I just posted Does Stakeholder Capitalism Have a (Viewpoint) Diversity Problem?, U. Puerto Rico Bus. L.J. (forthcoming) on SSRN (here).  The abstract:

Does stakeholder capitalism have a viewpoint diversity problem? What follows constitutes an initial inquiry into that issue.

Following the Introduction, Part II provides an overview of the Free Enterprise Project’s (FEP’s) 2021 Investor Value Voter Guide, which focuses at least in part on both stakeholder capitalism and viewpoint diversity in a way that provides a good introduction to a perceived tension between the two. This part of the essay contains three sub-parts. Sub-parts A and B provide at least some support for connecting stakeholder capitalism (in all its forms) to partisanship as well as a lack of relevant viewpoint diversity. Sub-part C then unpacks specific proposals that the FEP is submitting and/or recommends supporting/opposing. This sub-part is further broken down into brief overviews of the FEP’s viewpoint diversity and stakeholder capitalism proposals.

Part III shifts attention to related research and commentary. This part includes four sub-parts (A-D). Sub-part A addresses the issue of stakeholder capitalism as greenwashing. Sub-part B addresses some of the possible problems caused by a lack of viewpoint diversity in stakeholder capitalism, including increasing societal divisions. Sub-part C then addresses the related issue of whether stakeholder capitalism is a partisan movement. Sub-part D proceeds to delve into some of the potential costs of stakeholder capitalism, including political backlash, increased litigation, loss of competitive advantage in the marketplace, and even potentially providing an on-ramp for some type of totalitarianism. Part IV provides concluding remarks.

 

Sean Griffith has posted What’s “Controversial” About ESG? A Theory of Compelled Commercial Speech under the First Amendment on SSRN (here). The abstract:

This Article uses the SEC’s recent foray into ESG to illuminate ambiguities in First Amendment doctrine. Situating mandatory disclosure regulations within the compelled commercial speech paradigm, it identifies the doctrinal hinge as “controversy.” Rules compelling commercial speech receive deferential judicial review provided they are purely factual and uncontroversial. The Article argues that this requirement operates as a pretext check, preventing regulators from exceeding the plausible limits of the consumer protection rationale.

Applied to securities regulation, the compelled commercial speech paradigm requires the SEC to justify disclosure mandates as a form of investor protection. The Article argues that investor protection must be conceived on a class basis—the interests of investors qua investors rather than focusing on the idiosyncratic preferences of individuals or groups of investors. Disclosure mandates that are uncontroversially motivated to protect investors are eligible for deferential judicial review. Disclosure mandates failing this test must survive a form of heightened scrutiny.

The SEC’s recently proposed climate disclosure rules fail to satisfy these requirements. Instead, the proposed climate rules create controversy by imposing a political viewpoint, by advancing an interest group agenda at the expense of investors generally, and by redefining concepts at the core of securities regulation. Having created controversy, the proposed rules are ineligible for deferential judicial review. Instead, a form of heightened scrutiny applies, under which they will likely be invalidated. Much of the ESG agenda would suffer the same fate, as would a small number of existing regulations, such as shareholder proposals under Rule 14a-8. However, the vast majority of the SEC’s disclosure mandates, which aim at eliciting only financially relevant information, would survive.

I wanted to make two quick follow-ups to last week’s post on FTX’s proposed new clearing model for retail customers.  First, I highly recommend reading the recent FT Alphaville piece Did a major financial institution kinda maybe slightly default in March 2020? (FT subscription required) Among other things, it highlights remarks made by some participants during last week’s CFTC Staff Roundtable on Disintermediation relating to the potential cost of largely removing human discretion from the clearing risk management process (thanks to today’s Money Stuff by Matt Levine for bringing this piece to my attention!).  Second, a recent article by Rebecca Lewis and David Murphy, What Kind of Thing Is a Central Counterparty? The Role of Clearinghouses As a Source of Policy Controversy, does an excellent job of discussing clearing for BLPB readers who want to learn more about this area.  Murphy was among the participants in the CFTC Staff Roundtable!  I highly recommend this piece!  Here’s the abstract:

“Public policy surrounding central counterparties (‘CCPs’) is beset by conflicts between stakeholders. These turn on who bears which risks, who profits from clearing, and who has what say in CCP governance. They involve CCP equity holders, clearing members, clients, regulators, and taxpayers, among others. In order to probe them, three stylized edge case models of the role of the CCP are introduced: utilities, for-profit corporations under shareholder primacy, and clubs. The governance of each edge case is discussed and compared to the current situation in clearing and its framing in regulatory requirements. The risks in central clearing, who bears them, and the policies surrounding them, are surveyed. The paper argues that stakeholder risk-bearing affects CCP governance because risk bearing should, in equity, be accompanied by governance rights. Each edge case model suggests a different resolution to the key conflicts but none of the models are sufficient to explain existing CCP practice, and the resolutions suggested are unsatisfactory. This insufficiency suggests that the current policy conflicts are rooted in fundamental disagreements about the role of the CCP and thus in whose interests the CCP should act. Stakeholder theory is presented as a model which explains the nature of these conflicts and their persistent character, and which can provide an equitable setting for their continuing re-negotiation.”

 

This exciting news came to us earlier today from Emily Grant, Professor of Law and Co-Director, of the Institute for Law Teaching and Learning at Washburn University School of Law:

The Institute for Law Teaching and Learning is thrilled to be launching a new scholarly journal. The Journal of Law Teaching and Learning will publish scholarly articles about pedagogy and will provide authors with rigorous peer review. We hope to publish our first issue in Fall 2023.

If you have a scholarly article that might fit the needs of The Journal of Law Teaching and Learning, please consider submitting it directly to us via email at mcolatrella@pacific.edu or through the Scholastica platform.

Thanks for bringing this to our attention, Emily!  I know there is lots of good business law teaching going on out there that all can learn from.  I hope that some of you will consider sharing your teaching wisdom.

I am at a family reunion this weekend celebrating the joys of family.  We celebrate those that are here.  At the same time, we remember and honor those who are gone.  Some of those no longer with us have been lost in armed conflict or otherwise in service to their country–service to all of us.

Today, reflecting on all this, I have found it important to remind myself of the meaning of Memorial Day.  It always has had special meaning to/for me.  Yet, I was unfamiliar with the statute designating the national holiday.  When I read it, it was not what I expected (although I do not plan to offer a lawyerly or personal critique here).

(a) Designation.—

The last Monday in May is Memorial Day.

(b) Proclamation.—The President is requested to issue each year a proclamation—

(1) calling on the people of the United States to observe Memorial Day by praying, according to their individual religious faith, for permanent peace;
(2) designating a period of time on Memorial Day during which the people may unite in prayer for a permanent peace;
(3) calling on the people of the United States to unite in prayer at that time; and
(4) calling on the media to join in observing Memorial Day and the period of prayer.

36 U.S. Code § 116 (2018).  In fact, the statute is not wholly representative of the history of Memorial Day.  Nevertheless, it is poignant and powerful in its call for reflective time to offer a personal and collective solemn request for permanent peace.  With members of our armed forces fighting for justice and freedom in service to our country every day, it seems more than appropriate for us to stop, one day each year, to honor the ultimate sacrifice of those who have lost their lives in that service and ask for lasting peace.

But a few days ago, he published this Op-Ed in the Wall Street Journal:

ESG is a pernicious strategy, because it allows the left to accomplish what it could never hope to achieve at the ballot box or through competition in the free market. ESG empowers an unelected cabal of bureaucrats, regulators and activist investors to rate companies based on their adherence to left-wing values.

While I do believe that some aspects of ESG are financial (climate change is a clear example), others seem to be more of an expression of moral value (and apparently at least some investors view it that way).  In that sense, it is an attempt to accomplish what cannot be achieved at the ballot box.  Some surveys show support for gun control measures that reach nearly 90%; a majority of Americans support greater action on climate change, and a majority want to keep abortion available under at least some circumstances.  Yet increasingly, our political leaders fail to adopt policies that the populace supports; the ballot box is simply not an available tool.  It’s no wonder, then, that voters turn to corporations as a source of power that at least appears to be more responsive to public pressure.  Far from a distortion of free markets, though, it is the ultimate expression of them, because the entire theory is that investment dollars can be used to force social change.  This is why Jonathan Macey calls the ESG movement “radically libertarian,” and the head of MSCI defended ESG as a mechanism to “protect capitalism. Otherwise, government intervention is going to come, socialist ideas are going to come.”

The best way to eliminate ESG, then, is to reform our political system to make it more responsive to voters.

In the fall, I posted on Professor Kevin R. Douglas’s article, “How Creepy Concepts Undermine Effective Insider Trading Reform” (linked below), which is now forthcoming in the Journal of Corporation Law. The following post comes from Professor Douglas. In it, he develops one theme from that article:

Would U.S. officials imprison real people for failing to adhere to the most unrealistic assumptions in prominent economic models? Yes, if the assumption is that no one can generate risk-free profits when trading in efficient capital markets. What are risk-free profits, and why should you go to jail for trying to generate them? Relying on the ordinary dictionary definition of “risk” makes the justification for criminal penalties described above seem absurd. One dictionary defines risk as “the possibility of loss, injury, or other adverse or unwelcome circumstance,” and another simply defines risk as “the possibility of something bad happening.” Why should someone face criminal liability for attempting to generate trading profits without something bad happening—without losing money? The absurdity is especially jarring when thinking about securities markets, where hedge fund managers rely heavily on risk reduction strategies.

However, if we turn to the definition of “risk” used in prominent models of the efficient capital market hypothesis (ECMH), punishing investors who attempt to generate risk-free profits seems logical, if not sensible. The ECMH is the hypothesis that securities prices reflect all available information. Additional assumptions transform this hypothesis into the implication “that it is impossible to beat the market consistently on a risk-adjusted basis since market prices should only react to new information.” Here “beat the market” means generating profits that are greater than the returns of some index of the market. With these assumptions in mind, criminalizing the attempt to generate no-risk profits can seem logical if the existence of no-risk profits indicates market inefficiencies…and we accept that a proper role of government is increasing the efficiency of securities markets. Whether or not this approach is sensible depends on whether this model of risk bears any resemblance to anything operating in the real world. And even Eugene Fama who is thought of as the father of the ECMH, acknowledges that the model “is obviously an extreme null hypothesis. And, like any other extreme null hypothesis, we do not expect it to be literally true.”

Sensible or not, I argue that U.S. courts have relied on the ECMH’s model of risk for almost 60 years. Consider just one of several examples cataloged in my forthcoming article, How Creepy Concepts Undermine Effective Insider Trading Reform. The Court in SEC v. Texas Gulf Sulphur Co. provides the following justification for imposing insider trading liability under Rule 10b-5:

It was the intent of Congress that all members of the investing public should be subject to identical market risks,—which market risks include, of course the risk that one’s evaluative capacity or one’s capital available to put at risk may exceed another’s capacity or capital. … [However] inequities based upon unequal access to knowledge should not be shrugged off as inevitable in our way of life, or, in view of the congressional concern in the area, remain uncorrected.

It may seem arbitrary to expect equal “risk” for market participants to mean equality of information, but not equality of capital or skill. However, this disconnect is in harmony with models of market efficiency that focus on whether securities prices always “fully reflect” available information. Other cases identifying the attempt to generate risk-free profits to justify imposing liability for insider trading include two cases related to Ivan Boesky and Michael Milken, and Justice Ruth Bader Ginsburg’s majority opinion in United States v. O’Hagan. To differentiate acceptable and unacceptable information advantages, Justice Ginsburg states that the “misappropriation theory targets information of a sort that misappropriators ordinarily capitalize upon to gain no-risk profits through the purchase or sale of securities.”

Can explaining liability for securities fraud by reference to “risk-free profits” mean anything other than the implicit adoption of the strong form of the ECMH? If prominent economic models inspire the reference to risk-free profits in these cases, then it is astounding how little has been said about this fact. It was a big deal when the United States Supreme Court relied on some assumptions of the semi-strong form of the ECMH to justify adopting the fraud on the market theory. It is puzzling how quietly this feature of the ECMH crept into the insider trading case law.

A FINRA comment period for a proposed rule to accelerate arbitration proceedings for seriously ill or elderly parties recently expired. The proposal recognizes that the existing voluntary expedited processing for elderly parties has not resulted in swifter resolutions.  The new proposal would allow persons over age 75 or who face some increased medical risk (e.g. cancer diagnosis) to seek expedited processing.  Often, the arbitration panel will need to hear from the customer to make an informed decision.  Dead customers don’t ordinarily testify.

The comments to the proposal reveal real stakeholder concern about the speed with which FINRA has put forward rules to address known problems with the dispute resolution process.  A letter from Steven B. Caruso, a retired former chair of FINRA’s National Arbitration and Mediation Committee (NAMC) makes for a compelling read.  Procedurally, FINRA has put the proposal out for comment on its website.  If it later seeks to advance it, it will need to appear for comment again when it is submitted to the SEC for approval.  Caruso questions why FINRA did not simply send the rule to the SEC for one round of notice and comment.  The rule may eventually make its way through this lengthy process and into effect, but heel-dragging delays will cause harm to the investors who die before their cases can be heard.

Caruso also raised questions about why other rules have not been formally proposed.  Here is an excerpt:

Regulatory Notice 17-34 (“RN 17-34”), entitled “FINRA Requests Comment on the Efficacy of Allowing Compensated Non-Attorneys to Represent Parties in Arbitration,” was issued on October 18, 2017 and requested comment on proposed amendments to the FINRA Code which would “further restrict [the] representation of parties” by nonattorney representative firms (“NARs”). As stated in RN 17-34, among the predicates for the proposed amendments to the FINRA Code were “allegations reported to FINRA [that] raise serious concerns” about the conduct of NARS in the FINRA arbitration forum as well as the fact that “investors who retain representation by NAR firms may be more likely to experience harm at the hand of their representative and have less legal recourse to receive compensation for that harm.”

The comment period for RN 17-34 expired on December 18, 2017.

Thereafter, in June 2018, the members of the NAMC expressed unanimous support for a prohibition on allowing compensated NARs from representing parties in all arbitration cases in the FINRA forum and, in December 2018, the FINRA Board approved the filing of proposed changes to the FINRA Code with the SEC to prohibit compensated NARs from being able to represent parties in all arbitration cases.

Notwithstanding both the unanimous support of the NAMC for a prohibition on allowing compensated NARs from representing parties in all arbitration cases in the FINRA forum and the approval of the FINRA Board for the filing of a proposed rule change with the SEC consistent with this recommendation, as of the present date, nothing has been filed in the subsequent forty (40) month period of time nor has any explanation been provided to explain this unconscionable delay.

This regulatory paralysis remains perplexing.  The NAMC unanimously approved the rule filing.  The FINRA board purportedly approved the rule filing.  Yet despite that, over three years have passed without any rule filing.

Some of this lassitude may be attributable to the Trump Administration’s odd policies requiring twice as many regulations to be removed before any additional regulations could be implemented.  But a new administration has held sway in D.C. for some time without any rule proposals coming forward.  

Part of the rationale for embracing self-regulatory organizations is that their quasi-private nature and flexibility may make them more vigorous than traditional government agencies.  This has not translated into swift action along a range of investor protection priorities from expungement reform, barring non-attorney advocates from the forum, or discovery reform.

Caruso is not the only commenter to use the occasion to discuss regulatory delays.  The current chair of the NAMC, Nicole Iannarone, commented as well. In addition to providing thoughtful comments in support of the proposal for expedited processing, Professor Iannarone “join[ed] in the comments of former NAMC chair Steven Caruso that NAMC recommendations should be considered more expeditiously[.]”. She also “respectfully request[ed] that FINRA dedicate additional resources to accomplish this aim.”  

Hopefully we’ll begin to see more activity on this front soon.

 

 

I spent much of today watching the CFTC Staff Roundtable on Disintermediation.  The focus of this event was the “disintermediation” or direct clearing that FTX – “an international cryptocurrency exchange valued at $32bn” – proposes to offer to U.S. retail customers (though the option for customers to use an intermediary should still exist).  The House Committee on Agriculture also recently held a hearing on this topic.  Sam Bankman-Fried, the 30-year-old FTX CEO, cofounder and billionaire, is the son of two Stanford University law professors! 

In a nutshell, FTX proposes to offer U.S. retail customers direct clearing, meaning they would no longer need intermediation by a futures commission merchant (FCM) as under the existing market structure, for cryptocurrencies (at least as the initial asset class).  FTX would calculate margin requirements every 30 seconds and computer algorithms would automatically start liquidating a customer’s positions in specified increments were a customer’s account to be under-margined.  Customers could post a wide variety of collateral, including cryptocurrencies, to meet margin requirements.  FTX plans to also contract with backup liquidity providers who would put up their own collateral as a backup and, potentially, be allocated a portion of a defaulter’s portfolio at a discount to the market price.  Hence, FTX’s proposal would largely automate clearinghouse risk management.  Roundtable participants commented at length upon whether largely removing human discretion from this process was a net positive or negative.    

When I first read about FTX’s clearing proposal (here) for U.S. retail investors, I thought it interesting, but I also worried about several things, including potential market stability issues from the rapid sale of a defaulter’s portfolio and conflicts of interest, particularly with the potential allocation of a defaulter’s portfolio.  Others mentioned similar concerns during today’s Roundtable.  On the other hand, I’ve noted in the past (here) the small number of FCMs and the tremendous concentration of margin being held by these handful of clearing members.  It’s a problem.   Direct clearing could be a potential solution to this issue.  However, direct clearing arrangements can also be problematic as illustrated in the case of an individual power trader directly clearing trades at a Nasdaq clearinghouse in 2018.   

I’ve now started wondering if the general investment risk clearinghouses’ face when they invest customers’ collateral could be exacerbated by FTX’s approach.  I don’t recall mention of this concern.  However, what I know for sure is that I’ve much more to learn about this topic and look forward to keeping BLPB readers posted about this issue!

The edited (and annotated) transcript of my 2021 “Try This” session from the 7th Biennial Conference on the Teaching of Transactional Law and Skills (“Emerging from the Crisis: The Future of Transactional Law and Skills Education,” hosted virtually by Emory Law in the spring of 2021) was recently published.  Leadership for the Transactional Business Law Student, 23 Transactions: Tenn. J. Bus. L. 311 (2022), offers background and tips on teaching leadership to transactional business law students.  The substantive part of the SSRN abstract follows.

We do not always acknowledge this in legal education, but our students are learning to be leaders, because lawyers are leaders. That is as true of transactional business lawyers as it is of litigators, lawyers who hold political or regulatory appointments, lawyers engaged with compliance, and lawyers in general advisory practices. Yet, most law schools do little, if anything, to teach law students about leadership, or allow them to explore the contours and practices of lawyer leadership.

This edited transcript explains the importance of teaching leadership skills, traits, and processes to transactional business law students and offers insights on how instructors in a law school setting might engage in that kind of teaching as part of what they do. . . .

Edited transcripts of interactive teaching sessions at conferences are imperfect communication tools.  But I hope the publication of my teaching forum offers some food for thought for fellow business law profs (and maybe others).  I continue to explore teaching law leadership in specific and general settings.  Along those lines, I will have more to say about teaching leadership in law schools in a future post featuring my recently published piece in the Santa Clara Law Review on teaching change leadership, which I mentioned in an earlier post on Teaching Leadership in/and Law.