Kaal claims by topic: risk-and-incentives

779 atomic, individually citable claims from the published work of Wulf A. Kaal tagged risk-and-incentives.

The authors propose that private ordering can design an adjudication system for European corporate law better than public ordering by Member States that are marketing their corporate laws to managers and investors abroad. 2004
Regulatory competition for a bundled product of statutes plus courts is only a realistic possibility if relatively high supply side hurdles can be overcome to induce states to enter the market for corporate law. 2004
European lawyers may advise clients to incorporate at home simply because those lawyers do not want to deal with the courts and lawyers of another Member State, which suppresses cross border incorporation independently of statute quality. 2004
No Member State currently has courts specializing in corporate law comparable to the Delaware Court of Chancery, and establishing such courts or upgrading existing ones would be expensive for most Member States, with high marginal costs as usage grows. 2004
Fear of judicial bias operates through risk premiums: because investors and managers are uncertain how foreign judges will behave and may assume the worst, they price a decision to incorporate in another Member State higher. 2004
A single body of arbitrators affiliated through an association is better positioned than the courts of separate Member States to develop a systematic and consistent approach to the conflict of laws problems unique to the incorporation theory. 2004
Member States should provide in their corporate statutes an arbitration enabling provision allowing corporate charters to mandate arbitration of internal affairs disputes instead of adjudication in national courts. 2004
Compensating arbitrators by the number of cases they hear gives litigants a substantial role in shaping the system but may yield decisions so eager to please all parties that they lack decisiveness, sound reasoning and value as precedent. 2004
Arbitration of corporate governance disputes has not emerged in the United States because arbitration is at best the next best alternative to Delaware, and a second place finish does not justify the investment needed to design a workable arbitration framework. 2004
Valuation is very likely to become the next major issue for the hedge fund industry, because most jurisdictions lack regulatory oversight of valuation and the industry generally lacks self-discipline and internal controls. 2009
Because realization events for private equity investments occur infrequently, hedge fund managers have an incentive to avoid side pockets and to use estimated valuations for those investments instead. 2009
The hedge fund fee structure creates very strong financial incentives for managers to hide weak performance through valuation. 2009
Because net asset value drives subscriptions, redemptions, performance calculations, advertising, and fees, managers who both manage and value the portfolio have both an incentive and the ability to inappropriately over-value their portfolios. 2009
There is an adverse selection problem in independent valuation: an administrator who actually had the knowledge and understanding of complex instruments required for the task would probably be incentivized to use that expertise in a more profitable setting instead. 2009
The principal-agent problem in complex financial products is exacerbated by hierarchies in financial institutions, which create multiple layers of agency relationships between the traders using the products and the principals bearing the real economic risk. 2009
Moral hazard is worsened when the financial products traded are so complex that the agents, mostly on the buy side, do not entirely understand them and trade for the principal on the basis of incomplete and asymmetric information. 2009
Mandatory risk disclosure to the SEC would probably fail on staffing grounds, because professionals capable of understanding hedge fund risk data would be disincentivized to use that knowledge for supervision rather than economic gain, finding the private sector far more lucrative. 2009
Requiring hedge funds to supply risk and valuation data in a simplified format would in fact impose a significant burden on the industry, since simplification requirements would raise transaction costs, require pre-screening, and possibly additional staff. 2009
A retail investor asset threshold would be gamed: managers would be incentivized to keep retail assets under the applicable threshold, thereby keeping the fund in the existing regulatory scheme without implementing additional retail investor protection. 2009
Regulation targeted only at retail investors is misdirected, because incomplete and asymmetric information, bounded rationality, and moral hazard make it difficult even for professional and semi professional investors to discern the characteristics of highly complex instruments and hard-to-value assets. 2009
Investor suitability standards would address the sophistication problem by requiring independent verification that investors in highly complex financial products can evaluate investment risk independently and are capable of making independent investment decisions. 2009
If section 7216 becomes law and permits extraterritorial application of US antifraud provisions, it would further incentivize forum shopping by plaintiffs' attorneys. 2010
Applying section 10(b) and Rule 10b-5 together with the fraud on the market theory substantially increases the potential liability of issuers and can lead to questionable results, which is why EU jurisdictions may not want that rule applied to their securities markets. 2010
Enactment of section 7216 could make foreign cubed cases an integral part of the legal landscape in the United States and hence in Europe, ending the current situation in which most European companies are unaware of or unconcerned with that risk. 2010
The defendants harmed by section 7216 would almost all be non-US financial intermediaries and issuers who are less able to defend themselves in the US political system, which helps explain why Congress is not seriously considering repeal of the PSLRA but is seriously considering section 7216. 2010
German banks' exposure to CDO risk ran through credit enhancement and liquidity guarantees given to off balance sheet conduits, and because that exposure was often kept out of their accounting the inherent risk only surfaced once the CDO market collapsed. 2010
The German ABCP conduit model, which financed long term American mortgage loans with short term paper and pocketed the spread, was profitable only for as long as new buyers for the short term paper could be found, so the model collapsed the moment institutional buyers withdrew. 2010
Contesting the view that the 2008 crisis was an American problem inflicted on foreign victims, the authors argue that non U.S. institutions such as German banks were willing participants in the risk taking, even where they did not fully understand the risks they assumed. 2010
Beliefs about whether markets fail are causally consequential rather than merely academic: bankers who believe markets fail invest more cautiously, and regulators who believe markets fail regulate more aggressively. 2010
Law generally declines to adopt a general principle barring managers from incurring risk above a defined standard because such a standard is hard to define; corporate law instead insulates managers' risk decisions through the business judgment rule. 2010
The business judgment rule can be read not as a balanced middle ground but as excessively deferential to management, signaling that corporate law is ceding risk regulation to targeted rules aimed at particular risks in particular institutions. 2010
Because German banks absorbed both the 2008 credit crisis and the 2010 sovereign debt crisis while American banks faced only the first, German regulators and bankers are likely to impose stricter substantive risk management rules than countries that faced only one of those shocks. 2010
A country whose bankers do not embrace intentional risk taking is still exposed to risk, both through the collateral effects of intentional risk taking abroad and through unintentional risk taking at home, so domestic cultural restraint is not a sufficient safeguard. 2010
Hindsight bias exerts a stronger influence on how excessive risk is defined in countries culturally predisposed to dwell on their own past, while countries oriented toward a future unlike the past more easily dismiss earlier financial lessons as irrelevant. 2010
Limited liability lets managers and shareholders capture most of the benefits of excessive risk taking while not bearing all of its costs, which is one explanation for why bankers take excessive risk. 2010
The U.S. governance structure, built on periodic disclosure of performance data and stock price maximization, encourages risk taking because managers feel compelled to meet shareholder expectations at every reporting interval. 2010
German corporate law's historical focus on conflicts between controlling and minority shareholders leaves it poorly equipped to address managerial abuse of power, including excessive risk taking by managers. 2010
U.S. corporate law centers so heavily on shareholder manager conflicts of interest that, absent a demonstrable conflict, it treats risk taking as a situation where managers' and shareholders' interests are aligned and legal intervention is unwarranted. 2010
For different structural reasons in each country, corporate law in both Germany and the United States has little to say about the problem of excessive risk. 2010
Because the Aufsichtsrat owes its duty of loyalty to the firm rather than to shareholders alone, and because non shareholder constituencies such as employees and creditors are more risk averse than diversified shareholders, German supervisory boards may take a more conservative attitude toward risk than U.S. shareholder oriented boards. 2010
Director independence does not produce effective risk monitoring: as the failure of independent director oversight at Lehman Brothers and other large U.S. financial firms shows, independent directors cannot monitor risk when managers, accountants and lawyers keep them in the dark. 2010
Because U.S. companies historically financed themselves through markets rather than through each other, U.S. managers are less attuned to risks accumulating at other firms, a blind spot that mattered once swaps and other complex instruments made firms directly vulnerable to each other's conditions. 2010
The German and U.S. business judgment rules diverge most sharply at the German rule's fifth element, the requirement of no hazard decision or excessive risk taking, which German law presumes but allows to be rebutted. 2010
Because U.S. law frames the inquiry around corporate waste, and most risk taking does not meet the waste standard, showing that a decision was hazardous or excessively risky is not enough to rebut the business judgment rule in the United States. 2010
Under the German hazard decision doctrine, no manager acts reasonably, whether a bank officer or a board member, if the risks taken on the corporation's behalf would destroy the corporation should they be realized. 2010
In In re Citigroup the Delaware Court of Chancery refused to extend the Caremark oversight duty, which concerns monitoring for illegal conduct, into oversight liability for business risk, so an inability to predict the future and an incorrect evaluation of business risk are not breaches of a director's oversight responsibilities. 2010
U.S. courts applying the business judgment rule give little or no weight to the overall health of the company or to whether the risk jeopardizes the company's very existence, so managers are permitted to incur most of the risks they wish to incur. 2010
The German legislature enacted the VorstAG on the premise that managers who emphasize short term parameters lose sight of the corporation's long term benefit and are thereby incentivized to take irresponsible risks, and it accordingly required compensation reduction in a corporate crisis, a D&O deductible, and deferred payout of performance based pay. 2010
Dodd-Frank's mandatory risk committee is a significant change because most boards then delegated risk oversight to the audit committee, and it may generate new litigation if committee composition or alleged committee failure becomes a basis for shareholder suits. 2010
The incentive effects of corporate governance controls may not operate in systemically important financial institutions, because managers and owners who anticipate a bailout commitment adjust their risk preferences upward. 2011
Switching to contingent capital financing may reinforce rather than reduce risk incentives, and whether the risk incentives generated by contingent capital outweigh its risk reduction potential remains unresolved. 2011
By internalizing the costs of bank failure, contingent capital can reduce moral hazard, and because a contingent debt security with a conversion trigger would presumably not default, it helps avoid contagion and systemic spillovers. 2011
The threat of loss on conversion and the implicit dilution of existing stock holdings reduce shareholders' incentive to press management for higher risk in pursuit of higher returns. 2011
Information asymmetries between market participants and a systemically important institution's management before default can be reduced if a financial weakening after conversion of contingent capital triggers a voting rights increase. 2011
Contingent capital holders, as former creditors whose main interest is realizing their claims, have a natural interest in continuity and are therefore likely to support incumbent management after conversion. 2011
Contingent capital is more efficient than prepackaged plans or preplan sales because it provides a resolution mechanism outside formal proceedings and free of their restrictions, since the Bankruptcy Code does not regulate conversion or the use of increased voting rights. 2011
Strategic maneuvering by creditors before a bankruptcy filing or during plan negotiations could distort the incentive structure the sequential trigger proposal depends on. 2011
Contrary to critics who blame the Basel Accords, harmonization through Basel II is not what made banks hold similar assets; banks held similar assets because those assets were profitable. 2011
Building on the increase in capital requirements for counterparty risk already suggested in Basel III, Basel III could add a charge on banks' assets based on their lending exposure to hedge funds. 2011
If regulators lack the resources to protect against systemic risk, hedge fund regulation could be futile. 2011
Banks' lending practices and counterparty credit risk management can curtail hedge funds' excessive risk taking because banks can use the threat of cutting off future lending to change a fund's behavior. 2011
Banks are ideally positioned to deal with asymmetric information, moral hazard, and systemic issues pertaining to hedge funds, which is why hedge fund regulation should run through bank regulation. 2011
Because banks expect to be bailed out with taxpayer funds, they may have less incentive to monitor their hedge fund lending activities, even though hedge funds are not themselves counterparties in government bailouts. 2011
Systemic risk and financial market stability are public goods, so individual banks free ride on other banks' hedge fund credit risk management and are not incentivized to adequately monitor or limit their own hedge fund risk exposure. 2011
An institution or a country creates externalities when it manages its own hedge fund generated systemic risk without considering how its actions or inactions affect risk in the system as a whole. 2011
Even if hedge fund investing does have systemic implications, systemic risk is multifaceted enough that addressing it could require more than one regulator in a single jurisdiction, so the SEC alone may be unable to accomplish the task. 2011
The SEC would be better advised to interpret the rulemaking authority it received from Congress than to increase requirements on hedge funds in order to address concerns over potential systemic risk. 2011
A standard objection to indirect regulation is that counterparty credit risk management will not work effectively unless the lending bank has an exclusive relationship with the hedge fund that lets it control the relationship. 2011
Contesting the exclusivity objection, exclusivity of a banking relationship is not the only effective way to exercise control and manage risk: the intensity, endurance, and quality of the relationship also influence how much control a bank can exercise over a hedge fund. 2011
Banks' role in monitoring hedge funds is not easily comparable to the principal agent problem between securities buyers and credit rating agencies, because banks have more influence over hedge funds than securities buyers have over rating agencies and their ratings. 2011
Without the threat of systemic risk and without a clear delineation of the social externalities that hedge funds cause, the purpose of direct hedge fund regulation is unclear. 2011
Registering hedge funds with regulators and requiring disclosure of pertinent information could help minimize the moral hazard, social externalities, and systemic risk generated by the hedge fund industry. 2011
The authors contend that the European Commission's goal of maximum harmonization through a global single rule book may not be achievable, and that a legal framework for private ordering of contingent capital is the more realistic route to an adequate level of convergence. 2012
Reliance on public bail-outs, unaccompanied by any threat that management, shareholders and creditors would share significant losses, created an asymmetric incentive for excessive risk taking by financial institutions. 2012
Because German law fixes no threshold conditions or determining factors for market reception or market confidence, the systemic relevance and contagion determinations that turn on those factors can never be made in a reliable and objective manner. 2012
Contingent capital supports general risk control and reduces moral hazard by holding shareholders responsible and internalizing the costs of bank failure rather than externalizing them onto taxpayers. 2012
Because conversion carries a threat of loss and implicit dilution of stock holdings, contingent capital reduces shareholders' incentive to push management toward higher risk in pursuit of higher returns. 2012
The authors contend that the European Commission's suggested floor of 4 to 19 percent of risk-weighted assets in pre-qualified bail-inable debt under the targeted approach is unrealistically high. 2012
Building critical mass in the contingent capital securities market could require banks and other financial institutions to buy their competitors' contingent capital securities, which would raise ethical, antitrust and incentive concerns. 2012
Contingent convertible bonds placed in executive compensation serve a different purpose than those sold to investors: the point is not capital infusion during a crisis but governance-improving design that optimizes management incentives. 2012
Market solutions and private ordering alone are unlikely to produce contingent capital designs that improve corporate governance in SIFIs, because privately negotiated sales so far have not produced governance-sensitive designs. 2012
A contingent capital award to executives without a conversion feature yields only limited governance improvement and only limited incentive to lower risk-taking; in its current form it operates as a mere compensation supplement. 2012
Regulatory triggers insufficiently incentivize executives to lower risk, because executives would not have to self-monitor and adjust their own risk-taking preferences in order to avoid the trigger. 2012
Institution-specific automatic triggers are the preferred basis for early trigger designs because they are flexible and independent of regulatory discretion. 2012
Because conversion damages both the debt portion and the surviving equity portion of an executive's package at the moment equity matters most for total pay, the combined effect is a strong incentive for executives to lower risk in order to avoid the triggering event. 2012
Ordinary SIFI creditors have suboptimal incentives to monitor management because they implicitly expect that the government will provide bailout funding given the nature of the entity. 2012
Early triggers in executive compensation improve the signaling of default risk by producing the signal while default risk is present but still somewhat remote. 2012
Existing default risk signals were inadequate: CAMEL ratings and credit default swap pricing did not suffice to signal default risk at Lehman Brothers, Bear Stearns, or Merrill Lynch. 2012
Replacing stock options with contingent convertible bonds both lowers total executive compensation and disincentivizes short-termism and the executive focus on quarterly stock price performance. 2012
Unlike the liquidation value backing traditional inside debt, equity received by executives on early conversion can still appreciate, because the early trigger creates a substantial buffer before insolvency. 2012
Before conversion, contingent convertible bonds incentivize executives to lower risk-taking because their prices are sensitive to the downside risks of SIFIs, including default risk. 2012
Against the critique that long-term debt in pay does not deter short-run risky bets because expected short-term gains exceed the discounted value of the debt, adding early-trigger contingent convertible bonds changes managers' incentives by forcing them to weigh the effects of triggering events rather than only the debt to equity mix of their portfolio. 2012
An early trigger design for contingent convertible bonds in executive compensation enables earlier signaling of default risk, increases incentives for creditors and shareholders to monitor, and increases executives' incentives to lower risk-taking. 2012
By approving U.S.-style fee arrangements, the Converium decision adds an important incentive for plaintiffs' attorneys to bring claims in the Netherlands. 2012
The race to the bottom objection to a contract based approach is weaker than assumed because a race to the bottom requires the consent of both buyers and sellers, and the objection assumes that buyers will simply accept whatever securities law sellers choose. 2012
A contract selecting non-U.S. securities law can fail entirely: if the chosen jurisdiction's courts decline jurisdiction because the transaction did not clear there or the parties lack a local presence, the contract may as a practical matter mean that no law applies. 2012
Form PF reporting achieves broad coverage of systemic exposure with narrow coverage of firms: the SEC expects the small set of large filers to account for eighty percent of total hedge fund assets under management in the United States. 2012
Quarterly rather than annual Form PF updating for large hedge fund advisers is designed for timeliness: its purpose is to give the Financial Stability Oversight Council data current enough to identify emerging trends in systemic risk. 2012
Respondents identified the creation of barriers to entry as an industry level effect of the registration and disclosure requirements, because the rules make the market environment for private funds less attractive to new entrants. 2012
The compliance burden has raised the minimum viable scale for launching a hedge fund: an adviser reports that the capital needed to start a fund in New York rose from roughly $25 to $50 million to at least $100 million because of the increased cost of compliance with the registration and disclosure requirements. 2012
Mandatory reporting does not guarantee informative reporting: anecdotal evidence indicates that advisers can present the information required in Forms ADV and PF in ways that in effect flatten out and sanitize the disclosures. 2012
If advisers sanitize their Form ADV and Form PF filings, the disclosures become less useful for FSOC and SEC evaluation and undermine the very determination of systemic risk posed by private funds that the reporting regime was built to enable. 2012
Government bailouts of systemically important financial institutions create strong incentives for those institutions to externalize the cost of their risk taking onto taxpayers. 2012
The implicit guarantees contained in a bailout multiply the incentives for systemically important financial institutions to increase leverage, because those guarantees make debt cheaper than equity. 2012
Because governments prioritize the rescue of systemically important financial institutions over other entities, those institutions are incentivized to adopt similar risk profiles and to correlate their risks. 2012
Contingent capital contributes to minimizing moral hazard by internalizing bank failure costs, that is, by placing those costs on the institution's own security holders rather than on the public. 2012
The threat of dilution of stock holdings, combined with the threat of loss on conversion, reduces the pressure shareholders place on the management of systemically important financial institutions to take higher risks. 2012
Contingent capital rules could contribute to overriding the moral reasoning of decision makers, in which case contingent capital would actually increase, not reduce, risk incentives for institutions that are too big to fail. 2012
Regular corporate governance controls may not work in systemically important financial institutions, because those institutions are considered too big to fail and their leaders, anticipating a bailout commitment, are incentivized to shift their risk preferences upwards. 2012
Switching to contingent capital financing could reinforce rather than dampen risk incentives, and these distorted risk incentives are a drawback of contingent capital issuances. 2012
A mandatory contingent capital issuance regime induces institutions to buy their competitors' securities to satisfy regulatory obligations rather than for economic reasons, and the resulting cross holdings among systemically important institutions undermine the ability of contingent capital to limit systemic risk and contagion. 2012
Contingent capital securities approximate the characteristics of a quasi-public good: just as ships cannot readily be excluded from a lighthouse, systemically important institutions benefit from the issuance of contingent capital by other such institutions whenever the design minimizes systemic risk and contagion. 2012
The social welfare maximization potential of contingent capital securities is lower if their design features are left entirely to private ordering, because private parties do not necessarily structure those features with a view toward the common good, the avoidance of future bailouts, or the limitation of systemic risk and contagion. 2012
A contingent capital design that increases voting rights on conversion allows systemically important institutions to lower risk taking implicitly and to achieve an indirect, institution specific form of corporate governance reform through increased checks and balances. 2012
Because the threat of a change of control leads leaders to take fewer risks in order to avoid triggering conversion, a contingent capital design with increased voting rights allows those leaders to act more in accordance with their moral convictions and conscience. 2012
Management incentives for risk control are heightened upon conversion, especially where management knows that holders of converted contingent capital would command a majority vote, with or without institutional shareholders. 2012
Treating the price of contingent capital securities as an indicator of how much people care about market integrity and moral hazard would require altruistic motives on the part of purchasers, and the author doubts this: the nascent market appears to have been built on investors' expectation of above average returns. 2012
Combining the existing prioritization of bailouts for systemically important institutions with central bank purchases of their contingent capital in a given jurisdiction would further incentivize those institutions to adopt similar risk profiles and correlate their risks. 2012
Contingent capital can facilitate an incentive structure that lets regulators rely partially on private party contracting for the design of these securities while still accounting for systemic risk. 2012
Under Delaware law as applied in In re Citigroup, directors' incorrect evaluation of business risk and their inability to predict the future do not violate the duty of oversight, so the Caremark duty to monitor is not extended to business risk. 2013
Losses alone are not sufficient to hold directors personally liable for taking risks that lead to those losses, because risk is inherent in maximizing shareholder value. 2013
Directors who are inadequately informed about the expected standard of conduct will underestimate their personal liability exposure and engage in riskier behavior than is desirable for the company itself. 2013
Under German law, directors' business decisions lose the protection of the business judgment rule where the business risk taken was inappropriately excessive, a standard German courts announced in ARAG/Garmenbeck. 2013
German commentators, whose expertise German courts rely on heavily, concluded after the financial crisis that managers do not act reasonably under the German business judgment rule if the risks they take on behalf of the corporation result in the demise of the corporation. 2013
The German ARAG/Garmenbeck holding is diametrically opposed to In re Citigroup, where the Delaware Chancery Court declared that directors' incorrect evaluation of business risk did not violate the duty of oversight. 2013
The different legal standards for allocating liability in Germany and the United States illustrate rather different legal and societal attitudes toward managers' risk-taking. 2013
If the liability standard were lowered, directors and officers would take their increased personal liability exposure into account and could be incentivized to engage in less risky behavior. 2013
Financial innovation, the globalization of markets, transnationalism, ethical challenges, and the bounded rationality of humans are likely to create and increase future challenges that require additional and more extensive governance adjustments. 2013
The bounded rationality of public rulemakers aggravates shock conditions during rulemaking, because rulemakers satisfy their own constituencies rather than all affected parties and are therefore more willing to act on incomplete information. 2013
The cyclical nature of public rulemaking under incomplete information and bounded rationality is costly and produces suboptimal regulatory outcomes with long-term implications for financial markets and the economy. 2013
Regulatory cycles make it nearly impossible to address financial regulatory concerns adequately, and systemic risk in particular is difficult to address if rules are enacted in a cyclical and reactive format. 2013
The SEC never actually interpreted Section 402 of Sarbanes-Oxley and instead merely acquiesced in a law firm memorandum interpreting the provision, so private entities in effect fulfilled the SEC's statutory mandate. 2013
Future financial crises may be inevitable, because globalization, financial innovation, ethical challenges, suboptimal institutional designs, and the bounded rationality of decision makers create conditions that produce crises. 2013
The social and mental properties of decision makers in financial institutions, combined with the incentive structure of the respective institutional setup, determine a financial institution's adaptive capability. 2013
Institution specific automatic triggers in contingent capital securities are flexible and can be tailored to the parties' needs precisely because they operate independently of regulatory discretion. 2013
Managers are incentivized to manage their institutions so as to avoid contingent capital triggers, and that incentive itself can optimize the governance of financial institutions. 2013
The threat of heightened scrutiny under a deferred prosecution or corporate integrity agreement optimizes incentives because increased government monitoring attaches only after a first time offense, giving institutions a reason to comply and self-regulate in order to avoid it. 2013
A mixture of mandatory rules, market solutions, and private ordering would increase the adaptive capabilities of rulemaking, curtail the effects of the collective action problem of rulemaking, and dampen regulatory cycles. 2013
Rulemaking conducted under conditions of incomplete information and bounded rationality produces suboptimal outcomes that require costly rule revisions, retractions, and additional rulemaking. 2013
NIE acknowledges that transaction costs, imperfect information, and bounded rationality influence the rulemaking process, with the consequence that even optimal solutions to regulatory problems become unstable and suboptimal over time. 2013
Unlike ordinary private ordering, where formalization of informal rules can be a lengthy process that is never finalized, formalization of informal rules in the dynamic process happens sooner and is more likely to succeed if those informal rules provide relevant information for public rulemaking. 2013
Opportunistic behavior, transaction costs, and bounded rationality undermine comprehensive contracting, so contracting parties do not specify all of their respective obligations ex-ante because anticipating all contingencies is too costly. 2013
There is a substantial overlap between the systemic risk disclosure requirements imposed on hedge fund advisers under Title IV of the Dodd-Frank Act and the disclosure requirements under the fully revised version of Bankruptcy Rule 2019. 2013
Under the regulatory framework in place at the time of writing, the threat that hedge funds' systemic risk filings could be publicly disclosed through the bankruptcy process will affect hedge funds' tactics and their role in distressed investing only marginally. 2013
The SEC has not standardized the disclosures required in Form PF, and there is evidence that Form PF requirements rest on an inconsistent use of industry terms, which can in turn produce inconsistent and contradictory data reporting. 2013
Systemic risk reports filed by registered investment advisers are confidential and are not publicly available, so any effect of these filings on bankruptcy practice depends on the prospect of disclosure rather than on actual public access. 2013
Mandatory quarterly Form PF reporting for large hedge fund advisers is designed to give the Financial Stability Oversight Council timely data for identifying emerging systemic risk trends and to align United States practice with international trends. 2013
Bankruptcy and systemic risk disclosure obligations for hedge funds have different origins and serve different purposes: bankruptcy disclosure is meant to level the playing field in the restructuring process, while systemic risk disclosure is meant to help regulators detect and prevent systemic consequences. 2013
Data staleness degrades systemic risk evaluation more than it degrades evaluation of bankruptcy disclosures, because many distressed investment strategies depend on the outcome of the restructuring process and creditors are therefore incentivized to hold their positions until it completes. 2013
Form PF disclosures have not been standardized, and anecdotal evidence indicates that the SEC and the FSOC may be working with contradictory, misleading, inaccurate, and incomplete systemic risk data. 2013
Because the SEC is still working out the appropriate use of Form PF and still improving the form and its instructions, its enforcement division is unlikely to open investigations into alleged misreporting or failures to report. 2013
If Form PF systemic risk data became publicly available, or even only available to the presiding bankruptcy judge in a chapter 9 or chapter 11 case, the hedge fund industry's strong preference for secrecy could itself precipitate a change in distressed investment practices. 2013
Public access to hedge fund managers' systemic risk disclosures under the Dodd-Frank Act and the SEC implementation rules could improve hedge funds' distressed investments and their bankruptcy practices. 2013
The Investment Advisers Act prohibits contingent fee arrangements between investment advisers and their clients because such arrangements could induce inappropriate risk taking by the adviser. 2013
Congress created distinct hedge fund adviser categories in Title IV of the Dodd-Frank Act because it recognized that not all hedge fund advisers pose the same systemic risks and therefore do not all require the same level of oversight. 2013
Title IV and the SEC forms use assets under management as a proxy for systemic threat, so that disclosure obligations scale upward with the size of the hedge fund adviser. 2013
Registering large private fund advisers works by increasing the volume of data available to regulators, which in turn may help protect against systemic risk. 2013
Registration is the gateway that makes data collection and enhanced disclosure by hedge fund managers possible, and the Dodd-Frank Act raised disclosure requirements for registered advisers specifically to address systemic risk concerns. 2013
Form PF was created to improve SEC and CFTC investigations and examinations and to enable the Financial Stability Oversight Council to monitor systemic risk in U.S. financial markets. 2013
Quarterly rather than annual reporting by large private fund advisers is intended to give the FSOC data timely enough to identify emerging systemic risk trends. 2013
Form PF requires disclosure of the reporting fund's positions and how long it would take to liquidate them, because the SEC needs a view of portfolio liquidity rather than positions alone. 2013
The SEC excludes the value of a primary residence and related debts from the qualified client net-worth test because persons who clear the threshold only by counting their home are less able to bear the risk of performance fee arrangements. 2013
Because directors contractually agree to increase compliance through an open door policy for the government, CIAs substantially raise the liability risk for companies whose directors did not act in accordance with their fiduciary responsibilities. 2013
CIA provisions create economic incentives that affect directors' diligence, because stipulated daily noncompliance penalties stacked on top of monetary penalties under federal health laws expose companies that executed CIAs to significant financial ramifications. 2013
Strategic behavior by fund advisers around the assets under management registration threshold produces a strong increase in the measured discontinuity at that threshold. 2014
The quarterly Form PF reporting obligation imposed on hedge fund advisers with more than $1.5 billion in regulatory assets under management is designed to give the FSOC timely data for identifying systemic risk trends. 2014
Most of the 87 strategic funds keep their AUM very close to the $150 million disclosure threshold, oscillating around it rather than moving decisively above or below it. 2014
The largest number of strategic funds moving their AUM below $150 million occurs in the April to May 2012 window, which suggests a lagged response to the March 30, 2012 registration effective date. 2014
The Dodd-Frank Act registration threshold creates incentives strong enough that some advisers opt out of registration and disclosure by strategically changing their AUM size to stay below $150 million. 2014
Some large advisers reduce their AUM in the months from May to August 2012, which strongly increases the discontinuity around the registration threshold and separates the two groups more sharply, though the effect vanishes late in the sample period. 2014
The mandatory registration requirement of the Dodd-Frank Act affects the hedge fund industry asymmetrically, with advisers whose AUM floats around the $150 million threshold showing evidence of strategic AUM reduction. 2014
Rulemaking in a dynamic framework postpones the enactment of rules until rulemakers hold sufficient relevant and institution specific information, instead of proceeding by trial and error under incomplete information and bounded rationality. 2014
Because transaction costs, imperfect information, and bounded rationality shape the rulemaking process, even solutions that are optimal at enactment become unstable and suboptimal over time. 2014
Experimentation with different rules under the current framework of stable rulemaking carries substantial costs of rule revision and enactment, and there is evidence that this framework does not protect against systemic shocks and financial crises. 2014
In the current model of stable rulemaking, path dependencies lead rulemakers to act on a boundedly rational assumption that they already control sufficient information for rulemaking. 2014
If governmental contracts increasingly mandate replacement of boards and senior management, boards will have stronger incentives to make preemptive remedial measures effective. 2014
If advisers' allegations that Form PF disclosures cannot be answered other than by guessing are correct, then the SEC's capacity to evaluate the data is compromised, and regulation built on incomplete and misleading data will itself be questionable. 2014
Advisers themselves understand Form PF's purpose the way the statute frames it: most respondents identified assessing systemic risk and closing the historical information gap about private funds as the form's purpose. 2014
Respondents argued that the SEC's systemic risk objective would have been advanced more directly by asking a smaller set of targeted questions, emphasizing open derivatives positions, the entity's total market exposure, and its total underlying capital. 2014
Once prosecutors have investigated and identified corporate wrongdoing, non and deferred prosecution agreements let them avoid an expensive trial against a sophisticated and well funded corporate defendant, which is one reason both sides have strong incentives to settle. 2014
Prosecutors favor non and deferred prosecution agreements because those agreements avoid the uncertainty of potentially catastrophic collateral consequences for the company, unlike an indictment. 2014
Because the board changes mandated by non and deferred prosecution agreements consist largely of additional reporting obligations and committee reform rather than removal of officers or directors, those reforms alone may not create sufficient incentives for boards and management to improve governance and avoid execution of an agreement. 2014
The threat of bad press, reputational harm, legal costs, stock price declines, and the cost of implementing mandated governance changes can partly substitute for the weak direct incentives, pushing boards and management to optimize governance and keep the entity out of an agreement. 2014
High quality and effective preemptive remedial measures are themselves part of good corporate governance and can help a corporation avoid investigation, prosecution, and the execution of a non or deferred prosecution agreement. 2014
Anecdotal evidence suggests that Title IV of the Dodd-Frank Act more than doubled the market entry threshold requirements for smaller hedge fund advisers. 2014
Below $100 million in initial assets under management, the administrative cost of running a hedge fund in a post Dodd-Frank environment could be prohibitive. 2014
A disproportionate effect of Title IV on startup hedge funds and smaller advisers could create barriers to market entry and precipitate a trend toward consolidation among smaller hedge fund advisers. 2014
A surplus of larger private fund advisers holding correspondingly larger amounts of assets under management could increase systemic risk, so a regulation that consolidates the industry may work against its own systemic risk objective. 2014
Because there is no evidence of an inverse relationship between adviser size and per-unit compliance cost, industry concerns over the effect of Title IV compliance cost and possible barriers to entry for smaller funds and startups appear unjustified. 2014
Registered investment advisers must report systemic risk relevant information to the SEC, including trading practices, trading and investment positions, the amount of assets under management, valuation policies, and side letters. 2014
The SEC data collected from private fund advisers feeds every stage of the FSOC's systemic risk assessment, and the FSOC leans most heavily on precisely those disclosure items that are the most problematic. 2014
Accuracy and consistency problems in the SEC's private fund data collection can impair the FSOC's ability to evaluate the systemic risk posed by private fund advisers. 2014
Prior studies and anecdotal evidence indicate that the data collection mandated by Form PF could itself create problems for the FSOC when it evaluates hedge fund systemic risk. 2014
The systemic risk of hedge funds arises principally from the combination of aggressive investment strategies and high leverage with adverse price movements that can dry up credit and depress the market price of collateral. 2014
Hedge funds threaten the financial system through two distinct channels: directly, by damaging systemically important financial institutions, and indirectly, by generating liquidity shocks and raising volatility in key markets. 2014
The 2008 to 2009 financial crisis altered market conditions and the factors driving private fund systemic risk, which triggered a second, distinct wave of scholarship on private funds' systemic implications. 2014
The unprecedented growth of the private fund industry combined with the low interest rate environment created by post crisis quantitative easing drove private fund managers to reach for yield. 2014
National regulators reached opposite conclusions on the same question: unlike the OFR, FSB and IOSCO, the United Kingdom's Financial Services Authority concluded from its first comprehensive survey of London's hedge fund industry that the industry poses no systemic risk. 2014
The FSOC itself conceded that available data was insufficient when it tried to identify the activities of the twenty largest United States fund managers as possible sources of systemic risk. 2014
The interpretation Form PF demands generated particular concern among filers about the definition of counterparties and about counterparty performance measures. 2014