Tag: Legal systems


Conduct of Business Regulation: A Survey and Comparative Analysis

Andrew Tuch is Associate Professor of Law at Washington University School of Law.

Andrew Tuch is Associate Professor of Law at Washington University School of Law.

Although recent regulation and scholarship has focused on the financial stability and solvency of financial institutions, the business conduct of these institutions remains an issue of abiding regulatory concern. In a my chapter “Conduct of Business Regulation,” which is in the forthcoming Oxford Handbook of Financial Regulation, I provide a survey and comparative analysis of conduct of business (COB) regulation in the US, the EU, and Australia. COB regulation governs financial intermediaries’ conduct toward their clients; that is, toward the actors—whether individuals or institutions—with whom financial intermediaries transact in providing financial products and services. While the expression “conduct of business regulation” is not widely employed in the US, it is commonly used by international financial regulatory bodies and by financial regulators in many jurisdictions, including the Member States of the EU. In the US, COB regulation encompasses the regulation of broker-dealers and investment advisors under state and federal law; in the EU, the regulation of investment firms under MiFID I and the proposed MiFID II/ MiFIR regime; and in Australia, the regulation of financial services licensees and individual advisors under federal law. Generally speaking, these various financial intermediaries are in the business of providing securities-related services, including advice and recommendations.

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Freedom of Establishment for Companies

The following post comes to us from Martin Gelter, Associate Professor of Law at Fordham University.

The following post comes to us from Martin Gelter, Associate Professor of Law at Fordham University.

I recently posted my forthcoming book chapter, Centros, the Freedom of Establishment for Companies, and the Court’s Accidental Vision for Corporate Law (forthcoming in EU Law Stories, Fernanda Nicola & Bill Davies eds., Cambridge University Press 2015) on SSRN.

This chapter attempts to tell a short intellectual history of the debate about free choice in corporate law in the EU. In contrast to the United States, in many EU Member States it was traditionally not permissible to set up a corporation in one Member State in order to run the company with its head office (meaning the center of its actual commercial and financial operations) in another. This changed with three cases of the European Court of Justice (ECJ), namely Centros (1999), Überseering (2002), and Inspire Art (2003). Consequently, EU member states can no longer effectively deny the legal capacity to pseudo-foreign corporations, or apply key provisions of their own corporate law to them. At least in principle, founders can now exercise the freedom of establishment for companies to “pick and choose” the best national legal form.

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Comparative Study on Economics, Law and Regulation of Corporate Groups

The following post comes to us from Klaus J. Hopt, a professor and director (emeritus) at the Max-Planck-Institute for Comparative and International Private Law, in Hamburg and was advisor inter alia for the European Commission, the German legislator and the Ministries of Finance and of Justice.

The following post comes to us from Klaus J. Hopt, a professor and director (emeritus) at the Max-Planck-Institute for Comparative and International Private Law, in Hamburg and was advisor inter alia for the European Commission, the German legislator and the Ministries of Finance and of Justice.

The phenomenon of the groups of companies is very common in modern corporate reality. The groups differ greatly as to structure, organization, and ownership. In the US, groups with 100-per cent-owned subsidiaries are common. In continental Europe, the parents usually own less of the subsidiaries, just enough to maintain control. In Germany and Italy pyramids are frequent, i.e., hierarchical groups with various layers of subsidiaries and subsidiaries of subsidiaries forming very complicated group nets. The empirical data on groups of companies are heterogeneous because they are collected for very different regulatory and other objectives, for example for antitrust and merger control regulation or for bank supervision.

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New Approaches to International Financial Regulation

The following post comes to us from Annelise Riles, Jack G. Clarke Professor of Far East Legal Studies and Professor of Anthropology at Cornell Law School.

The following post comes to us from Annelise Riles, Jack G. Clarke Professor of Far East Legal Studies and Professor of Anthropology at Cornell Law School.

International financial law scholarship is undergoing a revolution. The financial crisis of 2008 has led to a dramatic rethinking of the “givens,” and has attracted a new community of scholars to the field. Until 2008, international legal theory played only a minor role in international financial law. The implicit and taken for granted neoclassical economic theory that undergirded debates about global financial regulation was presumed to be all the theory that could or should apply, and the analysis focused rather simply and uniformly on questions of efficiency and social welfare. Since the financial crisis, however, the mainstream debate has shifted its focus to so-called “macro-prudential issues” and to an awareness of a need for some sort of global, or at least a transnationally coordinated response to systemic risk.

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Three Pathways to Global Standards: Private, Regulator, and Ministry Networks

The following post comes to us from Stavros Gadinis of University of California, Berkeley Law School.

The following post comes to us from Stavros Gadinis of University of California, Berkeley Law School.

Scores of governments around the world have chosen to introduce international standards as domestic law, even though they were not legally obliged to do so. The drafters of these standards are not sovereigns or international organizations, but transnational regulatory networks: informal meetings of experts from various countries, some with government affiliations, and others without. Networks have puzzled scholars for years. Fascinated by the institutional novelty of the network phenomenon, some theorists praised their speed, informality, and lack of hierarchy. Others were not so enthralled. They were concerned about the influence of interest groups or the weight of big countries. This debate has examined both the inputs to the network phenomenon—preferences—and the outputs—global coordination—but has not discussed the mechanism: how do we get from preferences to standards? How do these networks come together, what is their strategy for their success? My new study, Three Pathways to Global Standards: Private, Regulator, and Ministry Networks, seeks to open up the black box of network standard setting and analyze these mechanisms. It proposes a new theoretical framework that distinguishes among private, regulator, and ministry networks, and presents empirical evidence that illustrates why these three network types appeal to different countries for different reasons.

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The Institutions of Federal Reserve Independence

The following post comes from Peter Conti-Brown of Stanford Law School.

The following post comes from Peter Conti-Brown of Stanford Law School.

On December 23, 2013, the Federal Reserve System celebrated its centennial. Over the course of that century, the Fed has become one of the most important governmental agencies in the history of the American republic, a transformation one scholar has labeled “the most remarkable bureaucratic metamorphosis in American history.” Its policies influence nearly every aspect of public and private life. Given this importance and influence, “[n]o one can afford to ignore the Fed.”

At the core of that “remarkable bureaucratic metamorphosis” is a much-invoked but as often misunderstood set of institutional arrangements that constitute the Fed’s unique independence. In the standard popular and academic account, law is at the center of that independence: indeed, it is the statute itself, under this view, that defines that independence. Economists and political scientists interested in central bank independence—having written enough on the phenomenon to give it an acronym (CBI)—take as given that law defines central bank independence. And legal academics, in the exceptional event that they have taken note of the Fed, have analyzed its independence within the context of administrative law and agency independence generally. Again, unsurprisingly, statutes are at the center of that analysis, too.

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Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital

The following post comes to us from John Core and Rodrigo Verdi of the Accounting Group at MIT, and Luzi Hail of the Department of Accounting at the University of Pennsylvania.

The following post comes to us from John Core and Rodrigo Verdi of the Accounting Group at MIT, and Luzi Hail of the Department of Accounting at the University of Pennsylvania.

Whether mandatory disclosure regulation and insider ownership affect a firm’s cost of capital is an important question in financial economics. In our paper, Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital, which was recently made publicly available on SSRN, we examine this question on a large global sample of more than 10,000 firms across 35 countries.

Theory predict that disclosure regulation is negatively related to the cost of capital due to two separate effects: (i) an information effect in which better disclosure improves investors’ prediction of future cash flows, or (ii) a stewardship effect in which better disclosure improves managerial alignment with shareholders and therefore increases expected cash flows. The stewardship effect is not unique to disclosure, but is also present in other governance mechanisms that increase managerial alignment such as inside ownership. As a result, these alternative alignment mechanisms potentially reinforce or substitute for the stewardship effect of disclosure. We test this argument by examining whether inside ownership is negatively associated with the cost of capital and how inside ownership affects the relation between disclosure and the cost of capital.

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The State of State Competition for Incorporations

Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law.

Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law.

The competition by states for incorporations has long been the subject of extensive scholarship. Views of this competition differ radically. While some commentators regard it as “The Genius of American Corporate Law,” others believe it leads to a “Race to the Bottom” and yet others have taken the position that it barely exists. Despite this lack of consensus among corporate law scholars, scholars in other fields have treated state competition for incorporations as a paradigm case of regulatory competition.

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Revisiting American Exceptionalism

The following post comes to us from Naomi R. Lamoreaux, Stanley B. Resor Professor of Economics and History, Yale University, and Research Associate, NBER.

The following post comes to us from Naomi R. Lamoreaux, Stanley B. Resor Professor of Economics and History, Yale University, and Research Associate, NBER.

The legal rules governing businesses’ organizational choices have varied across nations along two main dimensions: the number of different forms that firms could adopt; and the extent to which firms had the contractual freedom to modify the available forms to suit their needs. Until the last quarter of the twentieth century, businesses in the U.S. had a narrower range of forms from which to choose than their counterparts in most other countries and also much less ability to modify the basic forms contractually. In the recent NBER Working Paper, Revisiting American Exceptionalism: Democracy and the Regulation of Corporate Governance in Nineteenth-Century Pennsylvania, I explore the exceptional character of the U.S. legal rules by focusing on the different structure of U.S. and British general incorporation laws.

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The Foundations of Corporate Social Responsibility

The following post comes to us from Hao Liang and Luc Renneboog, both of the Department of Finance at Tilburg University.

The following post comes to us from Hao Liang and Luc Renneboog, both of the Department of Finance at Tilburg University.

A fundamental issue in business and economics is the sustainability—and not merely the growth—of economic development, which crucially hinges on the socially responsible operational and investment behavior of modern corporations (Porter, 1991). There is a widespread recognition, as well as growing empirical evidence, that corporate social responsibility (CSR) can substantially contribute to social progress and stakeholder wealth, including the wealth of shareholders (e.g., Dimson, Karakas, and Li, 2012; Deng, Kang, and Low, 2013). In our paper, The Foundations of Corporate Social Responsibility, which was recently made publicly available on SSRN, we examine the forces that fundamentally steer companies to behave as good citizens in society.

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