Rolling Back the Repo Safe Harbors
Edward R. Morrison, Mark J. Roe, and Christopher S. Sontchi, 69(4): 1015-1048 (August 2014)
Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code’s normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could prove illiquid or unable to fetch their expected long-run value in a panic. The exemptions from baseline bankruptcy rules facilitate this kind of panic selling and, according to many expert observers, characterized and exacerbated the financial crisis of 2007–2009. The exemptions from normal bankruptcy rules should be limited to United States Treasury and similar liquid securities, as they once were. The more recent expansion of these exemptions to mortgage-backed securities should be reversed.
SEC Administrative Proceedings: Backlash and Reform
Alexander I. Platt, 71(1): 1-52 (Winter 2015/2016)
The Securities and Exchange Commission’s aggressive prosecution of securities violations inside administrative proceedings (APs) has generated backlash. Key stakeholders are now attacking the agency’s enforcement program as illegitimate and a growing number of respondents charged in APs have launched broad constitutional challenges. Though these suits target deeply entrenched features of administrative adjudication, they have already begun to prove successful, and threaten significant transformations to the SEC and beyond.
Historically, the SEC’s enforcement architecture embodied respect for the principle that, holding all else equal, procedures ought to be commensurate with the stakes of the adjudication. After Dodd-Frank, the agency abandoned this principle. The backlash is, at least in part, attributable to and justified by this reversal.
The SEC should have done after Dodd-Frank what it had done after previous expansions of its administrative penalty powers: reestablish the equilibrium between penalties and procedures by revising its rules of practice that govern APs. The SEC’s recently proposed amendments to these rules are too little, too late. A bolder approach is required.
Disclosure Reform—The SEC Is Riding Off in Two Directions at Once
Roberta S. Karmel, 71(3): 731-834 (Summer 2016)
The U.S. Securities and Exchange Commission (“SEC”) is being buffeted by diametrically opposing forces with regard to disclosure policy rulemaking. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the SEC to pass rules to compel public companies to make disclosures about conflict minerals, mine safety, and certain payments to foreign governments, all for the purpose of advancing societal goals. Proponents of sustainability metrics have been urging the SEC to adopt standards relating to environmental and other similar matters, and a petition on disclosure of corporate contributions and lobbying expenses by public companies would involve the SEC in another political quagmire. Yet, forces that would deregulate disclosure mandates are also pressuring the SEC, and the JOBS Act of 2012 included some such deregulatory measures. Also, the SEC has embarked on its own initiative for streamlining disclosure obligations. This article discusses these conflicting disclosure initiatives and some of the current academic papers and theories with regard to SEC disclosure policy. I suggest a few possible ways for the SEC to move forward, including scaled and tiered disclosure.
Square Peg Meets Round Hole: Regulatory Responses to Challenges Created by Innovation in Banking
Jonice Gray Tucker, Daniel Stipano, Kari Hall, Brendan Clegg, and Anthony Carral, 75(4): 2491-2518 (Fall 2020)
During the past decade, an underlying tension between the financial sector’s embrace of innovative products and services and the regulatory framework that governs the industry surfaced—and that tension has since become even more acute during the COVID-19 pandemic. Facing pressure from customers’ twenty-first century expectations and competition from emerging fintechs, banks began implementing technological advances into their businesses even before disruptions to the U.S. financial system caused by the coronavirus placed a spotlight on the critical role those advances will play in banking’s future. This article highlights a number of areas of law where the governing framework erected during bygone eras has hindered the industry’s adoption of innovation and proven incompatible with the digital revolution that has changed the business of banking. This article also explores the successes and failures of a range of approaches adopted by the federal regulatory agencies responsible for the framework’s design, implementation and enforcement as they try to mitigate this tension. The degree to which these agencies embrace innovation in the industry, and use the tools at their disposal to encourage its continuation, will go a long way toward determining whether banks can weather this period of economic disruption, meet the changing needs of their customers, and fend off competition from industry upstarts.
The Treatment of Derivatives Under the SEC’s Net Capital Rule
Michael P. Jamroz, 76(1): 183-210 (Winter 2020-2021)
Every broker or dealer conducting a general securities business registered with the Securities and Exchange Commission (Commission) must comply with SEC Rule 15c3-1, the Net Capital Rule. The Net Capital Rule is designed to ensure that broker-dealers will have adequate liquid assets to meet their obligations to investors and liabilities to other creditors. The rule is complex and specifically addresses the liquidity, market, and counterparty credit risks associated with the proprietary positions of the broker-dealer.