Contingent Capital in Executive Compensation

Contingent capital has great potential to improve corporate governance in Systemically Important Financial Institutions (SIFIs). Early initiatives by European SIFIs to include contingent convertible bonds in executive compensation packages lack governance-improving designs. This Article suggests the use of contingent convertible bonds with an early conversion trigger in executive compensation. The proposal adds an important element to the literature on inside debt and the creditor-centered approach to executive compensation. Contingent convertible bonds with early triggers could be preferable to other debt instruments because, in addition to lowering income inequality and increasing sustainability, the early trigger design can improve incentives for executives to lower risk-taking, improve signaling of default risk, and increase incentives for monitoring by creditors and shareholders. The recognition of ownership characteristics in design features adds an important element to the literature on contingent capital trigger designs. The methodological assumptions of incomplete contract theory can improve the analysis of executive compensation arrangements

Hedge Fund Regulation via Basel III

This Article is a rejoinder to a recent comment by Professor Romano on an earlier paper I coauthored with Christian Kirchner. Professor Romano suggests regulatory arbitrage, rather than the targeted regulation of bank lending to hedge funds under Basel II, as a hedge against systemic failure. I contend that it was not harmonization through Basel II but rather the profitability of certain assets and business strategies that caused banks to hold similar assets and engage in similar strategies. In particular, I find that the increasing role of hedge funds in the credit derivatives market, in combination with the market\u27s recent failure, suggests that an increased emphasis on banks\u27 lending exposure to hedge funds could be justified. Using the methodological approach of New Institutional Economics, I evaluate recent regulatory changes, including the U.S. Dodd-Frank Act, the AIFM Directive, and other pertinent regulation. I provide an impact analysis of regulatory changes, de lege lata and de lege ferenda, with a special emphasis on, and historical analysis of, hedge fund registration rules and asymmetric regulation in Dodd-Frank and the AIFM Directive

The Systematic Risk of Private Funds After the Dodd-Frank Act

The Financial Stability Oversight Council (FSOC) was created under the Dodd-Frank Act with the primary mandate of guarding against systemic risk and correcting perceived regulatory weaknesses that may have contributed to the financial crisis of 2008-2009. The Securities and Exchange Commission (SEC) collects data pertaining to private fund advisers in order to facilitate FSOC’s assessment of non-bank financial institutions’ potential systemic risks. Evidence that the SEC’s data collection encounters accuracy and consistency problems might hamper FSOC’s ability to evaluate the systemic risk of private fund advisers. The author shows that while the SEC’s data plays a crucial role in all stages of FSOC’s systemic risk assessment of private fund advisers, FSOC relies most heavily on some of the most problematic disclosure items collected by the SEC

Hedge Fund Manager Registration Under the Dodd-Frank Act

Part I of this Article introduces the issue of hedge fund registration and the tension between regulators and the hedge fund industry regarding the appropriate level of regulatory oversight. After a short introduction of historical attempts to register hedge fund managers, Part II describes the legal requirements in the Dodd-Frank Act pertaining to hedge fund managers. Over fifty years of low-level regulatory oversight for the hedge fund industry came to an end with the enactment of the Dodd-Frank Act. Part III outlines the methodological approach of the survey study. It introduces the survey instrument, data sources, sampling, coding, and coding constraints, and evaluates possible selection bias issues. Part IV discusses the results of the survey study with descriptive statistics, and Part V presents the substantive results of the study in summary graphs. Part VI summarizes the key findings and discusses implications for hedge fund policy. It also evaluates limitations of the survey study and possible implications for future research