The Georgetown Law Journal

Latest print issue: Vol. 107 Issue 4

Like other major events, the Global Financial Crisis generated a large and diffuse body of academic analysis. As part of a broader call for operationalizing the study of crises as policy shocks and resulting responses, which inevitably derail from elegant theories, we examine how regulatory protagonists approached consumer protection after the GFC, guided by six elements that should be considered in any policy shock context. After reviewing the introduction and philosophy of the Bureau of Consumer Financial Protection, created as part of the Dodd–Frank Act of 2010, we consider four examples of how consumer protection unfolded in the crises’ aftermath that have received less attention. Our case studies investigate a common set of queries. We sought to identify the parties who cared sufficiently about a given issue to engage with it and try to shape policy, as well as the evolving nature of the relevant policy agenda. We also looked for key changes in policy, which could be reflected in various forms—whether establishing an entirely new regulatory agency, formulating novel enforcement strategies, or deflecting policy reforms.

Sustainability is receiving increasing attention from issuers, investors, and regulators. The desire to understand issuer sustainability practices and their relationship to economic performance has resulted in a proliferation of sustainability disclosure regimes and standards. The range of approaches to disclosure, however, limits the comparability and reliability of the information disclosed. The Securities and Exchange Commission (SEC)’s longstanding policy that sustainability is not properly part of financial disclosure has contributed to the current regime. Although the SEC has solicited comment on whether to reverse this policy and require expanded sustainability disclosures in issuers’ periodic financial reporting, and investors have communicated broad-based support for such expanded disclosures, the SEC to date still has not required general sustainability disclosure. This Article argues that claims about the relationship between issuer sustainability practices and risk management, business plans, and economic vulnerability warrant incorporating sustainability information into SEC-mandated financial reporting

In contrast to financial arbitrage, which causes prices of economically equivalent transactions to converge in the direction of one price, regulatory arbitrage does not lead to such price convergence. In contrast, regulatory arbitrage tends to produce two different prices for economically equivalent transactions that are subject to different regulatory costs: this is what I call the “law of two prices.” The key insight here is that regulatory costs can persist as a “wedge” between the prices of economically equivalent transactions that are subject to differing regulatory costs. Unlike the price gap that financial arbitrage reduces or eliminates, this regulatory cost wedge will persist as long as the relevant regulatory cost differential persists.

The persistence of the regulatory arbitrage wedge raises important and interesting policy concerns that the literature has not previously addressed. Specifically, the analysis here suggests that scholars should no longer describe regulatory arbitrage as “perfectly legal.” Instead, the persistent gap between the prices of transactions subject to differential regulatory costs warrants a more nuanced approach to the analysis of regulatory arbitrage. With respect to the normative analysis of the efficiency and fairness of the regulatory arbitrage wedge, scholars should consider, among other factors, the intentions and expectations of the decisionmakers engaging in regulatory arbitrage to determine whether they reasonably believe certain transactions should receive favorable regulatory treatment. Scholars should consider the law of two prices when addressing questions related to regulatory arbitrage.

This Article presents an economic model of corporate fraud arising from shareholder incentives. First, the model shows that a firm’s current shareholders have a preference for higher reported values. Current shareholders are, in expectation, net sellers of the firm’s shares; a higher reported value of the firm increases current shareholder returns in expectation. Second, these preferences for inflationary misreporting translate into equilibrium misreporting behavior, which generates inefficiencies due to asymmetric information among secondary-market traders. Informed traders undertake inefficient research costs, noise traders demand a discount to trade, and selling shareholders face deadweight illiquidity costs. Third, in general, some ex post penalty for misreporting can eliminate misreporting incentives and result in a unique truth-telling (that is, separating) equilibrium. This improves social welfare. With joint-welfare maximization among the firm’s initial stakeholders and unlimited liability, it does not matter on whom the penalty is placed. Finally, the specific mechanism of firm-level (or “vicarious”) fines has desirable qualities from the perspective of administrative feasibility: the optimal fine is a simple function of observable market data. Compensation does not affect this formulation, yet compensation may be desirable in the event of incomplete deterrence because it reduces asymmetric information liquidity costs. The same liability formula applies for alternative targets of liability, such as the manager, and the approximate magnitude of the optimal fine remains the same; however, judgment-proof defendants and limited liability may militate toward firm-level fines.

Fears have abounded for years that the sweet spot for capture of regulatory agencies is the “revolving door” whereby civil servants migrate from their roles as regulators to private industry. Recent scholarship on this topic has examined whether America’s watchdog for securities markets, the Securities and Exchange Commission (SEC), is hobbled by the long-standing practices of its enforcement staff exiting their jobs at the Commission and migrating to lucrative private sector employment where they represent those they once regulated. The research to date has been inconclusive on whether staff revolving door practices have weakened the SEC’s verve. In this Article, we offer a different perspective on the source of risks of the SEC’s capture as a consequence of revolving door practices. We focus on all the key divisions of the SEC, not just its Division of Enforcement, and we examine the individuals who lead the staff and set its agenda.

Many securities fraud lawsuits follow corporate disasters of some sort or another, claiming that known risks were concealed prior to the crisis. Yet for a host of doctrinal, pragmatic and political reasons, there is no clear-cut duty to disclose these risks. The SEC has imposed a set of requirements that sometimes forces risk disclosure, but does so neither consistently nor adequately. Courts in 10b-5 fraud-on-the-market cases, in turn, have made duty mainly a matter of active rather than passive concealment and thus, literally, wordplay: there is no fraud-based duty to disclose risks unless and until the issuer has said enough to put the particular kind of risk “in play.” The resulting incoherence could be rationalized by a more thoughtful assessment of how words matter to investors and better appreciation of the variable role that managerial credibility plays in the process of disclosure and interpretation, the main focus of this Article. Yet even with this, other hurdles remain that too often unnecessarily diminish the deterrence and compensatory value of these lawsuits. This study of disasters and disclosures offers a distinctive reference point for thinking about contemporary controversies associated with bringing matters of social responsibility (e.g., law abidingness) and sustainability (environmental compliance, cybersecurity, product safety, etc.) into the realm of securities law.

The U.S. disclosure regime is premised on the deceptively simple idea that requiring information from issuers will increase accountability and, thereby, help to level the playing field for investors, issuers, and the public. This Article explores that premise in the context of the purposes of disclosure, developing the understanding of the importance of the regime to stakeholders and the public, and situating it in the theory of publicness. The Article also examines the designated-securities-monitor role of directors, deploying case studies of Exxon and Wells Fargo to further develop the purposes of disclosure, the theory of publicness, and the role of directors in ensuring discourse and candor and upholding the securities regulatory regime.

More than ten years have passed since the 2008 financial crisis. In the years immediately following the crisis, systemically important financial institutions—known colloquially as too-big-to-fail firms—became a prominent subject in discussions about the underlying causes of the crisis. Indeed, the 2008 financial crisis drew into clear focus the unprecedented complexity and interconnectedness of the modern U.S. financial system. The 2008 financial crisis brought with it a new and unfamiliar type of bank run: a run on the shadow banking system—a system upon which Wall Street banks depended and of which Main Street investors were oblivious. To mitigate the systemic risks lurking in the shadow banking system, Congress enacted the Dodd–Frank Act, which established a federal systemic risk regulator, the Financial Stability Oversight Council, and empowered it to designate as “systemically important” those financial institutions whose material financial distress it determined could pose a threat to the financial stability of the United States. Once so designated, these institutions became subject to heightened prudential regulation by the Federal Reserve.

Now, less than ten years after the enactment of the Dodd–Frank Act and the establishment of the Federal Stability Oversight Council, legislators and federal regulators have begun to revisit the notion that systemically important financial institutions should be subject to heightened prudential regulation. Legislative and executive proposals for regulatory reform range from relaxing federal prudential regulation to eliminating it altogether. These proposals mistakenly prioritize the costs of designation to impacted institutions over the value of properly mitigated systemic risk to taxpayers. Although the 2008 financial crisis devastated millions, it also taught valuable lessons about the consequences of unmitigated systemic risk. Amid a plethora of proposals for financial reform, the time to revisit those lessons is now.

Web-exclusive content: GLJ Online Vol. 108

On March 26, 2018, Commerce Secretary Wilbur Ross announced that the 2020 Census would ask about the citizenship status of every person in the country. Since this announcement, the Trump Administration has relied heavily on broad historical arguments to defend Secretary Ross’s decision. In both the courts of law and the court of public opinion, the Administration has repeatedly insisted that Secretary Ross’s “citizenship question” has a deep historical pedigree stretching back more than two centuries. This historical narrative, however, is misleading where it is not outright false.

This Article—the first scholarly rejoinder to the Trump Administration’s use of history in the citizenship question cases—demonstrates that the Administration’s historical account is flawed in at least two significant respects. First, the census has never asked for the citizenship status of everyone in the country. Secretary Ross’s proposal is therefore historically unprecedented.

Second, the Administration relies on an impoverished view of census history to suggest that Secretary Ross can find a historical warrant for his decision in citizenship questions that were posed only to small subsets of the population at various points in American history. Viewed in context, these citizenship questions originated as sporadic components of an approach to census-taking that the Census Bureau long ago rejected as incompatible with its foundational, constitutional goal of actual enumeration. These early citizenship questions were part of an increasingly sprawling census that was attempting—with mounting difficulties—to pursue two objectives at once: first, counting everyone; and second, collecting additional information that was used for a mixture of collateral statistical, political, and economic objectives. In the wake of the 1950 Census, the Census Bureau rejected this older paradigm of census practice in favor of a radically different model. Indeed, once social science techniques like sampling granted the Bureau the technical ability to identify and remedy substantial problems in its approach to the enumeration, the Bureau overhauled its approach dramatically. As part of this overhaul, the Census Bureau rebuffed citizenship questions as viable items for any census survey designed to obtain a complete count of the population. Due to intervening developments in the American immigration environment, these questions have never been deemed fit to return to the complete-count form; they have been confined solely to sample surveys sent only to subsets of the population.

This Article will show that under these circumstances, the Administration cannot plausibly invoke census history to justify its current decision to add a new, untested citizenship question to the 2020 Census under either the Enumeration Clause or the Administrative Procedure Act. History instead creates a broad presumption against Secretary Ross’s proposal, one which the Administration has not succeeded in rebutting.