Exuberance on Fin Reg Reform
Few doubt that a revolution in financial regulation is coming. Treasury and the Fed already have succeeded in engineering considerable revolutionary incursions. Congressional staffers are busy writing even more sweeping legislation. Scores of proposals outline what must be done. They nearly-uniformly prescribe massive concentration of regulatory power in Washington.
Visions encompass all financial services industries, including insurance, banking, securities, futures, hedge funds, private equity and all. Prescriptions extend easily into matters of corporate governance traditionally handled by states. This especially concerns board of director composition and roles, with special attention to limiting executive compensation, at least for corporations of systemic significance.
A few participants evidently hope that revolution can be forestalled. That is a partial explanation for today’s Congressional momentum behind a bill to establish a formal panel to investigate causes of the financial collapse. Yet, peculiarly, even these hopefuls embrace concentrating greater power in Washington, although prescribing a light touch, supervisory, approach, not heavy handed regulatory intervention.
Amid the hurly-burly, I’m contributing two law review articles. Both offer cautionary analysis. One, released on SSRN today, is a comment on Robert Ahdieh’s Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance, just published in George Washington University Law Review.
Professor Ahdeih argues that state competition for corporate charters has little to do with the practice of corporate governance in the United States. Instead, corporate governance realities are a function of competition in managerial and capital markets. This means, among other things, that the reality would not change were Congress to preempt state corporation law and enact a federal corporation law.
Professor Ahdeih makes a plausible case that, contrary to historical precedent and common belief, such a preemptive federal corporation law need not resemble the typical mandatory, regulatory and interventionist character of federal securities regulation governing public corporation. It could be just as flexible and responsive as state corporation law has been.
My comment, to appear in a forthcoming issue of GWU Law Review explores this aspect of Professor Ahdeih’s thesis in some detail. It shows support for the thesis in one of the leading pending position papers on financial regulation reform: former Treasury Secretary Henry Paulson’s March 2008 blueprint, released at the dawn of crisis and still commanding considerable attention.
Despite appeal, however, the current political atmosphere more likely will result in federal intervention that is highly-regulatory and full of mandatory rules and limits, rather than offering the principles, flexibility and light touch characteristic of traditional state corporation law.
It is not far-fetched to imagine, for example, a new federal corporation law governing any corporation deemed to be of systemic significance, whether in banking, insurance or even automobile manufacturing or finance. Such a law could establish strict requirements for board of director size, composition, and duties. It could establish strict limits and parameters governing executive compensation. Certainly, it is not impossible for such federal intervention to take a lighter touch, but the current atmosphere suggests reason to doubt that result.
In what amounts to a related Article, written with David Zaring, and to appear in yet a later issue of GWU Law Review, we offer a deeper cautionary analysis about today’s exuberant appetite for revolutionary regulatory reform. We also offer a sober framework for evaluating contending alternative reform visions. It will be released on SSRN shortly and I plan to write a blog post here when it does.
For now, as I note in another nearby post, I can say that in the Article we: (1) caution that reforms should not discount the value of traditional financial regulation, overlook the functional regulatory reform that has already occurred, or overstate ultimate differences between contending reform proposals and (2) provide a framework for evaluating the scores of pending proposals into a manageable three or four alternative approaches to financial regulation that pose a just a few, but very stark, choices.