Volume 35, Issue 2 (Spring 2018)
S. Burcu Avci, Cindy A. Schipani & H. Nejat Seyhun, Eliminating Conflicts of Interest in Banks: The Significance of the Volcker Rule, 35 Yale J. on Reg. 343 (2018).[PDF]
Public policy has been focused on controlling the conflicts of interests in banks for the last eighty-five years with limited success. Banks have a unique place in the economy as intermediaries between investors and companies, allowing them to obtain significant private, proprietary information. Public policy is focused on trying to ensure that banks do not misuse this information for their own benefit to the detriment of their clients. This is a tough task.
In this Article, we focus our attention more specifically on proprietary trading. We exploit a unique dataset that allows us to observe the information banks receive and what they do with it. When banks are hired as investment advisers, they become temporary insiders, and they are required to report all transactions in their client firms’ stock to the SEC. Using this unique dataset, we analyze the kind of information banks acquire about their clients as part of their financial intermediary and advisory roles. Our data show that this information is highly valuable to banks. Specifically, banks have been able to earn more than 25% returns above market from proprietary trades on this information. Furthermore, after Glass-Steagall’s prohibitions against commercial banks engaging in investment banking activities were relaxed, this return on investment rose to a whopping 40%.
The Volcker Rule was enacted to aid in reducing systemic risks in the banking system and, among other purposes, to eliminate conflicts of interest that arise when banks profit at the expense of their clients. Scholars have previously argued that the Volcker Rule should be vigorously enforced to eliminate temptations to trade on material non-public information for banks’ benefit and against their client’s interest. We provide important empirical research for this proposition by showing that banks indeed trade on non-public information and earn higher than expected returns.
Kevin Haeberle & Todd Henderson, Making a Market for Corporate Disclosure, 35 Yale J. on Reg. 383 (2018).[PDF]
It has long been said that market forces alone will result in a problematic under-sharing of information by public companies. Since the 1930s, the main regulatory response to this market failure has come in the form of the massive mandatory-disclosure regime that sits at the foundation of modern securities law. But thisregime—especially when viewed along with its speech-chilling antifraud overlay—no doubt leaves society without all the corporate information from which it would benefit. The typical fix offered to the problem has been more of the same: add to the 100-plus-page list of what firms must disclose, often based on the latest Washington fad.
This Article argues that the underproduction of corporate information could be better addressed through constructing an information market. In particular, we theorize that an SEC rule regarding selective disclosure (Regulation Fair Disclosure) and a more general regulatory attitude relating to the same prevent this market from forming today, and that changes to them would allow firm supply and information-consumer demand to interact in a way that would motivate more corporate disclosure, presented in enhanced formats, delivered more frequently. Thus, the Article provides regulators with an innovative and far-reaching tool for use in their long struggle to get socially valuable information out beyond firms.
Scott Hirst, Universal Proxies, 35 Yale J. on Reg. 437 (2018).[PDF]
Contested director elections are a central feature of the corporate landscape and underlie shareholder activism. Rules governing proxy voting by shareholders prevent shareholders from “mixing and matching” among nominees from the two sides of contests. This Article’s analysis shows that these proxy voting rules can lead to distorted proxy contest outcomes: different directors being elected than if shareholders had been able to vote how they wished. These distortions are likely to have significant consequences for the affected companies and ex ante consequences for many more companies.
Changes to corporate voting rules are currently the subject of an important policy debate. The Securities and Exchange Commission (SEC) has proposed a universal proxy regulation, which would allow shareholders to vote for their preferred mix of nominees, and would eliminate distortions in proxy contest outcomes. But the rule has been met with substantial opposition. This Article provides the first empirical analysis of the extent of distortions, and the likely effects of universal proxies.
The Article’s empirical analysis uses a comprehensive and largely handcollected data set. It demonstrates that distorted proxy contest outcomes are a real and practical problem. As many as 15% of proxy contests between 2001 and 2016 may have had distorted outcomes. Contrary to the claims of most commentators, there is no empirical evidence that universal proxies would favor special interests or lead to more frequent proxy contests. The Article analyzes how the SEC should implement universal proxies and explains that a rule permitting corporations to opt out of universal proxies would be superior to the SEC’s proposed regulation, which would require all corporations to use universal proxies. If the SEC chooses not to implement a universal proxy regulation, the Article explains how investors could implement universal proxies through private ordering to adopt “nominee consent policies.”
Herbert Hovenkamp, Reasonable Patent Exhaustion, 35 Yale J. on Reg. 513 (2018).[PDF]
A lengthy tug of war between the Supreme Court and the Federal Circuit Court of Appeals may have ended with Impression Products v. Lexmark. The Supreme Court held that the sale of a patented thing exhausts the patentee seller’s rights to enforce restrictions on that thing through patent infringement suits. Further, the parties cannot bargain around this rule through the seller’s specification of conditions, no matter how clear. No inquiry need be made into the patentee’s market power, anticompetitive effects, or other types of harms, whether enforcement of the condition is socially costly or valuable, or whether the condition has a positive or negative impact on innovation. None of this is relevant.
Impression Products reveals an economic deficiency that manifests all too frequently when patent law is brought to bear on market practices. Economic concepts that are commonly used in antitrust law, such as market power or output effects, are virtually unknown in patent law. This fact has inclined courts to go to wild extremes—such as equating every patent with monopoly, or concluding that a patent is a mere property right and that anything done within the scope of the patent is permissible. The result, as in this case, can be draconian rules that are indifferent to effects on innovation, competition, economic efficiency, or any other measure that seems relevant to innovation policy. This Article argues that the Supreme Court would have been wise to develop a more nuanced exhaustion rule that examined actual effects likely to result from a particular restraint.
Jerry Mashaw & David Berke, Presidential Administration in a Regime of Separated Powers: An Analysis of Recent American Experience, 35 Yale J. on Reg. 549 (2018).[PDF]
This Article examines presidential direction of administrative action in the Obama and early Trump Administrations against the backdrop of ongoing debates concerning: (i) the desirability of and appropriate techniques for presidential control of administration and (ii) the relevance of separated powers when American government is under unified political control. To give this analysis a concrete context, the Article provides in-depth case studies of presidential administration in immigration policy, climate change policy, and executive structuring of the administrative state, under both the Obama and early Trump Administrations. Based on these three case studies, the Article argues that proponents of “presidentialism,” who base their support on the supposed effectiveness and democratic legitimacy of muscular presidential administration, have operated with an anemic and poorly specified set of normative criteria. These defects have led supporters to overstate the benefits and understate the risks of presidentialism. The Article further concludes that claims of the functional demise of separated powers, like Mark Twain’s death, have been exaggerated. While one cannot understand the functioning of separated powers without understanding the dynamics of party competition, separation of powers has retained functional importance in periods of both unified and divided government notwithstanding the emergence of the current era of hyper-partisanship.
John Yoo & Todd Gaziano, Presidential Authority to Revoke or Reduce National Monument Designations, 35 Yale J. on Reg. 617 (2018).[PDF]
The Antiquities Act of 1906 was passed in order to protect threatened historic ruins, structures and landmarks, and accordingly, it grantsthe President the power to designate such features as national monuments. Despite this goal, several Presidents have used this authority to unilaterally withdraw hundreds of thousands of acres of federal land from public use.
Moreover, many scholars now claim that while the Act gives a President the power to designate a national monument, it does not allow for significant presidential reductions or revocation. They argue that the absence of an explicit grant of revocation power in the Act as well as the language of contemporaneous statutes mean that once a monument is created by a President, only Congress can alter or revoke it.
Our analysis shows that a general discretionary revocation power does exist for the President. We argue that under traditional principles of constitutional, legislative, and administrative law, the authority to execute a discretionary power includes the authority to reverse it. Arguments that treat national monuments as a special case rely on a 1938 opinion by U.S. Attorney General Homer Cummings, which concluded that the Act did not grant the power of revocation. We argue that this opinion is poorly reasoned; misconstrued a prior opinion, which came to the opposite result; and is inconsistent with constitutional, statutory, and case law governing the President’s exercise of analogous grants of power.
Daniel B. Listwa & Charles Seidell, Note, Penalties in Equity, 35 Yale J. on Reg. 667 (2018).[PDF]
This Note defends the SEC’s statutory authority to seek judicial disgorgement. In Kokesh v. SEC, the Supreme Court held that judicial disgorgement brought by the SEC constitutes a penalty for the purpose of the five-year statute of limitations in 28 U.S.C. § 2462. In the following months, scholars and practitioners—and at least one putative class action—have argued that this opinion spells the end for judicial disgorgement. Their reasoning is simple: disgorgement is a penalty; there are no penalties in equity; SEC disgorgement is authorized by a statutory grant of equity jurisdiction; therefore, SEC disgorgement is not authorized. This Note refutes the premise that there are no penalties in equity by looking at the Court’s precedents and general approach to equitable remedies. Further, it offers an affirmative defense of the SEC’s authority to seek judicial disgorgement by pointing to congressional ratification. Next, the Note argues that Kokesh should be understood as a warning shot, directing the SEC to pull back its overly aggressive utilization of disgorgement. This Note concludes that the lesson ought to be heeded by similarly situated agencies as well—particularly the Federal Trade Commission.