William A. Birdthistle’s research while affiliated with Chicago-Kent College of Law and other places

Just as the firm has long served as the foundational molecule of the U.S. capitalist economy, theories of the firm have for more than a century dominated legal and economic discourse. Ever since Ronald Coase published The Nature of the Firm in 1937 and asked why firms should exist in an efficient market, classicists and neoclassicists have competed to develop theories — predominantly managerialist and contractual — that best explain the structure and behavior of business organizations.The investment fund, by contrast, has languished at the margins of corporate theory, relegated as simply a minor, if somewhat curious, example of the firm. But as the flow of assets into funds has swollen dramatically in recent years, so too has the relevance of the question whether funds are, in fact, best considered a subspecies of the firm or instead ought to be evaluated as independent phenomena.Part II of this Article discusses the shortcomings of the recent ruling in Janus Capital Group v. First Derivative Traders, taking particular exception with the remarkable formalism of the majority’s reasoning, which appears to ignore or misapprehend the actual operations of mutual funds. If operating companies follow the lead of investment funds and use Janus as a model for immunity against securities litigation, deterrence of financial fraud is likely to drop substantially. Part III considers the potentially deleterious implications of the Court’s fund jurisprudence and predicts that substantial mischief will flow from the decision should its lessons be taken advantage of in other sectors of the economy. Part IV considers the theoretical lens — the theory of the fund — that justices of the Supreme Court appear to use to examine investment funds, and it identifies mistaken assumptions and problems with that lens and its use in the pair of recent rulings in Janus and Jones v. Harris. This Article considers whether alternative theories of the firm might inform a more useful theory of the fund for both the judicial and legislative branches in the future.

Observers of our federal republic have long acknowledged that a fourth branch of government comprising administrative agencies has arisen to join the original three established by the Constitution. In this article, we focus our attention on the emergence of perhaps yet another, comprising financial self-regulatory organizations. In the late eighteenth century, long before the creation of state and federal securities authorities, the financial industry created its own self-regulatory organizations. These private institutions then coexisted with the public authorities for much of the past century in a complementary array of informal and formal policing mechanisms. That equilibrium, however, appears to be growing increasingly imbalanced, as financial SROs such as FINRA transform from “self-regulatory” into “quasigovernmental” organizations. We describe this change through an account that describes how SROs are losing their independence, growing distant from their industry members, and accruing rulemaking, enforcement, and adjudicative powers that more closely resemble governmental agencies such as the Securities and Exchange Commission and the Commodity Futures Trading Commission. We then consider the confluence of forces that might be driving this increasingly governmental shift, including among others, demographic changes in the style and size of retail investments in the securities markets, the one-way ratchet effect of high-publicity failures and scandals, and the public choice incentives of regulators and the compliance industry. The process by which such self-regulatory organizations shed their independence for an increasingly governmental role is an undesirable but largely inexorable development, and we offer some initial ideas for how to forestall it.

This brief was filed by law professors William Birdthistle, Tamar Frankel, Lyman P.Q. Johnson, Donald C. Langevoort, and Manning G. Warren III as amici curiae in support of respondent. The brief argues that investment managers exert an extraordinary degree of control over their mutual funds, that those managers "make" the statements contained the in the prospectuses of their funds, and that statements in mutual fund prospectuses are attributable to the funds' investment managers. For these reasons, the Court should reject the petitioners' theory that investment managers are simply secondary actors immune from Section 10(b) liability.

This Article argues that the Securities and Exchange Commission’s first and most significant response to the economic crisis increases rather than decreases the likelihood of future failures in money market funds and the broader capital markets. In newly promulgated regulations addressing the "breaking of the buck" in the $3 trillion money market - a debacle at the fulcrum of the 2008 financial meltdown - the SEC endorses practices that obfuscate rather than illuminate the capital markets, including fixed pricing for money market funds, potentially riskier portfolio requirements, and the continued use of discredited ratings agencies. These policies, premised implicitly upon doubt in the ability of markets to process information effectively, obscure the true perils of money market funds. Rather than swaddling investment risks in misleading regulatory padding, the SEC should illuminate the possible menace of these funds. This Article offers transparent solutions to alleviate moral hazard and systemic risk in the broader market and to end the regulatory subsidy of these specific investments.

Next Term, in Jones v. Harris, the Supreme Court will be called upon to resolve philosophical divergences on a massive, critical, yet academically slighted subject: the dysfunctional system through which almost one hundred million Americans attempt to save more than ten trillion dollars for their retirement. When this case was in the Seventh Circuit, two of the foremost theorists of law and economics, Chief Judge Frank Easterbrook and Judge Richard Posner, disagreed vociferously on competing analyses of the investment industry. The Supreme Court’s ruling will not only resolve the intricate fiduciary and doctrinal issues of this dispute but also have profound implications upon several major theoretical debates in contemporary American jurisprudence: the clash of classical versus behavioral economics; the judicial capacity to evaluate increasingly sophisticated econometric analyses of financial systems; and the determination of the legal constraints - if any - upon executive compensation decisions. In this Article, I advance a positive account of the economic and legal context of this dispute and then argue normatively for a behavioral approach to its resolution. Because of the unique structure and history of the personal investment industry in the United States, the architecture of this segment of the economy is singularly bereft of beneficial market forces and thus vulnerable to significant fiduciary distortions. The ultimate judicial resolution of this dispute should take full account of the behavioral constraints upon individual investors and their advisors to avoid nullifying a federal statute and to impose discipline in a vital segment of the U.S. economy.

Amici curiae law professors filed this brief to urge the Seventh Circuit to grant the plaintiffs' petition for rehearing en banc to clarify the proper scope of the fiduciary duty under ERISA in the context of investment funds. The brief argues that members of the Seventh Circuit have taken conflicting positions on the central issue regarding whether the market for mutual fund fees is competitive, that this case presents an excellent opportunity to reconcile its doctrine in this area, and that the panel's decision to expand the Section 404(c) exemption to the fiduciary duty eviscerates an essential element in the security of retirement savings plans.

Amici curiae law professors filed this brief to urge the Court to grant the petition for certiorari and to clarify the proper scope of the fiduciary duty under Section 36(b) of the Investment Company Act that investment advisers owe to mutual fund shareholders with respect to the compensation that advisers receive. The brief addresses the Seventh Circuit's decision to disavow the long-established Gartenberg precedent and to hold, instead, that so long as an adviser make[s] full disclosure and play[s] no tricks, a plaintiff cannot prevail in a Section 36(b) action. Amici argue that the Seventh Circuit's decision creates a circuit split, elides a critical provision from the statutory text, and engages in a superficial market analysis.

The nature of private equity investing has changed significantly as two dynamics have evolved in recent years: portfolio companies have begun to experience serious financial distress, and general partners have started to diversify and desegregate their investment strategies. Both developments have led private equity shops - once exclusively interested in acquiring equity positions through leveraged buyouts - to invest in other tranches of the investment spectrum, most particularly public debt. By investing now in both private equity and public debt of the same issuer, general partners are generating a host of new conflicts of interest between themselves and their limited partners, between multiple general partners in the same consortia, and between private investors and public shareholders.In this essay, we identify and explore these various new tensions that have begun to arise in the private equity industry. We then propose and examine an array of possible ways to eliminate or alleviate those conflicts, exploring the regulatory, fiduciary, and pragmatic strengths and weaknesses of each approach. General partners can seek investor unanimity or consent for follow-on investments, but certain tax and practical barriers complicate that approach. Alternatively, they can opt for a range of architectural prophylaxes to protect against conflicts. These add costs on everyone, however, and, experience in related fields shows, they do not work. Investors, for their part, can attempt to diversify their own investment holdings to counterbalance risk, but this still leaves some vulnerable to opportunistic fund managers, and may increase costs for all investors as well. We propose a less costly and more efficient solution: advisers and investors should work together to create a vibrant secondary market for private equity interests to create a salutary exit option, which would in turn discipline the investment behavior of fund managers in this turbulent new investing environment.

One of the most dynamic and complex new investment vehicles on the market today is the exchange-traded fund (ETF), a security that provides the diversification of a mutual fund but trades on a securities exchange like a stock. In just fifteen years, the number of ETFs has proliferated to well over 600, attracting more than half a trillion dollars in investment. The majority of that expansion has occurred in just the past two years, largely as a consequence of recent difficulties in the mutual fund industry. With ETF sponsors aggressively seeking to create novel kinds of ETFs and to add ETFs to retirement account menus, these funds are projected to continue growing at a pace far faster than hedge funds and mutual funds in the coming years. Yet, for all this extraordinary growth, legal scholars have virtually ignored ETFs. This article seeks to establish a descriptive and conceptual framework for the scholarly discussion of these funds as they gain ever-greater prominence, for good or for ill, in the coming years. In exploring the structure, advantages, and shortcomings of ETFs, this article argues that ETFs are a positive market response to the shortcomings of mutual funds. ETFs use a novel pricing mechanism that harnesses the utility of arbitrage to provide investors with accuracy, efficiency, tax advantages, and a range of investment choices, while insulating investors from many of the structural problems associated with mutual funds. Despite these advan-tages, critics decry their brokerage fees and vulnerability to harmful short-term trading. This article argues that the mutual fund industry and its recent spate of dramatic scandals contributed to the emergence of ETFs and concludes that mutual funds offer vivid warnings of the conflicts of interest that may come to afflict the ETF industry as it continues to grow.

The allegations of malfeasance in the investment management industry - market timing, late trading, revenue sharing, and several others - involve a broad range of mutual fund operations. This Article seeks to explain the common source of these irregularities by focusing upon a trait they share: the practice of investment advisers' capitalizing upon their managerial influence to increase assets under management in order to generate greater fees from those assets. This Article extends theories of executive compensation into the context of investment management to understand the extraction of rents by mutual fund advisers. Investment advisers, as collective groups of portfolio managers, interact with the boards of trustees of mutual funds in ways analogous to the dealings of business executives with corporate boards of directors. In this setting, the managerial power hypothesis of executive compensation provides a useful paradigm for understanding distortions in arm's-length bargaining between investment advisers and fund boards, as well as limitations of the market's ability to ensure optimal contracting between those parties.