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.
SECURITIES & FINANCIAL REGULATION
SHADOW TRADING AND MACROECONOMIC RISK
Yoon-Ho Alex Lee and Alessandro Romano
This Article explains that “shadow trading” occurs when a corporate insider uses sensitive inside information 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 economy 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.
CORPORATE LAW & GOVERNANCE
THE 401(K) CONUNDRUM IN CORPORATE LAW
Natalya Shnitser
This Article discusses how as institutional investors like BlackRock, Vanguard, and State Street have accumulated 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 deference, 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 deferential to corporate management out of fear of losing the corporations’ retirement plan business.