Robert M. Lawless and Elizabeth Warren
This article assesses the state of empirical legal research and chronicles the field's history focusing on bankruptcy. This article begins with a discussion of what might have attracted bankruptcy scholars to extract an empirical vein in their scholarly work. It offers a short chronicle of the development of empirical bankruptcy scholarship from Justice Douglas to the current generation. Because of the relative paucity of such scholarship outside the U.S., this chronicle inevitably focuses on that country. It is divided into separate discussions of individual and corporate bankruptcy. It elaborates the substantial amount of empirical scholarship in bankruptcy as compared with other fields, the grounds on which academic debates play out offer significant explanatory factors. This article concludes with some discussion regarding empirical questions on which bankruptcy scholars might probably focus future attention.
This chapter discusses the relationship between comparative law and economic analysis of law. After providing an overview of the characteristics of the economic analysis of law, it explains how one of the two disciplines can operate as an ancillary discipline to the other; this has been termed ‘Comparative Law and Economics’. The next section describes how comparative law and economic analysis of law can be brought together by making one discipline the subject matter of the other. It suggests that the role of economic analysis of law may be greater in case law systems than in codified systems and that this role may vary according to the subject of legislation. The section concludes with considerations on the role comparative law plays and should play in different contexts. Finally, it is argued that comparative law and economics should not be considered a discipline on its own.
The story of comparative law in the field of sales contracts is inextricably linked to Ernst Rabel. Rabel not only prepared the basis for any comparative study of the modern law of sales in his epochal treatise ‘Das Recht des Warenkaufs’, but also initiated the process of world-wide harmonization of the law of international sales. This process has not only led to one of the most important international conventions in the field of private law (the 1980 UN Convention on Contracts for the International Sale of Goods—CISG) but has also become a highly influential factor in the field of comparative sales law in the twentieth century. The article first outlines the most important projects in this area and their interaction with comparative law. It then goes on to discuss selected characteristic features of the law of sales which are interesting from a comparative point of view.
This Chapter examines conduct of business (COB) regulation, which governs the conduct of financial intermediaries in providing financial products and services. It considers financial intermediaries’ functional lines of business, particularly their securities activities. The Chapter discusses the rationales for COB regulation, the modal regulatory strategies used, and frameworks within which COB regulation operates. It then looks at COB regulation in the US, focusing on important market and regulatory developments in recent decades, including the adoption of a bifurcated regulatory regime in the aftermath of the 1929 market collapse and Great Depression; divergent rules of conduct, with reference to duties of loyalty and care; disclosure practices; and remuneration-based risks faced by broker-dealers. COB regulation in the US is then compared with that in Australia and the EU. Finally, the Chapter assesses reforms that have been proposed or adopted in the wake of the global financial crisis of 2007–09.
Dimity Kingsford-Smith and Olivia Dixon
This Chapter examines the paradox underlying the regulation of consumer interest in financial markets. It explains how consumer interest in financial markets is shaped by the ‘financialization’ of welfare provision. The discussion begins by considering the paradoxical need to regulate to reduce investment risk while also regulating to retain risk. The Chapter then looks at consumer interest in goods and services markets, the concept of ‘financial citizen’ and its limitations especially the insights of behavioural psychology and financial literacy, financialization, and citizenship. It also describes the ‘financial citizen’ as protected investor and as well-informed and confident investor or consumer. Finally, it analyses the regulation of the ‘financial citizen’ since the 2007–09 global financial crisis, with reference to the creation of consumer protection authorities, product intervention, mortgage-lending practices, simplified product disclosure, mitigation of conflicts of interest in financial advice, the distinction between wholesale and retail investors, and institutional restructuring.
This chapter argues that poverty is created, maintained, and regulated. Global poverty occupies a unique position as both the ‘blind spot’ and raison d’être of an international legal system that has long attempted to secure a veneer of cooperation, justice, and legitimacy over a reality of competition, conquest, and exploitation. As such, it vividly illustrates the radical indeterminacy and ‘schizophrenia ‘ that ‘ tear[s] apart the fragile structure’ of international law. That this contradiction appears to be little analysed, that there is so little conversation to detail, is testament to the strategies deployed to naturalize, excuse, and obscure the ‘fact’ of poverty.
Douglas W. Arner
This Chapter discusses regulation and supervision of financial institutions operating across borders. The cross-border supervision of internationally active financial institutions raises a distinct set of institutional and coordination risks to financial stability. It begins with a discussion of questions relating to market access and licensing before turning to questions of supervision, regulation, and resolution. The Chapter concludes with a discussion of the outlook for continued globalization of financial services.
This chapter examines the provisions of the Treaty on the Functioning of the European Union regulating capital movements both within the internal market and between Member States and third countries (Articles 63–65 TFEU). It reflects critically on the impact of these provisions on the activities of two distinct categories of market participant: corporate actors and (Union) citizens. The legal framework governing both intra- and extra-EU capital movements is characterized as an unusual mixture of the familiar and the exceptional. On the one hand, the free movement of capital is now an integral part of the internal market. At the same time, however, it retains key distinguishing features: a unique evolutionary trajectory; an external scope of application; and an uncharacteristic degree of residual direct Member State control.
Luca Enriques and Sergio Gilotta
This Chapter examines the debate over mandatory disclosure (MD) to the general public as a regulatory technique for financial markets, with emphasis on issuers of securities. It begins by outlining the goals that underlie MD as well as the various rationales for MD as opposed to voluntary disclosure, paying particular attention to information as a public good, externalities entailed by corporate disclosure, the agency problem, the need for a subsidy to informed traders, and standardization in information. It then discusses the limits and costs of MD before concluding with an assessment of some of the challenges faced by policymakers with regard to MD.
This Chapter examines evidence on the structure of ownership, control, and financing of corporate sectors in developed countries to draw lessons for economic development and the development of financial markets. It records the critical role that equity markets played in the ownership and financing of corporations throughout the twentieth century and how this occurred in the absence of formal systems of regulation, relying on a variety of informal institutional arrangements. The Chapter contrasts these informal arrangements in equity markets with the formal regulation that is required in banking. It describes the shift from micro-regulation of individual banks to the macro-prudential regulation of banking systems as a whole. It argues that these should be part of a clearly defined partnership between the state and banks by which the state protects core components of a banking system in return for banks delivering key economic and public functions. Finally, the Chapter questions whether the traditional elements of financial markets are correct in light of, first, the explosion of mobile money and, second, the emergence of China and Korea as major economic powers with equity markets that are very different from standard models.
This chapter deals with issues of regional economic integration in a comparative perspective. It is divided into two parts: a conceptual and a theoretical part. The conceptual part starts with a definition and typology of economic integration. It then presents features of institutional design that capture the institutional variation and development of regional economic integration. This conceptual apparatus has been used recently to map regional economic organizations and describe their variation and development. The theoretical part begins with economic theories of integration, which have, however, little to say about the political process of integration and the role and effects of institutions and organizations. It then moves on to political theories of economic integration, which have mainly been developed in the context of European integration: intergovernmentalism, supranationalism, and constructivism.
Richard R.W. Brooks
This chapter examines the treatment of fiduciary law in the field of law and economics. It begins with a typology of three theoretical tracts that accounts for loyalty in economics: the first tract takes a structural approach to questions of loyalty and disloyalty based on models occupied by strictly rational economic agents who are unable to choose or act in any manner than that dictated by narrow self-interests; the second explains loyalty in terms of personal character or preferences for particular actions and choices; and the third approaches loyalty in terms of allegiances to relationships or associations and, more specifically, to their associated rules of conduct. The chapter then discusses these three theoretical tracts of loyalty by reviewing the law and economics literature on beneficiaries and fiduciaries in general, and principals and agents in particular. The discussion is organized along lines of the two branches of scholarship that defines the field of law and economics: institutional economic analysis and economic analysis of law.
This Chapter deals with enforcement and sanctioning as part of financial regulation. It examines issues such as the role of private enforcement in supplementing public enforcement, the extent to which individuals should be held accountable compared to their employers, and how to design effective sanctions. It first provides an overview of enforcement strategies that a regulator may adopt, followed by a discussion on enforcement and its relation to the compliance strategies employed by regulated firms. It then reviews empirical studies of enforcement activity in the UK and the US, with particular emphasis on the impact of different enforcement styles, including private enforcement. It also explores the role of discretion in enforcement, along with the type of sanctions and how they are applied to individual cases. The article concludes by analysing the mechanisms used by regulators to facilitate enforcement in cases where financial markets and firms have a cross-border dimension.
This Chapter traces the evolution of theories and methods in law and finance following the financial crisis in 2008. It begins by analysing the notion of financial (and other) markets as complex, adaptive systems before turning to a discussion of the efficient capital market hypothesis. It then looks at the emergence of prices as a learning process, in which agents adjust their expectations and actions to a changing environment. It also examines the implications of behavioural economics for law and finance, along with the coevolution of the legal and financial systems. In addition, the Chapter considers methodological issues arising in the context of the empirical study of law and finance, with reference to data-coding techniques (‘leximetrics’) and statistical methods (time-series econometrics). Finally, it discusses how financial crises can be better understood by means of a learning model of the policymaking process.
Howell E. Jackson and Talia B. Gillis
This chapter explores the application of fiduciary duties to regulated financial firms and financial services. At first blush, the need for such a chapter might strike some as surprising in that fiduciary duties and systems of financial regulation can be conceptualized as governing distinctive and nonoverlapping spheres: fiduciary duties police private activity through open-ended, judicially defined standards imposed on an ex post basis, whereas financial regulations set largely mandatory, ex ante obligations for regulated entities under supervisory systems established in legislation and implemented through expert administrative agencies. Yet, as the chapter documents, fiduciary duties often do overlap with systems of financial regulation. In many regulatory contexts, fiduciary duties arise as a complement to, or sometimes substitute for, other mechanisms of financial regulation. Moreover, the interactions between fiduciary duties and systems of financial regulation generate a host of recurring and challenging interpretative issues. The chapter explores the reasons fiduciary duties arise so frequently in the field of financial regulation and provides a structured account of how the principles of fiduciary duties interact with the more rule-based legal requirements that characterize financial regulation. As grist for this undertaking the chapter focuses on a set of roughly two dozen judicial decisions and administrative rulings to illustrate its claims.
Andrew F. Tuch
This chapter examines fiduciary principles in banking law, focusing on both commercial and investment banking. It considers when fiduciary duties exist and what they require, the range of remedies available for breach, and the various techniques banks use to exclude or modify fiduciary duties. One puzzling feature of the legal landscape is that clients bring actions less often than banks’ size and conduct might suggest, contributing to legal uncertainty. Fiduciary law nevertheless constrains banks’ activities: courts have cast banks as fiduciaries in all of the major commercial and investment banking functions, including making loans and accepting deposits, advising on merger and acquisition transactions, and underwriting securities offerings, although banks face greater risk in some areas than others. Banks have responded by disclaiming fiduciary duties and using information barriers/Chinese walls, and yet recent judicial decisions refuse to accept these measures as automatically effective for avoiding fiduciary liability. Courts insist that they, rather than the parties themselves, determine whether fiduciary duties exist and what they require. The law thus diverges from some theoretical accounts of fiduciary doctrine, posing challenges for banks and new questions for scholars.
John A. E. Pottow
This chapter examines fiduciary duties in bankruptcy and insolvency, focusing on the bankruptcy trustee’s duties, which are triggered by virtue of appointment in a case. It first provides a background on bankruptcy law in order to elucidate the doctrines and rules affecting fiduciary responsibilities in bankruptcy, citing a number of relevant provisions in the Bankruptcy Code. It then considers the fiduciary, non-fiduciary, and anti-fiduciary obligations of the trustee under the Bankruptcy Code before discussing the fiduciary duties of care and loyalty. In particular, it highlights bankruptcy-related issues raised by the duty of loyalty with respect to secured creditors, priority unsecured creditors, general unsecured creditors, and debtors. It also explores the byzantine protective remedies available to trustees should there be a breach of fiduciary duty and concludes with an analysis of miscellaneous additional duties of the trustee in insolvency, as well as the unique challenges the debtor-in-possession (DIP) faces with its duty of loyalty. The chapter suggests that the Bankruptcy Code has many safeguards designed to confront conflicting creditor incentives, both against the DIP and in insolvency, that help fill the gaps left by reliance upon fiduciary duty law alone.
Lloyd Hitoshi Mayer
This chapter provides an overview of the fiduciary principles that apply to charities and other nonprofit organizations. More specifically, it discusses the criteria that trigger a fiduciary relationship, the duties of loyalty and care, other legal obligations that may apply to nonprofit fiduciaries, and the extent to which those duties and obligations may be modified or avoided. In the course of doing so, it draws upon applicable state law, applicable federal tax provisions, and various model and uniform acts. It also discusses and critiques the approaches taken to these principles by the draft Restatement of the Law, Charitable Nonprofit Organizations.
Arthur B. Laby
This chapter examines the fiduciary principles governing investment advice. Fiduciary principles in investment advice are both straightforward and complex. They are straightforward because most investment advisers are considered fiduciaries and subject to strict fiduciary duties under federal and state law. Their complex nature arises from the fact that many individuals and firms provide investment advice but are not deemed investment advisers and, therefore, are not subject to a fiduciary obligation. This chapter first explains whether and when an advisory relationship gives rise to fiduciary duties by focusing on both federal and state law, as well as the individuals and firms that typically provide investment advice. In particular, it looks at certain persons and entities excluded from the definition of investment adviser and thus not subject to the Investment Advisers Act of 1940, namely broker-dealers, banks, and family offices as well as accountants, lawyers, teachers, and engineers. The chapter also considers fiduciaries under ERISA, the Investment Company Act, and the Commodity Exchange Act before discussing the fiduciary duty of loyalty and how it is expressed and applied in investment advisory relationships; the fiduciary duty of care and how it differs from other standards of conduct, such as a duty of suitability; and other legal obligations imposed on investment advisers and how those obligations relate to an adviser’s fiduciary duty. Finally, the mandatory or default terms with regard to an investment adviser’s fiduciary duties are explored, along with remedies available for breach of fiduciary duty.
Dana M. Muir
This chapter examines the underlying fiduciary principles of pension law, focusing on two forms of pension plans: defined contribution (DC) plan and defined benefit (DB) plan. It first considers the ERISA principles and how they differ from public-sector pension law, along with the extent to which the courts have applied general principles of trust law when interpreting and filling gaps in ERISA. It then discusses the fiduciary triggers of pension law, laying emphasis on the definition of fiduciary in pension law and the ways in which that definition is circumscribed. It also tackles the fiduciary status that arises when investment advice is given in the case of DC plans, co-fiduciary liability that exists under ERISA, how ERISA circumscribes the extent to which fiduciaries owe duties, and the “two hat” problem that arises when the plan sponsors act as fiduciaries. The chapter proceeds by analyzing the fiduciary duties of loyalty, care, and diversification as applied in the pension plan context; breach of fiduciary duty associated with the selection of investment options and service providers; employer stock as an investment option in DC plans; and economically targeted investments. Finally, it explains ERISA’s periodic and episodic disclosure obligations that intersect with fiduciary duties, along with other legal obligations, mandatory and default rules governing a pension plan fiduciary’s obligations, and remedies under ERISA available to pension plan participants in cases of breach of fiduciary duty.