Joshua Mitts and Eric Talley
Cybersecurity has become a significant concern in corporate and commercial settings, and for good reason: a threatened or realized cybersecurity breach can materially affect firm value for capital investors. This paper explores whether market arbitrageurs appear systematically to exploit advance knowledge of such vulnerabilities. We make use of a novel data set tracking cyber-security breach announcements among public companies to study trading patterns in the derivatives market preceding the announcement of a breach. Using a matched sample of unaffected control firms, we find significant trading abnormalities for hacked targets, measured in terms of both open interest and volume. Our results are robust to several alternative matching techniques, as well as to both cross-sectional and longitudinal identification strategies. All told, our findings appear strongly consistent with the proposition that arbitrageurs can and do obtain early notice of impending breach disclosures, and that they are able to profit from such information. Normatively, we argue that the efficiency implications of cybersecurity trading are distinct—and generally more concerning—than those posed by garden-variety information trading within securities markets. Notwithstanding these idiosyncratic concerns, however, both securities fraud and computer fraud in their current form appear poorly adapted to address such concerns, and both would require nontrivial reimagining to meet the challenge (even approximately).
One of the signature rulemaking initiatives of the Obama administration was the Fiduciary Rule, which redefined the relationship between retirement investors and their brokers by imposing broad fiduciary obligations on financial professionals who had previously escaped classification as fiduciaries. The Rule was enormously controversial and was eventually struck down by the Fifth Circuit. Despite its demise, the Fiduciary Rule offers important lessons for regulating investment advice. This paper offers an assessment of the Rule in light of the academic literature. It argues that, while the Fiduciary Rule was a well-intentioned and plausible means to confront the well-documented problem of conflicted investment advice, it promised only modest benefits when all relevant costs were considered, and even those benefits were jeopardized by the risk of rising costs related to compliance and liability. A reform agenda aimed at reducing the demand for costly professional advice is likely to deliver greater returns than regulating how that advice is delivered.
Brent J. Horton
Today—perhaps more than at any other time in history—investors want to achieve two things: a positive financial return on their investment and the “warm glow” that comes from doing good. And the number of investors looking for that “warm glow” is increasing.
The benefit corporation—a hybrid business organization between a for-profit and a nonprofit corporation—is well-positioned to accept those investment dollars and use them to pursue good, whether by helping the homeless like ArtLifting, PBC, or helping the environment like Patagonia, Inc.
Unfortunately, benefit corporations are plagued by unworkable state-by-state disclosure rules. Benefit corporations are not required to inform investors what their financial return will be (or more precisely, provide the financial information necessary for an investor to perform such an analysis). More importantly for purposes of this Article, the existing state-by-state disclosure rules fail to provide adequate guidance for disclosing social performance (and thus, have the perverse impact of discouraging investment by socially conscious investors).
This lack of adequate guidance leads to confusing, non-uniform disclosure—assuming a benefit corporation bothers to prepare a benefit report at all—that does not empower investors or supporting stakeholders (like customers) to evaluate a benefit corporation’s performance or compare performance across firms.
This Article proposes a uniform disclosure regime that will apply to all benefit corporations. The proposed regime standardizes disclosure, and thus empowers stakeholders (both investors and supporting stakeholders) to compare and contrast competing firms. Moreover, the proposed regime has an enforcement mechanism that would allow both investors and supporting stakeholders to ensure that benefit corporations are providing the required disclosure. Finally, the proposed regime is narrowly tailored to avoid overburdening the growth of benefit corporations, many of which have limited resources. In fact, this regime may save benefit corporations time and money because it replaces the current state-by-state patchwork of disclosure rules with a single, simple regime.
Christina Parajon Skinner
Investment funds increasingly substitute for banks in supplying credit to the economy. Regulators have paid considerable attention to the potential financial stability risks of this migration to nonbank credit. This Article, however, argues that certain private investment funds (and the asset management institutions that house them) can enhance financial stability by promoting economic resilience. Specifically, it argues that certain private funds are incentivized and structured to supply the economy with a countercyclical source of credit—turning on their credit spigots precisely when banks are likely to turn theirs off. In doing so, these private funds have the potential to keep the economy buoyant in periods of economic downturn or distress.
Drawing from that descriptive claim, the Article presents a normative argument that legal and regulatory frameworks should facilitate the flow of capital into the nonbank market for credit, in order to augment the supply of countercyclical credit. In particular, the Article urges some departure from the current securities law framework by suggesting that retail investors—not only sophisticated and accredited investors—should be eligible to invest in private debt funds. It also provides a preliminary blueprint for how relevant law and regulation might be re-designed to safely allow for this new form of retail investing in private funds.