HBLR PRINT

VOLUME 7.2

Three Ages of Bankruptcy
Mark J. Roe

The shifts, rises, and falls among decision-making systems have previously been explained by successful evolution in bankruptcy thinking, by the happenstance of the interests and views of lawyers that designed bankruptcy changes, and by the interests of those who influenced decision-makers. Here I argue that these broad changes also stem from baseline market capacities, which shifted greatly over the past century; I build the case for shifts underlying market conditions being a major explanation for the shifts in decision-making modes. Keeping these three alternative decision-making types clearly in mind leads to better understanding of what bankruptcy can and cannot do and facilitates stronger policy decisions today here and in the world’s differing bankruptcy systems, as some tasks are best left to the market, others are best handled by the courts, and still others can be left to the inside parties to resolve.

Skin in the Game for Credit Rating Agencies and Proxy Advisors: Reality Meets Theory
Asaf Eckstein

This Article fills a current void in the corporate scholarship by analyzing whether two particular kinds of outside agents—credit rating agencies and proxy advisory firms—should be given skin in the game. The “skin” would be a financial incentive tied to the success of the agent’s service: rating agencies would be paid with the debt instruments they rate, and proxy advisors with share-based payment. The analysis is heavily based on principal-agent literature. The Article then applies theoretical insights derived from that literature and analyzes whether skin in the game would likely be beneficial with regard to proxy advisory firms and credit rating agencies. It concludes that the skin in the game approach would likely be beneficial when dealing with rating agencies, but should be employed cautiously when dealing with proxy advisory firms.

Proceeding Legally: Clarifying the SEC/Dodd-Frank Whistleblower Incentives
Matt Reeder

Rather than completely eliminating the SEC Whistleblower Program created by Section 922 of that Act, I propose a legislative solution to the split in the Federal Circuit Courts of Appeals regarding the scope of the program’s anti-retaliation protections. I begin by highlighting the imprecision of the concepts and terminology of whistleblowing. Then, after closely considering the history of the SEC whistleblower program and the split between the circuits, I discuss the underlying policy basis for the program and corporations’ objections to it. Finally, I propose that—in furtherance of both the policy basis for Dodd-Frank and in light of corporate concerns—lawmakers should amend 15 U.S.C. § 78u-6(h) to clearly protect individuals who disclose securities law violations within their corporations.

The Remaking of Wall Stree
Andrew F. Tuch

This Article critically examines the transformation of the financial services industry during and since the financial crisis of 2007–2009. First, this Article argues that private equity firms now mirror investment banks in their mix of activities; ethos of entrepreneurialism, innovation, and risk-taking; role as “shadow banks”; and overall power and influence. These similarities might suggest that private equity firms pose financial risks similar to those caused by their now-defunct predecessors. But, this Article suggests that private equity firms, as currently structured, are more financially stable and pose less systemic risk to the global economy. Importantly, however, this Article cautions that ongoing changes in private equity firms’ broker-dealer activities raise systemic concerns that require active regulatory monitoring. The Article also identifies systemic and financial stability concerns arising from the funds that these firms manage, particularly their hedge and credit funds, about which little detailed information is publicly available.

HBLR ONLINE

VOLUME 7

When the IRS Prefers Not to: Why Disparate Regulatory Approaches to Similar Derivative Transactions Hurts Tax Law
Leon Dalezman and Philip Lenertz

June 3, 2017

This Article examines decisions made by the Internal Revenue Service on whether to promulgate regulations pursuant to three different but related provisions of the Internal Revenue Code: sections 1259, 1260, and 871(m). This Article concludes that when there is a statutory imperative to regulate, the use of softer methods—methods other than issuing new regulations, such as creating listed transactions—has a negative effect on tax law, slowing its evolution. This Article argues that having clear regulatory lines is better than a regime where legitimate tax planners are faced with uncertainty and where enforcement against egregious abuse is less than forthcoming.

 Trading in Substitute Securities: Liability Under Rule 10b-5
Cody Donald

May 16, 2017

A trade in a substitute security occurs when a trader with inside information, typically an employee, trades—not in the securities of the company that is the subject and source of the information—but in the securities of another company whose stock would be affected if such inside information were to become public. The main academic literature on this topic is Ian Ayres and Joe Bankman’s article, Substitutes for Insider Trading. This Article builds on that work by providing a more in-depth analysis of liability for insider trading on substitute securities under Rule 10b-5. In contrast to Ayres and Bankman, this Article concludes that trading in substitute securities is presumptively illegal under the misappropriation theory pursuant to Rule 10b-5.

Stuck with Steckman: Why Item 303 Cannot be a Surrogate for Section 11
Aaron Jedidiah Benjamin

May 2, 2017

Item 303 of SEC Regulation S-K requires companies to disclose "known trends and uncertainties" in certain public filings. Item 303 provides no private right of action. However, Steckman v. Hart Brewing Co. held that an Item 303 violation automatically states a claim under section 11 of the 33 Act, short-circuiting any separate consideration under the statute. This Article examines the Steckman decision and contends that it was wrongly decided. Given that (i) an Item 303 violation cannot sufficiently establish Basic materiality, and (ii) Basic materiality is required under section 11, it follows that an Item 303 violation cannot be sufficient to state a claim under section 11.
 

Age Before Equity? Federal Regulatory Agency Disgorgement Actions and the Statute of Limitations
Michael Columbo and Allison Davis

April 4, 2017

At what point may a person rest assured that the government will not confiscate her money due to a past alleged regulatory infraction? In Kokesh v. SEC, the Supreme Court is poised to resolve a three-way split among the federal circuit courts of appeals over whether the statute of limitations in 28 U.S.C. § 2462 applies to federal regulatory actions seeking disgorgement of a person’s funds for long-past alleged regulatory infractions. The Supreme Court should reverse the Tenth Circuit’s decision and hold that the statute of limitations categorically applies to actions seeking confiscation of funds for past regulatory infractions, regardless of whether the government seeks the funds through forfeiture or disgorgement.