Peter Conti-Brown and Brian D. Feinstein
This Article suggests that the federal government’s primary financial-regulatory tool for combating wealth inequality is broken. Intended to push banks towards deeper engagement with lower-income and minority communities, the Community Reinvestment Act (CRA) of 1977 has failed to meaningfully reduce the prevalence of “banking deserts” across lower-income communities or to reduce the racial wealth gap. As regulators circulate a proposed overhaul and the prospect of generational reform appears within reach, there is a danger that the CRA’s current moment in the sun will pass without the law being substantially improved.
This Article argues that the roots of the CRA’s problems are supervisory: bank examiners have severely skewed CRA examination scores to presume suc- cess in community lending. The Article documents, for the first time, the extreme grade inflation in examinations, with 96 percent of banks receiving one of the top two ratings. Given the persistence of underinvestment in lower-income and minority communities, that result beggars belief.
As a corrective, banks should be graded on a curve, with a certain percent- age of institutions slotted in most grade categories—including, importantly, the categories that prevent banks from pursuing new business opportunities. This reform—which, to maximize its effectiveness, should be enacted in tandem with a collection of other measures designed to discourage regulatory arbitrage— would enable the CRA to fulfill its promise: to expand access to credit, spur investment in overlooked areas, and combat racial inequities through the finan- cial system.
Yoon-Ho Alex Lee and Alessandro Romano
This Article explains that “shadow trading” occurs when a corporate insider uses sensitive inside infor- mation pertaining to her own firm to buy or sell shares of other companies whose stock price movements can be predicted given the information. These transactions are highly profitable but not systematically regulated, and there is evidence that they are a widespread phenomenon among corporate insiders. Un- like classical insider trading, shadow trading by a corporation’s insiders does not result in a direct harm to the corporation’s own shareholders, and to some extent, shareholders may even benefit from such transactions. In this Article, we argue nevertheless that shadow trading poses three issues: (i) it can create a moral hazard problem for corporate insiders, which can lead them to engage in excessive corporate risk-taking and to even invest in negative-expected-value projects; (ii) it can increase the level of macroeconomic risk to which the econ- omy is exposed; and (iii) it can exacerbate the severity of economic crises. Our analysis thus offers novel rationales for regulating shadow trades. This Article concludes by suggesting a menu of possible policy reforms that can address the problems created by shadow trading.
Natalya Shnitser
This Article discusses how as institutional investors like BlackRock, Vanguard, and State Street have accu- mulated ever larger stakes in U.S. public companies, their voting behavior has come under increasing scrutiny. Scholarship analyzing voting by institutional investors—and particularly mutual funds—has focused on the passivity of mutual funds as shareholders and their reluctance to vote against the preferences of management. While scholars have explored a variety of theories for such defer- ence, a recurring explanation has emphasized that the largest fund managers also have business lines that offer services to 401(k) retirement plans sponsored by U.S. companies. Accordingly, numerous scholars have advanced the theory that institutional investors—and particularly mutual funds—have been deferen- tial to corporate management out of fear of losing the corporations’ retirement plan business.
The theory, though repeated often in corporate law scholarship and in rulemak- ing proposals, rests on limited empirical findings and outdated assumptions about how corporations make decisions about their retirement plans. This Arti- cle makes two key contributions: first, it draws on employee benefits law—in- cluding the Employee Retirement Income Security Act of 1974 (ERISA)—to illuminate legal requirements and norms that characterize corporate decision- making about the design and administration of employer-sponsored retirement plans. Second, this Article argues that the dramatic rise of ERISA fiduciary liti- gation over the last fifteen years has transformed decision-making within plans and constrained the ability of corporate managers to credibly threaten institu- tional investors who vote against management interests. Newly hand-collected data and survey results reveal that decision-making increasingly lies with plan administrative and investment committees, which draw from a range of roles and expertise within the company and require their members to undergo fiduci- ary training. Furthermore, insurance companies scrutinize plan governance and investment menus before issuing policies for fiduciary liability insurance. Taken together, these findings cast doubt on the traditional explanation for the voting behavior of institutional investors. A revised and richer understanding of the relationship between institutional investors and corporate retirement plans helps explain newer voting patterns, including institutional investors’ increasing will- ingness to challenge corporate management on certain environmental, social, and governance proposals.