I'm not sure whether to call it the power of regulation, the fact that investors like being deluded about the value of assets they hold, or the existence of an implicit government guarantee. But as OFR notes, investors are getting out of funds with gates and floating asset values, and getting into funds with fixed asset values (even if they also have feeds and gates). Not sure what to make of it, but the change is marked, and surely attributable to regulation.
I'm finding this recently released money market fund monitor by the Office of Financial Research to be an interesting bit of new governance. It enables investors and academics to keep track of how the funds are doing, and in so doing, gives OFR some information about risk in the industry. I hope it takes off, so do give it a look. Rumor has it that there may be another monitor for hedge funds coming soon. This one is a pretty user friendly tool.
I've been writing some about international financial regulation this year. Here's my take on what IFR tells us about international law, which it isn't, but which in practice it, in some ways, resembles. It's up at SSRN, and I hope you'll give it a look.
In an era riddled with critiques of the relevance of classic international law, some have loudly given up on the subject, while others have placed their hopes in alternative mechanisms of global governance. One alternative is “soft law,” and nowhere is soft law more successful than in international financial regulation (IFR). Today, almost every bank of any size across the world has to keep similar amounts of money in its emergency reserve, cannot stake its future on complex derivatives or other forbidden trades, and faces oversight that, no matter where the bank is located, will be conducted in roughly similar ways, with roughly similar tools. And yet the promulgators of these rules consistently disavow their status as binding law.
These disavowals are disingenuous, and unpacking the reasons why has useful lessons for how international governance works, whether backed by treaty and custom or not. IFR works like traditional international law in three ways. It, like international law, depends on domestic institutions for implementation, although traditional international law has often sought to ignore the importance of any institution below the level of the state. IFR reminds us that the coordination of international interests comes with winners and losers, and therefore that the “mere coordination exercise” that international governance represents should not be dismissed, though traditional international law occasionally has been critiqued for that reason. And IFR emphasizes the necessarily messy way that fundamental legal principles are arrived at in international governance of any stripe -- something I call the contestation principle. These features of both hard and soft law have been overlooked by both the traditionalists and critics of international law, but process-driven insights like them have much to tell us about both hard and soft law, which may not, in some ways, be so different after all.
Should you be so inclined, you can find the paper here.
I've posted on SSRN my article on the way Dodd-Frank deals with our new era of global capital markets.
Financial reform has rebalanced the power of international engagement, reducing the role of the President and his diplomats, and increasing that of Congress and independent agencies. In so doing, the reforms have readjusted a balance that many believe was skewed by the government’s response to the financial crisis. The international policy of financial reform has doctrinal implications as well: Congress has supplemented traditional international law with an endorsement of international regulatory cooperation. Because of this supplementation, the things that customary international law used to do — in particular enabling international cooperation and creating innovation in human rights — are now being done by financial regulators wielding the power of informal agreements. The privileging of regulatory cooperation, and the entry into human rights through financial regulation, is evidenced by the so-called Conflict Minerals and Resource Extraction Rules that Congress has directed the Securities and Exchange Commission to promulgate.
Do give it a look, and let me know if you have comments or thoughts.
I've got a post on the increasing efforts to create voluntary, or in some cases mandatory, responsibility for businesses regarding human rights up over at RegBlog. Here's a bit of it:
International businesses must now decide whether to sign on to a lengthy and disparate list of principles and standards that aim to promote human rights. Sometimes associations of regulators promulgate these human rights standards for businesses; other times non-governmental organizations promulgate them and ask businesses to sign them. Regardless of who adopts them, these “voluntary” standards constitute a different form of regulation, and not just because of their subject matter. In promulgation, content, and authority, these efforts do not entail traditional rulemaking or adjudication.
But human rights standards are a growth industry. In fact, it is fair to say that the obligation of businesses to consider human rights is at a turning point. Although business-based standards to improve human rights are all less than a decade old, they are gaining adherents, even among regulators. Even the U.S. Securities and Exchange Commission (SEC) and the European Union have now announced rules that discourage the use of conflict minerals in manufacturing. Other countries are following suit in restricting trafficking in conflict diamonds, a phenomenon which I examine further in this paper.
You can find the rest over here, if it's the sort of thing you like.
Over at DealBook, I try to forecast the most likely prominent challenges to the Consumer Financial Protection Bureau's Payday Lending Rule. Here's the start:
The new payday lending rule, once complete, will force many payday lenders out of business. That means that a legal challenge is certain, and also the courts, which worry about regulations that require bankruptcies, will take it seriously.
That is good news for challengers of the rule. The bad news is that their claims will probably fail.
Payday lenders will challenge the authority of the Consumer Financial Protection Bureau to issue the rule, the cost-benefit analysis behind the rule and the constitutionality of the consumer agency itself.
When they fail, we will know that we have a new and powerful financial regulator, one that can touch not just banks but any source of credit, including credit cards, payday lenders and other informal ways to get money.
Go give it a look!
The Dodd-Frank Wall Street Reform Act allowed the Securities and Exchange Commission (SEC) to bring almost any claim that it can file in federal court to its own administrative law judges (ALJs). The agency has since taken up this power against a panoply of alleged insider traders and other perpetrators of securities fraud. Many targets of SEC ALJ enforcement actions have sued on equal protection, due process, and separation of powers grounds, seeking to require the agency to sue them in court, if at all. This Article evaluates the SEC’s new ALJ policy both qualitatively and quantitatively, offering an in-depth perspective on how formal adjudication— the term for the sort of adjudication over which ALJs preside—works today. It argues that the suits challenging the SEC’s administrative proceedings are without merit; agencies have almost absolute discretion as to whom and how they prosecute, and administrative proceedings, which have a long history, do not threaten the Constitution. The controversy illuminates instead dueling traditions in the increasingly intertwined doctrines of corporate and administrative law: the corporate bar expects its judges to do equity; agencies and their adjudicators are more inclined to privilege procedural regularity.
You can find the article here or here. The constitutional claims against SEC ALJs are coming fast and furious, so it's worth taking a step back and seeing how the program actually works. So do give it a look!
This is very out of time, but I've been reading the very good dissent on the designation of MetLife as systemically significant by the independent member of the committee that does those designations - the Financial Stability Oversight Council. I disagree with the dissent because I think it requires too much of financial regulators, who want to avoid catastrophe, not encourage scientific rationality about it. But still, plenty of fine arguments. One that caught my eye, given that I've written about it, the international influence on the decision, emphasized by the decision of the global Financial Stability Board to designate MetLife as risky before the FSOC did:
Although it may be technically accurate to say that the FSB’s declaration is not legally binding on the Council, the FSB explicitly acts in collaboration with the standard-setters and national authorities with the expectation that the intended effects will be achieved by FSB member countries. The FSB’s framework for the identification of systemic risk in the financial system is clear about this intended influence: “The FSB’s decisions are not legally binding on its members – instead the organisation operates by moral suasion and peer pressure, in order to set internationally agreed policies and minimum standards that its members commit to implementing at national level.” As the FSB continues to consider other U.S. financial firms for designation as G-SIFIs, I encourage my fellow Council members whose agencies are members of the FSB to not again allow the FSB to “front-run” or pressure decisions that must be made first by the Council as a whole.
In my view, delegating policymaking to an international body is not that consistent with American administrative law principles, and entirely necessary in financial regulation. It will be fascinating to see how the courts grapple with the problem.
There's a lot of DPAs out there, and it looks like two swallow spring of judicial supervision of them is about to come to an end, thanks to icy appellate courts. I think it's bad! And I wrote something about it over at the Times:
something must change in the world of deferred prosecution agreements. They are increasing in number every year. The threat of punishment for noncompliance with a deferred prosecution agreement is a court order. Professors who have looked at the way prosecutors supervise deferred prosecution agreements do not like what they see. Prosecutors, moreover, have little experience with the oversight of a bureaucratic effort, even a little one.
It is no way to run an oversight process. If the government is going to set up compliance programs with the specter of a court order looming at the end, then it should not expect that courts will stay out of the process from the beginning. That is how regulation works in this country, and if prosecutors are going to fashion themselves as regulators, then they are going to have to take the bitter with the sweet.
MetLife successfully appealed its designation as a SIFI to the district court in Washington, which took an awfully searching review of the factors used by the FSOC to make the determination. The court, in the end, concluded that the council's designation was arbitrary and capricious, which means it was illegal. The most interesting part of the opinion is the part requiring the FSOC to do a cost benefit analysis before designating.
FSOC has refused to do a quantified cost benefit analysis, which is a departure for the executive branch. The White House requires agencies to conduct one before they promulgate expensive rules. That a financial regulator, where excel spreadsheets and quantified stress tests are part of the job, would refuse to do one in making a determination about the riskiness of a financial institution is a pretty interesting rebuke to those who believe that cost benefit analyses are essential components of effective regulation. But perhaps the FSOC has been listening to John Coates.
Here's what the court had to do to require a cost benefit analysis - most, um, interestingly it relied on the word "appropriate" while ignoring the word "deems" in Congress's guidance about how to do SIFI designations. Most administrative lawyers would conclude that it was up to the Council to decide whether to take costs into account in designations if the statute provides that the FSOC “shall” consider a number of factors and also “in making a designation, any other risk-related factors that the Council deems appropriate.”
But the court thought differently:
FSOC, too, has made the decision to regulate—by designating MetLife. That decision intentionally refused to consider the cost of regulation, a consideration that is essential to reasoned rulemaking. Cf. [Michigan v. Environmental Protection Agency, 135 S. Ct. 2699 (2015)] at 2707 (“Consideration of cost reflects the understanding that reasonable regulation ordinarily requires paying attention to the advantages and the disadvantages of agency decisions.”) (emphasis in original). In light of Michigan and of Dodd-Frank’s command to consider all “appropriate” risk-related factors, 12 U.S.C. § 5323(a)(2)(K), FSOC’s position is at odds with the law and its designation of MetLife must be rescinded.
I'm pretty unpersuaded by that reasoning. Cost benefit analysis may be a good idea, or it may not be, but I don't see how the courts should go around requiring it on the basis of a catch-all clause awarded discretion to the agency to add factors to an already long list of factors to be considered in SIFI designations.
I trust you all enjoyed our symposium on The Power And Independence of the Federal Reserve. There's another one starting on the (excellent) Notice and Comment blog, so do head over there for more takes on Peter Conti-Brown's book, and on assessing the place of the Fed and how it works.
I've got an article on the constitutionality of the SEC's administrative proceedings (bottom line: they are clearly constitutional), and Chris Walker has a take on the issue, and the paper, over at Notice and Comment.
And they are doing well. They - implausibly, by my reading - got a judge not to dismiss claims that Anthony Chiasson's business partner had suffered due process violations, based on the taking of his property, on the fact that their hedge fund was searched based on a misstatement in an affidavit that the business partner knew about the alleged insider trading, and that the supervisors of the lawyers and investigators who brought the claim failed to rein in the unconstitutional conduct of their subordinates. The judge wants discovery.
To me, this order looks bound for a quick reversal, and, as it is a qualified immunity claim that is being rejected, it should be immediately appealable. I'm no expert on searches and seizures. But it would be reasonable to assume that the government, with reason to believe that one of the co-founders of a hedge fund was engaging in insider trading, would search the papers of the hedge fund, including those of the hedge fund's other co-founder, and if the government made a mistake in one of the affidavits supporting the search, that mistake would be immaterial. The defendants in the case are all but absolutely immune prosecutors and law enforcement officials, and the court doesn't even address that issue.
I don't think the interesting thing about the decision is the legal analysis. Instead, it's interesting:
- because Manhattan judges and its US Attorney are in a repeat-player relationship. In this order, one of those judges basically instructed the US Attorney to prepare to be deposed, which is apocalyptically out of the ordinary. It suggests that the judges are really angry about prosecutorial overreaching, or at least that one of them is.
- because this is the sort of relief that judges can uniquely order in business law enforcement. I doubt that the government will ever have to pay Level Global's owners a penny for essentially shutting it down because it thought one of its principals was an insider trader. But courts can force the government to worry about that prospect with intrusive injunctive relief like this, and angered scolding. That's a real remedy, even if the usual remedy - money damages - won't work!
Over at DealBook, I've got a column on international insurance regulation and its discontents. A taste:
The globalization of the rules that govern insurance companies has been extremely quick — too quick for the tastes of many American insurers. They are fighting back by asking for process, process and more process.
I think that the protections sought would be unnecessary, and even counterproductive. But they are classics. The insurers are asking for more notice and comment and more trial-type procedures. Administrative process, and how much of it someone should get, lacks a bit of glamour. But it is something that the government and the financial industry will always fight about.
Go give it a look!