March 11, 2021



Large Order Execution in the Futures Markets
      committee on Futures Regulation of the Association of the Bar of the City of New York, 44(4): 1335–60 (Aug. 1989)
This Report describes block trading in the securities markets, examines the applicable legal principles in the futures markets, and discusses certain possible approaches to providing mechanisms for executing large futures orders with minimum adverse market impact.

Hybrid Instruments: Their Treatment Under Recent Commodity Futures Trading Commission Releases
      Cary J. Meer, 46(2): 405–26 (Feb. 1991)
In several releases issued over the past few years, the CFTC has attempted to define when hybrid instruments, instruments that combine characteristics of futures contracts or commodity options with debt, equity, or depository obligations, should not be regulated by the CFTC. The classification of these instruments is important because it determines which agency can regulate them and the type of market on which they can trade. This Article discusses the problems raised by the CFTC's approach.

The Limits of the Suitability Doctrine in Commodity Futures Trading
      Walter C. Greenough, 47(3): 991–1009 (May 1992)
Courts and regulators have wrestled with the question of whether brokers have a duty to prevent "unsuitable" customers from trading commodity futures. The author argues that these decisions, and the policy considerations underlying them, indicate that the duty of brokers should be limited to disclosure of the risks of trading; it should then be left to the customers themselves to determine whether they are willing to accept those risks.

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 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.