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Abstract: Hedge funds can sometimes achieve remarkable returns. The market fees exceed that of other asset classes, leading some fund managers to engage in illicit behavior, including fraud, that violates their duty to their investors and tempts institutional investors to violate their fiduciary duty to their principals. I will examine the hedge fund registration requirement struck down during the summer of 2006, as well as the tools used by other regulators to oversee institutional investors. This study relies on a survey of literature on financial regulation, commentary on the hedge fund registration rule, models of self-regulation, and examples in other area of financial regulation that have been successful. The result is a critique of the previous regulatory regime and proposals for the future. The growth of these investments is transforming the price discovery function of the securities markets, resulting in more efficient valuation and robust flows of capital. However, these innovative strategies morph so rapidly, and operationally they are so much leaner, that the simple regulatory strategies of the 33, 34, 40 Acts do not lend themselves to cookie cutter application. Further, the decision-makers are sharply divided. The challenge is crafting a lasting governmental administrative structure with justification that must rest, in part, on faith in a particular regulatory philosophy or market efficiency theory. The present dynamic is entirely novel, but risk is part of the financial regulatory game just as much as it is the essence of finance itself. Therefore, I propose a compromise between the extreme views on hedge fund regulation, using principles from other areas. Self-Regulation is a major theme of this piece. Crafting regulatory safe harbors, permissive information access, and designing legal defenses that encourage the operation of a self-regulatory entity to monitor this industry can help to overcome the severe disadvantage faced by bureaucrats. Further, more elaborate administrative guidance and an element of federal pre-emption, especially in oversight of the entities investing in hedge funds, is advisable.
hedge funds, Investment Advisers Act, Federal Reserve, Securities Exchange Commission, SEC, finance, regulation, financial regulation, registration, self-regulation, SRO, NASD, asset,
Abstract: Corporate law theory and practice considers shareholder relations with companies and the implications of ownership separated from control. Yet through the TARP bailout and the government's resultant shareholding, ownership and control at many companies has merged, leaving corporate theory and practice for the financial and automotive sectors in chaos. The government's $700 billion bailout is a unique historical event; not merely because of its size, but because of a resulting ripple through corporate scholarship and practice. This article builds on the author's four testimonies before Congress during the financial crisis and implementation of the TARP bailout and his consultation for the Inspector General for TARP. It updates the six central theories of corporate law to reveal that none function adequately when considered with a controlling government shareholder that enjoys sovereign immunity from corporate and securities law. From agency theory and nexus-of-contracts thought to the shareholder/director primacy debate, even to notions of progressive corporate law and the team production model, existing theory breaks down when a government shareholder is present. The article also develops an economic model of incentives facing political decision-makers in exercise of their shareholder power. After considering corporate theory, the article offers predictions for how Treasury's stock ownership reshapes the practice of corporate law. In short, TARP will result in a tectonic shift for current understanding about insider trading, securities class actions, share voting, and state corporate law fiduciary duties. The article closes with three recommendations. First, that Treasury take frozen options, an invention explained in the text, rather than equity. Second, that Congress pass legislation establishing a fiduciary duty for Treasury to maximize the value of its investment, a suggestion that has contributed to Sens. Warner and Corker's introduction of implementing legislation. Third, that Treasury adopt a sales plan for closing out its TARP holdings.
AIG, Chrysler, company ownership, Fannie Mae, federal government, Federal Reserve Board, Freddie Mac, GM, GMAC, interest group politics, shareholder control, Treasury Department, Troubled Asset Relief Program
Abstract: The Delaware General Assembly has recently adopted an amendment to the Delaware General Corporation Law (DGCL) which provides that where shareholders have adopted a majority voting bylaw for corporate elections over the traditional plurality scheme, a corporation may not subsequently amend its bylaws to return to plurality voting without shareholder approval. This article compares this provision to other approaches and attempts to explain the reasons underlying its adoption. The article also briefly summarizes the evolving shareholder empowerment debate and analyzes the majority voting provision in the context of that discussion. This article also describes some unique and unanticipated interactions between majority voting bylaws and various other working parts of corporation and securities laws affecting the shareholder franchise, a carefully protected right in Delaware jurisprudence. The most prevalent corporate strategies responding to this movement are explored and the difficulties of implementing majority voting are described. Finally, voting schemes from the political sphere are analyzed in an attempt to find analogous lessons for the corporate arena. The article ends with some predictions about future developments which will hinge on the outcome of SEC rules proposals, further DGCL revisions, and the responses of Delaware incorporated entities. This article blends three distinct groups of thought: (i) theoretical corporate law scholarship and financial regulatory theory; (ii) interpretation of Delaware Court of Chancery cases; and (iii) practical analysis on the future of the majority voting movement and the strategic choices facing boards of directors in the aftermath of the Delaware amendments and corollary Securities and Exchange Commission and New York Stock Exchange regulatory initiatives. The result is a developed framework for how majority voting could serve to alter significantly the balance of power between shareholders and board members, with the magnitude of that effect contingent on the result of pending governance changes at forums, board responses, and the continuing evolution of the Delaware General Corporation Law. The presence of activist shareholders will be an especially important phenomenon affecting this analysis. The article also briefly explores one alternative to majority voting, the runoff election proposal, to allow that concept to enter into the debate. As a secondary thesis to the ideas summarized above, this article will also respond to Martin Lipton's latest article, The Many Myths of Lucian Bebchuk, which summarizes Lipton's views as the leading voice against the shareholder empowerment movement. This article will argue that, though there are many valid criticisms of the shareholder empowerment movement, Lipton's latest invective diatribe is bereft of them.
Proxy access, corporate law, securities law, SEC, Delaware
Abstract: This essay considers the implications of Treasury holding common equity in banks participating in the federal government's bailout under the TARP program. The federal government's position as the dominant shareholder in the financial services and automotive sectors requires careful consideration of its shareholder rights. Governments are a very unique brand of shareholder. Without careful consideration and advance planning for how those shareholder rights and responsibilities will be managed, the unintended consequences to capital markets could be dramatic.
AIG, Bank of America, Bank of New York, Chrysler, Citigroup, GMAC, General Motors, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley, Proxy Access Rule, SEC, State Street, Wells Fargo
Abstract: Hedge funds are a fairly new asset class utilized by institutional investors and wealthy individuals. These funds can sometimes achieve remarkable returns. However, the market practice for fund managers is to charge performance fees that greatly exceed any other investment type in the financial services sector, leading some hedge fund managers to engage in illicit behavior, including fraud, that violates their duty to their investors and tempts institutional investors to violate their fiduciary duty to their principals.
This exploration examines a registration requirement, previously instituted by the Securities and Exchange Commission (SEC) to combat instances of hedge fund fraud, which was struck down during the summer of 2006. This study relies on a survey of general literature on financial regulation, specific commentary on the hedge fund regulatory reforms instituted, models of self-regulation, and analogous examples in other areas of financial regulation that have been successful. The result is a critique of the previous regulatory regime and proposals that will make it more effective.
The rapid expansion of hedge fund investments is transforming the price discovery function of the securities markets, resulting in more efficient valuation and robust flows of capital. However, these innovative strategies morph so rapidly and operationally they are so much leaner, that the simple regulatory strategies of the Securities Acts of 1933, 1934, and 1940 do not lend themselves to cookie cutter application. Further, the decision makers are sharply divided. The Administration has taken a firm stance in not supporting hedge fund regulation. Congress, under Democratic control, has signaled that it is clearly interested in advancing regulation. The SEC, under its previous chairman, was 3-2 in favor of added regulation, though the United States Court of Appeals for the District of Columbia subsequently overturned the form as it was adopted. The current chairman does not support hedge fund registration.
The future consequences of this market shift are far from certain. The challenge is crafting a lasting and expensive governmental administrative structure with justification that must rest, in part, on faith in a particular regulatory philosophy or market efficiency theory. The present incarnation of the market dynamic is entirely novel. Maybe we will institute a regime that will constrain the benefits hedge funds offer. Maybe we will continue to fly blind across a cliff that will make previous financial disasters look like child's play. Risk is part of the financial regulatory game just as much as it is the essence of finance itself. The only reasonable response is to learn from what worked in the past and attempt to model the variables that will persist in the future. Therefore, I am proposing a mean between the thus far advanced regulatory philosophies, using principles we find by analogy in other areas of financial regulation.
A self-regulatory model that utilizes the inherent advantage of firms regulating each other is a major theme of the policy recommendations presented. Crafting regulatory safe harbors, permissive information access, and designing legal defenses that encourage the operation of a self-regulatory entity to monitor this industry can help to overcome the severe disadvantage that bureaucratic regulators face in this field.
Abstract: This Article examines some of the extrajudicial activities in which members of the Delaware judiciary engage to minimize the systemic indeterminacy resulting from the resolution of economic disputes by a court of equity. These activities come in three unique forms: 1) the frequent speeches and articles offered by the judges about the direction and patterns they perceive in case law from their unique vantage point at the center of the maelstrom; 2) the analysis in the judges' opinions that, though technically dicta, provides useful insight into how open questions not part of the ruling might be expected to play out in the future; and 3) the roles the judges often undertake as formal policy makers, as members of committees of the American Bar Association (ABA) and other model rule making bodies. The result is an appreciation for how Delaware's judiciary offers unique insight, beyond the four corners of issued holdings, to the counselors of the Boards of Directors which govern the collective enterprise of our market system.
Delaware, Chancery, Corporate, Dicta
Abstract: The purpose of this article is to study some of the extrajudicial activities of Judges of the Delaware Court of Chancery and the Delaware Supreme Court undertaken to minimize the level of uncertainty that may be systemic to the interpretation of corporation law by a court of equity. That activity comes in three unique forms: the Judges frequently give speeches and write articles about the direction and patterns they perceive in the line of cases from their unique vantage point at the center of the maelstrom; the Judges include analysis in the opinions that, though technically "dicta," provide useful insight into how open questions not part of the ruling might be expected to play out in the future; and the judges frequently undertake formal policymaking roles as members of Committees of the ABA and other model rulemaking bodies.
Delaware, corporate, Chancery, jurisprudence, corporation
Abstract: This essay, recently featured in the Corporate Governance Advisor, describes a recent development in the Delaware Constitution that permits the Securities and Exchange Commission to certify questions of law directly to the Delaware Supreme Court. This essay analyses the effect of this new capability and predicts its importance to proxy fights. This issue has recently come alive, with the SEC's certification of a bylaw proposal by AFSCME to the Delaware Supreme Court to determine its legality for the purposes of the SEC's consideration of a no-action request.
corporate law, proxy access, bylaw, bylaws, Delaware, SEC, certification, certify
Abstract: This written testimony accompanied Professor J.W. Verret's oral testimony before the House Committee on Financial Services. This testimony argues that executive compensation proposals by the Administration will not address any systemic risk posed by large financial institutions. It also argues that quarterly earnings guidance is a more useful target to limit systemic risk than executive compensation practices at financial firms.
Bank of America, bailout, Barney Frank, Christopher Cox, Deutsche Bank, Federal Reserve Board, Mary Schapiro, Obama, SEC, Say on Pay, Securities and Exchange Commission, Spencer Bachus, TARP, Wall Street
Abstract: In Strong Managers, Weak Owners, Professor Mark J. Roe articulates an expansive theory to explain the evolution of the fragmented market structure in the United States. He posits that political choices led to fragmentation in the American financial markets, thus guiding the evolution of the Berle-Means Corporation. His view is sometimes supplemental to, but often in contradiction with, conventional economic efficiency or functionalism arguments that are used to explain that evolution. This Article examines Professor Roe's theory. It will use the political influences that Roe credits with fragmentation to understand current changes in market structure, including the growth of hedge funds, in general, as well as the advent of activist hedge funds that are re-shaping corporate governance. It will end by exploring some unique problems facing pensions and trusts that invest in hedge funds. The result will be a deeper understanding of the Disintermediation Thesis within the model of recent market evolution. This Article will also offer a policy prescription for government regulators that oversee the fiduciary intermediaries who invest in these new vehicles.
centralization, ERISA, hedge funds, regulation, shareholders
Abstract: This written testimony accompanied Professor J.W. Verret's oral testimony before the Senate Committee on Banking, Housing, and Urban Development. This testimony argues that corporate governance reforms under consideration in the Senate, including the Shareholder Bill of Rights, will work to limit shareholder choice in corporate elections and risk undermining the role of states in corporate governance.
corporate law, executive compensation, Delaware, Fannie Mae, Freddie Mac, mark-to-market accounting, Proxy Access, SEC, TARP, Wall Street
Abstract: This written testimony accompanied Professor J.W. Verret's oral testimony before the House Committee on Oversight and Government Reform. This testimony outlines flaws in the Trust Agreement established by the Federal Reserve Bank of New York to manage the government's $180 Billion investment in AIG. Also testifying during the hearing were Ed Liddy, the CEO of AIG, and the three trustees nominated by the Federal Reserve to manage the Trust.
bailout, Citicorp, Corporate Federalism Initiative, ERISA, Geithner, George Mason Law School, government ownership, immunity, indemnity, Issa, Mercatus Center, nationalization, public companies, TARP, Towns, Treasury Department
Abstract: This written testimony accompanied Professor J.W. Verret's oral testimony before the House Committee on Financial Services. This testimony highlights some of the costs of the Stop Trading on Government Knowledge Act, or STOCK Act. It argues that Section 2 of the Act, which would include in the definition of insider trading any trades based on material non-public information obtained from government sources about pending laws or regulations, stretches insider trading law beyond its original foundation in fiduciary duty principles in a way that risks harm to efficient flows of information about political risk in capital markets.
Bank of America, Citigroup, Congress, Emergency Economic Stability Act, Federal Reserve Board, Gwen Moore, Judy Biggert, SEC, Securities Exchange Commission, TARP, Treasury Department, U.S. v. Chiarella
Abstract: The Delaware General Assembly has recently adopted a provision to the Delaware General Corporation Law which provides that where shareholders have adopted a majority voting bylaw for corporate elections over the traditional plurality scheme, a corporation may not subsequently amend its bylaws to return to plurality voting without shareholder approval. I will compare this provision to other approaches and try to explain the reasons underlying its adoption. I will also briefly summarize the evolving shareholder empowerment debate and analyze the majority voting provision in the context of that discussion. I will then describe some unique and unanticipated interactions between majority voting bylaws and various other working parts of corporation and securities law affecting the shareholder franchise, a carefully protected right in Delaware jurisprudence. The most prevalent corporate strategies responding to this movement will be explored and the difficulties of implementing majority voting will be described. Finally, I will analyze voting schemes from the political sphere to generate analogous lessons for the corporate arena. I will then end with some predictions about future developments which will hinge on the outcome of SEC rules proposals, further DGCL revisions, and the responses of Delaware incorporated entities. This analysis blends three distinct groups of thought i) Theoretical corporate law scholarship, especially on the general shareholder empowerment debate, ii) Analysis of Delaware Court of Chancery and Supreme Court cases, with a focus on those that directly implicate the shareholder franchise, and iii) Practical analysis on the future of the majority voting movement for Delaware incorporated entities, and the strategic choices facing boards of directors in light of online proxy solicitation, Exchange Rule 452, and the looming specter of corporate ballot access.
Corporation, corporate law, corporate governance, shareholder, voting, board, directors, shareholder wealth maximization, empowering shareholders, majority voting, proxy, corporate ballot, Delaware, law, franchise, SEC, securities, withold, disney
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