Henry F. Minnerop, 58(3): 917–59 (May 2003)
This Article provides a comprehensive overview of securities clearing arrangements, the distinct and separate roles played by clearing and introducing firms, their respective and different duties to customers, the regulatory structure and policies governing clearing arrangements, and the statutory and case law defining the civil liability of clearing firms.
Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.
In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.
This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.
The Role and Regulation of Clearing Brokers—Revisited
Henry F. Minnerop 75(3): 2201-2246 (Summer 2020)
This article focuses on the liability of clearing brokers to introduced customers for the misconduct of their introducing firms. To delineate this liability, the article describes the distinct and separate responsibilities and functions of clearing and introducing firms in relation to transactions in introduced accounts. The article examines the key events that led Congress, in 1975, to mandate the U.S. Securities and Exchange Commission (“SEC”) to facilitate the establishment of a new and robust clearance and settlement system in the wake of the collapse of the prior, largely manual, system during the Paper Crunch crisis of the late 1960s and early 1970s as well as the resulting regulatory framework facilitated by the SEC between 1975 and 1982 that governs clearing brokers to this day.