Volume 7, Issue 2 (2017)


Three Ages of Bankruptcy

Mark J. Roe

During the past century, three decision-making systems have arisen to accomplish a bankruptcy restructuring—judicial administration, a deal among the firm’s dominant players, and a sale of the firm’s operations in their entirety. Each is embedded in the Bankruptcy Code today, with all having been in play for more than a century and with each having had its heyday, its dominant age. 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 not only leads to better understanding of what bankruptcy can and cannot do, but also 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

Financial markets function most efficiently when all of the actors perform their functions scrupulously and through exerting optimal effort. However, human nature demonstrates that people will often underperform if they lack sufficient incentives. In the case of the individuals and entities acting as agents in the U.S. financial markets, if these players do not perform appropriately then everyone suffers. This fact was clearly demonstrated through the Enron and Worldcom scandals, as well as the recent financial crisis. One promising mechanism for motivating these entities is forcing them to have “skin in the game”—a direct financial interest in the companies affected by their actions. Skin in the game has become ubiquitous with regard to corporate “inside” agents—the managers and directors who act on the corporation’s behalf—by providing them with stock options, bonuses, and other methods of pay-for-performance. So, if giving inside agents skin in the game tends to motivate them to act in the corporation’s best interest, would such a mechanism be appropriate for the “outside” agents—entities that are not actually part of the corporation, but perform work on its behalf or on behalf of investors?

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

The 2016 U.S. presidential election was won on—among other things— promises to deregulate and to repeal the Dodd-Frank Act. 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. The legislative proposal promises to better align corporate interests and regulatory goals, save costly and time-consuming litigation, and remove employees’ disincentives to report securities law violations within their company.

I begin by highlighting the imprecision of the concepts and terminology of whistleblowing. I trace the usage of the phrase “blow the whistle” from the 1930s to a set of twenty-two distinct modern-day definitions. 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 Street

Andrew F. Tuch

This Article critically examines the transformation of the financial services industry during and since the financial crisis of 2007–2009. This transformation has been marked by the demise of the major investment banks and the related rise of a set of powerful players known as private equity firms. 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. These firms are structured and funded in ways that may address the basic shortcoming that led to investment banks’ downfall—specifically, the use of short-term debt to fund longer-duration assets. It thus argues that, in the face of onerous post-crisis reforms, Wall Street has evolved to displace investment banks with more financially resilient institutions. 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.

Finally, this Article explores other implications of these developments, including for the effectiveness of post-Crisis regulation, the popular backlash against Wall Street, the incidence of misconduct, and the evolution of financial institutions.