Friday, March 27th

Worrell Professional Center, Room 1312

CLE Credits:  4.5 Hours General Approved

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Directions to the Worrell Professional Center can be found here.

A campus parking map can be found here.

Please direct any questions to Kenny Cushing at cushka12@wfu.edu.

Description

The Wake Forest Law Review will host its Spring 2015 symposium, “The Future of Financial Intermediation,” on Friday, March 27th at the Worrell Professional Center at Wake Forest University.  The symposium is co-sponsored by the BB&T Center for the Study of Capitalism.

Just as disintermediation is remaking the way goods and services are sold (think eBay, Craigslist, Airbnb), we seem to be heading toward greater disintermediation in financial markets.

In capital formation, newcomers such as crowdfunding and peer-to-peer lending are obvious examples. In corporate structures, conglomerates and combined firms have increasingly displaced intermediated equity markets. But there are counter-currents:  financial intermediaries (like mutual funds, hedge funds, and sovereign wealth funds) continue to grow and dig in.

This Symposium will explore the future of financial intermediation. What role does (and can) law play in shaping and responding to that future?  What adaptations are appropriate for traditional securities disclosure and oversight regimes?  How do decentralized structures affect rules on internal controls or the laws governing corporate groups? How do these changes affect the long-term versus short-term thinking of investors and managers?

Hosts

Alan Palmiter Associate Dean of Graduate Programs, Howard L. Oleck Professor of Business Law, Wake Forest University
Andrew Verstein Assistant Professor of Law, Wake Forest University

Schedule

 8:30 Continental Breakfast
 9:00 Introductory Remarks
 9:10 Peer-to-Peer Disintermediation
Moderator: Andrew Verstein
Michael B. Abramowicz Professor of Law, George Washington University Peer-to-Peer Insurance
Kathryn Judge Associate Professor of Law, Milton Handler Fellow, Columbia University Capital is Fungible: The Diverging Paths of Peer-to-Peer Lending and Kickstarter
 10:00 Short Break
 10:10 Degrees of Intermediation
Moderator: Andrew Verstein
Patricia A. McCoy Liberty Mutual Insurance Professor of Law, Boston College Evaluating Degrees of Disintermediation from a Consumer Protection Point of View
Tom C. W. Lin Associate Professor of Law, Temple University Infinite Financial Intermediation
 11:00 Morning Break (Refreshments Provided)
 11:15 New Directions in Financial Intermediation
Moderator: Alan Palmiter
Onnig H. Dombalagian George Denégre Professor of Law, Tulane University Exchanges, Listless?: The Future of Listing
Dale A. Oesterle J. Gilbert Reese Chair in Contract Law, Ohio State University Investing in the Internet Age: Crowdfunding Has Moved into the Intermediary Market
 12:05 Lunch (click here to see on-campus dining options)
 1:15 Berkshire’s Disintermediation
Introduction: Alan Palmiter
 Lawrence A. Cunningham Henry St. George Tucker III Research Professor of Law
Director, C-LEAF in New York, George Washington University
Berkshire’s Disintermediation
 2:00 Afternoon Break (Refreshments Provided)
 2:15 Disintermediated Corporate Governance
Moderator: Usha Rodrigues – Associate Dean for Falculty Development, M.E. Kilpatrick Chair of Corporate Finance and Securities Law, University of Georgia
Francisco Reyes Villamizar Superintendent of Companies in Colombia Foundations and Evolution of the Colombian Simplified Corporation
Erik P.M. Vermeulen Professor of Business & Financial Law, Tilburg University Corporate Governance in a Networked Age
 3:05 Adjourn

Abstracts

Peer-to-Peer Insurance
Michael Abramowicz

Peer-to-peer lending has begun to make small tentative inroads in the banking industry, but no comparable movement has emerged in the insurance industry. This Article will assess the potential for and obstacles to peer-to-peer insurance. With peer-to-peer insurance, individuals might collectively insurance risks of their acquaintances. A partial version of peer-to-peer insurance would involve individuals underwriting a small percentage of the insurable risk, so that insurance companies could use information about willingness of acquaintances’ to underwrite to improve their own actuarial ratings. A more developed version could allow for full underwriting through social networks, with more distant acquaintances taking on at least some of the function of reinsurers. Underwriters might also serve an adjudicatory function, providing information about whether insureds’ claims are valid. Peer-to-peer insurance is in some sense reminiscent of mutual associations, which were well positioned to take advantage of local information but did not enjoy the economies of scale of larger businesses. Perhaps the most significant obstacles to the emergence of peer-to-peer insurance, as with other forms of disintermediation but perhaps more severely, are regulatory. But cryptocurrencies, which so far have eluded effective regulation, could facilitate the development of peer-to-peer insurance. An offshore insurance company could use cryptocurrencies to sell insurance in the United States or elsewhere without regulatory approval, particularly if local underwriters are effective in limiting fraud. An insurance fund could also serve as a potential application of a self-governing cryptocurrency. Whether or not peer-to-peer insurance can evade regulation, this Article argues for a relaxed regulatory approach to such insurance, particularly in early stages of development, so that information can develop about whether it has advantages in some contexts over more traditional insurance products. Back to Top

Berkshire’s Disintermediation
Lawrence A. Cunningham (based on his book Berkshire Beyond Buffett)

Berkshire Hathaway, a 50-year old company that is now America’s fourth-largest, never uses intermediaries. Despite a market cap exceeding $350 billion, it has never borrowed money; despite being built by scores of acquisitions, it has never hired a business broker. Berkshire’s subsidiaries include several consumer finance companies whose business models dispense with intermediaries; the largest car insurer in the US, which has always sold direct without using intermediaries; and numerous commercial insurance companies, which often likewise skip the broker market. Exploring why Berkshire and its subsidiaries have shunned intermediaries–with answers ranging from thrift to loyalty and paternalism–should shed light on the history and current state of financial intermediation and perhaps on broader questions of business culture, consumer protection, and the role of technology. Back to Top

Exchanges, Listless?: The Future of Listing
Onnig Dombalagian

As the traditional intermediary for secondary market trading in most jurisdictions, securities and derivatives exchanges have historically exercised self-regulatory authority in three interrelated spheres:  regulation of trading practices, regulation of the business conduct of their broker-dealer members, and regulation of listed companies. Within the past decade, competition among demutualized, for-profit exchanges and other trading venues has triggered a series of regulatory reforms that has eroded this self-regulatory authority in the first two spheres. Exchanges, however, have managed to retain their formal authority over admission to listing under both U.S. and EU capital markets legislation, even as such legislation increasingly uses listing as a factor in calibrating the costs and benefits of public company regulation and in assuring the integrity of benchmark derivatives. This contribution will speculate about the future of listing as a commercial intermediary function, in light of developments such as the fall of the credit rating agencies, the rise of FINRA and PCAOB, and the globalization of trading and surveillance. Back to Top

Capital is Fungible: The Diverging Paths of Peer-to-Peer Lending and Kickstarter
Kathryn Judge

The paper explores why the technologies that have so transformed intermediation in other industries (as reflected in the rapid growth of Groupon, Airbnb, and Uber, among others) have not had similar effects on banking and other modes of financial intermediation.  Just a few years ago, peer-to-peer lending appeared positioned to bring similarly radical changes to financial intermediation.  It promised to make credit available to a broader pool of borrowers, to enable retail investors to make unsecured loans, traditionally the exclusive province of banks, and to create a direct relationship between these borrowers and lenders.  It now seems unlikely to fulfill any of these promises.  Peer-to-peer lending platforms increasingly screen eligible borrowers using metrics largely akin to those used by banks and increasingly focus on prime borrowers who get credit elsewhere.  The lender base, while in flux, increasingly consists of sophisticated financial firms who seem likely to cherry pick the best loans, eventually crowding out retail investors.  And, regulatory concerns have resulted in these chains becoming intermediated, with the lending platform now remaining as a node between the suppliers and recipients of the capital.  By exploring the dynamics driving these changes, and the areas where crowdfunding appears to have established a more lasting foothold, this piece sheds new light on how different forms of financial intermediation create value. Back to Top

Infinite Financial Intermediation
Tom Lin

No one is a financial island entire of itself. Intermediation is a fundamental fact of modern finance. Investment banks underwrite stock offerings for companies.  Commercial banks safeguard the savings of workers.  Fund managers invest the pensions of retirees.  Exchanges match orders of buyers and sellers. Brokers facilitate trades of investors.  Credit card companies advance funds to consumers. Collectively, these and other intermediaries form the fabric of modern finance. Yet despite all these existential financial links, entrepreneurs and innovators continue to endeavor towards the possibilities of fundamentally disrupting and disintermediating these financial ties, breaking apart from the financial main, and building new financial islands.

This Article is about those financial links and those disengaging endeavors, the ties that thread the fabric of modern finance and the efforts to tear those threads asunder to create anew, the truths about financial intermediation and the mirages of financial disintermediation.  It presents an examination of the functional evolution of financial intermediation, explains the difficulties of true financial disintermediation by revealing the less obvious links that remain, and highlights potential implications and recommendations arising from such a revelation. Back to Top

Investing in the Internet Age: Crowd Funding has Moved Into the Intermediary Market
Dale Oesterle

As the SEC struggles to amend its rules and procedures to adapt to the Internet Age, Internet investment continues to evolve.  With the Securities and Exchange Commission late on rules for individual, direct investments under the JumpStart Our Business Startups Act of 2012, the Internet is racing forward into the creation of internet investment funds.  AngelList is perhaps the best example.  Small investors use AngelList to form investment syndicates that invest in portfolio companies offering on the Internet.  The practice is yet another example of the need for a complete overhaul of SEC rules on capital offerings in the United States.  The agency needs to put all its offering rules on the table, face the advantages of the internet age, and draft a new system of capital offering regulations. Back to Top

Corporate Governance in a Networked Age
Erik P.M. Vermeulen

Corporate governance research is typically predicated on solving how we design the best way for managers, financial intermediaries, investors and other stakeholders to interact and better yet, do business. Based on this research, policymakers and regulators have introduced agency-based rules and regulations to ensure that self-interested managers will not act in ways that conflict with shareholder value creation. This all sounds great in theory. However, people nowadays are increasingly debating how well corporate governance frameworks truly prevent managerial misbehavior. Speaking from personal experience, when you are on the ground working in a listed company, you immediately recognize that there are other overriding considerations that should take precedence. Indeed, when you conceptualize the relationship between managers and investors as one of hierarchy, you create a short-term mentality that usually leads to stricter control mechanisms on corporate executives, corporate reorganizations, and demands for increased dividends and stock buybacks, making it extremely difficult for companies to recapture the focus on innovation, growth and wealth. It is this disconnect that is slowly but surely causing a shift in corporate governance thinking. This paper covers innovative companies that create wealth and growth and more specifically what we see happening within them. What is it that causes these companies to thrive and stay ahead of their competitors? As we start to think about this “dark matter” in the universe of corporate governance and ask ourselves how to architect and design these type of companies, we come across certain common themes, such as the protection of founder-CEOs, controlling ownership, investor relations that focus on non-financial metrics and a more fruitful interaction between the company’s managers and financial intermediaries. After analyzing the world’s most innovative companies, we come to the conclusion that it is better to view corporate governance as the interface between what a company is today and what it attempts to achieve in the future. Back to Top

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