Volume 35, Issue 1 (Winter 2018)
Susan C. Morse & Leigh Osofsky, Regulating by Example, 35 Yale J. on Reg. 127 (2018).[PDF]
Agency regulations are full of examples. Regulated parties and their advisors parse the examples to develop an understanding of the applicable law and to determine how to conduct their affairs. However, the theoretical literature contains no study of regulatory examples or of how they might be interpreted. Courts differ about whether examples serve as an independent source of law. There is uncertainty about the proper role of this frequently used regulatory tool.
In this Article, we argue that regulatory examples make law. Our claim is that, as a default rule, the legal content offered by regulatory examples is coequal with, not subordinate to, the non-example portions of regulations. Treating examples as co-equal with other portions of the regulations empowers agencies to improve regulatory content through concrete communication, while also acknowledging regulated parties’ natural inclination to treat such communications as law. We reject counterarguments that regulatory examples merit extra scrutiny, or less respect, that would relegate them to second-class status.
We also set forth a method for interpreting regulatory examples. We argue that they are best understood through analogical, or common law, reasoning, and we illustrate this approach. We show how analogical reasoning can be reconciled with the rest of the broader regulatory and statutory scheme using various interpretive approaches, such as textualism or purposivism. Our method places regulatory examples in dialogue with their broader regulatory and statutory schemes. It both empowers and constrains courts, agencies, and regulated parties in their efforts to understand the meaning of regulations.
Merritt B. Fox, Lawrence B. Glosten, & Gabriel V. Rauterberg, Stock Market Manipulation and Its Regulation, 35 Yale J. on Reg. 67 (2018).[PDF]
More than eighty years after federal law first addressed stock market manipulation, federal courts remain fractured by disagreement and confusion about manipulation law’s most foundational questions. Only last year, plaintiffs petitioned the Supreme Court to resolve a sharp split among the federal circuits concerning manipulation law’s central question: whether trading activity alone can ever be considered illegal manipulation under federal law. Academics have been similarly confused—economists and legal scholars cannot agree on whether manipulation is possible in principle; let alone on how, if it is, to address it properly in practice.
This Article offers an analytical framework for understanding manipulation, which resolves these questions, clarifies federal law, and can guide regulators in successfully prosecuting financial law’s most intractable wrong. We draw on the tools of microstructure economics and the theory of the firm to provide a synthesis of the various distinct forms of manipulation, identify who is harmed by each form, and evaluate their social welfare effects. This Article thus lays the foundation for a renewed understanding of manipulation and its place within securities regulation.
Dan Awrey, Blanaid Clarke & Sean J. Griffith, Resolving the Crisis in U.S. Merger Regulation, 35 Yale J. on Reg. 1 (2018).[PDF]
Regulation by litigation has driven U.S. merger regulation to crisis. The reliance on private lawsuits to police disclosures and potential conflicts of interest in mergers, takeovers, and other control transactions has resulted in the filing of claims after every major transaction. However, it has failed to achieve meaningful benefits for shareholders and has instead deprived them of potentially valuable rights. Regulation by litigation has devolved into attorney rent-seeking, and the raft of substantive and procedural reforms aimed at resolving the crisis has failed.
There is an alternative to regulation by litigation. Drawing upon the code and panel-based models of merger regulation in the United Kingdom and Ireland, this Article explores whether a regulatory model might be better at protecting shareholder interests in merger transactions. A regulatory alternative holds a number of significant advantages, including greater speed, responsiveness, certainty, and lower administrative costs. In light of these potential advantages, it is remarkable that no U.S. state has experimented with a code and panel-based model of merger regulation. We explain the persistent difference between the U.S. and Anglo-Irish models by reference to interest group politics and, in particular, the power of the bar to influence corporate law reforms in the United States.
Mark Roe & Michael Troege, Containing Systemic Risk By Taxing Banks Properly, 35 Yale J. on Reg. 181 (2018).[PDF]
At the root of recurring bank crises are deeply-implanted incentives for banks and their executives to take systemically excessive risk. Since the 2008- 2009 financial crisis, regulators have sought to strengthen the financial system by requiring more capital (which can absorb losses from risk-taking) and less risk-taking, principally via command-and-control rules. Yet bankers’ baseline incentives for system-degrading risk-taking remain intact.
A key but underappreciated reason for banks’ recurring excessive risktaking is the structure of corporate taxation. Current tax rules penalize equity and boost debt, thereby undermining the capital adequacy efforts that have been central to the post-crisis reform agenda. This tax-based distortion incentivizes financial firms to undermine regulators’ capital adequacy rules, either transactionally or by lobbying for their repeal. The resulting debt-heavy structure not only renders banks fragile but also pushes them toward further excessively risky strategies.
This result is not inevitable. By repurposing tax tools used elsewhere, we show how the safety-undermining impact of the corporate tax can be reversed without affecting the overall level of tax revenue that the government raises from the financial sector. Several means to the desired end are possible, with the best trade-off between administrability and effectiveness being to lift the tax penalty on banks to the extent that they add to their loss-absorbing, safety-enhancing equity buffer above the regulatory minimum. This solution would minimize the tax impact. Revenue loss would be small and could be offset by modest tax changes targeted at the riskiest forms of financial sector debt. Existing studies indicate that the magnitude of the resulting safety benefit should rival the size of the benefit from all the post-crisis capital regulation to date. Thus the main thesis
we bring forward is not a small or technical claim.
Standard bank regulatory style is command-and-control, and while much can be and has been accomplished with the standard style, it has its limits. In today’s political environment, current safety rules’ continuance may not be viable, as a repeal of recent regulatory advances, rather than refinement, has become a serious possibility. Yet rolling back the post-crisis regulatory advances without addressing the underlying risk-taking incentives would be unwise. While our policy preference would be to supplement and not replace traditional and recent regulation with the tax reform, any major rollback makes reducing the risk-taking tax distortion more urgent than ever.
Hannah J. Wiseman, Dysfunctional Delegation, 35 Yale J. on Reg. 233 (2018).[PDF]
Much of the scholarly literature lauds cooperative federalism, in which states regulate to achieve federal standards, as an innovative federal-state partnership. But delegation of authority also has grave dangers caused by principal-agent problems, among others. The largely toothless nondelegation doctrine captures these challenges, but the bidirectional difficulties of principals adequately monitoring agencies, and vice versa, extend far beyond Congress’s delegation of duties to agencies. Congress or federal agencies—the principals who craft and oversee cooperative federalism under many existing statutes— sometimes delegate authority knowing that subfederal actors will not fully implement a statute. Even delegation for more noble purposes can cause regulatory failure when federal actors struggle or refuse to adequately oversee subfederal agents or perform their own duties. Further, subfederal agents often lack the tools needed to hold federal agencies to task. The recent case of Flint, Michigan, where tainted drinking water permanently harmed thousands of children due to flagrant violations of a cooperative federalism statute, poignantly highlights this. But delegation is often necessary and can be beneficial, particularly where subfederal agents are more motivated to implement basic risk-preventing regulatory requirements than their federal principal is. Broad-brush cooperative federalism theory tends to ignore the regulatory design of delegation and its associated pathologies and benefits.
This Article cuts to the core of the dysfunction of delegated governance regimes within cooperative federalism. It argues that given the federal statutes in place—with requirements that even recalcitrant federal and state agencies must follow—the design and implementation of cooperative federalism must change. Even if the original purpose of delegation was an ignoble one, the baseline requirements of federal statutes may not and should not be ignored.
The Article builds a theoretical framework for understanding and normatively assessing the shared features of numerous forms of delegation under cooperative federalism, and it applies this framework to environmental and energy law case studies. It argues that necessary regulatory design changes include, among others, consistent case-by-case and long-term monitoring of both principals’ (federal agencies) and agents’ (subfederal governments’) behavior and expanded use of judicial review and other mechanisms for overseeing all actors within delegated governance regimes.
Ming Wang, Note, Credit Default Swaps on Municipal Bonds, 35 Yale J. on Reg. 301 (2018).[PDF]
The municipal bond market has traditionally been viewed as a relatively safe market, where credit risk wasn’t a primary concern. The spate of fiscal crises that state and local governments have experienced in recent years, however, has changed this narrative. With credit risk increasingly on the forefront of investors and bond issuers’ minds, credit default swaps (“CDSs”) loom large as a financial derivative that can directly mitigate or hedge municipal credit risk. A nascent market for municipal credit default swaps (muni CDSs) does exist. The market, however, is thinly traded, and, for a number of reasons, a robust muni CDS market has not yet developed.
This Note explores whether a more robust muni CDS market should be developed and considers the available options for doing so. While a number of policies could make the muni CDS market safer and more robust, policymakers must grapple with costs and benefits that come with more widespread use of
muni CDSs. Besides tracing the reasons for the historical lack of a robust muni CDS market, this Note makes a number of additional contributions. It provides an overview of the mechanics and state of the extant muni CDS market. Additionally, it argues that the current distressed conditions within the municipal bond market may be tempering some of the constraints that have historically limited the muni CDS market. It also suggests a number of proposals that would help make the muni CDS market more robust, while also discussing at length the costs and benefits of these proposals.
James Durling, Comment, Diagramming Interpretations, 35 Yale J. on Reg. 325 (2018).[PDF]
Sentence diagramming—a method of showing the relationship between different parts of a sentence—has long been used by judges to interpret legal texts. This Comment documents how judges employ sentence diagrams in constitutional, statutory, and contract cases. It finds that diagramming plays an important role in constitutional and statutory cases, complementing traditional canons of legal interpretation, but that diagramming is less often used in contract cases for fear of disadvantaging grammatically unsophisticated parties. In addition, this Comment defends the practice of judicial diagramming as a way of improving textualist interpretation and promoting broader values of judicial opinion writing.