As this conceptual art enterprise has not been nested within any limited liability business entity, I wonder whether the owners of certified copies of the work become anything like general partners in the enterprise under common law.  I’m not sure that a court would view this conceptual art piece as

As many BLPB readers know, former Chairman of the Federal Reserve System, “inflation slayer,” and namesake of the famous “Volcker Rule,” Paul A. Volcker, passed away Sunday.  He was 92.  Much has already been – and will continue to be – written about him.  To pay tribute to this great man and public servant, I wanted to share a few such pieces (in bold), with a quote from each (in italics).    

The Volcker Alliance (here)

Mr. Volcker worked in the United States Federal Government for almost 30 years, culminating in two terms as Chairman of the Board of Governors of the Federal Reserve System from 1979-1987, a critical period in bringing a high level of inflation to an end. He also served as Under Secretary of the Treasury in the 1970s, a period of historic change in international monetary arrangements.  Upon leaving public service, he headed two private, non-partisan Commissions on the Public Service, in 1987 and 2003; both recommended a sweeping overhaul of the organization and personnel practices of the United States Federal Government. His last official role in government service was as head of the President’s Economic Recovery Advisory Board, established by President-Elect Obama…

One of the biggest corporate law battles today concerns the appropriate role of institutional investors – and especially mutual funds – in corporate governance.  There has been increasing concern expressed in the academy that mutual funds – especially index funds – don’t have sufficient incentives to oversee their portfolio companies, and/or that mutual fund complexes have become so huge that they dominate the economy.  The concerns are rising to a level where the funds themselves are responding; witness, for example BlackRock’s attempted defenses here and here.  And, of course, we have the SEC’s sneak attack on institutional power via proposed regulation of proxy advisors.

Which is why I found Fatima-Zahra Filali Adib’s new paper, Passive Aggressive: How Index Funds Vote on Corporate Governance Proposals, so interesting.  She studies index fund voting behavior and contribution to corporate value by focusing on the “close call” votes, i.e., ones that narrowly pass or narrowly fail.  She finds that index fund support is associated with value enhancement, and that these votes are not dictated by the proxy advisors (rebutting arguments that institutions blindly follow advisor recommendations).  On the other hand, she also finds that ISS recommendations are not well…

Senator Rand Paul has a new proposal out to (among other things) allow retirement savers to make tax-free withdrawals from their retirement accounts in order to pay down student loans.  The press release describes the plan this way:

As U.S. student loan debt hits its highest-ever levels, Dr. Paul’s HELPER Act would allow Americans to annually take up to $5,250 from a 401(k) or IRA — tax and penalty free — to pay for college or pay back student loans. These funds could also be used to pay tuition and expenses for a spouse or dependent. 

Why his office refers to him as Dr. Paul and not Senator Paul, I cannot fathom.  If I ever get elected to anything and start introducing legislation, I’m not going to be calling myself “Professor” in the press release.

For people paying down student loans, this could result in a substantial tax savings.  Think about it from the perspective of a person lucky enough to make good money and have the funds available to make significant contributions.  Routing funds through the 401(k) account would reduce taxable income and make it possible to pay $5,250 a year with pre-tax money. 

I’m not sure why we…

In reading, CFTC Relying More Heavily on Coordination with Criminal Prosecutors, I saw that the CFTC recently released their Division of Enforcement Annual Report for FY2019 (Report) (here).

Surprisingly, it’s only the second such report, and it aims to increase the transparency, continuity, and consistency surrounding the priorities of the Division of Enforcement (Division).  This strikes me as a good thing.  In case you’re wondering, the current priorities are: “preserving market integrity; (2) protecting customers; (3) promoting individual accountability; and (4) increasing coordination with other regulators and criminal authorities.”  The Report also provides several interesting charts and lots of metrics about the Division’s enforcement activities.

I found several items in the Report particularly interesting.  First, in May 2019, the Division made its Enforcement Manual public for the first time (here).  Second, the amount recovered in enforcement actions for FY 2019 – $1,321,046,710 – was the 4th highest amount ever for the CFTC!  Third, there’s much focus these days on entities’ compliance programs.  This should be of interest to the increasing number of law schools offering compliance courses/curriculum.  Indeed, the Report’s concluding paragraph states that “The ultimate goal is to foster among our market participants a…

I’m assuming most readers know the backstory here, but CBS and Viacom are both controlled by NAI, which in turn is controlled by Shari Redstone.  NAI owns nearly 80% of the voting stock of each company; the rest of the voting shares are publicly traded but held by a small number of institutions.  The bulk of each company’s capitalization, however, comes from no-vote shares, which are also publicly traded.

Redstone has long sought a merger of the two companies, which has been perceived as a boon to Viacom and a drag on CBS.  That’s why, when she proposed a merger in 2018, the CBS Board revolted and tried to issue new stock that would dilute NAI’s voting control.  That case resulted in a settlement whereby Redstone promised not to propose a merger for two years unless the CBS independent directors raised the issue first.  By sheerest coincidence, as luck would have it, mere months after the settlement was reached and the CBS board restructured, CBS and Viacom announced that they had reached an agreement and would merge by the end of 2019.

Of course, the immediate question among academics was whether, if the merger did proceed, Redstone would shoot…