Archives For corporate & securities law

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.

The semester is off to a bang.  I arrived at Stanford Monday to start teaching in the Law School and begin a research fellowship at the Hoover Institution.  Yesterday I hiked in the mountains overlooking the SF Bay.  Today I am flying back to DC (and blogging in flight, how cool is that) to testify Thursday before the House Committee on Financial Services alongside SEC Chairman Schapiro, former Chairman Pitt, and former Commissioner Paul Atkins on proposed legislation from Congressman Scott Garrett and Chairman Spencer Bachus to reform and reshape the SEC.

Part of the hearing, titled “Fixing the Watchdog: Legislative Proposals to Improve and Enhance the Securities and Exchange Commission” will deal with the study on SEC organizational reform mandated by the Dodd-Frank Act and conducted by the Boston Consulting Group.  Frankly, I found it full of quotes from the consultant’s desk manual, with references to “no-regrets implementation,” “business process optimization” and “multi-faceted transformation.”  I believe the technical term is gobbledy-gook.

The remainder of the hearing will involve a discussion of the SEC Organizational Reform Act (or “Bachus Bill”) and the SEC Regulatory Accountability Act (or “Garrett Bill”).  The Bachus Bill proposes a number of organizational reforms, like breaking up the new Division of Risk, Strategy, and Financial Innovation to embed the economists there back in to the various functional divisions.  The Garrett Bill seeks to strengthen the guiding principles originally formulated in the NSMIA amendments by elaborating on how the agency can meet its economic analysis burden in rule-making.

I thought I would give TOTM readers a sneak peak at my testimony.  I aim to make two key points.  First, sincere economic analysis is important.  SEC rules have consistently done a poor job of meeting the mandate of the NSMIA to consider the effect of new rules on efficiency, competition, and capital formation, and they will continue to do a poor job until they hire more economists and give them increased authority in the enforcement and the rule-making process.  Second, the SEC’s mission should include an explicit requirement that it consider the effect of new rules on the state based system of business entity formation.

Here’s a sneak peak at my testimony for TOTM readers:

Chairman Bachus, Ranking Member Frank, and distinguished members of the Committee, it is a privilege to testify today.  My name is J.W. Verret.  I am an Assistant Professor of Law at Stanford Law School where I teach corporate and securities law.  I also serve as a Fellow at the Hoover Institution and as a Senior Scholar at the Mercatus
Center at George Mason University.  I am currently on leave from the George Mason Law School.

My testimony today will focus on two important and necessary reforms.

First, I will argue that clarifying the SEC’s legislative mandate to conduct economic analysis and a commitment of authority to economists on staff at the SEC are both vital to ensure that new rules work for investors rather than against them.  Second, I will urge that the SEC be required to consider the impact of new rules on the state-based system of business incorporation.

Every President since Ronald Reagan has requested that independent agencies like the SEC commit to sincere economic cost-benefit analysis of new rules.  Further, unlike many other independent agencies the SEC is subject to a legislative mandate that it consider the effect of most new rules on investor protection, efficiency, competition and capital formation.

The latter three principles have been interpreted as requiring a form of cost-benefit economic analysis using empirical evidence, economic theory, and compliance cost data.  These tools help to determine rule impact on stock prices and stock exchange competitiveness and measure compliance costs that are passed on to investors.

Three times in the last ten years private parties have successfully challenged SEC rules for failure to meet these requirements.  Over the three cases, no less than five distinguished jurists on the DC Circuit, appointed during administrations of both Republican and Democratic Presidents, found the SEC’s economic analysis wanting. One
failure might have been an aberation, three failures out of three total challenges is a dangerous pattern.

Many SEC rules have treated the economic analysis requirements as an afterthought. This is in part a consequence of the low priority the Commission places on economic analysis, evidenced by the fact that economists have no significant authority in the rule-making process or the enforcement process.

As an example of the level of analysis typically given to significant rule-making, consider the SEC’s final release of its implementation of Section 404(b) of the Sarbanes-Oxley Act.  The SEC estimated that the rule would impose an annual cost of $91,000 per publicly traded company.  In fact a subsequent SEC study five years later found average implementation costs for 404(b) of $2.87 million per company.

That error in judgment only applies to estimates of direct costs.  The SEC gave no consideration whatsoever to the more important category of indirect costs, like the impact of the rule on the volume of new offerings or IPOs on US exchanges.

In Business Roundtable v. SEC alone the SEC estimates it dedicated over $2.5 million in staff hours to a rule that was struck down.  An honest commitment by the SEC to empower economists in the rule-making process will be a vital first step to ensure the mistakes of the proxy access rule are not replicated in future rules.

I also support the goal in H.R. 2308 to further elaborate on the economic analysis requirements.  I would suggest, in light of the importance and pervasiveness of the state-based system of corporate governance, that the bill include a provision requiring the SEC to consider the impact of new rules on the states when rule-making touches on issues of corporate governance.

The U.S. Supreme Court has noted that “No principle of corporation law and practice is more firmly established than a state’s authority to regulate domestic corporations.”

Delaware is one prominent example, serving as the state of incorporation for half of all publicly traded companies.  Its corporate code is so highly valued among shareholders that the mere fact of Delaware incorporation typically earns a publicly traded company a 2-8% increase in value.  Many other states also compete for incorporations, particularly New York, Massachusetts, California and Texas.

In order to fully appreciate this fundamental characteristic of our system, I would urge adding the following language to H.R. 2308:

“The Commission shall consider the impact of new rules on the traditional role of states in governing the internal affairs of business entities and whether it can achieve its stated objective without preempting state law.”

The SEC can comply by taking into account commentary from state governors and state secretaries of state during the open comment period.  It can minimize the preemptive effect of new rules by including references to state law where appropriate similar to one
already found in Section 14a-8.  It can also commit to a process for seeking guidance on state corporate law by creating a mandatory state court certification procedure similar to that used by the SEC in the AFSCME v. AIG case in 2008.

I thank you again for the opportunity to testify and I look forward to answering your questions.

Ten leading corporate and securities law professors have petitioned the SEC to develop rules to require companies to disclose their political spending.

This is the latest iteration of efforts to end-run Citizens United’s restrictions on regulating corporate campaign activities by calling it corporate governance regulation.  See my recent post on the Shareholder Protection Act.  I’ve written on these issues in my recently published The First Amendment and Corporate Governance.

The proposed regulation has a good chance of passing muster under the First Amendment because it would focus on disclosure rather than imposing substantive restrictions on corporate speech. Nevertheless, the First Amendment is still relevant.  I have already noted my view that the SEC’s proxy access rule (which is also basically a disclosure rule) avoided a confrontation with the First Amendment only because the DC Circuit could invalidate it on other grounds. At some point mandatory disclosure can sufficiently burden corporate speech to be unconstitutional.  To give just one example, requiring firms to pre-disclose all of their spending for the coming year, thereby preventing them to respond flexibly to changes in the political environment, could push the line.

Even if the SEC rules are constitutional, they would still not necessarily be good policy.  Notably, the law professors’ rulemaking petition, while spending some time discussing the supposed importance to investors of corporate political spending, said nothing about whether an SEC rule was necessary.  The petition highlighted the fact that many corporations already were voluntarily disclosing political spending, sometimes even without shareholder request. Why not continue the experimentation and evolution rather than locking down a one-size-fits-all rule?  Do the benefits of standardization outweigh the costs of experimentation?

The petition cites precedents such as executive compensation disclosure as evidence of the “evolving nature of disclosure requirements.”  But there’s nothing about this evolution that suggests it needs to proceed toward more disclosure about every political hot-button issue.

No doubt the SEC will proceed as the petition requests.  After all, it needs a juicy political issue to deflect attention from the recent questions about the SEC’s soundness and competence as a financial cop. But let’s at least hope that the Commission has learned something from its most recent run-in with the DC Circuit and tries to get some data on exactly who would be helped and hurt by regulation of political disclosures and how much. As with proxy access, would this be all about empowering certain activists at the expense of others, or passive diversified shareholders?  My article discusses some of these tradeoffs. The SEC’s analysis  might benefit from data on exactly what was accomplished by the Commission’s past disclosure enhancements the petitioners highlight.

The danger that the SEC will fall prey to the arbitrariness the DC Circuit criticized is especially intense given the petitioners’ argument that the “symbolic significance of corporate spending on politics suggests setting an appropriately low threshold” on when disclosure is required. I don’t even want to think about the consequences of inviting the SEC to weigh the benefit of “symbolism” against the direct and indirect costs of disclosure.

Anyway, get ready for a contentious debate which, while providing an enjoyable distraction, does nothing to protect investors from the fraud and market dangers that are supposed to be the SEC’s top priority.

Tulane Law’s Elizabeth Nowicki, a former TOTM guest, asked me to post the following notice:

The AALS Annual Meeting in San Francisco is fast approaching, and the AALS Section on Securities Regulation will be having two events on Saturday, January 8, 2011, in celebration of the Section’s 10th Anniversary.  Participation is invited, as described below:

  1. Luncheon:  On Saturday, Jan. 8, at 12:15, the Section on Securities Regulation will be hosting a Luncheon at which corporate and securities law guru Joel Seligman (currently President of the University of Rochester) will be presenting the keynote remarks.  The Luncheon is open to everyone (although advance registration is required as per the Annual Meeting brochure), and all are welcome!
  2. Networking and Biographical Information Sharing:  At the Luncheon, we will be handing out a list of all Luncheon attendees (who want to be included on the list), with brief biographical blurbs about each attendee.  Our hope is to facilitate networking at the Luncheon and allow academics with similar interests to identify each other.  If you will be attending the Luncheon, and you would like to have your biographical blurb included in the hand-out, please e-mail a biographical blurb for inclusion (no longer than 100 words) to by December 31, 2010.  In addition to including your name, affiliation, and e-mail address in your blurb, consider also including a short statement of anything relevant or interesting in your background, the courses you teach and your specific areas of research interest, the title of a recent work or a work-in-progress, any blog or website with which you are affiliated, and whether you would like to find someone willing to comment on a draft of yours or whether you are willing to comment on someone else’s draft.
  3. Paper Presentation on Panel:  On Saturday, January 8, 2011, from 10:30 a.m. – 12:15, the Section on Securities Regulation will be hosting an engaging panel titled “Current Issues in Securities and Corporate Law: Fraud, Gatekeeping, the Economic Crisis, Reforming Reform, and ‘Where Were the Lawyers?’.”  The panel will include corporate and securities law experts such as Stanford Law School Professor Joe Grundfest and Northwestern Professor Bernie Black.  The panel will also include at least one paper presentation, so, if you have a current paper (either in draft form, accepted for publication, or published within the last year) that you would like to present on the panel on January 8, 2011, please submit the paper for consideration to by December 25, 2010.  (This call is going out on short notice due to some unexpected planning issues, and we sincerely apologize for such.)


On behalf of the Section on Securities Regulation, I hope to see you at the Annual Meeting.

Best regards,
Elizabeth Nowicki, 2010 Chair, AALS Section on Securities Regulation
Tulane University School of Law

I have been asked a few times today to opine, as a corporate and securities law scholar, on President Obama’s nomination of Judge Sonia Sotomayor for the Supreme Court.  ( has a couple of quotes reflecting my thoughts.)

I have three main comments:

First, this is a pivotal time in American securities and corporate law jurisprudence.  Any appointment to the Supreme Court has the potential to significantly influence the evolution of corporate and securities law.  The Supreme Court has recently granted certiorari for a couple of big-ticket securities and corporate law cases, and there is every reason to believe, particularly in light of the SEC’s recently announced rulemaking and Senator Schumer’s recently proposed Shareholder Bill of Rights Act of 2009, that the Supreme Court will continue to handle important business matters like these in the near future.  Federal preemption, Securities and Exchange Commission rule-making authority, corporate governance reform, damages, and the reach of federal securities laws are all incredibly important topics that are certain to come before the Supreme Court in the next few terms.

Second, it is difficult to gauge where exactly Judge Sotomayor falls on the spectrum of pro-management versus pro-investor jurists.  Is she a shareholder primacist, does she defer to the invisible hand of the market, does she interpret Section 10(b) of the Securities Exchange of 1934 broadly or narrowly?  These are questions to which Judge Sotomayor’s judicial writings provide no clear answers.  Sotomayor was nominated to the federal bench by President Bush, so one might have suspected that she would embrace ardent pro-management leanings.  However, the business and securities opinions she has penned have not evinced such a bent.  For example, she penned the Second Circuit’s relatively recent shareholder-friendly opinion in Merrill Lynch v. Dabit (a detailed summary of the case is available here).  Indeed, upon reflection, one recalls that Sotomayor was viewed as a less conservative Bush nominee (proposed by Moynihan) when she was appointed, and it was President Clinton who elevated her to the Second Circuit.  Yet Judge Sotomayor has dismissed numerous cases in favor of management despite her more liberal affiliations.

Third, Judge Sotomayor has a strong background in sophisticated corporate and securities law cases, as she comes from the Second Circuit, a jurisdiction that generates a significant number of these cases (given that Wall Street falls within the jurisdiction of the Second Circuit).  This bodes well, in that pundits often query whether Supreme Court jurists fully appreciate the complex business nuances arising in many securities and corporate matters.  That Judge Sotomayor has been both a district court judge and an appellate judge in a jurisdiction where these difficult business cases arise delights me, and I think she would add a valuable perspective on the Supreme Court.

Taking off the “corporate and securities law scholar” hat, and putting on the “Chair of the American Association of Law Schools Section on Women in Legal Education” hat, I can say that I am thrilled that President Obama has nominated a woman to the Supreme Court.  I was disheartened that Justice O’Connor’s seat was not filled by a woman, but I remain optimistic that someday the number of women on the Supreme Court will mirror, as a percentage, the number of women in the average law school entering class.

Of course, given that, in the almost 30 years since a woman first ascended to the United States Supreme Court, we appear to have reached a plateau, with only two women serving at any one time over the past 16 years, perhaps my optimism is misplaced.  I remain optimistic nevertheless.

The DC Madam killed herself today, about a week after being found guilty by a jury on prostitution-related charges of money-laundering (among other things).

Among her alleged clients are Louisiana Senator David Vitter, former U.S. Deputy Secretary of State Randall Tobias, and Harlan K. Ullman, a senior associate with the Center for Strategic and International Studies, who developed the “shock and awe” doctrine.

I titled this post with a “Dammit,” something I am not inclined to do normally in this academic setting, because I am just disgusted and disheartened at how this has played out.  Anyone who has paid attention to how women versus men have been treated in the context of prostitution could have seen this train coming down the tracks. Women who are exposed as having been involved in prostitution scandals often kill themselves.  Men tend to waltz away, unscathed in the long term.  I realize these are gross generalizations for which I have no empirical substantiation, but I am thinking about Brandy Somethingorother, from about a year ago.  Without going back and looking the story up, I think Brandy was a professor (or used to be) who was also a prostitute.  When she was publicly revealed as a prostitute, and when it seemed that she was going to be in huge legal trouble, she killed herself.  I do not recall that any of her male clients, nor any of the DC Madam’s male clients, killed themselves.  Just the DC Madam and this Brandy Somethingorother killed themselves.  Why is it that the women are scorned and shamed and kill themselves but the same thing does not happen on the male side?

I am one of three daughters, raised in an all-girl household (save my long-suffering father).  All three of us Nowicki girls have graduate degrees.  We were raised completely unaware of the notion that being a girl ever mattered in the bigger-picture sense.  (It mattered in terms of whether I needed to lift the toilet seat and whether I was likely to grow to a size to be able to compete on the football field with any chance of success, but it did not matter – or so I thought – in terms of justice and fairness in life.)  We were raised with the belief that everyone – women, men – are judged equally on the basis of their achievements and missteps, and gender is irrelevant.

But, yet, the DC Madam was left dangling by her neck in some shed in Florida, while Vitter, Tobias, and Ullman are out there, happily employed, likely soon to put their affiliation with the blissfully deceased (likely their view) DC Madam far, far behind them.  *That* is what prompts me to title this post “Dammit.”  We all could have seen this coming.  *That* is why this post is titled “Dammit.”

It strikes me as ironic that I just learned today that corporate and securities law professor Jill Fisch was hired by UPenn, such that there is now one fewer top top law school with basically no women among the corporate/securities law faculty.  Score one for the women.  Congratulations Professor Fisch.  Tough to juxtapose that, however, with “RIP Deborah Jean Palfrey.”  I guess today is a wash in terms of equality for women.  Dammit.

My condolences to Ms. Palfrey’s mother.  Regardless of the legality or illegality of Palfrey’s actions, it should not have ended this way.

George Washington University Law School Professor Larry Mitchell’s new book, The Speculation Economy, is a worthwhile read, and anyone with an interest in corporate law, securities regulation, stock market evolution, the rise of big business, legal history, antitrust, and other related topics should consider putting the book on his or her holiday wish-list

More specifically, The Speculation Economy is a valuable book for anyone wanting to understand how the legal, regulatory, financial, and legislative climate of big business evolved through the late 1800s into the early 1900s, laying the foundation for today’s modern publicly-held corporations and giving rise to what Mitchell calls “American corporate capitalism.”  Though the time period covered in the book is narrow, the developments during this period are far-reaching and important.  To that end, Mitchell fearlessly deconstructs the antitrust, corporate law, securities law, and the related federalism and state competition events over these three decades, describing, blow-by-blow, the move from a large business entity world dominated by major individual players focused on building an industrial enterprise to a business environment where business entities – trusts turned conglomerates turned corporations – were no longer a means to an end but rather an end in and of themselves.Â

And Mitchell’s attention to detail is actually where I found the true value in the book.  Based on the book’s subtitle – “How Finance Triumphed Over Industry” – and based on various reviewers’ comments on the jacket and otherwise, I thought the book would be valuable because it explains why finance came to dominate industry.  The reality, however, is that the book basically dispenses with that issue in its first two chapters.  The rest of the book is spent on an a journey through the regulatory, legislative, state, political, and federal struggling and machinating in response to this capital market paradigm shift.  It is this rich discussion and description that I found most valuable and wonderfully edifying.  Mitchell takes us from New Jersey’s appearance as the first winner of the real race to the bottom to the Panic of 1907 to early attempts to federalize corporate law to the Owen Bill, the Pujo Committee, the Hepburn Act, the Mann-Elkins Act, and the Littlefield Bill to the sunset of Woodrow Wilson’s economic progressivism (covering, on the way, a whole host of other relevant material).  The Speculation Economy is a solid historical read highlighting a critical time in corporate and capitalism history.Â

Columbia Professor Harvey Goldschmid’s comment on The Speculation Economy book jacket promises that “[a]nyone interested in the development of our modern financial markets will be richly rewarded by a careful reading.”  Harvey was right.  The Speculation Economy, while requiring an attentive, slower read due to its factual density, delivered, in return, a wealth of information, coherently explained and colorfully detailed, about a pivotal time in corporate history.  The book earned its rightful place on my office bookshelf of corporate and securities law tomes, and, for only 279 pages of text (excluding the endnotes), The Speculation Economy is must-read contribution to the legal history, corporate law, securities regulation, and big business scholarship.

** Look for the Conglomerate’s book review session on The Speculation Economy in a few weeks!