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The AALS each year selects a few “hot topics” program proposals for discussion of “late-breaking” subjects at the January meeting.  This year I agreed to be included in a hot topics panel described as follows:

Law schools have long kept a comfortable distance from the concerns of the practicing bar. Earlier calls for reform such as the MacCrate Report (1992), the Carnegie Foundation’s Educating Lawyers: Preparation for the Practice of Law (2007), and Stuckey et al, Best Practices for Legal Education (2007), have led to a greater emphasis on more practical training, at least in law school admissions brochures if not always in the curriculum. Increasing competition for rankings has also changed the dynamics of reputation with respect to academic study and practical training at some law schools. Fundamentally, however, most schools have seen little change in the curriculum and overall approach to delivery of instruction since the last century. Despite this, students have continued to flock to law schools, and more law schools have sought and received accreditation. Recently, however, a series of high-profile news reports, blogs, lawsuits by recent graduates, ABA disciplinary actions against law schools, and calls from Congress for stricter regulation have brought increased public attention to fundamental questions about the delivery of legal education in the U.S. What was once dismissed as the unfounded complaints of a minority of embittered law students is approaching a full-blown scandal. Issues such as the ABA’s capture by the law schools it is meant to accredit and regulate, the skyrocketing cost of a legal education in the face of what some argue is a long-term restructuring in the legal market and a permanent downturn in employment, and law schools’ failure to disclose meaningful and accurate information regarding employment prospects, are converging into a widespread sense of disillusionment and dissatisfaction with legal education.

While the perspectives and methods of the panelists vary, each has been a voice for reform within legal education. Some call for a strengthened regulatory hand; others call for deregulation of the legal profession or for voluntary collective action by law schools. All share a concern for the improvement of legal education and the profession. This panel will be an opportunity for a candid and highly interactive assessment of the situation and directions forward.

Does this discussion sound like the sort of late-breaking “hot topic” that ought to have been included in the AALS program?  I guess not, because it was rejected. 

Instead, the AALS chose programs on Occupy Wall Street, the Endangered Species Act, human rights in Russia, health care reform, the legacy of Derrick Bell, Supreme Court recusal, the ministerial employment discrimination exception, DOMA and alternatives to incarceration.

Why the rejection?  There are two hypotheses: the AALS didn’t think its members would regard the future of legal education to be as important and current a topic as those just listed; or the AALS as an organization didn’t want to be the forum for such a panel.

Either way, the rejection seems disturbing for law teaching (not for me — I can find other things to do).

Professor Bainbridge is urging his readers to pressure Eric Cantor into dropping his opposition to pending legislation that would ban Congressional insider trading.  But before you Twitter Cantor, please read Todd Henderson and my Politico column, in which we make the following point, among others:

A prohibition on trading would be impossible to enforce because congressmembers have so many opportunities to use information without trading on it. They could trade tips or exchange them for political favors. Given the pervasiveness of political events, the Securities and Exchange Commission would face an impossible task of identifying the trading from market movements — its usual tool for tracking insider trading.

If the SEC did try to enforce the ban, it could chill legitimate information flows on Capitol Hill and create a powerful tool for political parties to deploy against their enemies. Moreover, the SEC itself would be exposed to accusations of political favoritism — which could undermine its market-policing role. Conflict-of-interest allegations, like those during the Madoff investigation, would become routine.

The SEC is already embroiled in more politics than you want a market regulator to be.  Does it really need to start regulating Congress?  I think this Act needs more thought and less Twittering.

Roberta Romano has just posted her paper, Regulating in the Dark. Here’s the abstract:

Foundational financial legislation is typically adopted in the midst or aftermath of financial crises, when an informed understanding of the causes of the crisis is not yet available. Moreover, financial institutions operate in a dynamic environment of considerable uncertainty, such that legislation enacted even under the best of circumstances can have perverse unintended consequences, and regulatory requirements correct for an initial set of conditions can become inappropriate as economic and technological circumstances change. Furthermore, the stickiness of the status quo in the U.S. political system renders it difficult to revise legislation, even though there may be a consensus to do so. This essay contends that the best means of responding to this dismal state of affairs is to include, as a matter of course, in crisis-driven financial legislation and its implementing regulation two key procedural mechanisms: (1) a requirement of automatic subsequent review and reconsideration of the legislative and regulatory decisions at some future point in time; and (2) regulatory exemptive or waiver powers, that encourage, where feasible, small scale experimentation, as well as flexibility in implementation. Both procedural devices will better inform and calibrate the regulatory apparatus, and could thereby mitigate, at least on the margin, the unintended errors which will invariably accompany financial legislation and rulemaking originating in a crisis. Given the centrality of financial institutions and markets to economic growth and societal well-being, it is exceedingly important for legislators acting in a financial crisis with the best of intentions, to not make matters worse.

It’s worth noting that Henry Butler and I, in our book about SOX (at 96-97, footnotes omitted), also suggested “sunset” provisions as an antidote to crisis-driven regulation:

[S]ignificant new financial and governance regulation like SOX that displaces and supplements prior regulatory approaches should be subject to periodic review and sunset provisions. Although Congress, of course, can always undertake such reviews, prior experience indicates that it will not. Legislation is a one-way regulatory ratchet. It arises when the conditions for reform are ripe for a regulatory panic. The conditions for a “deregulatory panic” are less likely to develop. Firms learn to live with the extra costs and may not be willing or able to bear the costs of lobbying for repeal, at least in the absence of a regulatory cataclysm. Thus, it is not surprising that SOX sponsor Michael Oxley, despite recognizing that SOX was “excessive” in some respects, and admitting that it had been rushed through Congress, suggested that Congress would not be revisiting the issue, even as to the seriously affected small companies. He said, “If I had another crack at it I would have provided a bit more flexibility for small- and medium-sized companies.” In other words, Congress normally does not have “another crack” at regulation. A sunset or review mechanism would change that.

Perhaps Congress can learn some lessons from itself. The USA Patriot Act was passed less than one year before SOX and, like SOX, was passed by an overwhelming majority. Unlike SOX, the USA Patriot Act includes sunset provisions for some of its most controversial provisions. The Patriot Act’s sunset provision forced Congress and the president to reevaluate and debate those provisions, in an atmosphere far  removed from the immediate post-9/11 panic. American investors would benefit from a sober reevaluation of SOX. Perhaps the courts will provide that opportunity. For future regulatory panics, Congress would do well to remember the lessons of the Patriot Act.

One footnote in Romano’s article particularly grabbed my attention.  Referring to Jack Coffee’s criticism of sunset provisions in a non-yet-public manuscript (“The Political Economy of Dodd-Frank: Why Financial Reform Tends to be Frustrated and Systemic Risk Perpetuated”), Romano notes:

Coffee (2011:4, 6,9) sweepingly seeks to dismiss the scholarship with which he disagrees by engaging in serial name calling, referring to the authors, Steve Bainbridge, Larry Ribstein and me, as “the ‘Tea Party Caucus’ of corporate and securities law professors” (a claim that would have been humorous had it not been said earnestly), “conservative critics of securities regulation,” (a claim, at least in my case, that would be accurate if he had dropped the adjective), and further referring to Bainbridge and Ribstein, as “[my] loyal adherents.”

 She also observes in this footnote:  

[I]n the American political tradition and academic literature, advocacy of sunsetting has historically cut across political party lines. It has had a distinguished liberal pedigree, having been advocated by, among others, President Jimmy Carter, Senator Edward Kennedy, political scientist Theodore Lowi, and Common Cause (Breyer 1982; Kysar 2005).”

Like Butler and me, she cites the Patriot Act precedent.

Well, I’m proud to be included in Romano’s and Bainbridge’s “tea party” and surprised at being there because I advocated an idea also endorsed by Carter, Kennedy, Lowi and Common Cause.  It’s sad a scholar of Coffee’s stature sees a need to resort to such rhetoric, though almost understandable since Romano’s devastating critique doesn’t leave him much of a ledge to sit on.

 As for Romano’s article, definitely do read the whole thing.  Rather than simply condemning Dodd-Frank, she argues persuasively for a way to avoid future financial over-regulation.

Update:  Matt Bodie confuses blogs and scholarly articles, statutes and people. Bainbridge sets him straight, and Leiter agrees.  But do read Bodie’s post anyway because he links to some great Gretchen posts which even I had forgotten.

About a month ago I discussed a case in which I had written an amicus brief:

Last year I wrote here about Roni LLC v Arfa, which I cited as an example of the ”troubling lawlessness of NY LLC law.” In brief, the court sustained a non-disclosure claim based on “plaintiffs’ allegations that the promoter defendants planned the business venture, organized the LLCs, and solicited plaintiffs to invest in them” despite holding that the parties’ arms-length pre-formation business relationship did not support a fiduciary relationship.  I argued that this new pre-formation duty to disclose

promises to make a mess out of NY LLC law. It also creates significant problems for business people who now have a fiduciary duty, with uncertain disclosure duties, imposed on what the court itself recognized is basically an arms’ length market relationship. It’s not even clear how parties can contract out of this duty, since the whole problem is that they do not yet have a contract.

I later noted that my blog post was cited in the appellants’ brief on appeal, which triggered a response in the respondents’ brief (see n. 25) and then my amicus brief in connection with the appeal, which the NY Court of Appeals accepted for filing.

Now the NY Court of Appeals has decided the case.  In its brief opinion the Court said “we conclude that plaintiffs’ allegations of a fiduciary relationship survive the dismissal motion.” The Court added (footnote 2):

2 Based on the foregoing analysis, we need not decide the question of whether the promoter defendants’ status as organizers of the limited liability companies, standing alone, was sufficient to allege a fiduciary relationship.

In other words, the Court of Appeals, without saying so directly, effectively rejected the lower court’s determination that the complaint had not alleged a fiduciary relationship.  The Court did so in order to avoid a holding in favor of promoter liability that would, I argued, “make a mess out of NY LLC law.”

The Court elsewhere in its brief opinion alluded to another aspect of my amicus brief.  My brief pointed out (p. 6) that there was no authority for a pre-formation disclosure duty in LLCs, and that analogies from other business entities

should be drawn carefully because * * * the LLC has evolved as a unique entity, sharing some features of but ultimately distinct from all other business entities. See generally, Larry E. Ribstein, Rise of the Uncorporation ch. 6 (2010). 

In its opinion, the Court recognized (n. 1) that “[c]ertainly, there are differences between limited liability companies and traditional corporations, but the distinctions are not relevant to the allegations in this case.”  They were not relevant because the Court strained to accept the alternative basis for a fiduciary duty the lower court had rejected.

In short, I invited the Court not to wreck NY LLC law by imposing open-ended pre-formation promoter liability.  The Court accepted my invitation although this forced it to weave a circuitous course around the lower court’s opinion.

Now, I must avoid taking too much credit for the result in the case.  The NY court might have reached the same conclusion without my brief.  The case was very well argued by the defendant-appellant’s lawyer, David Katz, who raised all the relevant issues. 

All I can say for sure is that my brief made it harder for the Court of Appeals to accept the lower court’s promoter liability theory, and the Court did, in fact, reject that theory.   I think it’s plausible my brief affected some of the language in the opinion, and thereby the course of NY LLC law.

I make these points not solely out of pure ego (not that I’m totally devoid of same) but because they relate to the many words that have been spilled over the uselessness of legal academics.  You see, we academics do have some credibility because we devote ourselves to the study of underlying theory and policy rather than to achieving particular results in cases.  This is a quality that could be lost if legal academic is restructured so as to reduce the time and resources available for such work.

It’s Sunday so the NYT has another David Segal screed on legal education.  This time he presents the insight that law school is expensive because of accreditation standards that prevent law schools from containing costs even if they wanted to.  Segal says, “[t]he lack of affordable law school options, scholars say, helps explain why so many Americans don’t hire lawyers.” He quotes several law professors — my former colleague Andy Morriss, now at Alabama; USC’s Gillian; Emory’s George Shepherd.

The article seeks to rebut the claim of the chairman of the ABA’s legal education section that high accreditation standards are necessary to give students “what they have a right to receive in terms of education” and “protect the public and make certain that graduates who offer themselves as qualified lawyers know what they’re doing.”  It examines the experiences of a start up law school in Tennessee, the Duncan School of Law, which is seeking ABA accreditation. The school must have a big library and professors with tenure and time to write law review articles.  This setup is great for law professors. So, as a couple of former law deans tell Segal, the professors exert their power through the accreditation process to maintain the status quo. 

In the end, the Duncan folks had to fly to a beachfront Ritz-Carlton in Puerto Rico to meet with the ABA to meet and make a 15-minute argument for provisional accreditation. The ABA’s questions indicated they were interested in the lawyer market in east Tennessee, suggesting that lowering clients’ costs mattered less to them than threatening lawyers’ income.

As usual (see my posts on past Segal screeds here and here) Segal presents common complaints in an overwrought stew with little cogent analysis.  Law is high-priced because the ABA is powerful and wants to keep it that way. Clifford Winston, co-author of First Thing We Do, Let’s Deregulate All the Lawyers, says this ABA-enforced “near-total absence of competition” is the big problem.  Raise your hand if this shocks or surprises you.

If you want more thoughtful analysis on the modern issues confronting law teaching you need to look beyond the NYT to a blog — namely this one, and especially our “Unlocking the Law” symposium, which had essays by, among many others, Gillian Hadfield and Winston’s co-author, Robert Crandall. My law review article, Practicing Theory, discusses many of the issues presented in Segal’s paper.

The NYT article typically fails to articulate the causes and cures of our over-priced legal system beyond the commonplace that the ABA somehow manages to restrict competition.  Segal blames the law professors, finding comfort in the scam-bloggers’ simple-minded denunciation of high-priced legal scholarship. But since Segal doesn’t explain how a bunch of eggheads sitting around writing useless articles came to control the ABA, he sounds like he’s blaming the mosquitoes for banning DDT.  This narrow focus isn’t surprising given Segal’s mission, which not to analyze or educate, but to entertain with simplistic narratives and pithy quotes.

So what’s really happening?  The cause of the current situation, as I make clear in my Practicing Theory, is obviously the practicing bar, a powerful lawyer interest group with an incentive to keep the price of legal services high.  Lawyers operate not only through the ABA but also local bar associations. Legal educators (law professors, law school and university administrators) come into the picture because they manage the key instrument for doing so — the academic institutions that keep the price of entry high. If the lawyers really wanted to make law school cheaper and more “practical” they could do it in an instant.

Gillian Hadfield’s suggestion to Segal of alternative accrediting bodies is one possible future world, but there are others.  The route to all of these worlds isn’t simply changing the law school accreditation system (accreditation is pervasive throughout the education world), but changing the system of lawyer licensing which maintains the current one-size-fits-all approach.  But how to do that when the powerful lawyers’ guild has maintained its grip on the process for almost a century?   

As I have discussed (Practicing Theory, Law’s Information Revolution, Delawyering the Corporation, Death of Big Law) the answer lies in the current rise of technology and global competition, which are combining with the soaring costs of legal services to crack the foundations of the current regulatory system.  Systemic changes such as changing the choice of law rules regulation of the structure of law practice and changing the intellectual property rules governing legal information products (Law’s Information Revolution, Law as a Byproduct) could hasten this process. 

Reform of law school accreditation ultimately will come along with significant changes to lawyer licensing whether lawyers and law professors like it or not.  Regulation of legal services will be unbundled, with only core legal services (however that comes to be defined) subject to anything like the current level of regulation, and other areas regulated at different levels or deregulated altogether. 

While lawyers and law professors can’t stop change they can shape the future.  In particular, they should start to provide a rationale for why the world needs at least some high-priced legal experts.  What, exactly, is it that lawyers do that’s so valuable?  The answer is clearly not “nothing,” although in a world of increasing competition and sophisticated technology may not be enough to maintain the current level of lawyer employment.

With respect to legal educators, as I discuss in Practicing Theory, law schools should continue to do what they do best — teach theory.  Although the theory should be relevant to what lawyers do, this doesn’t mean that law school should devolve to three-year apprenticeships overseen by practitioners.  The new world of law practice will leave the more menial and routine stuff to machines and non-lawyers.  Lawyers will handle the high-level legal planning and architecture.  They will have to learn how to build that legal architecture using disciplines such as philosophy, economics, political science, psychology, and computer science.

This leads me to the most interesting, if unspoken, aspect of Segal’s article.  All of the non-ex-dean law professors quoted in the article trained as economists. This isn’t surprising. An economist would not ask how we make sure lawyers remain important, but rather what it is that lawyers contribute on the margin.  (Perhaps it’s that tendency to ask such pesky questions and their skepticism about the government regulation that secures the demand for lawyers that some law professors don’t like about economists.) This is the kind of multidisciplinary perspective (as noted above, not just economics) that will provide the intellectual foundation of the future of legal services.  It’s going to come from law professors writing the high-priced articles that Segal and the scam-bloggers decry.  Of course, there will be fewer of them, at fewer schools, but that’s a story for another day.

Who is the 99%?

Larry Ribstein —  17 December 2011

Todd Henderson insightfully observes that it’s a collection of well-organized 1%’s.

Poets vs. capitalists

Larry Ribstein —  17 December 2011

Eric Felten writing in yesterday’s WSJ, observes the hypocrisy of the poets who withdrew from competition for the T.S. Eliot Poetry Prize because it was funded by a financial firm. “Hedge funds are at the very pointy end of capitalism” sniffed one self-described “anti-capitalist in full-on form.” The anarchist vegan correctly observed that the funder’s business “does not sit with my personal politics and ethics.”

Felten notes that modern winners of a poetry prize do not “expect the florid lickspittlery once lavished on those who provided artists their livings.” He also calls out the hypocrisy of a poet who turned down a hedge funded prize but wasn’t too shy to acknowledge the support of

the ‘Arts for Everyone’ budget of the Arts Council of England’s Lottery Department. Which is to say, she’s happy to bank the cash culled from the easy marks who pay the stupidity tax, but not the earnings of a mainstream investment firm. * * * So let’s get this straight: If the investment bankers’ money is grudgingly handed over to the taxman it’s squeaky clean. But if it is given voluntarily, the lucre is filthy. What an odd and upside-down moral equation.

But Felten shouldn’t have focused all of his ire on poets.  I have written about American filmmakers who similarly find a lot to dislike in the capitalists who support their work but have little problem with government.

We have heard much about the costs of internal controls reporting under SOX 404. Proponents argue that the fraud reduction is worth the costs.  One might question this in light of anecdotes like all the missing cash at MF Global (and many other post-SOX securities fraud suits where auditors and executives had signed off on internal controls).  But more comprehensive evidence would be helpful.

The latest word on the evidence front is Rice and Weber, How Effective is Internal Control Reporting Under SOX 404? Determinants of the Non-Disclosure of Existing Material Weaknesses.  Here’s the abstract:

We study determinants of internal control reporting decisions during the SOX 404 era using a sample of restating firms whose original misstatements are linked to underlying control weaknesses. We find that only a minority of these firms acknowledge their existing control weaknesses during their misstatement periods, and that this proportion has declined over time. Further, the probability of reporting existing weaknesses is negatively associated with external capital needs, firm size, non-audit fees, and the presence of a large audit firm; it is positively associated with financial distress, auditor effort, previously reported control weaknesses and restatements, and recent auditor and management changes. These results provide evidence that detection and disclosure incentives play a role in whether existing material weaknesses are reported, which has implications for the effectiveness of SOX 404 in providing investors with advance warning of potential accounting problems.

There are three remarkable things here. 

  • The authors study only firms that had internal controls weaknesses to see which reported, reducing the problem of confounding the existence of problems with the weakness of reporting. 
  • “Only a minority” (32.4%) of these weak-controls firms actually report their weaknesses, despite SOX. 
  • These firms are least likely to report weaknesses when they most need money.  This shouldn’t seem too surprising, because this is when the firm has most incentive to misreport.  But if you hoped SOX would be effective in counteracting those incentives, forget about it.

The authors explain on the Harvard blog

The usefulness of internal control reports in providing advance warning on the likelihood of misstatements in the financial reports is reduced if control weaknesses are not disclosed until after the misstatements themselves are later revealed. * * *

The results of this study make several contributions to the literature. By documenting that SOX 404 reports are not always effective in identifying existing control weaknesses and, further, that the effectiveness has not improved over time, our results lend some support to criticisms of internal control reporting in practice and suggest that recent declines in reported material weaknesses may not be reflective of improvements in underlying control practices, consistent with concerns voiced by the SEC. These results also inform recent debates over the value of requiring control reports to be audited. Despite the audit requirement of SOX 404, our evidence indicates that the majority of restating firms provided no advance warning of the control problems that led to their misstatements. Finally, our results also have implications for future academic research. We document considerable variation in whether existing weaknesses are actually reported and our evidence on the determinants of that reporting should be considered by future research using public disclosures to study internal control practices.

The authors note the caveat that “the generalizability of our results to firms with control weaknesses that do not lead to restatements is unclear. This is particularly true of our results for Big 4 vs. non-Big 4 auditors because of the direct role that auditors play in certifying the reliability of financial statements (and thus in the likelihood of restatement).” They offer the following explanation of the curious negative correlation with Big 4 accountants:

Given previous evidence that larger auditors tend to provide higher quality financial statement audits (see Francis [2004] for a review), larger auditors may be better able to “audit around” control weaknesses and avoid the misstatements that would lead to inclusion in our sample.

The bottom line is that even if internal controls reporting is generally a good idea, this evidence indicates the current approach is failing: it’s not only imposing high costs, but it’s getting low results.  One might hope that in light of these results SOX would at least be revised to target mandates where they are most needed. This could happen in a more dynamic regulatory system.  But in 2002 Congress locked internal controls reporting in a vault impervious to post-2002 data.  The PCAOB can tweak auditors’ obligations, but it can’t change the basic regulatory framework.

A lot of ink has been spilled about the technology threat to traditional law practice. But U.S. law firms need also to worry about lawyers elsewhere in the world. 

The WSJ reports that Beijing-based King & Wood is planning to join with Australian firm Mallesons Stephen Jaques to form Hong Kong-based verein King & Wood Mallesons.  It would be the largest non-U.S. or U.K law firm merger. 

Obviously the law business is following the global economy to Asia. Will U.S law firms be part of that move?  Or will they continue to assume that the U.S. is the center around which the rest of world business revolves. The article concludes:

New York University law professor Jerome Cohen, a leading scholar on the Chinese legal system, said that despite the restrictions, he expects the deal to spur other Western firms to seek Chinese partners. “It’s going to be a scramble,” he said

In my recent Practicing Theory: Legal Education for the Twenty-First Century I noted:

Global competition is relevant not only to the legal market within the United States but also to U.S. law firms seeking to enter foreign markets. U.S. law firms used to have the significant advantage of exporting clearly superior American legal technology. This enabled them to easily enter foreign markets at low cost with their own U.S.-trained lawyers. However, foreign law firms more recently have been able to enter non-U.S. markets with lawyers who can combine U.S. LLMs and local knowledge. Also, countries such as Japan and Korea have increased the quality and output of their law schools, partly by incorporating knowledge from the United States. Thus, the United States’ export of its legal infrastructure, though profitable in the short-term, ultimately may contribute to the long-term erosion of its global competitive advantage.

I concluded that U.S. legal educators needed to prepare for these developments.  Yet subjects like comparative law are still small niches in the curriculum.

Fish on law teaching

Larry Ribstein —  14 December 2011

Stanley Fish opines on the NYT’s recent criticisms of legal education (HT Leiter):

The expert practitioner is expert in part because when he listens to a client or walks into a courtroom the field of action is already configured for him by an internalized understanding of what could possibly be at stake in proceedings like these.

That understanding is what law schools offer (among other things). Law schools ask and answer the question, “What’s the game here?”; the ins and outs of the game you learn later, as in any profession. The complaint reported by David Segal in his Times article is that law firms must teach their new hires tricks of the trade they never learned in their * * * classes. But learning the tricks would not amount to much and might well be impossible for someone who did not know — in a deep sense of know — what the trade is and why it is important to practice it. * * *

I agree. I argue in Practicing Theory that technology will enable lawyers to shed the small tasks that machines can do and focus on the big questions Fish describes. For example, instead of using forms to draft contracts, lawyers can leave this to machines and create the forms.  This will entail focusing more directly on the functions of contracts than most lawyers do today. Law schools should enable this deeper focus rather than shifting to training students for tasks that technology is making obsolete.

States can be a wonderful laboratory and platform for jurisdictional competition.  But sometimes the laboratory seems to belong to Dr. Frankenstein and then federal law must step in to bring order.

Biff Campbell thinks Reg D has failed its intended purpose and the reason is state law.  Here’s part of the abstract:

Regulation D * * * offers businesses — especially businesses with relatively small capital requirements — fair and efficient access to vital, external capital.  * * * The data show that Regulation D is not working in the way the Commission intended or in a way that benefits society. The data reveal that companies attempting to raise relatively small amounts of capital under Regulation D overwhelmingly forego the low transaction costs of offerings under Rule 504 and Rule 505 in favor of meeting the more onerous (and more expensive) requirements of Rule 506. Additionally, these companies overwhelmingly limit their relatively small offerings to accredited investors, which dramatically reduces the pool of potential investors. This unintended and bad outcome is the result of the burdens imposed by state blue sky laws and regulations, and this has to a large degree wrecked the sensible and balanced approach of the Commission in Regulation D.  Congress. . . could solve the problem by expanding federal preemption to cover all offerings made under Regulation D.

He has a point.  Permitting the states to regulate national securities transactions enables individual states to impose regulatory costs outside their borders for the benefit of local interest groups.  This can have perverse effects — in this case, by letting individual states impede national capital formation and entrepreneurship .Indeed, a key economic rationale for federal law is to address this problem.  See Easterbrook & Fischel, Mandatory Disclosure for the Protection of Investors, 70 Virginia Law Review 669 (1984).  

But we don’t have to eliminate state securities laws, along with state law’s potential advantages of competition and experimentation, to deal with this problem.  There’s an alternative:  apply state law only to intrastate transactions, or to corporations that have contracted for the securities law of a particular state (e.g., by incorporating in the state).  In other words, apply the same choice-of-law rule to state securities law as to state corporate governance law.  I discuss this approach in Dabit, Preemption and Choice of Law and Preemption and Choice-of-Law Coordination (with O’Connor).

The WSJ Law Blog reports that New York Supreme Court Justice Marcy Friedman held that a former Holland & Knight partner wasn’t an employee under city and state anti-discrimination laws and therefore wasn’t entitled to age discrimination protection for his expulsion at age 55. 

Per the Law Blog’s summary, the ex-“partner” argued that he was “utterly unable to influence the firm to do much of anything” (which will ring true to many law partners). But the Justice reasoned that plaintiff “offered no evidence to show that he didn’t have a stake in Holland & Knight, or that he didn’t have a right to elect managing partners or directors.”

A few years ago I blogged an overview of the vague and confused law on the subject, including the views of Judges Easterbrook and Posner in an important case, and the leading Supreme Court opinion.  For the full and up-to-date examination, see Bromberg & Ribstein, §2.02(b)(2).  

Until the Court clarifies the law (as Judge Easterbrook sought to do), these cases will multiply as Big Law disintegrates, dumping partners along the way.