VOLUME 13 • ISSUE 1 • PRINT
PROMISE & PERIL OF PLAIN ENGLISH: MUTUAL FUND DISCLOSURE READABILITY
Anne M. Tucker & Yusen Xia
The SEC requires mutual funds to write disclosures for the average investor using plain English. These requirements make funds’ investment strategies and associated risks transparent and accessible to investors. Improved investor understanding furthers the SEC’s regulation-through-disclosure regime. But our examination of funds’ summary prospectuses—an abbreviated discussion of a fund’s strategies and risks—suggests that funds often fail to meet the plain English standard. Our analysis of all summary prospectuses filed between 2010 and 2020 reveals that mutual funds write long, hard-to-read, and complex disclosures. Importantly, we find that failure to draft disclosures in plain English is more than a technical error. Using a regression model, we find that positive past returns predict easier-to-read disclosures, but an increase in fund risk predicts harder-to-read disclosures. Further, we find that compliance with other metrics of plain English, like short sentences and active voice, predicts easier-to-read disclosures. In other words, compliance in one dimension of plain English writ- ing suggests compliance in other aspects as well.
VOLUME 11 • ONLINE
CAN BLACKROCK SAVE THE PLANET? THE INSTITUTIONAL INVESTORS’ ROLE IN STAKEHOLDER CAPITALISM
Giovanni Strampelli1Full Professor of Business Law; Director of the PhD in Legal Studies, Bocconi University, Milan.
Within a context of increasing concentration of ownership, where the Big Three –BlackRock, State Street and Vanguard– now hold over 20% of the shares in S&P500 companies, the spotlight now falls more than ever on institutional investors, which are being increasingly called upon to play a major role in favoring the shift towards stakeholder capitalism by pursuing environmental and societal objectives. These expectations are reinforced by leading institutional investors’ commitments –such as those included in Larry Fink’s last annual letter– to do well by doing good. In spite of this however, while the incorporation of ESG issues into investment policies is surely intended –perhaps above all– to attract an increasing share of clients that place central attention on those aspects, institutional investors’ commitment to pursue sustainability objectives face several limitations. First, promoting more virtuous conduct by investee companies entails significant costs, thereby impairing institutional investors’ returns. Secondly, even though portfolio value maximization objectives may, to some extent, favor the incorporation of ESG factors into investment and stewardship policies, the dissemination of passive funds (i.e. portfolios that track a particular benchmark equity index) is a factor that can impinge upon the effective capacity of institutional investors to encourage the adoption by investee companies of policies that pursue sustainability objectives. Against this backdrop, this article shows that it is illusory to assume that institutional investors can be charged with the task of pursuing objectives of general interest, such as fighting climate change (thus essentially acting in place of the state), where such a task is not aligned with their clients’ and their own interest in improving risk-adjusted returns.
VOLUME 9 • ISSUE 1 • PRINT
THE FIDUCIARY RULE CONTROVERSY AND THE FUTURE OF INVESTMENT ADVICE
Quinn Curtis
One of the signature rulemaking initiatives of the Obama administration was the Fiduciary Rule, which redefined the relationship between retirement investors and their brokers by imposing broad fiduciary obligations on financial professionals who had previously escaped classification as fiduciaries. The Rule was enormously controversial and was eventually struck down by the Fifth Circuit. Despite its demise, the Fiduciary Rule offers important lessons for regulating investment advice. This paper offers an assessment of the Rule in light of the academic literature. It argues that, while the Fiduciary Rule was a well-intentioned and plausible means to confront the well-documented problem of conflicted investment advice, it promised only modest benefits when all relevant costs were considered, and even those benefits were jeopardized by the risk of rising costs related to compliance and liability. A reform agenda aimed at reducing the demand for costly professional advice is likely to deliver greater returns than regulating how that advice is delivered.
VOLUME 7 • ONLINE
A FEDERAL FIDUCIARY STANDARD UNDER THE INVESTMENT ADVISERS ACT OF 1940: A REFINEMENT FOR THE PROTECTION OF PRIVATE FUNDS
Tyler Kirk
The appropriate role of the fiduciary standard in the financial industry has garnered a lot of attention of late. However, what has gotten lost in the debate is the astonishing fact that Article III courts have barely begun to interpret one of the oldest federally established fiduciary relationships, that of the investment adviser and its client. This Article argues that an investment adviser’s liability under section 206–when acting as the agent for a private fund–should be determined under a federally established uniform framework, and should not be contingent upon the application of state fiduciary law.
VOLUME 6 • ISSUE 1 • PRINT
DISENTANGLING MUTUAL FUND GOVERNANCE FROM CORPORATE GOVERNANCE
Eric D. Roiter
This Article addresses mutual fund governance, explaining how it has recently become entangled with the norms and rules of corporate governance. At one level, it is understandable that the Securities and Exchange Commission (SEC) and courts have viewed mutual funds as a type of ordinary corporation. Both mutual funds and corporations are separate legal entities, having directors and shareholders. Directors of each are held to fiduciary duties, charged with serving shareholders’ interests, and expected to aspire to best practices. However, there are fundamental differences between mutual funds and ordinary corporations.
VOLUME 5 • ISSUE 1 • PRINT
INSTITUTIONAL INVESTING WHEN SHAREHOLDERS ARE NOT SUPREME
Christopher Geczy, Jessica Jeffers, David K. Musto, and Anne M. Tucker
Institutional investors, with trillions of dollars in assets under management, hold increasingly important stakes in public companies and fund individual retirement for many Americans, making institutional investors’ behaviors and preferences paramount determinants of capital allocation. In this paper, we examine high fiduciary duty institutions’ (HFDIs’) response to decreased profit maximization pressure as measured by the effect of constituency statutes on HFDI investment. We ask this question, in part, to anticipate HFDIs’ response to alternative purpose firms, like benefit corporations. Only with access to institutional investors’ capital can alternative purpose firms gain economic significance to rival the purely for-profit corporation. In our empirical study, we ask whether decreased profit maximization pressure, as evidenced by expanded director discretion to pursue nonshareholder interests, affected HFDIs’ decision to invest (or remain invested) in firms incorporated in constituency statute states because of a conflict, or perceived conflict, between fiduciary duties owed to beneficiaries and shareholders and the “other” serving interests. HFDIs, as agency investors for their shareholders and beneficiaries, are subject to strict fiduciary duties, which, among other things, explicitly disallow sacrificing monetary returns for other goals. We focus on HFDIs under the theory that any impact of fiduciary duties on investment behavior would be strongest among those subject to the strictest duties. In other words, if we were to see an effect at all between expanded duties and investment behavior, it would be most easily observable in HFDIs. Our findings also answer questions raised in earlier scholarship regarding the scope and impact of constituency statutes. In addition, our findings connect constituency statutes to the current academic debate on alternative purpose firms by identifying potential litigants and theories of recovery under the new statutes. Finally, we observe that HFDIs did not meaningfully change investment behavior in response to constituency statutes’ expansion of director duties. Our empirical observations are evidence against fiduciary concerns that impede alternative purpose firms’ access to public capital.
VOLUME 1 • ONLINE
A BRIEF HISTORY OF HEDGE FUND ADVISER REGISTRATION AND ITS CONSEQUENCES FOR PRIVATE EQUITY AND VENTURE CAPITAL ADVISERS
William K. Sjostrom, Jr.
Historically, hedge fund advisers have not had to register under the Investment Advisers Act of 1940 (the Advisers Act) because of the private adviser exemption. This exemption applied to an investment adviser who (1) had fewer than fifteen clients during the previous twelve months, (2) did not publicly hold itself out as an investment adviser, and (3) did not advise registered investment companies. Even though a hedge fund routinely has fifteen or more investors, hedge fund advisers were able to meet the fewer than fifteen client requirement because they only had to count as clients the funds they advised (which they were careful to keep at fourteen or fewer) and not individual investors in the funds.