The Future of Price Distortion in Federal Securities Fraud Litigation

In its recent Halliburton decision, the Supreme Court focused on the role of price distortion in meeting the requirements for class certification in private securities fraud litigation. Accepting the argument that the fraud-on-the-market theory requires fraudulent information to have an effect on stock price, the Court reasoned that defendants should therefore be allowed to introduce evidence of lack of price impact in an effort to defeat class certification. Specifically, the Court suggested that defendants might introduce event studies as direct evidence that could sever the link between the misrepresentation and stock price. This conclusion, however, misapprehends the event study methodology. Specifically, the emphasis on event studies is misguided because the event studies proffered by defendants do not conclusively establish that the fraud did not distort stock price. More broadly, the limitations of existing quantitative methods suggest that they should not be the exclusive way of analyzing price distortion for purposes of class certification. Instead, the importance of price distortion suggests the need for greater consideration of materiality because a finding of materiality is an implicit determination that the information has the capacity to affect stock price

The Qualified Legal Compliance Committee: Using the Attorney Conduct Rules to Restructure the Board of Directors

The Securities and Exchange Commission introduced a new corporate governance structure, the qualified legal compliance committee, as part of the professional standards of conduct for attorneys mandated by the Sarbanes-Oxley Act of 2002. QLCCs are consistent with the Commission\u27s general approach to improving corporate governance through specialized committees of independent directors. This Article suggests, however, that assessing the benefits and costs of creating QLCCs may be more complex than is initially apparent. Importantly, QLCCs are unlikely to be effective in the absence of incentives for active director monitoring. This Article concludes by considering three ways of increasing these incentives

Overseeing the Administrative State

In a series of recent cases, the Supreme Court has reduced the regulatory power of the Administrative State. Pending cases offer vehicles for the Court to go still further. Although the Court’s skepticism of administrative agencies may be rooted in Constitutional principles or political expediency, this Article explores another possible explanation—a shift in the nature of agencies and their regulatory role. As Pritchard and Thompson detail in their important book, A HISTORY OF SECURITIES LAW IN THE SUPREME COURT, the Supreme Court was initially skeptical of agency power, jeopardizing Franklin Delano Roosevelt (FDR)’s ambitious New Deal plan. The Court’s acceptance of agency regulation was premised on the belief that the expertise of administrative agencies coupled with their insulation from political influence afforded them distinctive regulatory advantages. Today there are questions about the extent to which agencies continue to reflect these characteristics. Instead, as the Article explains, agency decisionmaking has become increasingly polarized and the product of political influence rather than scientific or technical expertise. The possibility that Congress and the President are using agencies as political tools to avoid the accountability associated with direct legislation is potentially troubling. One response is the reduction in agency power suggested by the Court. Alternatively, this Article suggests modest practical reforms to align agencies with the legitimating principles of the New Deal settlement

Why do retail investors make costly mistakes? An experiment on mutual fund choice

There is mounting evidence that retail investors make predictable, costly investment mistakes, including underinvestment, naïve diversification, and payment of excessive fund fees. Over the past thirty-five years, however, participant-directed 401(k) plans have largely replaced professionally managed pension plans, requiring unsophisticated retail investors to navigate the financial markets themselves. Policy-makers have struggled with regulatory interventions designed to improve the quality of investment decisions without a clear understanding of the reasons for investor mistakes. Absent such an understanding, it is difficult to design effective regulatory responses. This article offers a first step in understanding the investor decision-making process. We use an internet-based experiment to disentangle possible explanations for inefficient investment decisions. The experiment employs a simplified construct of an employee’s allocation among the options in a retirement plan coupled with technology that enables us to collect data on the specific information that investors choose to view. In addition to collecting general information about the process by which investors choose among mutual fund options, we employ an experimental manipulation to test the effect of an instruction on the importance of mutual fund fees. Pairing this instruction with simplified fee disclosure allows us to distinguish between motivation-limits and cognition-limits as explanations for the widespread findings that investors ignore fees in their investment decisions. Our results offer partial but limited grounds for optimism. On the one hand, within our simplified experimental construct, our subjects allocated more money, on average, to higher-value funds. Furthermore, subjects who received the fees instruction paid closer attention to mutual fund fees and allocated their investments into funds with lower fees. On the other hand, the effects of even a blunt fees instruction were limited, and investors were unable to identify and avoid clearly inferior fund options. In addition, our results suggest that excessive, naïve diversification strategies are driving many investment decisions. Although our findings are preliminary, they suggest valuable avenues for future research and important implications for regulation of retail investing

Leave it to Delaware: Why Congress Should Stay out of Corporate Governance

Commentators have debated the relative merits of state and federal regulation of corporate law and corporate governance for many years. The debate has attained heightened importance with the enactment of the Dodd- FrankWallStreetReformandConsumerProtectionActof2012. InDodd- Frank, Congress intruded into the allocation of decision-making authority between shareholders and directors, a subject generally relegated to state law, by adopting federal provisions on say on pay and proxy access. In so doing, Congress made an explicit determination that the financial crisis had exposed shareholders’ inability to ensure management accountability. This Article criticizes the congressional usurpation of Delaware’s traditional role in regulating corporate governance. Focusing on the topics of proxy access and say on pay, the Article demonstrates the continued superiority of Delaware’s approach over federal regulation. In particular, this Article reveals that in precisely those areas where Delaware’s approach has been criticized, market developments have enabled investors to use moderated responses and private ordering to address perceived problems, without incurring excessive costs or destabilizing management authority. In contrast, Dodd-Frank’s reforms eliminate the potential for issuer-specific tailoring and experimentation, while mandating procedures that are unlikely to provide investors with meaningful value. Nonetheless, Delaware’s effective regulation of corporate governance and its ability to maintain its leadership position, face continuing challenges in the form of business and technological developments. The Article argues that Delaware’s lawmaking structure is particularly well-suited to adapt to these challenges. The Article concludes by exploring Delaware’s ongoing responses to three such challenges—private dispute resolution, globalization, and developments in shareownership

Promoting Corporate Diversity: The Uncertain Role of Institutional Investors

Two developments are having an impact on corporate decisions. One is the increased engagement by institutional intermediaries and a shift in the focus of that engagement from corporate governance to environmental and social issues. The other is a heightened societal awareness of diversity, equity, and inclusion (DEI) issues, particularly the importance of diversity in corporate leadership. This Article considers the intersection between the two. It describes how institutional investors have focused their attention on increasing diversity in corporate leadership, the potential motivations for that focus, and the impact of that focus, to date. It highlights the tensions that result from relying on institutional intermediaries to promote diversity. Institutional involvement in environmental, social, and governance (ESG) issues, as a general matter, raises a host of questions including the extent to which a fiduciary may appropriately trade off economic and noneconomic considerations in its investment and engagement strategies. Diversity, however, raises distinctive concerns because the justifications for DEI initiatives are multifaceted and extend beyond firm-specific economic considerations to a broad range of societal objectives. This range of objectives creates challenges both in structuring diversity efforts and evaluating their success. While there is little doubt that the societal case for greater diversity in corporate leadership is compelling, to the extent that the rationale for diversity extends beyond demonstrable effects on firm-specific economic value, it is unclear that institutional intermediaries and their agents—those who make engagement and voting decisions on behalf of such institutions—are well-positioned to address those issues in terms of both accountability and institutional competence. This Article highlights the potential costs of existing institutional efforts and concludes by considering the effectiveness of existing tools of corporate governance in addressing those concerns