The Ascertainable Standards that Define the Boundaries of the SEC’s Rulemaking Authority

On the heels of the U.S. Supreme Court’s decision in West Virginia v. Environmental Protection Agency, the “major questions” doctrine quickly came to be perceived as a significant impediment to the finalization of the Securities and Exchange Commission’s proposed rule on climate-related disclosures. This Article presents a new argument against finalization, an argument that does not require the application of the major questions doctrine. This argument finds its authority in the policy objectives and the one policy constraint found in the statutes that underlie the proposed rule. These policy standards, referred to as ascertainable standards in the Article, not only provide guidance to the SEC in its rulemaking, including the promulgating of rules on climate-related disclosures, but also identify the boundaries of authority that the SEC must not cross. The SEC has exceeded its delegated authority in promulgating its proposed rule on climate-related disclosures by not adhering to the ascertainable standards found in the 33 and 34 Acts: “for the protection of investors,” promoting “efficiency, competition, and capital formation,” and “materiality.” These ascertainable standards are identified through the application of the “intelligible principle” test of the nondelegation doctrine and apply to all SEC rulemaking promulgated under these Acts, not just the proposed climate-related disclosures. Moreover, it would not be surprising to find that if a review of all SEC rules and interpretations were to occur, many of them would be found to violate the boundaries of the SEC’s discretionary authority

ESG Investing Under ERISA

The Department of Labor (“DOL”), through its administration of ERISA,has a critical role to play in the regulation of private“employee pension benefit plans.”Most importantly, the DOL is tasked with enforcing the fiduciary duties of ERISA plan managers (trustees who retain investment and voting authority or “investment managers”who receive such authority through delegation by the trustees).Under ERISA, plan managers owe the strictest duties of loyalty and care to their participants and beneficiaries. They are to be constantly guided by the fiduciary prin-ciples of acting solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing financial benefits to them

Shareholder Activism as a Corrective Mechanism in Corporate Governance

Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Kenneth Arrow also recognized that other elements within the organization, beyond the central authority, occasionally may have superior information or decision-making skills. In such cases, such elements may act as a corrective mechanism within the organization. In the context of public companies, this Article finds that such a corrective mechanism comes in the form of hedge fund activism, or, more accurately, offensive shareholder activism. Offensive shareholder activism operates in the market for corporate influence, not control. Consistent with a theoretical framework that protects the value of centralized authority and a legal framework that rests fiduciary responsibility with the board, authority is not shifted to influential, yet unaccountable, shareholders. Governance entrepreneurs in the market for corporate influence must first identify those instances in which authority-sharing may result in value-enhancing policy decisions, and then persuade the board and/or other shareholders of the wisdom of their policies, before they will be permitted to share the authority necessary to implement the policy. Thus, boards often reward offensive shareholder activists that prove to have superior information and/or strategies by at least temporarily sharing authority with the activists by either providing them seats in the board or simply allowing them to directly influence corporate policy. This Article thus reframes the ongoing debate on the value of shareholder activism by showing how offensive shareholder activism can co-exist with—and indeed, is supported by—Kenneth Arrow’s theory of management centralization, which undergirds the traditional authority model of corporate governance. This Article also provides a much-needed bridge between the traditional authority model of corporate law and governance as utilized by Professors Steven Bainbridge and Michael Dooley and those who have done empirical studies on hedge fund activism, including Professor Lucian Bebchuk. This bridge helps to identify when shareholder activism may be a positive influence on corporate governance

How Discretionary Decision-Making Impacts the Financial Performance and Legal Disclosures of S&P 500 Funds

When investment funds track the S&P 500, the index becomes more than just a list of 500 companies. The focus then becomes the financial and regulatory issues that arise from the discretionary decision-making power of the Index Committee that governs the S&P 500. Based on our empirical research and analysis, this article recommends a new principal risk disclosure under SEC Form N-1A, which we refer to as “selection risk,” to be included in the statutory and summary prospectuses of investment funds that track the S&P 500. This type of risk results when the Index Committee uses its discretionary decision-making power to exclude stocks or groups of stocks that may outperform the index and not allow S&P funds to create portfolios of stocks that most accurately represent the market risk and expected returns of large cap, Blue Chip America. This new disclosure will provide investors with the necessary information to evaluate whether index funds that track the S&P 500 are appropriate for their investment needs. Moreover, this article argues that the S&P 500 index is no longer an appropriate broad-based securities market index for purposes of Form N-1A benchmarking

Shareholder Activism as a Corrective Mechanism in Corporate Governance

Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Kenneth Arrow also recognized that other elements within the organization, beyond the central authority, occasionally may have superior information or decision-making skills. In such cases, such elements may act as a corrective mechanism within the organization. In the context of public companies, this Article finds that such a corrective mechanism comes in the form of hedge fund activism, or, more accurately, offensive shareholder activism. Offensive shareholder activism operates in the market for corporate influence, not control. Consistent with a theoretical framework that protects the value of centralized authority and a legal framework that rests fiduciary responsibility with the board, authority is not shifted to influential, yet unaccountable, shareholders. Governance entrepreneurs in the market for corporate influence must first identify those instances in which authority-sharing may result in value-enhancing policy decisions, and then persuade the board and/or other shareholders of the wisdom of their policies, before they will be permitted to share the authority necessary to implement the policy. Thus, boards often reward offensive shareholder activists that prove to have superior information and/or strategies by at least temporarily sharing authority with the activists by either providing them seats in the board or simply allowing them to directly influence corporate policy. This Article thus reframes the ongoing debate on the value of shareholder activism by showing how offensive shareholder activism can co-exist with—and indeed, is supported by—Kenneth Arrow’s theory of management centralization, which undergirds the traditional authority model of corporate governance. This Article also provides a much-needed bridge between the traditional authority model of corporate law and governance as utilized by Professors Steven Bainbridge and Michael Dooley and those who have done empirical studies on hedge fund activism, including Professor Lucian Bebchuk. This bridge helps to identify when shareholder activism may be a positive influence on corporate governance