January 6, 2013: Paper Presentation at Annual Meeting of the Association of American Law Schools

Link to the paper: Forum Competition and Choice of Law Competition.

Forum Competition and Choice of Law Competition in Securities Law after Morrison v. National Australia Bank

Wulf A. Kaal

University of St. Thomas, Minnesota – School of Law

Richard W. Painter

University of Minnesota Law School


Minnesota Law Review, Vol. 97, 2012
U of St. Thomas Legal Studies Research Paper No. 12-12
Minnesota Legal Studies Research Paper No. 12-16

In Morrison v. National Australia Bank, the U.S. Supreme Court in 2010 held that U.S. securities laws apply only to securities transactions within the United States.

The transactional test in Morrison could be relatively short lived because it is rooted in geography. For cases involving private securities transactions in which geographic determinants of a transaction and thus applicable law are unclear, this article suggests redirecting the inquiry away from the geographic location of securities transactions towards the parties’ choice of law. In the long run, allowing parties to choose the law pertaining to private transactions could be more effective than relying on geography that is both indeterminate and easy to manipulate. Jurisdictions could then compete to induce transacting parties to bring private transactions within their jurisdictional reach by designing substantive law and procedures that parties choose ex-ante (“Choice of Law Competition”).

Recent cases expanding the jurisdictional reach of Dutch courts suggest that the Netherlands or another EU member state could engage in a different type of jurisdictional competition. Jurisdictions performing this role adjust their procedural rules to set up a forum within their borders for litigation that appeals to plaintiffs and their lawyers (“Forum Competition”). The U.S. engaged in some Forum Competition for extraterritorial securities litigation prior to Morrison, and the Dodd-Frank Act of 2010 empowers the SEC to continue to bring suits in the United States over securities transactions outside the United States. For many issuers and investors who do not choose the forum ex-ante, Forum Competition can be suboptimal. Depending on future developments, the acceptable outer bounds of Forum Competition between the United States and Europe may need to be defined by treaty or multilateral agreement.

Number of Pages in PDF File: 74

Keywords: securities, securities law, securities regulation, securities and jurisdiction, securities and choice of law

Accepted Paper Series


Venture Backed IPOs and the Competitiveness of US Capital Markets

The competitiveness of US capital markets can be impacted by IPO trends and listings of US companies and non-US companies on non US stock exchanges. Corporate Governance in the United States can influence listing decisions by management. A recent report from Wilson Sonsini (http://entrepreneur.typepad.com/files/ipo-survey-2012_web.pdf) on venture-backed IPOs has several interesting findings:

  • 98% of these companies had adopted a code of business conduct.
  • 94%  of the companies are incorporated in Delaware
  • Over 80% of the companies implemented a classified board in connection with the IPO.
  • More companies separated the chairman and CEO roles than combined them.
  • Venture capitalists who had invested in the companies are often represented on board committees (counting the VCs as independent,” despite their share ownership).

Inaccurate data reporting and suboptimal evaluations may prove to be a very serious issue that could really call into question FSOC’s work. To help policy makers evaluate these issues, I present data and discuss results in my forthcoming article.

Hedge Fund Manager Registration under the Dodd-Frank Act

Hedge Fund Manager Registration Under the Dodd-Frank Act (2013). San Diego Law Review, Vol. 50, 2013. Available at SSRN: http://ssrn.com/abstract=2150377

For the last three decades, the SEC has repeatedly yet unsuccessfully attempted to register hedge fund managers. Resolving the tension between the industry and regulators regarding the appropriate level of regulatory oversight, the Dodd-Frank Act mandates hedge fund adviser registration as well as increased record-keeping and disclosure. To provide guidance for policy makers, this article presents the results of the first survey study after the SEC’s registration effective date, March 30, 2012.

The author and a team of four research assistants contacted a population of 1,264 private fund advisers that registered with the SEC before the registration effective date. The entire population was approached via fax, in an electronic survey via email, and in phone interviews. Respondents (n=94) answered questions designed to evaluate the long-term effect of reporting and disclosure rules on private funds and the private fund industry. The survey questions assess strategic responses of the hedge fund industry, investigate the possible long-term effects of hedge fund registration, quantify compliance cost, assess compliance measures, investigate the implications of disclosure requirements in the Dodd-Frank Act pertaining to hedge funds, evaluate the effect of the regulatory regime on assets under management, and assess the effect of the regulatory regime on profitability.

The results reported in this study suggest that the Dodd-Frank Act registration and disclosure requirements and the SEC’s implementation of these requirements create several areas of concern for the hedge fund industry. Despite these concerns, the hedge fund industry appears to be only moderately affected and seems to be adapting well to the regulatory environment after the enactment of the Dodd-Frank Act.


Wall Street Does Not Fear the Dodd-Frank Act

Should Wall Street be afraid of the new rules established by the Dodd-Frank Act? For more than thirty years until the enactment of the Dodd-Frank Act, the hedge fund industry had resisted attempts by the SEC to register hedge fund managers. The SEC’s last attempted to register hedge fund managers failed in 2006 when the United States District Court of Appeals for the District of Columbia in Goldstein v. SEC vacated the registration of hedge fund managers by the SEC as arbitrary. All hedge funds managers that had registered with the SEC under the invalidated rule deregistered after the Goldstein decision.

The industry’s opposition to regulatory oversight can be traced back to several factors. Since the inception of the hedge fund industry, hedge fund managers considered regulatory oversight an infringement on their ability to generate absolute returns. Hedge funds evolved in a regulatory environment that allowed them through so-called safe harbors to stay exempt from regulatory oversight.  Hedge funds’ ability to operate without regulatory oversight facilitated successful hedge fund launches, generated higher returns, and attracted investors.

The Dodd-Frank Act appears to be the last chapter in the debate on hedge fund adviser registration and disclosure. Title IV of the Dodd–Frank Act authorized the SEC to register hedge fund managers and demand enhanced disclosure. The SEC now requires the disclosure of financing information, risks metrics, strategies and products used by hedge fund managers, performance and changes in performance, positions held by the investment adviser, percentage counterparties and credit exposure, of assets traded using algorithms, and the percentage of equity and debt, among others.

The new rules are controversial and precipitated vehement industry complaints. Industry representatives allege the Dodd-Frank rules result in lower profits and undermine managers’ competitiveness. Given its limited resources, it is unclear how the SEC will evaluate the new information it collects.[1] Industry representatives also voiced concern about the confidentiality of disclosure and the impact on the industry if information should be leaked to the market or to hedge funds’ competitors. There is also a concern that the new Dodd-Frank Act requirements could push new market entrants out of the market because of higher startup costs.

Despite these concerns and industry grumbling, the hedge fund industry is taking the new regulatory environment under the Dodd-Frank Act in stride.[2]  Hedge fund investors’ rate of return was not affected by the registration and disclosure requirements. The new regulatory regime has not affected the asset size of hedge funds. Hedge fund managers are not planning changes in their portfolio structure or operations, nor are they planning any other strategic responses. Fund managers are also not changing the size of the assets they hold to avoid the application of Dodd-Frank Act regulations.

Although compliance with Dodd-Frank Act requirements has increased costs for the hedge fund industry, the industry is adjusting well to the new cost structure. Costs have increased because of outsourced compliance work, hiring of additional counsel, new record-keeping policies, the hiring of additional staff, as well as new investor communications and marketing materials.  For most hedge fund managers the cost of compliance ranges from $50,000 to $200,000 and most hedge fund managers spent less than 500 hours per year to comply with the new registration and reporting requirements. These additional costs seem manageable for most hedge funds. It is too early to tell if additional burdens stemming from the Dodd-Frank Act will slow down hedge fund activity and reduce investor returns.

So far, the hedge fund industry has no reason to fear the Dodd-Frank Act.  However, there is one caveat, the SEC and the newly founded Financial Stability Oversight Council (FSOC) have the authority to further increase the regulatory oversight to address systemic concerns posed by the private fund industry. Unless both regulators substantially increase the regulatory oversight, the hedge fund industry should be well prepared to adjust to the new regulatory environment under the Dodd-Frank Act.

[1] Wulf Kaal, Hedge Fund Regulation via Basel III, 44 Vand. J. Transnat’l L. 389 (2011).

[2] Wulf A. Kaal, Hedge Fund Manager Registration under the Dodd-Frank Act – An Empirical Study, 50 San Diego L. Rev. (2013).


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