Volume 15
Volume 15.1
If Apps Be the Food of the Future, Arbitrate on!: Mobile-Based Ride-Sharing, Transportation Workers, and Interstate Commerce
Tamar Meshel
Mobile-based ride-sharing companies such as Uber and Lyft are increasingly facing lawsuits filed by drivers claiming to be misclassified as independent contractors rather than employees. Uber and Lyft have both attempted to compel their drivers to arbitrate these claims under the Federal Arbitration Act (FAA) pursuant to arbitration clauses they include in their service agreements. In response, the drivers frequently argue that they are not required to arbitrate their claims since they are “transportation workers” who are “engaged in interstate commerce” and thus excluded from the FAA. This article provides a detailed examination of courts' interpretations of this exception from the FAA, and exposes considerable inconsistencies in the jurisprudence. Given the frequency of employment claims made by drivers against mobile-based ride-sharing companies and the implications of holding their arbitration agreements to be unenforceable under the FAA, the article advocates for a uniform interpretation of the Act. It argues that the FAA's text, purpose, and legislative history all suggest that drivers of mobile-based ride-sharing companies are not “transportation workers” who are “engaged in interstate commerce” within the meaning of the FAA and therefore should not be excluded from its purview.
International Tax Planning for Domestic Multinational Corporations: Optimizing Effective Tax Rates by Turning Sticks into Snakes and Implementing Other Strategies
Cody Wilson
The Tax Cuts and Jobs Act overhauled the U.S. international tax regime and drastically changed the mechanisms, known as favorable permanent differences, for optimizing a domestic multinational corporation's Effective Tax Rate (ETR) as measured by financial accounting. This constitutes a notable change because optimizing the ETR maximizes two indicators that investors widely use to gauge a corporation's profitability: net income and earnings per share.
This Article provides guidance to tax lawyers tasked with optimizing a multinational corporation's ETR. They must avoid the base erosion anti-abuse tax (the BEAT), utilize foreign-derived intangible income (FDII), and manage global intangible low-taxed income (GILTI) by affirmatively planning into the Subpart F regime at times. Interestingly, by design, the GILTI and Subpart F regimes were to serve as anti-deferral sticks that beat on the heads of taxpayers, but together, they can metamorphose into snakes that bite the Commissioner on the hind part by helping to minimize a multinational corporation's U.S. tax expense and thus optimize its ETR.
Spread the Fed: Distributed Central Banking in Pandemic and beyond
Robert Hockett
This article proposes both an interpretation of and an institutional optimization plan for successors to the broad array of new Fed Liquidity Facilities introduced in response to the novel coronavirus pandemic of 2020. These represented an attempt by our nation's central bank to fund concerted state and municipal action as if it were federal action--a mode of action gone AWOL during the Trump administration. In one sense, this necessity was regrettable: over 350,000 Americans have died of COVID-19. In another sense, however, the conundrum is simply the latest iteration of our republic's perennial ambivalence about financial and political federalism alike. This accordingly yields an opportunity: to re-distribute and revive our once-distributed Fed's functionality across its more locally attentive subsidiaries, as originally envisaged in the Federal Reserve Act of 1913.
Volume 15.2
Exchange-Traded Confusion: How Industry Practices Undermine Product Comparisons in Exchange Traded Funds
Ryan Clements
Despite their incredible popularity and importance to modern capital markets, exchange traded funds (ETFs) are extremely difficult to compare side-by-side. Investors who successfully navigate the initial challenges of product choice overload and opaque index construction methodology, soon encounter a wide array of discretionary operational, management, marketing and financial practices of ETF sponsors that combine to undermine simple product and performance comparisons. This dilemma is compounded by disclosure effectiveness challenges, given investor cognitive limitations and behavioral tendencies. This article is the first scholarly work, amongst a growing body of ETF studies, to illustrate why accurate “apples to apples” product comparisons in ETFs are so challenging (at times even impossible) to perform. This article presents a variety of ETF case studies to demonstrate this challenge, including recent performance instabilities during the coronavirus pandemic.
This article advocates for continued positive momentum around investor-focused reforms in ETFs, building on encouraging steps undertaken by the U.S. Securities & Exchange Commission in its recent “Rule 6c-11” under the Investment Company Act of 1940. Finally, this article makes several recommendations to improve ETF product comparisons, including standardizing website formats and layouts for information presentation, uniform calculation methodologies of key ETF variables, an ETF naming convention, and standard terms in sustainable investing. ETF investors would also greatly benefit from a systematized and structured electronic reporting mechanism whereby standardized data is provided by ETF sponsors to a centrally controlled public repository. Additional studies are warranted on strategic ETF disclosure ordering digital enhancement, and added contextual discussion around critical concepts like arbitrage and index composition methodology. The ETF “model portfolio” industry is also an emerging concern that should be assessed, and this article provides suggestions to reduce informational opacity and improve comparative assessments.
Bail-outs and Bail-ins Are Better than Bankruptcy: A Comparative Assessment of Public Policy Responses to COVID-19 Distress
Kristin van Zwieten, Horst Eidenmüller and Oren Sussman
COVID-19 has severely disrupted the conduct of business around the globe. In jurisdictions that impose one or more “lockdowns,” multiple sectors of the real economy must endure prolonged periods of reduced trading or even total shutdowns. The associated revenue losses will push many businesses into bankruptcy. No public policy response can recover these losses. States can, however, act to reduce the amplification of the shock by the manner in which they treat the cohort of newly bankrupt businesses. In jurisdictions where a well-functioning reorganisation procedure can produce value-maximising outcomes in normal conditions, the temptation may be to subject this cohort to such procedures. This temptation should be resisted, not only because of the (significant) costs of these procedures, or because of concerns about institutional capacity to treat a high volume of cases, but also because such procedures are likely to be a poor “fit” for the treatment of COVID-19 distress. The more attractive routes to relief are bail-ins (one-time orders to creditors or counterparties, or some class thereof, to forgive), bail-outs (offers to assume the debtor's liabilities, or a class thereof, or some combination of the two. In this paper, we explain why a public policy response is necessary to mitigate the amplification of the shock caused by trading shut-downs, and we compare treatment by the prevailing bankruptcy law with treatment by bail-ins or bail-outs along a range of dimensions. We conclude by suggesting principles to help guide the choice between bail-ins and bailouts, and the design of either form of intervention. These principles should offer a useful starting point for thinking about the design and delivery of novel forms of relief to debtors distressed by COVID-19-related revenue losses.
The U.S. Supreme Court in Kaestner: Deciphering the Constitutionally Required Minimum Contacts Necessary for State Taxation of Trust Income
Beckett G. Cantley and Geoffrey C. Dietrich
As far back as 1929, several states have sought to broaden their tax base by expanding taxation to out-of-state trusts that have in-state beneficiaries, even when the beneficiaries possess only a contingent interest in the trust's assets. On June 21, 2019, the U.S. Supreme Court confronted the constitutionality of this trust tax practice in North Carolina Dep't of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (“Kaestner Trust”). In Kaestner Trust, the Supreme Court issued a narrow decision in favor of the Trust, basing its opinion on a compilation of landmark constitutional law and civil procedure cases. Specifically, the Court ruled that the domicile of a contingent beneficiary on its own does not constitute sufficient “minimum contacts” between a trust and a jurisdiction for tax purposes, and thus the North Carolina statute violated the Due Process Clause of the U.S. Constitution.
Every jurisdiction has its own method of defining the minimum contacts necessary to bring a trust into its taxation orbit. In light of the Court's decision, other state statutes that impose a fiduciary income tax based on weak connections may face constitutional scrutiny in the near future, including tax regimes containing “throwback” rules, “one-dollar” rules, and testamentary trust residency standards that rely indefinitely on the domicile of a testator. The main purpose of this article is to understand the Kaestner Trust decision, discuss how the impacted states have adjusted, and identify any statutes peripheral to the case that may face constitutional inquiry in the future.
The introduction to this article provides the foundation for understanding state trust taxation regimes and frames the controversy of multi-state taxation. Tart II explains the facts within Kaestner Trust and analysis used by the Supreme Court in rendering the North Carolina statute unconstitutional. It also discusses how the North Carolina trust statute has been impacted. Tart III identifies the other states, besides North Carolina, directly impacted by the Kaestner Trust decision and how these states have responded to the case. Tart TV analyzes how the decision might promote further inquiry into the constitutionality of statutes that lie on the margins of Kaestner Trust. Finally, the article considers estate planning and trust drafting opportunities created by the case and concludes by briefly summarizing the significance of Kaestner Trust.
Disintermediation of the IPO Industry: The Viability of Auctioned IPO as an Alternative under the Changing Underwriting Paradigm
Iris Tian
The firm commitment offering method has been dominating the world's initial public offering stage for over three decades. Although popular, it is increasingly associated with issues such as high offering expenses, severe underpricing, prevalent agency costs, and inegalitarian access to shares. This article seeks to demonstrate that the conventional reputation-based underwriting paradigm is shifting and lays out baselines for comparison with the more efficient, equitable, and inexpensive auctioned offering. It concludes that, based on both the merits of the auctioned offering method and external changes in the underwriting industry, the auctioned offering can supplement, and largely supersede, the traditional firm commitment offering.
Volume 15.3
Constitutional Limits on Public Pension Reform: New Directions in Law and Legal Reasoning
T. Leigh Anenson, Linda L. Barkacs and Jennifer K. Gershberg
Millions of Americans are at risk of losing their pensions. Faced with alarming actuarial deficits, state and local legislatures are enacting comprehensive reforms to avoid insolvency. Government employees, however, are challenging these reforms under the Contract Clause. This Article collects the most important constitutional cases on public pension reform over the last six years. It adds a comprehensive study of recent state and federal court practice to the existing literature, including key U.S. Supreme Court decisions that have been overlooked. This Article takes stock of forty-eight decisions across twenty-two states, more than a dozen of which reached resolution in the highest courts. It offers a critical examination of key developments, an assessment of emerging challenges, and a new sustained account of the reforms that have succeeded and the grounds for that success. It also provides an appendix and various diagrams documenting our analysis and conclusions.
The most surprising finding is that an overwhelming majority of barriers to pension reform are judge-made, meaning that changing case outcomes would not require a constitutional amendment. Another discovery is that reforms routinely have been upheld even in those states in which existing doctrine is more protective of employee pensions. These results have practical implications because they suggest that governments can expand the scope of reforms. Clarifying the reasons for and reasoning underlying these decisions also has jurisprudential significance. Courts in a number of jurisdictions have yet to rule on constitutional contract claims and, in those that have ruled, the decisional law is in flux and bordering on incoherence.
Principled Conservatism: The CARES Act and the Lone Voice
Chad G. Marzen
The Coronavirus Aid, Relief and Economic Security (CAKES) Act was the largest spending bill passed by Congress and enacted into law in American history. This Article concludes that despite all of the criticism he has endured, Congressman Massie's lone voice calling for a vote for over $2 trillion in government spending will be remembered years from now as a beacon and clarion call for fiscal and principled conservatives. The Article also examines two prior historical instances which involved a lone voice in the United States House of Representatives: Congresswoman Jeannette Rankin's lone vote against a declaration of war with Japan in 1941 and Congresswoman Barbara Lee's lone vote against the war in Afghanistan in 2001. Both the lone votes of Congresswoman Rankin and Congresswoman Lee illustrate that taking a principled, highly unpopular stance at the risk to one's political career in the United States House of Representatives can result in a positive, long-term legacy. This Article predicts Congressman Massie's lone voice will be viewed in the same lens in the future.
Rethinking Open- and Cross-Market Manipulation Enforcement
Joseph Zabel
The modern stock market bears little resemblance to its form when the statutes designed to regulate it were first enacted. In the twenty-first century, the market is almost entirely digital--replete with interconnected instruments and exchanges--spanning multiple jurisdictions and products. As recently as 1969, trades could take over a week to clear; now in the era of high-frequency trading they are effectively instantaneous. With the influx of more exchanges and instruments that trade on those exchanges, transacting at dizzying speed and magnitude, new and more difficult-to-identify forms of market distortion have emerged. Chief among those forms of distortion is open-market manipulation.
Open-market manipulation--in which a trader uses facially legitimate trading methods in order to camouflage non-bona fide trades (including manipulations across markets and even in the crypto currency sphere)--has frustrated regulators and, in particular, prosecutors. Prosecutors and courts have struggled to fit open-market manipulation into an anachronistic statutory regime and particularly labored to prove the requisite criminal intent to manipulate in schemes comprised of facially valid trades. This failure of the law to match the conduct is exacerbated by the use of complex high-frequency trading algorithms. Since manipulative intent may often be embodied in the design of the trading algorithm itself, it presents a literal and figurative black box in certain cases. These difficulties are especially acute in the context of cross-market manipulation, in which the manipulation is based on the interplay of two different markets. In terms of its negative effects, potential magnitude, and increasing frequency, open-market manipulation, particularly cross-market manipulation, should be considered among the most volatile and dangerous forms of white-collar crime and apriority for the Department of Justice and regulators alike.
This Article first identifies where the critical issues in modern manipulation prosecution lie and the split among federal circuits regarding whether open-market manipulation is even a violation of the securities laws at all. This Article then proposes solutions to these issues in the form of principles upon which regulators and judges should rely, as well as a statutory proposal to bring the regulatory landscape up to speed in an increasingly fast, complex, and volatile digital trading world. In that vein, this Article is the first to do several things. It is the first to provide an in-depth analysis of the distinct challenges involved in prosecuting open-market manipulation. It is also the first to demonstrate the particular pronounced difficulties necessarily involved in detecting regulating and prosecuting cross-market manipulation. Finally, it is the first to propose a tangible statutory solution to the urgent issues involved in deterring and prosecuting these forms of manipulation.
Automating Universal Wealth: How Robo Advisors Can Improve Capital Market Efficiency
Andrew Kingsbury
Public markets serve a central role in modern economies. These markets enable global operations to operate at a once inconceivable scale. An ancillary--but important--function of public markets is their price discovery function. A central economic theory is that in an efficient capital market, the secondary market processes all the information about that company, which is then reflected in how the market prices that company's securities. This theory is so central to modern finance that it has become inextricably tied with U.S. securities laws and is consistently cited throughout the nation's courts. However, this theory has long engendered vigorous debate. Many economists, scholars, judges, and the like doubt the existence of the theory and question the merits on which it is based. One need not look further than the events that transpired early in 2021--with many unprofitable companies soaring to new all-time highs after the companies' ticker symbols gained favor on online messaging boards. This Note argues that perhaps it is not that the market cannot accurately reflect information and incorporate it into a security's price, but rather that market participants disturb the market's ability to do so in some instances. This Note proposes a theoretical framework arguing for a regulatory approach that favors algorithmic trading to best capture gains and more effectively spread wealth among all market participants.
Repo Turmoil and Lessons for Liquidity Policy
Andrew Tynes
This Note considers repo market stress in September 2019. First, I find that the multiple causes of that market disruption--fiscal, monetary, and regulatory--suggest the need for more comprehensive review of liquidity policy frameworks. I then review recent proposals to prevent future repo funding disruptions, evaluating them against the efficiency and financial stability goals of liquidity policy. This work contributes to the literature first, by consolidating multidisciplinary perspectives on structural and regulatory flaws in short-term funding markets, second, by introducing and discussing newly available data from the Office of Financial Research, and third, by reinterpreting old proposals and discussions through the lens of the mid-September episode.