November 04, 2020

Financial Institutions

Financial Institutions

Interstate Branching and the Constitution
      Geoffrey P. Miller, 41(2): 337–46 (Feb. 1986)
This Article outlines an avenue for interstate bank expansion that might hold considerable promise for money-center institutions now frozen out of regional banking areas.

Interpreting the McFadden Act: The Politics and Economics of Shared ATMs and Discount Brokerage Houses
      Donald C. Langevoort, 41(4): 1265–80 (Aug. 1986)
The limits on bank branching imposed by the McFadden Act pose interesting issues of statutory interpretation in an era of radical marketplace change. This Article explores two current controversies —shared automatic teller machines and discount brokerage offices—and suggests appropriate judicial approaches to resolving them.

Discovery in Bank Regulatory Agency Enforcement Actions
      John E. Shockey, 42(1): 91–100 (Nov. 1986)
Formal adjudicatory hearings before the bank regulatory agencies have multiplied as the agencies have increasingly resorted to formal enforcement actions to achieve regulatory objectives. Although discovery in such proceedings appears severely limited by restrictive rules, this Article concludes that significant discovery may be obtained in appropriate cases. The Article examines the rules and agency practice in contested cases and offers suggestions for achieving meaningful discovery.

Bank Regulatory Enforcement—1985 Developments
      John C. Deal, 42(1): 145–56 (Nov. 1986)
In 1985, the federal banking agencies continued to expand their use of enforcement powers, particularly against individuals. This Article focuses on 1985 developments involving issues of agency and judicial jurisdiction as well as the proper extent of judicial review.

The Federal Home Loan Banks and the Home Finance System
      Dirk S. Adams and Rodney R. Peck, 43(3): 833–64 (May 1988)
The Federal Home Loan Banks constitute an essential finance resource for the U.S. thrift industry, which is in crisis and transition. This Article discusses the development and basic elements of the Federal Home Loan Bank system, including the structure and ownership of the Federal Home Loan Banks, and discusses the key role to be played by the banks in the recapitalization of the Federal Savings and Loan Insurance Corporation and in seeking to meet the challenges now facing the savings industry.

Practical Aspects of the Deposit Insurance System
      Thad Grundy, Jr., 44(1): 169–210 (Nov. 1988)
With financial institutions closing at a pace not seen since the Depression, deposit insurance has become a significant concern for millions of depositors at banks and savings institutions. This Article examines the origins of the deposit insurance system, the enabling statutes, and the FSLIC and FDIC deposit insurance regulations.

Regulation of Savings Associations Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
      Paul T. Clark, Bryan M. Murtagh, and Carole Corcoran, 45(3): 1013–1102 (May 1990)
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 was a sweeping legislative effort to resolve the financial crisis confronting the thrift industry. This Article describes the revisions made by the Act to the regulatory structure governing the thrift industry. In addition, the Article examines the principal reforms relating to the regulation of savings associations. Finally, the Article concludes with some observations regarding the future of a dual federal/state regulatory system and the prospects for the continued separation of the thrift and banking industries.

A Decade's Journey from "Deregulation" to "Supervisory Reregulation": The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
      Daniel B. Gail and Joseph J. Norton, 45(3): 1103–1228 (May 1990)
The recently enacted FIRREA legislation constitutes the most significant legislative restructuring of U.S. "banking institutions" and deposit insurance apparatus in over fifty years. The Act will effect a consolidation of the U.S. thrift industry and sets the stage for the "supervisory reregulation" of all U.S. banking institutions (including commercial banks).

Financing the Bailout of the Thrift Crisis: Workings of the Financing Corporation and the Resolution Funding Corporation
      Marirose K. Lescher and Merwin A. Mace III, 46(2): 507–35 (Feb. 1991)
This Article describes the structure and operations of the Financing Corporation and the Resolution Funding Corporation, two government corporations created to raise funds in the public capital markets to resolve insolvent thrifts. The Article questions the efficacy of this bailout mechanism established by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, both in terms of the use of off-budget corporations to fund the thrift resolutions and the sufficiency of funds identified for the thrift industry bailout.

Enforcing Agreements with Failed Depository Institutions: A Battle with the FDIC/RTC Superpowers
      Robert J. Stillman, 47(1): 99–125 (Nov. 1991)
With bank failures on the rise, this timely Article discusses the added rights and protections given to the FDIC and RTC when they take over failed depository institutions. Among other things, these protections estop customers of failed banks from enforcing otherwise valid agreements and give the FDIC and RTC power to disaffirm and repudiate such agreements or to enforce agreements that otherwise would terminate on the bank's insolvency.

Advising Corporate Directors After the Savings and Loan Disaster
      Harris Weinstein, 48(4): 1499–1507 (Aug. 1993)
The savings and loan and bank failures of recent years have generated extensive litigation testing theories of liability applicable to directors of depository institutions. The author, formerly Chief Counsel of the Office of Thrift Supervision, argues that the traditional business judgment rule should prevail over simple negligence theories advanced by the FDIC and the RTC. By resting on post hoc reexaminations of business decisions, the simple negligence theory fails to take adequate account of the risk inherent in business decisions and unduly inhibits the service of qualified persons as corporate directors.

Bank Powers to Sell Annuities
      Tamar Frankel, 49(4): 1691–1705 (Aug. 1994)
The debate on banks' powers to issue and sell annuities will be heard and decided by the Supreme Court who granted certiorari on the question. See Variable Annuity Life Ins. Co. v. Clarke, 998 F.2d 1295 (5th Cir. 1993), cert. granted sub nom. NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co ., 511 U.S. 1141 (1994). The author argues that banks may issue and sell fixed annuities in the form of deposits. These annuities belong to "insurance business," rather than "insurance contracts," which are reserved exclusively to the insurance industry; other financial institutions may issue and sell fixed annuities. In sum, on this issue, the banks have it. ( Editor's note: The Supreme Court subsequently reversed the decision of the Fifth Circuit. NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co. , 513 U.S. 251 (1995)).

The Business of Banking: Looking to the Future
      Julie L. Williams and Mark P. Jacobsen, 50(3): 783–816 (May 1995)
The basic framework that governs the powers and permissible activities of national banks was, at last, resolved by the Supreme Court in the recent decision of NationsBank of North Carolina, N.A. v. Variable Annuity Life Ins. Co ., 513 U.S. 251 (1995). This decision ended over 100 years of muddled precedent and conflicting commentary by holding that the "business of banking" is not limited to those activities and powers that are expressly enumerated in the National Bank Act but rather is an expansive concept and the enumerated powers in the act are merely illustrative. The key issue now turns to how to identify the activities that fit within the VALIC framework. This Article presents an approach to defining the "business of banking" in contemporary contexts, based upon the history of the national bank charter and the purpose of the national bank system and guided by the analytical threads that link the numerous, and seemingly inconsistent, cases that address the issue.

The Business of Banking: Looking to the Future—Part II
      Julie L. Williams and James F.E. Gillespie, Jr., 52(4): 1279–1331 (Aug. 1997)
The Article analyzes the nature of national banks' "incidental powers." A review of the case law addressing national banks' incidental powers discloses several distinct contours of the concept: (i) activities that facilitate operating a bank as a business enterprise, (ii) activities functionally adjacent to the business of banking that enhance the quality and efficiency of its content and delivery, and (iii) activities that optimize the use and value of a bank's facilities and competencies or enable the bank to avoid economic waste in its banking franchise. Further, a review of OCC decisions regarding the role of technology in the banking business indicates that these component facets of national banks' incidental powers are adaptable and applicable to the modern banking environment.

Banks v. Credit Unions: The Turf Struggle for Consumers
      Kelly Culp, 53(1): 193–216 (Nov. 1997)
This Article reviews the bitter battles waged between U.S. banks and federal credit unions in both Congress and the Supreme Court. The dispute is focused on two issues— whether banks have standing to sue and whether the current National Credit Union Administration's interpretation of federal credit union membership policy should stand. The Supreme Court heard arguments in both cases on October 6, 1997. See First Nat'l Bank & Trust v. NCUA, 988 F.2d 1272 (D.C. Cir. 1993), cert. granted, 519 U.S. 1148 (1997); First Nat'l Bank & Trust v. NCUA ( AT&T Family Fed. Credit Union), 90 F.3d 525 (D.C. Cir. 1996), cert. granted, 519 U.S. 1148 (1997). Meanwhile, both sides continue to lobby heavily in Congress for a resolution. It remains to be seen what fate awaits many federal credit unions with multiple employee groups and the millions of memberships that could be terminated.

Competition, Innovation, and Regulation in the Securities Markets
      Steven M.H. Wallman, 53(2): 341–71 (Feb. 1998)
This Article describes a variety of factors that encourage both command and control regulation and regulatory incrementalism. The author warns that "incremental regulation fails when the underlying economics or competitive context, or the technology itself, move other than in slow incremental steps. " With the accelerating changes in technology, markets, and competition as well as significantly greater globalization of the financial industry, the author asserts that "a broader, bolder approach is not only desirable, but absolutely necessary." He argues for "goal-oriented" regulation, in which regulators articulate broad standards and allow market participants —driven by competition—to determine how best to satisfy them.

Financing Small Bank Holding Companies: Securitization of Capital Securities
      John J. Madden, 54(1): 93–118 (Nov. 1998)
In 1996, the Federal Reserve Board issued a one-page release allowing bank holding companies to include capital securities as a component of their Tier 1 regulatory capital requirement. For tax purposes, distributions on capital securities are deductible to the issuing company, making them the cheapest source of Tier 1 qualifying regulatory capital. Unlike large banking organizations, very few small bank holding companies have issued these securities. This Article summarizes the obstacles facing small bank holding companies interested in issuing capital securities. In conclusion, the author recommends utilizing asset securitization as a means of providing small bank holding companies with access to the capital markets to issue these tax-advantaged securities.

Home Banking Services Agreement
      Task Force on Home Banking Services Agreement, ABA Section of Business Law, 61(2):611—640 (February 2006)

Consumer PerspectiveÂ-Home Banking Agreements: Don't Bank on Them
      Mark E. Budnitz, Donald F. Clifford, Michael Ferry, and Margot Saunders, 61(2):641—652 (February 2006)

Task Force Response to Consumer Perspective
      Task Force on Home Banking Services Agreement, ABA Section of Business Law, 61(2):653—658(February 2006)

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.

Civil Liability for Aiding and Abetting
      Richard C. Mason, 61(3):1135—1182 (May 2006)
Civil liability for aiding and abetting provides a cause of action that has been asserted with increasing frequency in cases of commercial fraud, state securities actions, hostile takeovers, and, most recently, in cases of businesses alleged to be supportive of terrorist activities. The U.S. Supreme Court, in its 1994 decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver , ended decades of aiding and abetting liability in connection with federal securities actions. However, the doctrine since has flourished in suits arising from prominent commercial fraud cases, such as those concerning Enron Corporation and Parmalat, and even in federal securities cases some courts continue to impose relatively broad liability upon secondary actors. This article reviews Central Bank and its limitations, before turning to an analysis of the elements of civil liability for aiding and abetting fraud. The article then similarly identifies and analyzes the elements of liability for aiding and abetting breach of fiduciary duty, which predominantly concerns professionals, such as accountants and attorneys, that are alleged to have assisted wrongdoing by their principal. The analysis then examines aiding and abetting liability in the context of particular, frequently–occurring, factual matrices, including banking transactions, directors and officers, state securities actions, and terrorism. The article concludes by summarizing emerging principles evident from judicial decisions applying this very flexible and potent source of civil liability.

Consumer Arbitration: If the FAA "Ain't Broke," Don't Fix It
     Alan S. Kaplinsky and Mark J. Levin, 63(3): 907–920 (May 2008)
During 2007, Congress showed significant interest in mandatory pre–dispute consumer arbitration agreements. Some in Congress focused on whether to prohibit them altogether. This Article argues that such legislation is unnecessary because the current system of consumer arbitration works well and needs no fix. The authors review case law and empirical studies showing that the current system of checks and balances in the area of consumer arbitration law is sufficiently protective of consumers' rights. These protections emanate from: (1) the Federal Arbitration Act ("FAA") itself, (2) the careful drafting of arbitration agreements, (3) the use of third–party arbitration administrators, and (4) the rigorous enforcement of the FAA by state and federal courts.

Reforming the Regulation of Broker-Dealers and Investment Advisers
      Arthur B. Laby, 65(2): 395–440 (February 2010)
A key component of financial regulatory reform is harmonizing the law governing broker-dealers and investment advisers. Historically, brokers charged commissions and were regulated under the Securities Exchange Act of 1934. Advisers charged asset-based fees and were subject to the Investment Advisers Act of 1940, which contains a special exclusion for brokers. In recent years, brokers have changed their compensation structure and many now market themselves as advisers, raising questions about whether they should be treated as such. The Obama Administration's 2009 white paper on regulatory reform and draft legislation call for a fiduciary duty to be imposed on brokers that provide advice. This Article explores the debate over regulating brokers and advisers, and makes four key claims. First, changes in brokers' compensation and marketing methods vitiate application of the broker-dealer exclusion and should subject brokers to the Advisers Act. Second, changes in the nature of brokerage, spurred by changes in technology, make the broker-dealer exclusion unsustainable and Congress should repeal it. The third claim is that imposing fiduciary duties on brokers is incompatible with their historical roles as dealers and underwriters. To resolve this tension, this Article suggests a compromise that enhances brokers' duties but does not hobble their ability to perform their traditional functions. Finally, regulating brokers as advisers would overburden the U.S. Securities and Exchange Commission. This Article offers alternatives to alleviate the strain.

How Safe Are Institutional Assets in a Custodial Bank’s Insolvency?
     Edward H. Klees,68(1): 103 - 136 (November 2012)
It is a widely held belief among institutional investors that custody accounts are protected against a bank's insolvency in the United States. This assumption undergirds trillions of dollars of assets held in custody in U.S. banks. However, despite the 2008 financial crisis, little if any attention has been paid to analyzing whether this belief is, indeed, valid. This article argues that while the FDIC, as receiver of almost all failed banks in the United States, will likely protect custodied assets to the extent permitted by law, clients bear several significant legal and operational risks that could limit recovery of their custodied assets. While investors can protect against some risks, others may be outside their control. The article outlines these risks and proposes ameliorative steps for institutional investors.

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.

Fiduciary Society Unleashed: The Road Ahead for the Financial Sector
      Edward J. Waitzer and Douglas Sarro, 69(4): 1081-1116 (August 2014)
Informational asymmetries, misaligned incentives and artificially elongated chains of intermediation have created a disconnect between the financial sector and the “real economy” that is detrimental to the public interest. Courts and regulators are increasingly intervening to break the cycle. We argue that fiduciary law offers a conceptual framework both for understanding and responding to this trend, and that the financial sector, rather than waiting for this trend to develop and reacting to new rules in a piecemeal way, should be proactive and try to shape the way in which this trend develops. We describe some elements of what such an approach might look like, and consider how regulators and political institutions can encourage financial institutions to adopt this approach, and in so doing support a broader transition to a more sustainable economy.

Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
     70(2): 319-320 (Spring 2015)

Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
     Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.

As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.

As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.

As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.

Financial Advisor Engagement Letters: Post-Rural/Metro Thoughts and Observations
     Eric S. Klinger-Wilensky and Nathan P. Emeritz, 71(1): 53-86 (Winter 2015/2016)
The liability of RBC in last year’s In re Rural/Metro decision was derivative of several breaches of fiduciary duty by the Rural/Metro directors, including those directors’ failing “to provide active and direct oversight of RBC.” In discussing that failure, the Court of Chancery stated that a “part of providing active and direct oversight is acting reasonably to learn about actual and potential conflicts faced by directors, management and their advisors.” In the year since Rural/Metro, there has been an ongoing discussion—in scholarly and trade journals, courtrooms and the marketplace—regarding how, if at all, the process of vetting potential financial advisor conflicts should evolve. In this article, we set out our belief that financial advisor engagement letters are an efficient (although admittedly not the only) tool to vet potential conflicts of a financial advisor. We then discuss four contractual provisions that, we believe, are helpful in providing the active and direct oversight that was found lacking in Rural/Metro.

The Promise of Unfavorable Research: Ramifications of Regulations Separating Research and Investment Banking for IPO Issuers and Investors
     Benjamin J. Catalano; 72(1): 31-60 (Winter 2016/2017)
The trend in Securities and Exchange Commission and Financial Industry Regulatory Authority rulemaking and enforcement to insulate research from investment banking influence has led to the removal of research analysts from the underwriting process with adverse consequences for new issuers and their investors. The approach conflicts with the congressional objective under the Jumpstart Our Business Startups (JOBS) Act to incorporate research fully in public offerings for emerging growth companies, which now comprise the vast majority of IPO issuers. Faced with these competing objectives, broker-dealers should have written policies and procedures that are carefully crafted to service their underwriting and investor clients appropriately and to take advantage of the JOBS Act privileges with respect to research.

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.