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No full textA review of The Shadow Docket: How the Supreme Court Uses Stealth Rulings to Amass Power and Undermine the Republic. By Stephen Vladeck
The Duty to Diversify and the Logic of Indexing
No full textIndex funds, such as those that track the S&P 500, are popular with investors because they offer maximum diversification—and thus minimum risk—with management fees that are far lower than those charged by traditional, actively managed stock-picking mutual funds. As a result, investors have flocked to such funds, which have grown dramatically in size. But many observers find this trend alarming because they see index funds as a threat to both corporate governance and competition.
Most critics have focused on the passivity of index funds, which they see as a failure of fund managers to do their duty as stockholders to vote with care and otherwise to engage with portfolio companies to induce optimal performance. They also see index fund passivity as free riding on the efforts of other stockholders who do their duty to monitor investee companies. In other words, they see a case of market failure in which index funds offer higher returns at lower cost because they shirk their responsibility to participate in corporate democracy. Other critics focus on the idea that index funds own a large percentage of the market and then jump to the conclusion that they will use their market power to cajole or coerce portfolio companies to modify business strategies. In short, the critics are worried that index funds will both do too little and do too much. But it cannot be that index funds will use their power to meddle in the affairs of investee businesses and, at the same time, neglect to engage with the management thereof. This puzzling division of opinion suggests that index funds are not well understood—even by many sophisticated observers.
This Article addresses the confusion about index funds and concludes that the worries expressed by the critics are not only unfounded, but also that index funds make the market more efficient. Specifically, that critics have failed to see (1) the compelling logic that leads investors to invest in index funds, (2) the natural constraints on index fund managers that prevent abuses, and (3) the significant ways in which index funds augment the disciplinary forces of the market. This Article focuses solely on true index funds—those that track a broad-based capitalization-weighted market index (such as the S&P 500). Although there are many funds that track other indices— including industry sectors and even idiosyncratic investment theories—the argument here focuses on the logic of investing in the market as a whole (or as much of it as is reflected by the S&P 500).
First, ordinary investors in common stock—those who have no reasonable expectation of influencing company management or business policy—have no real choice but to invest in index funds, which offer the same expected return as stock-picking funds but at the least possible risk. Moreover, an index fund investor can expect a higher rate of return over the long-term than an investor who chooses a riskier fund—even though both funds offer the same average annual rate of return. Although this may sound too good to be true, it is a straightforward implication of compounding of returns. Finally, index investors ultimately drive stock prices higher because they are willing to pay more for a given stock because they assume less risk and expect higher returns by virtue of indexing. As a result, investors who decline to invest in an index fund must pay more for the stocks they buy than the prospect of expected returns justifies because they assume more risk than necessary.
It also follows that fiduciary duty requires investment advisers to recommend index funds to their ordinary-investor clients because the duty of care is measured by how a reasonably prudent person would act in the conduct of their own affairs. This is a radical proposition. It implies that much investment advice borders on fraud. It also explains why the securities industry has so vigorously opposed regulations that would classify broker-dealers as fiduciaries.
Second, the foregoing logic applies doubly to index fund managers, who are required by statute to be registered investment advisers and are thus fiduciaries. For an index fund manager, the logic of indexing leaves little room for discretion in connection with choosing or trading portfolio stocks, which must be held in proportion to market capitalization. Thus, indexing implies that research is a literal (and legal) waste because the fruits thereof it can have no use. To expend fund resources thereon or to charge the fund a fee to defray such costs is a per se breach of fiduciary duty. In contrast, the managers of a traditional stock-picking fund will almost always be protected by the business judgment rule in connection with any investment or trading decision they may make. This is true even to the extent of a decision to alter fund strategy, as long as the managers can provide some reasonable explanation for their decisions.
This same logic applies to voting and other forms of engagement with portfolio companies. Presumably, the purpose of engagement is to enhance performance and return. Consequently, managers of traditional stock-picking mutual funds have broad discretion both as to voting the shares they hold and otherwise kibbitzing with portfolio company management. But engagement is expensive. It requires delving into the operational details of individual portfolio companies. For index fund managers, whose portfolios are hedged by virtue of being fully diversified, it makes no sense to devote fund resources to such ends. One possible exception to this general rule arises when some improvement in corporate governance might make many companies better off. But ironically, such efforts have been dismissed by some critics as low-value engagement.
Third, despite their supposed passivity, index funds contribute significantly to the disciplinary forces of the market. The minimal trading they do for purposes of maintaining portfolio balance has the effect of rewarding companies who perform better and punishing companies who perform worse. Moreover, portfolio companies understand that indexing leaves no room for them to talk their way out of the consequences of mismanagement (as might be the case with the managers of a stock-picking fund). As for voting fund shares, index funds that follow the sensible practice of mirror voting—voting fund shares in proportion to the votes cast by other shares—effectively enhance the voting power of actively managed funds, which increases the voice of stockholders who have strong opinions. In other words, index funds reduce the separation of ownership from control.
The overarching point of this Article is that the logic of indexing has profound legal implications. For one, indexing should not be seen as opportunism (or market failure), but rather should be seen as an innovation that makes some investors better off without significant externalities, and without foisting any clear loss on other investors. For another, the benefits of indexing are so demonstrable that they imply that fiduciaries have no choice but to recommend that their clients who invest in common stocks invest in an index fund. In other words, it should be seen as a breach of fiduciary duty for an investment adviser not to recommend indexing to such clients, which may also explain much of the growth indexing. In short, index funds have made the financial world a much better place than it was in the past. And efforts to control their further growth and evolution should be undertaken only with an abundance of caution
Transcription of 2023 Texas A&M Law Review Symposium: More Than Sports: What Comes After NIL?
No full textThis transcription presents Jeffrey Kessler\u27s keynote speech at the 2023 Texas A&M Law Review Symposium on NCAA v. Alston and the future ahead
Chapter 5 Avoidance Actions Can be Sold as Property of The Estate
No full text(Excerpt)
Many courts, including the Fifth, Seventh and Ninth Circuits, have found that avoidance actions, under Chapter 5 of the Bankruptcy Code, are property of the estate. Section 541(a)(1) of the Bankruptcy Code defines property of the estate as all legal or equitable interests of the debtor in property as of the commencement of the case, and section 541(a)(7) states that [a]ny interest in property that the estate acquires after the commencement of the case is estate property. The Supreme Court has interpreted the definition of property of the estate broadly, finding section 541(a)(1) can be read to include in the estate any property made available to the estate by other provisions of the Bankruptcy Code. Arguments for and against avoidance actions being sold as property of the estate have been prevalent until recently, when the Eighth Circuit definitively held that avoidance actions are property of the estate and can be sold.
Chapter 5 of the Bankruptcy Code grants bankruptcy trustees the power to set aside certain types of transfers and recapture the value of these avoided transfers for the benefit of the estate. These powers are part of the bankruptcy estate. Once the transfers are avoided and the property is recovered, the property becomes part of the bankruptcy estate and is available for distribution to creditors. Further, [u]pon the commencement of a case in bankruptcy, all corporate property passes to an estate represented by the trustee. The trustee is then accountable for all property received, and has the duty to collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of the parties.
This memorandum will explore the differing arguments for whether chapter 5 avoidance actions may be sold as property of the estate. Part I will discuss what constitutes property of the estate under 11 U.S.C §541(a)(1)-(7) and the analysis of why avoidance actions can be sold as such. Part II analyzes the legal arguments against avoidance actions being property of the estate with analysis from both sides of the issue and how it has been analyzed in previous courts. Part III will conclude with an overall summary of the issue
U.S. Bankruptcy Courts Balance the Statutory Protections of Stakeholders with the Needs of Discovery in Foreign Bankruptcy Proceedings
No full text(Excerpt)
Chapter 15 of title 11 of the United States Code (the Bankruptcy Code ) establishes methods for managing insolvency cases that encompass debtors, assets, claimants, and other parties across multiple nations. Section 1521(a)(4) allows courts to grant discovery relief. To determine whether to grant discovery relief, courts balance the right to discovery relief with stakeholder interests. As part of a U.S. courts’ analysis, it considers principles of comity to support a foreign bankruptcy proceeding.
This memorandum discusses the statutory availability for discovery relief under chapter 15, limitations on discovery imposed by courts to protect stakeholder interests, comity, and how courts balance these considerations when granting or denying discovery relief
Service of a Subpoena through Alternative Means: Social Media
No full text(Excerpt)
Service of a subpoena via a means besides personal service, i.e., alternative service, has been routinely authorized under Rule 45 of the Federal Rules. The functional purpose of requiring delivery is to ensure receipt, which then allows the enforcement of a subpoena to be consistent with due process. With the development of new means of communication, however, an emerging issue has become whether service of a subpoena via social media may provide similar evidence of actual receipt. Many courts have read Rule 45 broadly to allow for service of a subpoena through social media if certain fundamental requirements are met. However, some jurisdictions remain hesitant in reading out the express personal service requirement.
Part I of this memorandum addresses how service of a subpoena through alternative means is consistent with Rule 45 and due process if a plaintiff (1) shows a diligent effort to personally serve and (2) the alternative method of service is reasonably calculated to ensure actual receipt. Part two of this memorandum expands on the first and analyzes how less-traditional alternative means (i.e., certified mail, email, and social media) are reasonably calculated to provide proper notice. Part III of this memorandum offers a countervailing position, noting how some courts apply a more stringent interpretation of Rule 45 and only find personal in-hand service sufficient
Insider may be an alter-ego when it exercises control over a debtor
No full text(Excerpt)
Section 101(31) of title 11 of the United States Code (the Bankruptcy Code ) defines an insider. This definition, however, is not exhaustive. Courts have concluded that certain persons or entities not mentioned in the statute can be non-statutory insiders. In certain circumstances, a statutory or non-statutory insider may be the alter-ego of a debtor. As an alter-ego, an insider may be liable for a debtor’s debt. Alter-ego liability may be imposed on an insider who significantly controls the debtor and has committed some form of injustice.
This memorandum discusses an insider’s possible liability for a debtor’s debt in the Second and Third Circuits. Part I discusses statutory insider and non-statutory insider. Part II outlines the factors of an alter-ego claim. Parts III and IV examine when an insider is or is not an alter-ego of a debtor, which typically hinges on the amount of control an alleged insider asserts over a debtor. Specifically, Part III examines when an insider has been held liable, while Part IV examines when an alleged insider has not been held liable for a debtor’s debt
Good Deeds? A Critical Race Analysis of the Nova Scotia \u3ci\u3eLand Titles Clarification Act\u3c/i\u3e
No full textThe Nova Scotia Land Titles Clarification Act (“LTCA”) is remedial legislation that was enacted in 1964 to resolve insecure land titles within designated communities, particularly African Nova Scotian communities. However, African Nova Scotians had been advocating for legal title to their land for over 100 years prior to the enactment of the LTCA, and those demands were largely ignored by the government. Furthermore, despite the 60-year existence of this remedial legislation, many African Nova Scotians still hold insecure title to their land. Through a critical race analysis, this article explores why the LTCA has failed to achieve its promise to African Nova Scotians and attributes that failure to the converging interests which gave rise to the enactment of the LTCA but were insufficient to sustain transformative change. The author concludes that unless the motivations for racial equality change, the promise of prosperity for African Nova Scotians will not be achieved.
La loi sur la clarification des titres de propriété (Land Titles Clarification Act) de la Nouvelle-Écosse (“LTCA”) est une loi corrective qui a été adoptée en 1964 pour résoudre le problème des titres fonciers non sécurisés au sein des communautés désignées, en particulier les Afro-Néo-Écossais. Cependant, les Néo-Écossais d’origine africaine réclamaient depuis plus de cent ans des titres de propriété pour leurs terres depuis plus de cent ans avant la promulgation de la loi, et ces demandes ont été pour l’essentiel ignorées par le gouvernement. En outre, malgré les soixante ans d’existence de cette législation corrective, de nombreux Néo- Écossais d’origine africaine détiennent toujours des titres fonciers incertains. Par le biais d’une analyse raciale critique, cet article explore les raisons pour lesquelles la LTCA n’a pas tenu ses promesses à l’égard des Néo-Écossais africains. L’auteur conclut qu’à moins que les motivations en faveur de l’égalité raciale ne changent, la promesse de prospérité pour les Afro-Néo-Écossais ne sera pas tenue
