Whither State Securities Enforcement?

November 18, 2008

Susan Antilla of Bloomberg news published a recent column  revisiting the question of the continued viability of state securities regulators’ enforcement authority.  I spoke to Susan about my research  on the issue and I am quoted in the article. 

At risk in current frenzy for financial regulatory reform may be the authority of state securities regulators to police securities fraud.   Securities firms unsuccessfully pursued legislation to limit the enforcement power of states, back in 1994, but the issue remains on the reform agenda.  The preemption of state regulatory authority across a range of areas is a significant theme of the recommendations in the Treasury Department’s Blueprint for a Modernized Financial Regulatory Structure.


Why Do Judges Write Law Review Articles?

January 25, 2008

Here is a question I have been pondering for a while: Why do Delaware judges write so many law review articles? For example, I have sitting on my desk a stack of 14 articles by Norman Veasey former Chief Justice of the Delaware Supreme Court.  On closer examination, most of these are speeches rather than articles.  But still the question remains why do the judges write these pieces and why do the law reviews publish them?

The question arises as part of my research into the mechanisms for crafting corporate law in the U.S.  Because Delaware judges play a central role in the process, it seems important to determine how they play their role, what motivates them, and to whom they are accountable. 

Many scholars have noted the prolific nature of Delaware’s judiciary.  Professors Marcel Kahan and Ed Rock counted 22 recent articles published by Delaware judges. Professor Lawrence Hamermesh has published a helpful chart as an appendix to his Columbia Law Review article, The Policy Foundations of Corporate Law. Yet nobody seems to have persuasively explained this phenomenon.  Presumably judicial opinions provide judges with an adequate forum to explain and justify their decisions.  Why then would judges feel compelled to supplement their legal opinions with further explanations, elaborations or justifications in the academic literature?  More importantly are these extra-judicial exhortations helpful, harmless or insidious?

One purpose of these articles and speeches could be to provide guidance to corporate managers, attorneys and commentators as to the substance and meaning of Delaware corporate law.  Thus judges are supplementing their law-making role, moving beyond ex-post assessment of corporate conduct to ex-ante guidance for practitioners and their clients.  Such motivation can be viewed as positive, but also potentially  problematic.  The message may be lost in translation and, because judges cannot be bound by these extra-judicial comments, advice gleaned from their comments may be of dubious value.

Another view is that the constant commentary has a political purpose: to shore up the legitimacy of the state’s role in setting corporate policy.  On this view, Delaware judges not only seek to explain their approach to corporate controversies, but promote their own superior abilities to act as arbiters in these disputes.  Certainly, many articles by Delaware jurists fit this mold.  If this is the motivation, we might want to take the message conveyed with a grain of salt.  If part of the motivation for the articles and speeches is preserving the state’s (and the judges’) sphere of influence, then readers and scholars should consider such when evaluating the arguments the judges present.   

 Cross-posted at Conglomerate.

Steven Ramirez, The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top

November 9, 2007

Steven Ramirez has posted the The End of Corporate Governance Law: Optimizing Regulatory Structures for a Race to the Top , 24 Yale Journal on Regulation (2007) on SSRN.  The article calls for the creation of a new federal agency modeled after the Federal Reserve Board to oversee corporate governance rules for corporations.  Ramirez envisions the new federal regime as an “opt in” regime that that shareholders could choose as an alternative to state corporate law.  He argues that his alternative regime would offer benefits when compared to current federal law and state law, because the agency he envisions would be more impartial and politically independent than the agencies and officials who contribute to the current hodgepodge of corporate governance rules. 

Ramirez’s analysis seems sensible, but his prescription leaves me with two queries:  (1) In what way would the Fed-modeled structure he proposes be superior to the SEC which is ostensibly an independent, bipartisan commission; (2) How could shareholders meaningfully be empowered to opt in to the regulatory scheme he proposes?

Here is the abstract:

The pernicious influence of politics continues to pollute corporate governance applicable to public corporations in the United States. In particular, the political process has yielded a corporate governance regime that simultaneously imposes excessive regulatory costs and impairs investor confidence. CEOs continue to enjoy too much autonomy over the public corporation. Increasingly, empirical evidence shows that corporate governance standards in the U.S. are sub-optimal. This Article proposes to change the legal structure by which corporate governance standards are articulated. Using the Federal Reserve Board as a model, this Article urges the creation of a depoliticized federal agency with authority over an optional federal regime selected by shareholders. As such, corporate governance would be based upon market verdicts and the best corporate governance science rather than institutions (legislatures, courts, and the SEC), which are poorly equipped to impose standards based upon science instead of political caprice.

Robert Mikos and Cindy Kam, Do Citizens Care About Federalism? An Experimental Test

June 21, 2007

Robert Mikos (UC Davis-Law) and Cindy Kam (UC Davis-Political Science) have posted Do Citizens Care About Federalism? An Experimental Test on SSRN.  The article describes the authors’ empirical study which they say demonstrates that citizen preferences for federalism (state-centered authority and autonomy) play a role in shaping public opinion in policy debates.  Specifically, they claim that when political elites advance federalism values it can weaken public support for federal action within a sphere where citizens have a preference for state-based control.  Because issues of federalism often lie at the heart of corporate law debates, this research is relevant to corporate policy debates on the legitimacy of federal action regulating corporations.  Here is the abstract:

The ongoing debate over the political safeguards of federalism has essentially ignored the role that citizens might play in restraining federal power. Scholars have assumed that citizens care only about policy outcomes and will invariably support congressional legislation that satisfies their substantive policy preferences, no matter the cost to state powers. Scholars thus typically turn to institutions —  the courts or institutional features of the political process — to cabin congressional authority. We argue that ignoring citizens is a mistake. We propose a new theory of the political safeguards of federalism in which citizens help to safeguard state authority. We also test our theory using evidence from a nationally representative survey experiment that focuses on the timely issue of physician-assisted suicide. We find that citizens are not single-mindedly interested in policy outcomes; trust in state governments and federalism beliefs, on the urging of political elites, reduce their willingness to support a federal ban on physician-assisted suicide.

William Buzbee, Asymmetrical Regulation: Risk, Preemption, and the Floor/Ceiling Distinction

June 7, 2007

William Buzbee of Emory Law School has posted a thoughtful and interesting article on SSRN.  The article, Asymmetrical Regulation: Risk, Preemption, and the Floor/Ceiling Distinction, draws a distinction between federal preemption that creates a regulatory floor, allowing states to adopt more stringent standards and federal preemption creating a ceiling, prohibiting states from setting higher standards.  Buzbee argues that “ceiling” preemption is more problematic than “floor” preemption, an observation he views as underemphasized in the literature.

Although his article focuses on environmental, tort and health and safety regulation, Buzbee’s analysis is highly relevant to ongoing debates on the effect of federal securities laws on state regulatory power, and in particular, the wisdom of arguments favoring federal preemption of state authority to enforce their securities laws.  Here is the abstract:

If the federal government has constitutional power to address a social ill, and hence has power under the Supremacy Clause to preempt state, local, and common law regimes, is there a principled rationale for distinguishing federal standard setting that sets a federal floor or ceiling? At first blush, the two appear to be mere flip sides of the same federal power, only distinguished by their different regulatory preferences for a world of minimized risk (with floors) or higher levels of risk (with ceilings). This Article argues, however, that these two central regulatory choices are fundamentally different. Floors embrace additional and more stringent state and common law action, while ceilings actually are better labeled a “unitary federal choice” due to how they preclude any more lax or more stringent action as well as the different actors, incentives, and modalities of information elicitation and proof of common law settings. Advocates of less hindered markets respond that this is precisely the idea–regulatory certainty is enhanced with ceiling preemption, allowing producers of goods to plan with confident knowledge of the regulatory terrain, unbuffeted by an array of uncoordinated actors.

This debate was, until recently, largely hypothetical. Recently, however, in settings as diverse as product approvals, to regulation of risks posed by chemical plants, to possible legislation regarding greenhouse gases contributing to climate change, legislators and regulators have suggested or asserted such a broad, preemptive impact. The federal action, whatever it is, would be the final regulatory choice. But under what theory of regulation and legislation can one be confident that locating all decisionmaking power in one institution at one time will lead to appropriate standard setting? In fact, advocates of risk regulation, “experimentalist regulation” scholars, and, at the other end of spectrum, skeptics about the likelihood of public-regarding regulation, all call for attention to pervasive risks of regulatory failure. Agency and legislative inertia, information uncertainties and asymmetries, outdated information and actions, regulatory capture, and a host of other common regulatory risks create a substantial chance of poor or outdated regulatory choice.

Considering these pervasive risks of regulatory failure, the principled distinctions between floor and ceiling preemption become apparent. Vesting all decisionmaking power in one institution can freeze regulatory developments. Unitary federal choice ceiling preemption is an institutional arrangement that threatens to produce poorly tailored regulation and public choice distortions of the political process, whether it be before the legislature or a federal agency. Floor preemption, in contrast, constitutes a partial displacement of state choice in setting a minimum level of protection, but leaves room for other actors and additional regulatory action. Floors anticipate and benefit from the institutional diversity they permit. This Article closes by showing how the institutional diversity engendered by retaining multiple layers of law and regulatory actors creates conditions conducive to reassessment and adjustment of often rigid or outdated regulation.

Interactive Federalism and the Proxy Access Debate

May 25, 2007

The latest academic salvos in the proxy access debate are now available online in the Virginia Law Review.  The May issue features an essay by Lucian Bebchuck, The Myth of the Shareholder Franchise, along with responses from Lynn Stout, Jonathan Macey and others disputing Bebchuk’s analysis and recommendations.

This important debate highlights the phenomenon of interactive federalism.  The various interations of policy proposals designed to “fix” perceived problems in the director election process play off of one another in an interesting and somewhat predictable fashion.   Corporate governance “activists” press their case with Congress or the SEC for reforms to federal regulatory scheme.  Business interests (represented in this instance by the corporate bar and Delaware judges) take note of the activists’ agitation and the SEC’s perceived responsiveness and advocate for more mild reforms at the state level.

Majority voting amendments to the Delaware Code and the Model Business Corporation Act reflect this pattern and succeeded in sidetracking the SEC’s 2003 shareholder access proposal.  However, the state-led majority vote movement may have helped spur another activist tactic: binding bylaw amendments, which has kept shareholder access on the federal agenda despite the apparent inclination by current Commissioners to sweep it aside.

This interactive pattern shows that states respond to federal reform proposals even when federal reform efforts languish.  It also shows that the state approach to shareholder voting reform will not be the final word, and that reform proponents will continue to seek alternative avenues of reform when their efforts are thwarted either at the state or federal level.

The Disclosure-Conduct Distinction?

May 24, 2007

In his written comments to the SEC on proxy reform posted below, Professor Stephen Bainbridge argues for a restricted view of the SEC’s authority to regulate the director election process.  His argument relies heavily on the reasoning of Business Roundtable v. SEC and the disclosure-conduct disctinction the Business Roundtable court sought to preserve.

The “disclosure-conduct” distinction heralded in Business Roundtable is based on the oft-repeated generalization that the federal securities laws are disclosure-based rather than conduct-oriented.  As I have discussed, such an assertion curiously ignores many provisions of the federal securities laws that directly proscribe conduct.  After the adoption of Sarbanes-Oxley which contains a number of significant corporate governance provisions, the disclosure-conduct distinction as a demarcation of SEC authority becomes far less tenable.

In an essay, Revisiting Business Roundtable and Section 19(c) in the Wake of the Sarbanes-Oxley Act, 23 Yale Journal on Regulation 249 (2006), Jeffrey Wu questions the continued viability of the Business Roundtable holding.  Here is the abstract:

Although section 19(c) of the Exchange Act authorizes the SEC to modify stock exchange rules “in furtherance of the purpose” of the Exchange Act, federalism has frustrated the SEC’s attempt to use that power to effect corporate governance reform. In Business Roundtable v. SEC, the D.C. Circuit vacated the SEC’s “one share, one vote” rule, on grounds that Congress did not intend for the SEC to intrude into corporate governance, which traditionally has been considered the domain of state law. However, the Sarbanes-Oxley Act has changed the federalism calculus of section 19(c). Because Sarbanes-Oxley’s amendments to the Exchange Act established a new federal policy of fighting fraud through corporate governance reform, federalism has lost much of its vitality as a constraint on SEC authority. Accordingly, the SEC should now have the power to use section 19(c) to promulgate corporate governance standards in furtherance of the purpose of Sarbanes-Oxley, particularly its audit committee provisions.