The fiduciary obligations of corporate directors is one of the most written about and important topics in corporate law. Increasingly, critics of American capitalism have urged that corporations, and implicitly corporate directors, act in a more socially responsible fashion and thus eschew the notion of shareholder primacy is the exclusive guide to a director’s fiduciary duty. On this view, directors must consider the effect of their actions on “stakeholders” other than shareholders and be guided by morality – do the right thing – when making business judgments. When directors move away from shareholder primacy, however, decision-making becomes more difficult and problematic. This article analyzes the arguments that underpin a rejection of shareholder primacy, alternatives to shareholder primacy, and the utility of morality as a guide for directors making business judgments.
This Note provides an overview of the debate around the current state of ESG disclosure practices, and the perceived need for the SEC to establish a system of mandatory ESG disclosures. Part I explores the inherent difficulty of defining ESG, the problematic nature of quantifying and measuring ESG factors, and the tools currently being used by market-leading ratings firms and investment vehicles. In particular, this part addresses the inconsistencies of ESG self-reporting, the influence of this practice on the ensuing ratings, and the potential for investors to be misled as a result. Part II of the Note explores the possible consequences of a system of mandatory ESG disclosure, weighing the main arguments in favor and against the establishment of a regulation that mandates ESG disclosures. Drawing from a 2018 SEC submission by the law professors Cynthia A. Williams and Jill E. Fisch, Part II explores the arguments around general market efficiency, U.S. capital markets competitiveness, and the ultimate goal of giving investors access to better, more consistent, and fairly comparable information, while keeping the costs of increased reporting outweighed by the benefits of it. Part III closes by describing current proposals in favor of mandating ESG disclosures. In particular, the Note presents the proposal by Professor Fisch, under which the SEC may mandate a discussion on ESG, while allowing companies the flexibility to decide what factors to address and how to address them in view of materiality considerations for their specific industries.
The pandemic and the social issues which have been brought into focus this year have strengthened the importance of this larger conversation, and today's program aims to foster a meaningful dialogue concerning the history, present state, and future of environmental, social, and economic governance criteria as a measure of corporate performance. In Europe, you go from jurisdictions where employees are required to have a seat on the board-in certain cases, at least three seats on the board-and therefore, have meaningful participation through their representatives in the actual corporate governance of the company itself. There is a shift these days to refocusing on the actual language that describes these fiduciary duties and focusing on other aspects of the company-on the input of employees and other stakeholders-and so, I would say that given that starting point, there is far less concern with the topic of liability of directors for not exclusively promoting shareholder value. The dominant view of corporate law was that the purpose of the corporation was solely to benefit the financial interests of shareholders.
The Investment Advisers Act of 1940 (“IAA”) and its regulatory purview have changed dramatically over the life of the statute. The statute began as a simple registration scheme with barebones conduct integrity prohibitions for wealth managers and purveyors of investment newsletters. Although the statute’s original minimalist cast was deficient, the IAA’s regulatory scope has undergone a fundamental transformation, both in terms of the expanding class of advisers covered by the statute’s substantive provisions and the statute’s expansive structural integrity requirements. Over a span of decades, the IAA’s focus has been reoriented so that it is directed at least as much, if not more, at institutional asset managers rather than wealth managers who advise retail investors. As matters now stand, the IAA is the primary mechanism for regulating institutional asset managers that manage trillions of dollars in assets while retaining its legacy purpose of enforcing conduct integrity norms in delivering investment advice. This transformation is a product of the regulatory scheme’s enhanced reliance on structural integrity safeguards attained through rulemaking. This historical assessment offers useful lessons for crafting successful regulatory strategies in this area, as well as lessons that expose deficiencies in recent SEC initiatives. The SEC’s recent efforts to restate a standard of conduct for advisers under the IAA (the “Interpretation”) illustrates this point well. The Interpretation was not well-conceived and, if anything, represents a missed regulatory opportunity to rethink existing models of investor protection for retail investors in the investment adviser context. The Interpretation was part of the SEC’s multi-part Regulation Best Interest rulemaking initiative (the “Initiative”), which sought to reconcile the standards of conduct governing the two main types of securities professionals serving retail investors: broker-dealers and investment advisers. Wholly apart from the overall merits of the Initiative, the Interpretation is disappointing both as a matter of law and policy. As a matter of law, the Interpretation is a deeply flawed construction of the IAA because it completely disregards contemporary principles of statutory interpretation. It asserts that the statute mandated a federal fiduciary duty, even though the statute is silent as to any such duty. Moreover, while laudable in its aspirations, the agency’s interpretation is meek in substance. The asserted fiduciary duty accomplishes little more than what a natural reading of the statute’s text mandates, namely a heightened standard of disclosure (as opposed to the SEC’s asserted generalized fiduciary duty). More importantly, the SEC’s interpretation is disappointing as a matter of policy; it restates largely undisputed principles of accountability and does not offer any new meaningful benefits in terms of investor protection for average retail investors. If, instead, the SEC had embraced a more ambitious objective to rethink the issue of investor protection for average retail investors under the IAA, it could have more usefully pursued targeted default conduct rules to affirmatively enhance investor protection for average retail investors. Although the SEC chose not to pursue rulemaking for investment advisers, the elements for such a rulemaking strategy can be sketched out. Such an approach would design conduct rules with a consumer-protection cast. In order to enhance investor protection under the IAA for average retail investors, conduct standards should go beyond mere fiduciary principles and incorporate targeted default rules that offer affirmative investor protection guideposts. Such rules eventually might serve as a template for analogous rules for broker-dealers when providing average retail clients with personalized investment advice on a non-discretionary basis.
This paper considers whether the values contained within the idea of human rights have normative priority over economic values as they are inscribed in shareholder-oriented interpretations of the duty of loyalty in corporate law. While stakeholder theorists have sought to expand the ambit of the fiduciary duty to include a broad range of stakeholder interests, this paper shifts the frame of debate: it proposes that the range of corporate fiduciary loyalty is constrained by human rights as normative values that are distinct from the strictly economic values that are given priority in the shareholder primacy approach. This constraining effect occurs in decision making and in appraisals of decisions taken quite apart from whatever fiduciary loyalty is thought to demand as a matter of positive law. In other words, human rights are ‘parents’ of corporate law, rather than the other way around. The paper begins by considering a mixed question of law and ethics: does a loyal corporate fiduciary have the freedom to make decisions concerning human rights for the specific regard of non-shareholders, or must the loyal fiduciary treat human rights concerns in ways that are instrumental to enhancing stockholder wealth? By shifting the focus away from what law places inside the ‘urn’ of fiduciary duty (i.e. away from the debate over what categories of interests the fiduciary is given permission by law to consider), this paper reveals the ‘negative space’ that shapes the range of fiduciary duty from the outside. This novel approach reconfigures the contours of the shareholder-stakeholder debate by examining the constraints on the fiduciary duty concept within the larger normative ecosystem in which it resides. Recognizing these prior normative constraints, corporate law should expect only the ‘reflective loyalty’ of flesh-and-blood decision makers, and it should not demand mechanistic or algorithmic approaches to corporate loyalty that are tantamount to a compliance-obligation.
The prohibition against insider trading is a judge-made law that has evolved for over 50 years, and reached a critical impasse in two recent decisions in the Second Circuit Court of Appeals: United States v. Newman and United States v. Martoma. Judges of the Second Circuit sharply divided over what conduct constitutes improper trading on material nonpublic information, leaving the law in profound disarray. At bottom, the disagreement stems from a decades-old split within the judiciary about how to ensure a fair securities marketplace while enabling institutional analysts to probe for corporate information in furtherance of efficient market valuation of securities. In 1983, the Supreme Court in SEC v. Dirks sought to strike a balance between these two interests by holding that trading on material nonpublic information is not illegal unless the information was disclosed in exchange for a personal benefit. But the effort to balance two competing economic and moral interests should never have been the province of the judiciary, nor did its formulation ever win uniform consensus among the judges. After decades of struggle, the Newman/Martoma impasse is the consequence. Congress appears finally poised to pass a law of insider trading that would break the deadlock, but the bill under consideration apparently ignores the market efficiency interests that undergirded the personal benefit element of insider trading. The Article suggests that before passing any law, Congress must undertake an empirical review of the impact that the insider trading bill would have on an efficient market to ensure that the final law is not only clear but good for the health of the capital markets.
For decades, changing technology and policy choices have worked to fragment securities markets, rendering them so dark that neither ownership nor real-time price of securities are generally visible to all parties multilaterally. The policies behind these developments are found in the US National Market System and the EU Market in Financial Instruments Directive, together with universal adoption of the indirect holding system, and have painted Western securities markets into a corner from which escape to full transparency has seemed either impossible or prohibitively expensive. Although the reader has a right to skepticism given the exaggerated promises surrounding blockchain in recent years, we demonstrate in this paper that distributed ledger technology (DLT) contains the potential to lead fragmented securities markets back to multilateral transparency. Leading markets generally lack transparency in two ways that derive from their basic structure: multiple platforms on which trades in the same security are matched have separate bid/ask queues and are not consolidated in real time (fragmented pricing), and high-speed transfers of securities are enabled by placing ownership of the securities in financial institutions, preventing transparent ownership (depository or street name ownership). The distributed nature of DLT allows multiple copies of the same pricing queue to be held simultaneously by a large number of order-matching platforms, curing the problem of fragmented pricing. This same distributed nature of DLT would allow the issuers of securities to be nodes in a DLT network, returning control over securities ownership to those issuers and thus restoring transparent ownership through direct holding with the issuer. A serious objection to DLT is that its latency is very high – with a Bitcoin blockchain transaction taking up to 10 minutes. To cure this, we first propose a private network without cumbersome proof-of-work cryptography and, second, introduce into our model the quickly evolving technology of “lightning networks”, which are advanced two-layer off-chain networks conducting high-speed transacting with only periodic memorialization in the permanent DLT network. This paper demonstrates against the background of existing securities trading and settlement that a DLT network could bring multilateral transparency and thus represent the next step in evolution for markets in their current configuration.
The U.S. Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258 (2014) (Halliburton II) appeared to give corporate defendants a new tool to defeat class certification in the context of securities fraud class action litigation: rebutting the requisite presumption of reliance by showing a lack of “price impact”—a term that Halliburton II used to describe whether the price of an allegedly affected company’s stock went up or down. However, based on an empirical study of preversus post-Halliburton II class certification decisions, it appears that the outcomes of class certification decisions have become even more hostile to defendants, as class certification is now being granted with greater frequency post-
The 28.7 million small businesses in the United States--99 percent of all American businesses---are the backbone of the American economy. Historically, small businesses relied on community banks for their credit needs. Over the last decade, small businesses increasingly have turned to lenders--nonbank lenders that are largely unregulated. Nonbank consumer lending is governed by consumer protection statutes, but nonbank small business lending is outside of any clear regulatory framework that would protect borrowers from potentially predatory practices. I argue for updates to consumer protection statutes so that they afford the same protection to small business borrowers as to consumers for loans below a certain dollar threshold. I then show that state regulation, combined with placing the small business lending market under the jurisdiction of the Consumer Financial Protection Bureau, is the best approach for nonbank fintech entities. Finally, I demonstrated why the proposed 'Special Purpose Bank Charter' as proposed by the Office of the Comptroller of the Currency is an optimal approach to regulating the non-bank small business lending market.
