Money market funds (MMFs) have, since the 2008 financial crisis, been deemed part of the nefarious shadow banking industry and targeted for regulatory reform. In my paper, The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform, I critically evaluate the logic behind current reform proposals, demonstrating that none of the proposals is likely to be effective in addressing the primary source of MMF stability—redemption demands in times of economic resources that impose pressure on MMF liquidity. In addition, inherent limitations in the mechanisms for calculating the fair value of MMF assets present a practical limitation on the utility of a floating NAV. I then offer an unprecedented alternative approach—mandatory sponsor support. My proposal would require MMF sponsors to commit to supporting their funds as a condition of offering a fund with a fixed $1 NAV.
Posts Tagged ‘Jill Fisch’
In the US, every M&A deal of any significant size generates litigation. The vast majority of these lawsuits settle, and the vast majority of these settlements are for non-pecuniary relief, most commonly supplemental disclosures in the merger proxy.
The engine that drives this litigation is the concept of “corporate benefit.” Under judge-made law, litigation that produces a corporate benefit allows the court to order plaintiffs’ attorneys’ fees to be paid directly by the defendants provided that the outcome of the litigation is beneficial to the corporation and its shareholders. In a negotiated settlement, plaintiffs will characterize supplemental disclosures in the merger proxy as producing a corporate benefit, and defendants will typically not oppose the characterization, as they are happy to pay off the plaintiffs’ lawyers and get on with the deal. The supposed benefits of these settlements thus are rarely tested in adversarial proceedings. Knowing this creates a strong incentive for plaintiffs’ attorneys to file claims, put in limited effort, and negotiate a settlement consisting exclusively of corrective disclosures. But is there any real value to these settlements?
The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. One of the most serious was the DC Circuit’s 2011 decision in Business Roundtable v. SEC, in which the court invalidated the SEC’s proxy access rule, Rule 14a-11, on the basis that the SEC had failed to conduct an adequate cost-benefit analysis. By imposing an onerous, and possibly insurmountable procedural burden, the decision threatens to paralyze rulemaking by the SEC and other administrative agencies. The effect is particularly troubling in light of the heavy rulemaking obligations imposed by Dodd-Frank and the JOBS Act.
In my article, The Long Road Back: Business Roundtable and the Future of SEC Rulemaking (forthcoming in Seattle University Law Review), I critically evaluate the Business Roundtable decision. Specifically, I argue that, although Rule 14a-11 suffered from a number of flaws, flaws I have noted in other work (see Fisch, The Destructive Ambiguity of Federal Proxy Access, 61 Emory L. J. 435 (2012)), the deficiencies in SEC’s rule-making that led to the adoption of Rule 14a-11 cannot accurately be ascribed to inadequate economic analysis. Nor is the demanding standard imposed by DC Circuit’s decision a product of the statutory constraints on SEC rulemaking. Rather it stems from the court’s skepticism about proxy access and the SEC’s policymaking generally.
The SEC’s inability to defend its proxy access rule against attack was, in part, a product of two important constraints on its policy formation – the notice and comment requirements of the Administrative Procedure Act and the Government in the Sunshine Act. Although commentators have defended both these requirements in terms of transparency and democratic values, they sacrifice consensus building as well as decision-making efficiency, and they allow for the increased influence of political forces and interest groups. These sacrifices are of particular concern in the context of SEC rulemaking and, I argue, were at the heart of a problematic Rule 14a-11.
The Supreme Court’s decision in Basic, Inc. v. Levinson is widely credited with spawning a vast industry of securities fraud litigation by removing the requirement of individualized proof of reliance as an obstacle to class certification. Modern criticisms of private litigation coupled with questions about the validity of the economic premises on which Basic relied have led critics to question the legitimacy of the Court’s holding in Basic. Most recently, with the Supreme Court’s decision to grant certiorari in Amgen, commentators are again speculating that the Court may use the Amgen case as an opportunity to overrule Basic.
In my article, The Trouble with Basic: Price Distortion After Halliburton (forthcoming in Washington University Law Review), I argue that this criticism of Basic mischaracterizes the decision. Basic did not release federal securities fraud from its moorings in common law fraud and deceit. Rather, by retaining the reliance requirement in federal securities fraud litigation, Basic reflected judicial conservatism. Despite contemporaneous recognition by lower courts and commentators that a reliance requirement was anomalous in the context of impersonal transactions in the public securities markets, the Supreme Court lacked the courage to reject reliance outright. Instead, the Court constructed a complex theory of market integrity relying on the fact that, in an efficient market, fraudulent public statements distort stock prices. According to the Basic Court, the existence of this price distortion justifies a rebuttable presumption of reliance.
In our paper, An Experiment on Mutual Fund Fees in Retirement Investing, we report the results of a new experiment studying the impact of mutual fund fees on consumer investment decisions. The importance of fees to overall investor returns, especially in the context of long-term investing like retirement accounts, is frequently overlooked. Morningstar’s Director of Mutual Fund Research recently observed, “If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision.” But there is evidence that many investors are paying high fees. One study estimates that in 2007 alone, retail investors paid $206 million more in S&P index fund expenses than they would have paid had all investments been in the lowest-fee funds.
Why are investors willing to pay high fees? Are existing fee levels the result of robust market competition or do market failures or investor biases limit market discipline? In his recent Jones v. Harris opinion, Judge Easterbrook took the efficient market position, concluding that market forces will lead investors to reject funds that charge excessive fees in favor of more fairly-priced alternatives. Under this view, investors will only pay higher fees when those fees are justified. Judge Posner countered, in dissent, with an empirical question: do high fees really affect investor behavior? A growing collection of evidence suggests that Judge Posner’s skepticism is well-founded; in the market for mutual funds, uninformed investors do not appear able or willing to distinguish between cheap and expensive funds.
The paper, The Destructive Ambiguity of Federal Proxy Access, forthcoming in the Emory Law Journal, demonstrates the tension between the federal requirements for the exercise of shareholder nominating rights and the state law principles upon which the SEC purports to ground those rights. The paper unpacks the ambiguities in the SEC’s conception of which shareholders should nominate director candidates. And it highlights the ambiguity resulting from the SEC’s failure to confront, in adopting its rule, the appropriate allocation of power between shareholders and management and the effects of proxy access on that balance.
Under U.S. corporate law, the shareholders elect the board of directors. In most cases, however, those shareholders do not nominate director candidates. Instead, the nominating committee of the board chooses a slate of candidates, and those candidates are submitted to the shareholders for approval. Absent the infrequent phenomenon of an election contest, shareholders do not participate in the nomination process.
In the paper, Rethinking the Regulation of Securities Intermediaries, which is forthcoming in the University of Pennsylvania Law Review [Jill E. Fisch, Rethinking the Regulation of Securities Intermediaries, 158 U. Pa. L. Rev. (forthcoming 2010)], I argue that existing regulation of mutual funds has serious shortcomings. In particular, the Investment Company Act, which is based primarily on principles of corporate governance and fiduciary duties, fails to support and, in some cases impedes, market forces. Existing evidence suggests that retail investing behavior and the dominance of sales agents with competing financial incentives further weakens market discipline.
As a solution, I propose that funds should be treated primarily as financial products rather than corporations and, correspondingly, investors should be treated primarily as consumers rather than corporate shareholders. To implement this approach, I propose the creation of a new federal agency that would develop standardized financial products coupled with corresponding disclosure principles. Sellers of retail products would be required either to conform their products to these standards or to explain material differences. The goal is to enhance market discipline while making retail funds less complicated and more understandable for individual investors.