Stephen Davidoff recently posted a piece on DealBook
entitled “A Push to End Securities Fraud Lawsuits Gains Momentum,” in which he notes
that “Halliburton is asking the Supreme Court to confront one of the
fundamental tenets of securities fraud litigation: a doctrine known as “’fraud
on the market.’”  He goes on to provide a
lot of interesting additional details, so you should definitely go read the
whole thing, but I focused on the following:

In its argument, Halliburton is asking the
Supreme Court to confront one of the fundamental tenets of securities fraud
litigation: a doctrine known as “fraud on the market.” The doctrine has its
origins in the 1986 Supreme Court case Basic v. Levinson. To state a claim for
securities fraud, a shareholder must show “reliance,” meaning that the
shareholder acted in some way based on the fraudulent conduct of the company. In
the Basic case, the Supreme Court held that “eyeball” reliance — a requirement
that a shareholder read the actual documents and relied on those statements
before buying or selling shares — wasn’t necessary. Instead, the court adopted
a presumption, based on the efficient market hypothesis, that all publicly
available information about a company is incorporated into its stock price…. A
group of former commissioners at the Securities and Exchange Commission and law
professors represented by the New York law firm Wachtell, Lipton, Rosen &
Katz have also taken up the cause. In an amicus brief, the group argues that,
in practice, the Basic case has effectively ended the reliance requirement
intended by the statute, something that is not justified. They rely on a forthcoming
law review article by an influential professor, Joseph A. Grundfest of Stanford
Law School. Professor Grundfest argues that the statute on which most
securities fraud is based — Section 10(b) of the Exchange Act — was intended by
Congress to mean actual reliance because the statute is similar to another one
in the Exchange Act that does specifically state such reliance is required.

This got me to thinking about how I might
introduce the fraud-on-the-market reliance presumption to students the next
time I teach it.  This is what I came up
with as a possibility:

Assume you know that a particular weather app is 100%
accurate.  Assume also that you know all
your neighbors check the app regularly. 
If in deciding whether you need an umbrella you simply look out your
window to see whether any of your neighbors are carrying one, rather than checking
the weather app, are you not still actually relying on the weather app?  The fraud-on-the-market presumption of
reliance effectively answers that question in the affirmative.  In the securities context it provides that instead
of reviewing all publicly available disclosures when deciding to buy or sell
securities, it is enough for you to simply “look out your window” at the market
price because we assume the market price reflects the consensus equilibrium of
all publicly available information.

One might protest that the plaintiff should still have to
prove that all the neighbors are in fact checking the weather app, and this is
in fact the case when we require plaintiffs seeking the benefits of the FOM
presumption to prove the relevant market is efficient.  Alternatively, one might protest that the
idea that the actions of your neighbors reflect well-enough the information
provided by the weather app is questionable, but since Eugene Fama just won the
Nobel prize in economics it might be an uphill battle to overturn the
presumption on that basis.  Another
objection might be that we don’t need the presumption because there are enough
alternative mechanisms to hold corporate actors accountable for fraud, and it
is certainly the case that when the Supreme Court adopted the FOM presumption,
a large part of the rationale was the perception that there was a need for the presumption
in order to facilitate actions that would otherwise never be brought in any
form.  What I see as a possible obstacle
to this approach is that, while one may debate whether the Roberts Court is in
fact pro-business, I do believe it is concerned about appearing overly so – and authoring a decision that states we no longer need the FOM presumption because
alternative corporate accountability mechanisms are working so efficiently
strikes me as just throwing fuel on that fire when the Court could arguably
reach the same result by continuing to tighten up class-action law generally.  Finally, one might object that the FOM presumption
actually allows folks who just run out of the house without either checking the
app or looking out their window to claim the presumption, but at least a
partial answer to this objection is that the Basic decision itself provides
that: “Any showing that severs the link between the alleged misrepresentation
and either the price received (or paid) by the plaintiff, or his decision to
trade at a fair market price, will be sufficient to rebut the presumption of
reliance,” Basic Inc. v. Levinson, 485 U.S. 224, 248 (1988), and this is
typically understood to at least include plaintiffs who are, to continue the
analogy, rushing out of the house because they don’t have time to grab an
umbrella.

Obviously, the issues are ultimately more complicated than
the foregoing suggests, but it is just intended to serve as an introduction,
which can be expanded to account for more complicated matters as the discussion
proceeds. I’d be curious to hear what readers think needs to be added/amended
to make this introduction work.

Really great piece by Justin Fox on “What We’ve Learned from
the Financial Crisis” over at the Harvard Business Review.  What follows is a brief excerpt, but you’ll want to go read the whole thing.

Five years ago the global financial system seemed on the
verge of collapse. So did prevailing notions about how the economic and
financial worlds are supposed to function. The basic idea that had governed
economic thinking for decades was that markets work…. In the summer of 2007,
though, the markets for some mortgage securities stopped functioning…. [T]he
economic downturn was definitely worse than any other since the Great
Depression, and the world economy is still struggling to recover…. Five years
after the crash of 2008 is still early to be trying to determine its
intellectual consequences. Still, one can see signs of change…. To me, three
shifts in thinking stand out: (1) Macroeconomists are realizing that it was a
mistake to pay so little attention to finance. (2) Financial economists are
beginning to wrestle with some of the broader consequences of what they’ve
learned over the years about market misbehavior. (3) Economists’ extremely
influential grip on a key component of the economic world—the corporation—may
be loosening.

Fox goes on to dissect each of these shifts, putting them in
historical perspective.  As I said, I
think it is well worth your time to read his entire piece.  A
couple of additional noteworthy quotes from his analysis of item (3) above follow:

  • [M]ost economic theories also build upon a common foundation
    of self-interested individuals or companies seeking to maximize something or
    other (utility, profit) …. Still, one narrow way of looking at the world can’t
    be the only valid path toward understanding its workings. There’s also a risk
    that emphasizing individual self-interest above all else may even discourage
    some of the behaviors and attitudes that make markets work in the first
    place—because markets need norms and limits to function smoothly.
  • I don’t think the shareholder value critics have come up
    with a coherent alternative. We’re all still waiting for some other framework
    with which to understand the corporation—and economists may not be able to
    deliver it. Who will? Sociologists have probably been the most persistent
    critics of shareholder value, and of the atomized way in which economists view
    the world. Some, such as Neil Fligstein, of UC Berkeley, and Gerald Davis, of
    the University of Michigan, have proposed alternative models of the corporation
    that emphasize stability and cohesion over transaction and value.

For those of you who have seen the classic film
The Wizard of Oz, you may remember the scene where Dorothy, the tin man, and the scarecrow made their way through the Spooky Forest chanting “lions and
tigers and bears, oh my.”  They feared what could come next on their
journey. Some in the business community have a similar fear of what could come
next with the rise of shareholder activism, increasing but unclear regulation,
and more demands from particular investors.

On October 16th,  I had the privilege of serving on a
panel with the corporate secretary of JP Morgan Chase, an executive of the
AFL-CIO, and the fund controller for Vanguard during an informational session on
corporate governance and proxy trends. The US Chamber of Commerce Center for
Capital Markets Competitiveness sponsored the event.

The
morning started with New Jersey Congressman Scott Garrett setting the tone for
the day by praising SEC Chair Mary Jo White for her recent statements promoting
agency independence and discretion, and decrying disclosure overload.  He expressed his opposition to what he
perceived to be a growing push to “hijack” the SEC disclosure regime to push “environmental and social causes that are immaterial to investors.”  He spent the remainder of his time outlining
his concerns about the rise of proxy advisor firms, the over reliance on these
firms by clients, potential conflicts of interest, and the lack of competition
(2 companies control 97% of the market). 
Proxy advisors in attendance invited the Congressman and all interested
parties to meet to discuss transparency and the value they bring to the
process. 

Former
SEC chair Harvey Pitt echoed Congressman Garrett’s sentiments later in the day.
Pitt also talked about the tensions between investors who want less disclosure
and those who want more, the less than stellar record that the SEC has had recently with
rulemaking and litigation, and the need for higher resubmission thresholds for
shareholder proposals. Pitt also called pay ratio “one of the dumbest
provisions in Dodd-Frank…because it either states the obvious or confuses the
issue beyond recognition.”

Although
I missed his report, Jim Copland of the Manhattan Institute presented
proxymonitor.org’s report of the 2013 proxy season.  Of note the average Fortune 250 company faced 1.26 shareholder proposals,
up from 1.22 proposals per company in 2012. But only 7 percent of shareholder
proposals received the backing of a majority of shareholders in 2013, down from
9 percent in 2012. Of the 20 proposals that received a majority vote, over half
involved just two issues: whether to elect all corporate directors annually and
whether each director should be required to receive a majority of votes cast to
be elected. 99% of shareholder proposals were sponsored by either organized labor, or
a social, religious or other public policy organization. Finally, this tidbit
–“among the 41 Fortune 250 companies contributing $1.5 million or more to the
political process in the 2012 election cycle, 44 percent faced a
labor-sponsored proposal, as opposed to only 18 percent of all other companies.
Those companies that gave at least half of their donations to support
Republicans were more than twice as likely to be targeted by shareholder
proposals sponsored by labor-affiliated funds as those companies that gave a
majority of their politics-related contributions on behalf of Democrats.”
Nonetheless, political spending and lobbying proposals received only 18% of the
shareholder vote. The full report is here.

During
our panel, I focused my remarks on the three recent waves of litigation by a
small cadre of enterprising lawyers alleging: (1) directors breached their duties by approving
excessive compensation and failing to rescind the compensation after failed say-on-pay votes (despite
say-on-play’s nonbinding nature and the fact that Dodd-Frank makes it clear the
law does not create any new duties); (2) inadequate proxy disclosures; and (3) failure to comply with 162(m) of the
IRS code.  I also speculated about
potential suits that may come in the 2016 proxy season regarding
pay ratio, and discussed some of the environmental and social shareholder
proposals. JP Morgan Chase, the AFL-CIO and Vanguard talked about the
increasing importance of engaging with shareholders early to work through issues
in advance of shareholder proposals. In fact the union indicated that through the
engagement process, it had withdrawn 43% of its proposals.

On the pay ratio
matter, the AFL-CIO lauded the benefits of additional disclosure (although they
have no ideal ratio in mind), and stated that their top concerns included
executive compensation, board diversity and board tenure. Vanguard, which owns
a bit of most companies, discussed its priorities of majority voting and board
classification, and educated the audience on how the firm targets companies for
engagement, which the speaker noted was a “process, while voting is an event.”

All in all, an informative morning for those
in attendance, who should now be better equipped to deal with the Spooky Forest
of the 2014 proxy season. 

The 2013 Nobel Prize in Economics winners were announced
earlier this week and the award was shared by three U.S. Economists for their
work on asset pricing.  Eugene
Fama of the University of Chicago, Lars
Peter Hansen of the University of Chicago and Robert Shiller of Yale University
share this year’s prize for their separate contributions in economics research.

The work of the
three economics is summarized very elegantly in the
summary publication produced by The Royal Swedish Academy of Sciences
titled “Trendspotting in asset markets”.  The combined economic contribution of the
three researchers is described below:

The behavior of asset prices is essential for many important
decisions, not only for professional inves­tors but also for most people in
their daily life. The choice on how to save – in the form of cash, bank deposits
or stocks, or perhaps a single-family house – depends on what one thinks of the
risks and returns associated with these different forms of saving. Asset prices
are also of fundamental impor­tance for the macroeconomy, as they provide
crucial information for key economic decisions regarding consumption and
investments in physical capital, such as buildings and machinery. While asset
prices often seem to reflect fundamental values quite well, history provides
striking examples to the contrary, in events commonly labeled as bubbles and crashes. Mispricing of assets may contribute to financial crises and, as the
recent global recession illustrates, such crises can damage the overall
economy. Today, the field of empirical asset pricing is one of the largest and
most active subfields in economics.

Nobel

 This year’s award has
several implications for those of us interested in the legal side of law and
economics.  First, Fama is the
grandfather of the efficient capital market hypothesis, the foundation for
fraud on the market, a economics elements incorporated into securities fraud
litigation.

Second, Fama’s inclusion in the award is being heralded by some as
a win, or vote of confidence, for free
marketers whose regulatory view (that markets should be largely
unregulated) rests on the fundamental assumption that markets are efficient.  On the other hand, Shiller’s inclusion in the
award challenges the coup that can be claimed by free marketers because Shiller
has long questioned the efficiency of the markets.  John
Cassidy at The New Yorker writes “Shiller, in showing that the stock market bounced up and down a lot more
than could be justified on the basis of economic fundamentals such as earnings
and dividends, kept alive the more skeptical and realistic view of finance that
Keynes had embodied in his “beauty contest” theory of investing.”  Market efficiency, or lack thereof, are key
arguments against and for market regulations. 
Trends in support for either theory or validation of one could signal
future approaches to regulation.

Finally,
the focus on asset pricing, particularly Fama’s work has some potential
implications for the mutual fund industry. 
Fama’s efficiency view of the markets largely discounts the value of
actively managed funds, once costs and annual fees are deducted because the
market, if efficient, cannot consistently be beaten.  This last thread regarding fund management is
a theme woven into some of my more recent research on the regulations, risks,
and ownership anomalies facing retirement investors.  More on this later, with links to newly
published papers of course, but for now read the Nobel summary document
included above and briefly contemplate taking the time to audit an economics
course next semester—I am going to browse the b-school catalogue now.

-Anne Tucker

Early this month, the United States
District Court for the Middle District of
Pennsylvania decided Gentex Corp. v. Abbott, Civ. A. No. 3:12-CV-02549,  (M.D.Pa. 10-10-2013).  The outcome of the case is not really objectionable (to me), but some of the
language in the opinion is. As with many courts, this court conflates LLCs and
corporations, which is just wrong.  The
court repeatedly applies “corporate” law principles to an LLC, without
distinguishing the application.  This is
a common practice, and one that I think does a disservice to the evolution of
the law applying to both corporations and LLCs.

I noted this in a Harvard Business Law Review Online article a while back:

Many courts thus seem to view LLCs as close cousins to corporations, and many even appear to view LLCs as subset or specialized types of corporations. A May 2011 search of Westlaw’s “ALLCASES” database provides 2,773 documents with the phrase “limited liability corporation,” yet most (if not all) such cases were actually referring to LLCs—limited liability companies. As such, it is not surprising that courts have often failed to treat LLCs as alternative entities unto themselves. It may be that some courts didn’t even appreciate that fact. (footnotes omitted).

To be clear, though, Pennsylvania law applies
equitable concepts, such as piercing the corporate veil, to LLCs.  Still, courts should not discuss LLCs as
though they are the same as corporations or improper outcomes are likely to
follow.  When dealing with LLCs, the
concept should be referred to as “piercing the LLC veil” or “piercing the veil
of limited liability.”  Instead, though,
courts tend to discuss LLCs and corporations as equivalents, which is simply not accurate.

By way of example, the Gentex court
states:

Helicopterhelmet.com’s principal place of
business is in South Carolina, while Helicopter
Helmet, LLC is a Delaware corporation with its principal place of business
also in South Carolina.

 Gentex Corp. v. Abbott, 3:12-CV-02549, 2013 WL
5596307 (M.D. Pa. Oct. 10, 2013) (emphasis added).  It is not! 
It is a Delaware LLC!

Further, the court says:

 From the record, it does not appear that
Helicopter Helmet LLC was
anything less than a bona fide independent corporate
entity, or that Plaintiff intends to allege as much. 

Id. (emphasis
added).  Again – no.  An LLC is NOT a corporate entity.  It is as, Larry Ribstein liked to say, an
uncorporation.  In fact, I would argue that Pennsylvania law, in Title 15, is called Corporations and Unincorporated Associations for a reason. Chapter 89 of that title is called Limited
Liability Companies.

In fairness to Judge Brann, who wrote the Gentex opinion, Pennsylvania courts have merged the concepts of LLC and corporate veil piercing in other cases, even when discussing the
differences between the two.  In Wamsley
v. Ehmann, C.A. No. 1845 EDA 2009 (Pa. Super. Ct. Feb. 28, 2012), summarized nicely here, the court
explained:

These factors [for determining whether to
pierce the veil] include but are not limited to: (1) undercapitalization; (2) failure
to adhere to corporate formalities; (3) substantial intermingling of corporate
and personal affairs; and (4) use of the corporate form to  perpetrate fraud. [citing Village at Camelback
Property Owners Assn. Inc.] . . .

Certain corporate formalities may be relaxed
or inapplicable to limited liability corporations and closely held companies.
Advanced Telephone Systems, Inc., supra at 1272. An LLC does not need to adhere to
the same type of formalities as a corporation. Id. (finding lack of financial statements,
bank accounts, exclusive office space, and tax returns was not evidence of
failure to adhere to corporate formalities because entity was LLC with limited
scope). In fact, the appropriate formalities for an LLC “are few” and,
depending on the purpose of the LLC, it may not need to be capitalized at all.
Id. Moreover, not all corporate formalities are created equal. Id. at 1279. To
justify piercing the corporate veil, the lack of formalities must lead to some
serious misuse of the corporate form. Id. 

Okay, got
that?  The rules that apply to
corporations apply to LLCs.  Except when
they don’t because LLCs are sometimes different.  To justify piercing the “corporate veil,” then, an LLC must have seriously misused the corporate form, even though an LLC is a
distinct form from the corporation. This is not especially helpful, I am afraid. 

Veil piercing is
difficult enough to plan around, and the seemingly random nature of veil
piercing is often noted (with some, such as Prof. Bainbridge, arguing that we should do away with it altogether).  There has not been much of a move to abolish veil piercing, and there hasn’t even been much progress to make the standards for veil
piercing more clear. Still, given the prevalence of LLCs, it’s high time courts at least help
LLC veil piercing law evolve into murky standards specifically designed for
LLCs.  That doesn’t seem like too much to
ask.  

The JOBS Act offers two new opportunities to offer securities on the Internet without Securities Act registration. Both the Rule 506(c) exemption and the new crowdfunding exemption could be used to sell securities on web sites open to the general public. But could a single web site offer securities pursuant to both exemptions at the same time (assuming the SEC eventually proposes and adopts the regulations required to implement the crowdfunding exemption)?

Background: The two exemptions

Rule 506(c) allows an issuer to publicly advertise a securities offering, as long as the securities are only sold to accredited investors. Rule 506(c) is not limited to Internet offerings, but it could be used by an issuer to advertise an offering on an Internet site open to the general public—as long as actual sales are limited to accredited investors.

The new crowdfunding exemption, added as section 4(a)(6) of the Securities Act, allows issuers to sell up to $1 million of securities each year. The offering may be on a public Internet site, as long as that site is operated by a registered securities broker or a “funding portal,” a new category of regulated entity created by the JOBS Act.

Could a single intermediary do both 506(c) and crowdfunded offerings?

Yes, but only if the intermediary is a federally registered securities broker.

Rule 506(c) does not limit who may act as an intermediary, but the crowdfunding exemption says that only registered brokers or funding portals may host crowdfunded offerings. By definition, funding portals appear to be limited to offerings under the crowdfunding exemption. A funding portal is “any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6).” Exchange Act section 3(a)(80), as amended by the JOBS Act. Thus, funding portals could not act as intermediaries in Rule 506(c) offerings.

The JOBS Act does not impose a similar limitation on brokers, so brokers could act as intermediaries in both Rule 506(c) and crowdfunded offerings.

Could a broker include both types of offerings on the same web site?

The answer to this is probably yes.

Rule 506(c) does not limit the content of the web site, so any limitations are going to come from the crowdfunding exemption. Crowdfunding intermediaries are subject to a number of requirements, but the crowdfunding exemption does not appear to prohibit the inclusion of other offerings on the same web site.

Operating a dual site could be cumbersome. For example, Rule 506(c) offerings could appear on the site’s main page, but no investor may see crowdfunded offerings until they satisfy the crowdfunding exemption’s investor education requirements. But unless the SEC rules implementing the crowdfunding exemption prohibit it, dual-exemption sites should be possible.

Could an issuer do a double-door offering, using a single web site to simultaneously sell the same securities in both types of offerings?

I have heard that some ill-advised fledgling intermediaries have plans to do this, but the answer to this question is no. The integration doctrine would not allow it.

Rule 506(c) incorporates the requirements of Rule 502(a) of Regulation D, and Rule 502(a) indicates that “[a]ll sales that are part of the same Regulation D offering must meet all of the terms and conditions of Regulation D.” Section 4(a)(6) of the Securities Act, the crowdfunding exemption, exempts “transactions” that meet the criteria of the exemption.

Under that transactional language, as consistently interpreted by the SEC and the courts over the years, the entire offering must comply with the requirements of the exemption, or none of the sales is exempted. An issuer cannot sell parts of a single offering pursuant to two separate exemptions.

Unless an integration safe harbor is available, and none would apply here, the SEC uses a five-factor test to determine whether ostensibly separate offerings are part of the same transaction. This test considers (1) whether the sales are part of a single plan of financing; (2) whether the sales involve issuance of the same class of securities; (3) whether the sales are made at or about the same time; (4) whether the issuer receives the same type of consideration; and (5) whether the sales are made for the same general purpose.

Under this test, an issuer could not sell a security pursuant to the Rule 506(c) exemption and at the same time sell the same security on the same web site pursuant to the crowdfunding exemption. Those two ostensibly separate offerings would be integrated and would have to fit within a single exemption. (There is vague language in the crowdfunding exemption that might arguably protect against integration, but the argument is a weak one. For a discussion of that argument see pp. 213-214 of my article here.)

1. Russell
G. Pearce & Brendan M. Wilson on Business Ethics

 

This Essay
makes three contributions to the field of business ethics …. First, the Essay
identifies the dominant approaches to business ethics as profit maximization,
social duty, and ordinary ethics, and summarizes the claims made by proponents
of each perspective. We intend this categorization as a way to refine the
distinctions between and among various views of business ethics and to address
the conundrum that John Paul Rollert has described as the “academic anarchy
that is business ethics…. Second, the Essay explores the strengths and
weaknesses of these three approaches. It suggests that their emphasis on
viewing business persons and organizations as existing autonomously, rather
than within webs of relationships, helps explain why the field of business
ethics has had minimal influence on business conduct, as does the false
dichotomy between economic and ethical conduct that proponents of these
approaches often embrace…. Third, the Essay proposes an alternative approach
that would locate business ethics at the center of business conduct. This approach
embraces the relational character of business behavior. It offers a conception
of self-interest that recognizes the relational dimension of self-interest and
identifies mutual benefit as the goal of business conduct. The text of the
essay is available in the book itself or on Professor Pearce’s Fordham
University web page.

 

2. John
Robinson Jr. on Social Public Procurement: Corporate Responsibility Without
Regulation

 

The growing
perception in the developed world that multi-national corporations conduct
social and environmental exploitation abroad raises numerous questions about
corporate social responsibility. That those corporations would not get away
with, nor probably even attempt, such exploitation in their home countries
complicates the dialogue: to what extent are the home governments responsible
for ensuring their native corporations act responsibly abroad?  The E.U. answers this question affirmatively
and takes an active role in promoting social responsibility. One major
mechanism they use is socially responsible public procurement, which
incentivizes good social outcomes by awarding contracts based, in part, on
social criteria….  This Essay explores
the E.U.’s framework for achieving these social goals and suggests that the
U.S. should undertake many of the same policies.

 

3. Tony A.
Freyer & Andrew P. Morriss on Creating Cayman as an Offshore Financial Center:
Structure & Strategy Since 1960

 

The Cayman
Islands are one of the world’s leading offshore financial centers (OFCs). Their
development from a barter economy in 1960 to a leading OFC for the location of
hedge funds, captive insurance companies, yacht registrations, special purpose
vehicles, and international banking today was the result of a collaborative
policy making process that involved local leaders, expatriate professionals,
and British officials…. [T]his Article describes how the collaborative policy
making process developed over time and discusses the implications of Cayman’s
success for financial reform efforts today.


Hardcover book forthcoming. 
Here is a description from the Amazon product page:

Since the 1980s,
society’s wealthiest members have claimed an ever-expanding share of income and
property. It has been a true counterrevolution, says Pierre Rosanvallon–the
end of the age of growing equality launched by the American and French
revolutions. And just as significant as the social and economic factors driving
this contemporary inequality has been a loss of faith in the ideal of equality
itself. An ambitious transatlantic history of the struggles that, for two
centuries, put political and economic equality at their heart, The Society of
Equals calls for a new philosophy of social relations to reenergize egalitarian
politics. For eighteenth-century revolutionaries, equality meant understanding
human beings as fundamentally alike and then creating universal political and
economic rights. Rosanvallon sees the roots of today’s crisis in the period
1830-1900, when industrialized capitalism threatened to quash these
aspirations. By the early twentieth century, progressive forces had begun to
rectify some imbalances of the Gilded Age, and the modern welfare state
gradually emerged from Depression-era reforms. But new economic shocks in the
1970s began a slide toward inequality that has only gained momentum in the
decades since.

Jennifer S. Taub has updated “What We Don’t Talk About When
We Talk About Banking” on SSRN.  Here is
the abstract:

The run on the shadow banking system in 2008 is routinely
identified as the event that transformed the nonprime mortgage securities
meltdown into a full-blown Global Financial Crisis. Yet, the components of this
shadow sector have not been brought into the light let alone under adequate
regulatory supervision. The government-initiated reform measures enacted to
date lack consistency and cohesion. Too little attention has been paid to how
the varied pieces of this system interconnect with each other and with “real”
banking. For example, the multi-trillion dollar repurchase agreement (“repo”)
market was ground zero for the sudden, severe withdrawal of liquidity from the banking
system in the United States. Yet little has been done to address the dependence
upon this short-term, often overnight funding market. Conversely, some shadow
players like money market mutual funds, (MMFs) that were already subject to
heavy structural controls, have been further regulated. While these new rules
were designed to strengthen the funds, making them less prone to runs by their
own investors, these same changes may create even more instability and risk for
bank and shadow bank counterparties who depend upon them for short-term
financing. Additionally, with regard to some of the most risky “nonbank”
financial firms, such as hedge funds, the regulatory reform measures to date
have been flimsy at best. Accordingly, this chapter first will describe what is
meant by “shadow banking,” and the role it played in the financial crisis.
Next, it will highlight two key components of shadow banking system: MMFs and
the repo market, including the regulatory reforms accomplished to date and
proposals being studied. And, finally it will present alternative suggestions
for further reform.

On October 16th, the US Chamber of Commerce’s
Center for Capital Markets Competitiveness will host a half-day event to
examine trends from the 2013 proxy season and look ahead to 2014.  The day
will start with a presentation from the Manhattan Institute about the 2013 season
and then I will be on a panel with Tony Horan, the Corporate Secretary of
JP Morgan Chase, Vineeta Anand from the Office of Investment of the AFL-CIO,
and Darla Stuckey of the Society of Corporate Secretaries and Governance
Professionals. Our panel will look  back at the 2013 proxy season and discuss hot
topics in corporate governance in general.  Later in the day, Harvey Pitt
and other panelists will talk about future trends and reform proposals, and
depending on the state of the government shutdown, we expect a
member of Congress to be the keynote speaker. The event will be webcast for
those who cannot make it to DC.  Click here
to register.