The New Jersey Bureau of Securities recently announced that it would let its state fiduciary rulemaking expire.  In its release, it indicated that it intended to shift focus to gamified digital brokerage practices:

Since the Bureau published its rule proposal in 2019, the securities industry has seen a dramatic rise in the use of digital platforms and digital engagement practices by broker-dealers and investment advisers. COVID-19 accelerated this trend, as millions of investors turned to trading applications and social media for investment advice. Meanwhile, the Bureau has been monitoring federal regulatory developments.

“Prior to finalizing a Fiduciary Rule, the Bureau intends to reassess the rapidly changing landscape of the financial industry and determine whether further modernization of the Bureau’s rules is necessary,” said Christopher W. Gerold, Chief of the New Jersey Bureau of Securities. 

The financial industry’s use of digital engagement practices, including digital marketing, has drawn new investors into the market, many of whom have little or no prior investment experience. These unsophisticated investors may be particularly susceptible to predatory tactics, including the use of gaming features (for example, point scoring and competition with other investors) to increase trading activity, a practice known as “gamification.”

Undoubtedly New Jersey has limited resources and must pick between approaches.   Still, New Jersey abandoning the field here will likely be seen as a major victory for brokerage houses.  New Jersey’s proposed rule had more teeth than the SEC’s Regulation Best Interest.  It would have required advice without regard to the broker’s interest and also eliminated a presumption that disclosing a conflict satisfied the duty of loyalty.  

 

Yesterday, Professor Art Wilmarth posted on SSRN a new article, It’s Time to Regulate Stablecoins as Deposits and Require Their Issuers to Be FDIC-Insured Banks.  As I’ve written about stablecoins (here) and am planning future research on this topic, I’m really looking forward to reading this piece.  Here’s its abstract:

“In November 2021, the President’s Working Group on Financial Markets (PWG) issued a report analyzing the rapid expansion and growing risks of the stablecoin market. PWG’s report determined that stablecoins pose a wide range of potential hazards, including the risks of inflicting large losses on investors, destabilizing financial markets and the payments system, supporting money laundering, tax evasion, and other forms of illicit finance, and promoting dangerous concentrations of economic and financial power. PWG called on Congress to pass legislation that would require all issuers of stablecoins to be banks that are insured by the Federal Deposit Insurance Corporation (FDIC). PWG also recommended that federal agencies and the Financial Stability Oversight Council should use their “existing authorities” to “address risks associated with payment stablecoin arrangements . . . to the extent possible.”

At present, stablecoins are used mainly to make payments for trades in cryptocurrency markets and to provide collateral for derivatives and lending transactions involving cryptocurrencies. However, technology companies are exploring a much broader range of potential uses for stablecoins. In October 2021, Facebook launched a “pilot” of its Novi “digital currency wallet,” which uses the Pax Dollar stablecoin as its first digital currency and allows customers to make person-to-person payments within and across national borders. The launch of Novi indicates that stablecoins could potentially become a form of “private money” that is widely used in consumer and commercial transactions. PWG’s report calls on federal agencies and Congress to take immediate steps to establish a federal oversight regime that could respond effectively to the dangers created by stablecoins.

This paper strongly supports three regulatory approaches recommended in PWG’s report. First, the Securities and Exchange Commission (SEC) should use its available powers to regulate stablecoins as “securities” and protect investors and securities markets. However, the scope of the SEC’s authority to regulate stablecoins is not clear, and federal securities laws do not provide adequate safeguards to control the systemic threats that stablecoins pose to financial stability and
the payments system.

Second, the Department of Justice (DOJ) should designate stablecoins as “deposits” and should bring enforcement actions to prevent issuers and distributors of stablecoins from unlawfully receiving “deposits” in violation of Section 21(a) of the Glass-Steagall Act. Section 21(a) offers a promising avenue for regulatory action, but its provisions contain uncertainties and gaps and do not provide a complete remedy for the hazards created by stablecoins. The most significant gap in Section 21(a) allows state (and possibly federal) banking authorities to charter special-purpose depository institutions that could issue and distribute stablecoins without obtaining deposit insurance from the FDIC.

Third, Congress should adopt legislation mandating that all issuers and distributors of stablecoins must be FDIC-insured banks. That requirement would compel all stablecoin issuers and distributors and their parent companies to comply with federal laws that protect the safety, soundness, and stability of our banking system and obligate banks to operate in a manner consistent with the public interest. Requiring stablecoin issuers and distributors to be FDIC- insured banks would also maintain the longstanding U.S. policy of separating banking and commerce. It would prevent Facebook and other Big Tech firms from using stablecoin ventures as building blocks for “shadow banking” empires that would erode consumer protections, impair competition, subvert the effectiveness of financial regulation, and potentially unleash systemic crises across our financial and commercial sectors during severe economic downturns and financial disruptions.”

Perhaps you missed these interesting programs–with super speakers–among all the amazing business associations, securities regulation, business transactions, etc. sessions!  I know I did and was glad a friend highlighted them for my attention.

Wednesday, January 5, 2022, 12:35 PM to 1:50 PM
Climate Finance and Banking Regulation: Beyond Disclosure?
Financial Institutions and Consumer Financial Services

U.S. banking regulation has been slower than other forms of financial regulation (and slower than in Europe) to address climate-related financial risks. This panel explores the role of banking regulation in addressing the physical and transition risks from climate change. Possible measures include: mandatory climate risk disclosures by banks; supervisory assessments of climate-related financial risk; capital and liquidity regulation; scenario tests; determination of the appropriate role of banks in mitigating climate risk; financial stability oversight of climate risk; and action (through the Community Reinvestment Act and otherwise) to deter harms to disadvantaged communities and communities of color from climate change.

    • Patricia A. McCoy, Boston College Law School, Moderator
    • Christina Skinner, Wharton School of the University of Pennsylvania, Speaker
    • Graham Steele, Stanford Graduate School of Business, Speaker
    • Hilary J. Allen, American University, Washington College of Law, Speaker
    • Nakita Cuttino, Georgetown University Law Center, Speaker from a Call for Papers

Sunday, January 9, 2022, 3:10 PM to 4:25 PM
Workers, Boards, and the Global Corporation
Section on Economic Globalization and Governance

The appropriate role and status of employee voice in corporate governance is an evergreen issue for corporate law. In the US, the field has traditionally focused on the interactions between boards of directors, shareholders, and managers, but with an increased emphasis on corporate social responsibility, that view has expanded. Despite widespread embrace of CSR principles, however, many corporations still resist union organizing. The inclusion of worker voice in corporate governance has significant comparative law dimensions, encompassing co-determination and union representation on boards. With the recognition that work is increasingly remote, these issues will become even more salient.

    • Miriam Cherry, Saint Louis University School of Law, Moderator
    • Lenore Palladino, University of Massachusetts Amherst School of Public Policy, Speaker
    • Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law, Speaker
    • George S. Georgiev, Emory University School of Law, Speaker
    • Matthew T. Bodie, Saint Louis University School of Law, Speaker

Looking forward to seeing many of you on Zoom later in the week!

Yes, like many, I was saddened by the loss of TV personality Betty White on New Year’s Eve at the age of 99–just a few weeks shy of her 100th birthday.  I have been fascinated by the many tributes and, indeed, tuned in for the SNL reprise of her Mother’s Day host night (from eleven years ago!) on Saturday night.  Why are so many of us intrigued by this near centenarian whom we have never met in person?  I have mulled this as I complete the calculation of my fall semester grades, ready myself for presentations, commentary, and attendance at the 2022 AALS conference (which starts later this week), and prepare to start teaching for the spring semester.

My colleague and friend Stuart Brotman gets a lot of it right, imv, in this short post.  I invite you to read it.  Stuart is a lawyer embedded in our School of Journalism and Electronic Media (part of the College of Communication and Information) and on the Advisory Board for our Institute for Professional Leadership.  Here’s what I have culled from Stuart’s piece and other articles I have read (and from just watching Betty “do her thing”) over the past few days.

  • She showed up.
  • She brought her “A Game” to what she did.
  • She embraced challenge.
  • She was candid at the risk of showing herself to be less than perfect–even unattractive.
  • She brought a sense of humor to her craft (including a sense of humor about herself).
  • She loved people and life–or at least always made it look that way.

I am sure there is more.  I will keep thinking on it, for fun.  But as I assembled this list in my head, I realized it included a number of inspiring thoughts for the new year and the new semester.  So, I invite you to honor Betty White’s memory by adopting her norms–or at least some of them–as you begin your work in 2022.  They are so positive and strong!

🎉 Happy New Year to all.  🎊 I hope 2022 brings you good health and joy.

Aswani, Bilokha, Cheng, and Cole have posted The Cost (and Unbenefit) of Conscious Capitalism on SSRN (here). The abstract:

This paper examines the costs and benefits of ‘stakeholder governance’ for shareholders and other stakeholders by using the adoption of constituency statutes as a quasi-exogenous shock to corporate governance. Constituency statutes permit board members to consider all stakeholder interests, relaxing fiduciary duty to only shareholders. Using a sample of U.S. publicly traded firms (1981-2010) and employing a difference-in-difference methodology, we find that the discretionary adoption of ‘stakeholder governance’ leads to managerial entrenchment and a reduction in institutional ownership and shareholder wealth with little to no ‘trade-off’ benefits to other stakeholders. As states adopted constituency statutes, signs of managerial entrenchment increased (proxied by significant declines in earnings transparency and jumps in CEO and Director compensation) as did harm to shareholder wealth and to governance through institutional ownership. At the same time, we do not observe potential ‘trade-off’ benefits to the non-shareholder stakeholders these statutes were intended to help; we find that labor, customers, and creditors only marginally benefited (if at all) from the introduction of these statutes. These results are robust to a battery of checks including the biasedness in the staggered DiD estimator.

Choi, Cook, Via, and Zhang have posted The Mitigation of Reputational Risk via Responsive CSR: Evidence from Securities Class Action Lawsuits on SSRN (here). The abstract:

We examine the strategic production of CSR as a post-shock damage control instrument (responsive CSR). We proxy for these shocks using securities lawsuits. Using hand-collected data to supplement our main CSR dataset, we find that responsive CSR is temporary and consists primarily of strategically placed news releases to blunt short-term effects from periodic negative news developments related to the litigation process. Firms use responsive CSR synergistically with advertising, and it is concentrated in firms headquartered in urban or liberal-leaning states that exert high ESG demands. We find that responsive CSR mostly represents window dressing – it does not add long-term value and is associated with board members that are faced with significant reputational concerns.

Honestly, the most interesting business news I’ve seen during this liminal time between Christmas and New Year’s is this story from my local New Orleans paper.  Four academics – from Tulane, LSU, and the University of New Orleans – joined together to form a … well, a gourmet toothpaste company.  Which apparently became quite popular, recommended by Gwyneth Paltrow and sold in Harrod’s and luxury stores in Dubai. Three of the four founders are now suing the CEO for fraud and misuse of company funds:

the lawsuit says worrying signs were accumulating, including Sadeghpour’s persistent refusal to move operations from his parents’ home on 8th Street in Metairie, a few blocks from the Lakeway business complex, to offices rented in the BioInnovation Center on Canal Street.

When the board members would meet at Sadeghpour’s house on Wednesdays, they started to get uneasy about the fact the company’s sales stagnated after 2018 at the $1 million mark….The lawsuit says the other board members noticed an accumulation in Sadeghpour’s home of Japanese pottery and other high-end art.

The lesson, apparently, is that if you’re the CEO of a small business and you’re spending company funds on personal luxuries, it’s probably best not to hold board meetings at your home.  But, according to one the plaintiffs, “We wanted him to move this business out of his kitchen but he refused… It seems he wanted to have the convenience of walking down his stairs in his robe at his leisure and have his assistant go to the Whole Foods and get him breakfast every morning.”

Happy New Year, everyone!

People rarely keep resolutions, much less ones they don’t make for themselves, but here are some you may want to try.

  1. Post information about the law and current events that lay people can understand on social media. You don’t need to be a TikTok lawyer and dance around, but there’s so much misinformation out there by “influencers” that lawyers almost have a responsibility to correct the record.
  2. Embrace legal tech. Change is scary for most lawyers, but we need to get with the times, and you can start off in areas such as legal research, case management, accounting, billing, document automation and storage, document management, E-discovery, practice management, legal chatbots, automaton of legal workflow, contract management, artificial intelligence, and cloud-based applications. Remember, lawyers have an ethical duty of technological competence.
  3. Learn about legal issues related to the metaverse such as data privacy and IP challenges.
  4. Do a data security audit and ensure you understand where your and your clients’ data is and how it’s being transmitted, stored, and destroyed. Lawyers have access to valuable confidential information and hackers know that. Lawyers also have ethical obligations to safeguard that information. Are you communicating with clients on WhatsApp or text messages? Do you have Siri or Alexa enabled when you’re talking about client matters? You may want to re-think that. Better yet, hire a white hat hacker to assess your vulnerabilities. I’ll do a whole separate post on this because this is so critical. 
  5. Speaking of data, get up to speed on data analytics. Your clients use data every day to optimize their business performance. Compliance professionals and in-house lawyers know that this is critical. All lawyers should as well.
  6. Get involved with government affairs. Educate legislators, write comment letters, and publish op-ed pieces so that people making the laws and influencing lawmakers can get the benefit of your analytical skills. Just make sure you’re aware of the local, state, and federal lobbying laws.
  7. Learn something completely new. When you do your CLE requirement, don’t just take courses in your area of expertise. Take a class that has nothing to do with what you do for a living. If you think that NFTs and cryptocurrency are part of a fad waiting to implode, take that course. You’ll either learn something new or prove yourself right.
  8. Re-think how you work. What can you stop, start, and continue doing in your workplace and family life?
  9. Be strategic when thinking about diversity, equity, and inclusion. Lawyers talk about it, but from what I observe in my lawyer coaching practice and the statistics, the reality is much different on the ground and efforts often backfire.
  10. Prioritize your mental health and that of the members on your team. Do you need to look at billable hours requirements? What behavior does your bonus or promotion system incentivize? What else can you do to make sure that people are valued and continually learning? When was the last time you conducted an employee engagement survey and really listened to what you team members are saying? Whether your team is remote or hybrid, what can you do to make people believe they are part of a larger mission? There are so many resources out there. If you do nothing else on this list, please focus on this one. If you want help on how to start, send me an email.

Wishing you a safe, healthy, and happy 2022.

As the year quickly draws to a close, I want to wish BLPB readers a Happy New Year and a wonderful start to 2022!  I also wanted to share some exciting end of the year news: the 2nd edition of FinTech: Law and Regulation (ed. Jelena Madir) is now available (here and here)!  I’m honored to have contributed a chapter, Blockchain in Financial Services, with coauthor Professor Kevin Werbach.  Below, I provide a summary of the book and its contents from the publisher’s (Edward Elgar) website.

“This fully updated and revised second edition provides a practical examination of the opportunities and challenges presented by the rapid development of FinTech in recent years, particularly for regulators, who must decide how to apply current law to ever-changing concepts driven by continually advancing technologies. It addresses new legislative guidance on the treatment of cryptoassets and smart contracts, the European Commission’s Digital Finance Strategy and FinTech Action Plan, as well as analysing significant recent case law.”

Continue Reading Now Available: FinTech: Law and Regulation (2nd edition)

As the Interim Director of UT Law’s Institute for Professional Leadership (IPL), I have the privilege of working with a student fellow. Both last year’s fellow (chosen by the founder and Director of the IPL) and this year’s fellow (selected by me) have been advanced business law students. I have had the pleasure of getting to know both well, inside and outside the classroom. 

Our Hardwick Fellows have a number of roles in the IPL. They often involve collaborative tasks. One of the most fun components is our work co-editing guest posts for the IPL’s Leading as Lawyers blog. We read and revise posts authored by students, alumni, faculty, staff, and sometimes others. We endeavor to publish a post about every two or three weeks. Click on the “follow” button on our WordPress home page to receive email notices of new posts.

The IPL’s 2021-22 Hardwick Fellow is Stefan Kostas. As we sat down to do some semester-end planning, we somehow came to the idea of co-creating a holiday season post–a dialogue capturing some of our relevant reflections. We conducted the “conversation” by e-mail and then edited it. The end result is a post entitled: “Leadership Musings, Goal-Setting, and the New Year: A Colloquy.”

It struck me that our holiday season/year-end post might be of interest to BLPB readers, too. So, feel free to click on the link and give it a read. It exemplifies many of the conversations business law profs–and other law profs–have with students whom they mentor and with whom they collaborate. This kind of give-and-take–part social conversation, part mentoring and career development–is a wonderfully joyful part of our job as instructors in the law school setting. We are, indeed, blessed.

Sending out wishes to all for a very happy, healthy new year.  No doubt surprise challenges in legal education will continue to arise in the lingering pandemic environment.  But the rich professional and academic relationships our jobs allow us to have will be part of what sustains me in 2022. 🎉

In recent years, there’s been a lot of talk about the macro effects of consolidation in the asset management industry, whereby a handful of managers own stock in just about everything.  In particular, several scholars have argued that these massive investors “own the economy,” and therefore internalize any externalities generated by the antisocial behavior of an individual portfolio company.  Therefore, the theory goes, these firms have an interest in reducing sources of systemic risk, like climate change, or potentially racial inequality.  See, e.g., Madison Condon, Externalities and the Common Owner, 95 Wash. L. Rev. 1 (2020); John C. Coffee, The Future of Disclosure: ESG, Common Ownership, and Systematic Risk; Jim Hawley & Jon Lukomnik, The Long and Short of It: Are We Asking the Right Questions? Modern Portfolio Theory and Time Horizons, 41 Seattle U. L. Rev. 449 (2018).

There were always some kinks in the theory.  Most obviously, concerns have been raised that asset managers encourage less competition among portfolio firms, to the detriment of customers and labor.  See, e.g., Miguel Anton, Florian Elder, Mireia Gine, & Martin C. Schmalz, Common Ownership, Competition, and Top Management Incentives; Zohar Goshen & Doron Levit, Common Ownership and the Decline of the American Worker.  I’ve written about how the theory sits uneasily with our concepts of corporate governance, and glosses over the fact that these investments are held in different funds which may not all have identical interests.

Still, law professors like myself find it attractive because at the end of the day, it provides a justification for more stakeholder-focused business practices without challenging the underpinnings of shareholder primacy or the structure of the modern corporation.  We get to have our cake and eat it too.  No wonder, then, that the Chair of MSCI said that ESG investing is a mechanism to “protect capitalism. Otherwise, government intervention is going to come, socialist ideas are going to come.”  At the end of the day, ESG investing is an incredibly mild intervention that leaves our corporate regulatory system intact.

Which is why two new papers, The Limits of Portfolio Primacy, by Roberto Tallarita, and Systemic Stewardship with Tradeoffs, by Marcel Kahan and Edward Rock, are so important.  Both take a hard look not only at the ways in which this theory is out of sync with current corporate governance standards, but also at more practical realities – namely, the actual investments of large asset managers, and the ways in which they do not, in fact, own the economy, while many of the worst corporate actors are beyond their influence.

And on that note … happy Christmas to everyone who celebrates (and to those of us who just enjoy the festive atmosphere)!  I hope everyone is having a wonderful (safe, healthy!) holiday season.