Columbia Business Law Review

Where Was this T-Shirt Made?

Miguel Angel Bacigalupe — Fri, 28 Jan 2022 00:00:00 +0000

In March 2021, Biden’s administration formally declared China’s treatment of Uyghur Muslims a genocide in its annual human rights report published by the Department of State. It is difficult not to conclude that these findings may have also been influenced by the rare bipartisan criticisms aimed at China’s human rights record over the last few years.

This bipartisan condemnation of the Chinese government seems to have paid off as President Joseph R. Biden signed into law the Uyghur Forced Labor Prevention Act (UFLPA) on December 23, 2021. This legislation prohibits the importation of goods produced with forced labor in China as it directs US Customs and Border Protection (CBP) to apply a rebuttable presumption that “any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of the People’s Republic of China” have been made with forced labor.

This Note argues that given the UFLPA’s overbroad economic implications and lack of clear enforcement mechanisms, is neither effective nor a realistic way of holding American companies seeking to import products from China accountable in the long term.

ISS and Other Proxy Advisory Firms' Conflicts of Interest

Dan Daskal — Fri, 28 Jan 2022 00:00:00 +0000

This Note discusses the impact of conflicts of interest on the proxy advisory firm industry, with a particular focus on conflicts plaguing Institutional Shareholder Services, the dominant proxy advisory firm. The increased proportion of shares held by institutional investors, strong reliance on voting recommendations by certain investment advisors and continuing dominance of Institutional Shareholder Services have culminated in Institutional Shareholder Services’ substantial influence in proxy voting. The lack of sufficient regulatory oversight has precipitated considerable risk of proxy voting that serves the best interest of proxy advisory firms rather than that of shareholders. Recent rules and guidance issued by the Securities and Exchange Commission have not adequately addressed these concerns. Several possible reforms may help this situation, including eliminating robo-voting, separating voting advice and corporate governance consulting services and mandating engagement in voting research beyond that provided by proxy advisory firms. Pursuing these avenues of reform could help restore the integrity of voting recommendations and ensure that proxy advisory firms are used in the way they were initially intended: to reduce information costs and help investment advisors vote shares in their clients’ best interests.

Foreclosure Sales Under the UCC During the Covid-19 Pandemic

Matthew Digirolamo — Fri, 28 Jan 2022 00:00:00 +0000

Under the Uniform Commercial Code (UCC), “every aspect” of a foreclosure sale must be commercially reasonable. The traditional commercial reasonableness standard was tested during the first year of the COVID-19 pandemic, as the unprecedented circumstances imposed by state restrictions prompted increased judicial scrutiny of UCC foreclosure sales. This occurred most prominently in the context of commercial property mezzanine loan foreclosures. A mezzanine loan is a property loan secured by a pledge of equity interests in the property-owning entity rather than a security interest in the property itself. As state mortgage foreclosure moratoriums restricted lenders’ abilities to foreclose on commercial property, mezzanine lenders initiated UCC foreclosures to circumvent this barrier and take control of their collateral.

This Note argues that courts adopted a more probing and holistic analytical approach to commercial reasonableness analyses during the first year of the pandemic. This approach more closely analyzed the procedures employed by foreclosing lenders and contextualized fair price considerations within wider market and societal concerns. This Note then proposes ways for secured creditors to protect their foreclosure sales during future periods of market uncertainty. Although secured creditors cannot fully insulate their foreclosure sales from fair price challenges in a market downturn, they should employ additional procedural safeguards to deflect commercial reasonableness challenges aimed at the alleged procedural irregularities of such sales.

Mandatory Corporate Climate Disclosures

John Armour, Luca Enriques, Thom Wetzer — Fri, 28 Jan 2022 00:00:00 +0000

Mitigating the worst consequences of climate change by transitioning to a net-zero economy requires investment on a large scale. Directly pricing emissions, the first-best solution to drive capital reallocation, is considered politically infeasible—so policymakers put their currency in facilitating the pricing of climate risk by investors. Yet investors, faced with scientific and policy uncertainty around climate risks compounded by a lack of information about companies’ exposures, struggle to do just that. This Article shows that current disclosure policies do not require companies to disclose the information that investors need to price climate risk, and voluntary frameworks like the Task Force on Climate-related Financial Disclosures—important as they are—have failed to turn the tide. The result is mispricing and a misallocation of capital, which harms investors and hampers the net-zero transition. Against that context, this Article argues that traditional securities regulation rationales and net-zero imperatives call for mandatory corporate climate disclosures. To create a yardstick against which governments’ proposals can be evaluated, both to support their efforts and to call out policy greenwashing, this Article outlines several design principles that go beyond the emerging consensus and cover the regulatory architecture that supports such a disclosure regime.

The SEC's Shareholder Proposal Rule

James D. Cox, Randall S. Thomas — Fri, 28 Jan 2022 00:00:00 +0000

In this Article, we take advantage of this Symposium’s goals to think broadly about the future of Rule 14a-8 of the Securities Exchange Act of 1934, the shareholder proposal rule. We set forth a vision for the rule to address boardroom insularity by likening the shareholder proposal rule as the public square for shareholders. The existence of such a forum would redound to the benefit of investors, officers, and boards of directors as a fount of current and useful information about their investors’ and stakeholders’ concerns.

We therefore rethink the mission of Rule 14a-8. In doing so, we explore whether it can provide a ready-made corporate public square for all companies; that is, rather than view Rule 14a-8 as purely enabling shareholders to sample the beliefs of their fellow shareholders, we perceive a broader social value. We cast Rule 14a-8 as a mechanism for assisting corporate directors generally, meaning not just those on the board of the corporation that is the target of a proposal, but also directors at all corporations, in gathering valuable information to help them better perform their duties.

In making these claims, we fully accept the functional view that Rule 14a-8 addresses itself to shareholders facing high barriers to their efforts to communicate with their directors and among themselves by providing them with an inexpensive vehicle for making their views known. We also believe it is equally important to understand that the message derived from proposals, and the votes they garner, is also heard by managers of other companies. We see that the temperature being taken through Rule 14a-8 is not just that of the proponent but a broad group of the company’s stockholders that likely is reflective of societal beliefs.

Construing Rule 14a-8 to facilitate a public square will weaken the social and psychological forces that can insulate management and the board from alternative perspectives regarding the firm’s objectives. Board directors often live cloistered lives and naturally identify with the firm’s successes and the operating practices. Thus, as their length of service increases, directors risk failing to broaden their perspectives to reflect the constellation of views held by the shareholders. Overall, a public square could help directors preserve and even gain a far richer and aligned perspective.

Moreover, as opposed to one-off meetings with portfolio companies, voting on shareholder proposals provides both the chance to discern the views of other financial institutions and the opportunity to present a cohesive voice across a group of investors behind a recommended course of action set forth in a proposal.

To be sure, some conditions should be imposed on proponents to guard against abusive proposals. We review the data bearing on the extent that a small group of investors, so-called “gadflies,” produce a disproportionate number of the poorly tailored proposals and hence are a distraction, and we believe that the SEC should study whether their proposals are associated with negative returns.

We conclude that recent SEC amendments to Rule 14a-8 are ill-advised. In making these changes, the SEC assessed the value of Rule 14a-8 by narrowly focusing on votes garnered by proposals. We argue the worth of this rule has many more features than the outcome of the votes cast in favor of a proposal.

The New Public/Private Equilibrium and the Regulation of Public Companies

Elisabeth de Fontenay, Gabriel Rauterberg — Fri, 28 Jan 2022 00:00:00 +0000

This Symposium Article examines how the public/private divide works today and maps out some of the potential implications for major issues in securities law. Classic debates in securities law were often predicated on the idea that public companies are a coherent class of firms that differ markedly from private companies. For more than fifty years after the adoption of the federal securities laws, this view was justified. During that period, the vast majority of successful and growing private firms eventually accepted the regulatory obligations of being public in order to access a wider and deeper pool of capital, among other benefits. This was a descriptive reality, but it had important normative implications as well. An identifiable class of large, growing firms went public, and they generally went public for a reason they shared: raising capital. As a result, regulatory interventions imposed on the category of “public companies” had a coherent target.

We argue that firms’ going public decisions are now shaped by a much larger and more varied set of factors. These factors are complex, cross-cutting, and impact firms considering going public in very heterogeneous ways. This complexity results from several developments and we emphasize two. First, it is a result of the fact that while the public/private divide was created by securities law, public and private markets now provide two widely different ecologies for firms, which profoundly shape firms’ governance as well as the issuance and trading of their shares. Second, long-term advances in the ease of capital raising in private markets have made it possible for firms to remain private indefinitely and have diminished or eliminated the capital-raising advantages of public markets. The result of this latter change has been rightly called a “new equilibrium.” In that equilibrium, fewer and older firms go public, while other successful firms remain private indefinitely. In this equilibrium, capital raising is no longer the primary reason firms go public. Rather, we argue, firms go public due to one or more of the many other features of the public market’s ecology.

The normative implication of this new equilibrium is to reduce the coherency of the regulation of public companies. The benefits and costs of being public (or private) apply unevenly to firms eligible to go public. Instead, to a greater degree firms now face idiosyncratic, company-specific tradeoffs between being public or private, and they often go public for reasons unrelated to the original design of the public/private divide. Regulations imposed on public firms are likely to not only be increasingly under- and over-inclusive, but also to apply to a class of companies whose coherency as an economic phenomenon may be increasingly suspect.

Spoofing and its Regulation

Merritt B. Fox, Lawrence R. Glosten, Sue S. Guan — Fri, 28 Jan 2022 00:00:00 +0000

Nearly a century after the United States enacted its first securities laws, urgent questions remain as to the scope of manipulation law: whether manipulation is possible in principle, and if so, how the law should respond in practice. Sharp disagreement among courts, economists, and legal scholars as to whether trading or quoting activity constitutes illegal manipulation has led to a legal framework that lacks precision and cogency. Moreover, the poorly articulated normative basis for court rulings has resulted in enforcement that is both under-inclusive and over-inclusive in ways that do a poor job of discouraging socially harmful transactions and enabling socially beneficial ones.

This Article seeks to clarify this confusion. Drawing on microstructure and financial economics, this Article offers a new understanding of a common kind of quote-driven manipulation, often referred to as “spoofing.” By employing an analytical and normative framework developed previously by two of the authors in assessing another major form of manipulation, trade-driven manipulation, this Article assesses the impact of spoofing on what occurs in the securities markets and carefully evaluates its effects on social welfare and economic efficiency. The result is a new understanding of quote-based manipulation that helps resolve essential questions in manipulation law and provides guidance for future regulation and enforcement.

The Emergence of the Actively Managed ETF

Kevin S. Haeberle — Fri, 28 Jan 2022 00:00:00 +0000

Since the first exchange-traded fund began trading in 1993, the ETF form has attracted enormous investment flows. However, this triumph of the ETF has been overwhelmingly limited the world of passive investment. Due to a mix of recent market innovation and regulatory change, this state of affairs is changing today. As I explain in this Article, there is much reason to believe that the actively managed ETF is now set to emerge as a significant feature of the investment landscape. And this emergence has important implications for, among others, the main parties that play key roles in protecting investors (namely, the Securities and Exchange Commission as well as investment intermediaries).

Strengthening the Treasury Market

Heath P. Tarbert — Fri, 28 Jan 2022 00:00:00 +0000

For more than 200 years, the market for U.S. Treasury securities has propelled U.S. economic success. More recently, it has been described as the world’s most important financial market because Treasury securities promote liquidity, price discovery, and economic stability across the globe. Despite its vital role at home and abroad, the Treasury market lacks certain structural protections that are common in other advanced financial markets. Bringing the Treasury market into the modern age is necessary because it is not immune to the risks that confront other financial markets. This was underscored in early 2020, when the coronavirus (COVID-19) pandemic roiled the Treasury market, producing significant trading disruptions and liquidity constraints.

To help reduce the risk of future Treasury market instability, this Article recommends modest enhancements that have proven successful in similar markets. Robust public reporting of Treasury securities trades, improved oversight of trading venues, safeguards that promote operational resiliency, and expanded central clearing will promote Treasury market strength and resiliency well into the future.

Risky Business

Charles K. Whitehead — Fri, 28 Jan 2022 00:00:00 +0000

The Securities Act of 1933 is tied to transactions in securities, rather than the risk of those securities, an approach that reflects the risk management of the times. Managing risk through diversification did not occur until twenty years later, and a further twenty years passed before new instruments were created to facilitate the transfer of discrete portions of financial risk. For much of the capital markets, this shift resulted in a separation between the risk associated with individual securities and the securities themselves. The idiosyncratic risk of individual securities now matters less than its impact on a portfolio’s total risk.

In response, SEC disclosure requirements increasingly have facilitated cross-company comparisons and portfolio-level investment decisions. Nevertheless, the growing separation between risk and the instruments evidencing that risk, and the ability today to manage and transfer risk by itself, prompts a question: Should we begin reconsidering the Securities Act’s approach to regulation, moving from requirements tied to transactions in securities towards requirements that reflect the management and transfer of risk?

There is certainly merit to doing so, but we may be limited by the practical difficulty of tracing risk in today’s capital markets. For now, regulation’s practical reach may fall short of contemporary investment and risk management strategies. While regulatory responses are possible, there is likely to continue to be a tension between the requirements of the Securities Act and the risk-based approach to investing taken by institutions whose investments comprise most of the transactions subject to the Securities Act.