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At the heart of corporate governance are fundamental doctrines that limit court scrutiny of fiduciary and stockholder decisions: the business judgment rule limits scrutiny of informed director decisions and, as with Corwin cleansing, informed voting by “disinterested” shareholders is accorded substantial deference. Only when, for example, the motivations of a director or controlling shareholder are sufficiently suspect would either the “entire fairness” or “enhanced scrutiny” standards of review apply. How to assess such motivations, however, is underdeveloped in the case law. This Article addresses this task in three areas, relying partly on a methodology for assessing a person’s overall economic motivation flowing from the person’s financial stakes in or directly relating to the corporation. The methodology, from the analytical framework for “decoupling” (e.g., “empty voting”) introduced in 2006, deconstructs the person’s “overall economic interest” in a company’s shares (“host shares”) from such stakes by considering the net effect of the person’s: (a) host shares; (b) “coupled assets”; and (c) “related non-host assets.” First, the Article offers a re-calibration of standards of judicial review of fiduciary decisions when a fiduciary has financial stakes on both sides of the challenged transaction (as with Elon Musk in the 2022 Tesla-SolarCity merger case). Dubious outcomes flow from the traditional approach to choosing from the triad of the business judgment rule, enhanced scrutiny, and entire fairness. We show, for example, how courts use entire fairness in circumstances not meriting such review, such as where a controller’s percentage ownership stakes in the corporation and a counterparty are identical. We also offer a generalized approach methodically mapping the triad of zero, materially positive, and materially negative “overall economic interest” to the triad of standards of review. Second, the Article shows that court deference to “disinterested” shareholder decisions needs rethinking, due largely to the now overwhelmingly institutional ownership of public companies combined with the prevalence of new financial stake patterns and new organizational voting dynamics at institutions. As to new financial stake patterns, related non-host asset issues (e.g., increased index investing in conjunction with increased asset manager size) and coupled asset issues will often result in institutional investors having a zero or negative “overall economic interest” in host shares. We show this both by looking at “related non-host assets” of large asset managers not party to the 2010 CNX-T. Rowe Price case and by offering broader evidence. (These foregoing effects are independent of the usual cost/lack of payoff reasons why many believe index funds are less motivated to invest in corporate stewardship.) Rigid application of existing law would disqualify asset managers from being considered “disinterested” shareholders with surprising, likely undesirable, frequency. We propose steps to improve the integrity of shareholder voting while mitigating that undesirable prospect. We also propose a general method for determining when an institutional investor’s overall economic interest should be deemed “material.” As to organizational voting dynamics, court precedents suggest that being “disinterested” rests on the premise of a motivation to maximize the value of host shares. If institutional investors heed calls to consider non-share price-directed goals, this conceptual basis for deference is brought into question. Other new organizational voting dynamics, such as “pass-through voting,” raise mechanical complexities. The very idea of a “disinterested” shareholder is increasingly a convenient myth. Third, this Article addresses a novel and especially challenging context for assessing motivation: the “de-SPACing” of special purpose acquisition companies (SPACs). The 2023 Delman case takes the welcome step of analyzing deference to shareholder “cleansing” by relying in part on certain aspects of the decoupling framework. This Article shows how full deployment of the framework’s deconstruction methodology, however, could not only provide more comprehensive guidance as to shareholder cleansing but also provide guidance in selecting the proper standard of review of fiduciary decisions. [ABSTRACT FROM AUTHOR]

Exchange-traded funds ("ETFs") are among the most important financial innovations of the modern era. And yet they still have no coherent regulatory system. This Article addresses the problem by assessing the SEC's recent effort in this area in light of the recommendations we provided in prior research. In March 2018, we offered the first academic work to show the need for, or to present, a comprehensive regulatory framework for all ETFs. On June 28, 2018, just prior to that article's scheduled publication, the SEC issued a proposal to change the way it regulates certain types of ETFs. On May 20, 2019, the SEC issued its "Precidian" exemptive order, allowing for the first time "non-transparent" actively managed ETFs--an order that we believe has surprising, hitherto unexplored implications for ETF regulation. Precidian order in the context of our earlier article's proposed regulatory framework, and also refines that framework. We provide additional rationales for the framework, relying in part on new empirical findings. The SEC's proposal does not seek to provide a comprehensive regulatory framework for all ETFs. However, the proposal is a commendable start to addressing some of the problems in the current ad hoc approach to ETF regulation, especially as to the substantive side of ETF regulation. In proposing a more rules-based approach, the SEC helps deal with the central problem of current substantive ETF regulation--the reliance on individualized exemptive letters. However, this partial shift only applies to certain ETFs that are organized under the Investment Company Act of 1940 and also leaves in place an anomalous set of individualized exemptions for several specific Investment Company ETFs, including those offering leveraged and inverse exposures. More broadly, the proposal does not address problems of SEC discretion pertaining to the underlying process of financial innovation in ETFs. The proposed rule also neglects to address the frequent need for individualized exemptions with respect to stock exchange listing requirements. With respect to the disclosure side of regulation, the SEC proposal again only covers Investment Company ETFs, but is even more incremental in nature. The SEC contemplates modest enhancements of disclosures related to "trading price frictions" of such ETFs. And, going the other direction, the SEC contemplates eliminating the primary source of information for retail investors on intraday values of ETF shares. We welcome the SEC's invitation for views on more fundamental disclosure reforms. We offer a refined version of the comprehensive disclosure approach advanced in our first article, and provide fresh rationales for such an approach, based in part on new empirical findings. This approach would apply to all ETFs, and would be cognizant of the distinctive characteristics of ETFs and the subtle complexities introduced by the underlying innovation process. Collectively, a disclosure regime consisting of a "dynamic" SEC-specified ETF nomenclature and required ETF selfidentification (which nomenclature and self-identification we refer to as the "disclosure building block"), fuller quantitative disclosures of trading price frictions (such as those related to the arbitrage mechanism and bid-ask spreads), and periodic Management's Discussion and Analysis-style qualitative information centered on the arbitrage mechanism (including, as appropriate, consideration of the impact of the liquidity of the assets in which the ETF is invested) would help individual and institutional investors alike. [ABSTRACT FROM AUTHOR]

This is the first academic work to show the need for, or to offer, a regulatory framework for exchange-traded funds ("ETFs"). The economic significance of this financial innovation is enormous. U.S.-listed ETFs now hold more than $3.6 trillion in assets and comprise seven of the country's ten most actively traded securities. ETFs also possess an array of unique characteristics raising distinctive concerns. They offer what we here conceptualize as a nearly frictionless portal to a bewildering, continually expanding universe of plain vanilla and arcane asset classes, passive and active investment strategies, and long, short, and leveraged exposures. And we argue that ETFs are defined by a novel, model-driven device that we refer to as the "arbitrage mechanism," a device that has sometimes failed catastrophically. These new products and the underlying innovation process create special risks for investors and the financial system. Despite their economic significance and distinctive risks, ETFs remain a regulatory backwater. The United States has neither a dedicated system of ETF regulation nor even a workable, comprehensive conception of what an ETF is. A motley group of statutes divide similar ETFs into a plethora of different regulatory cubbyholes that were originally intended for very different vehicles such as mutual funds, commodity pools, and operating companies. Other regulatory constraints center on a process of discretionary review that generally allows the Securities and Exchange Commission ("SEC") to assess the merits of each proposed ETF on an ad hoc, individualized basis. This process of review is opaque and unfocused. It is also inconsistent over time, with the effect that older funds often operate under lighter regulation than newer ones. And because it has its roots in statutes originally designed for other kinds of vehicles, the regulation of ETFs fails to address the ETF's distinctive characteristics. Rooted in a disclosure system largely designed for mutual funds, the SEC's disclosure mandates for ETFs fail to comprehend the significance and complexities of the arbitrage mechanism and often require no public disclosure of major breakdowns in the mechanism's workings. Our proposal contemplates a single regulatory framework for all ETFs. The treatment of all ETFs would be unified. This systematic approach, rooted in the arbitrage mechanism common to all ETFs, would largely displace the hodge-podge of regulatory regimes that vary widely across both the different ETF regulatory cubbyholes in use today and different ETFs within each such cubbyhole. The functional elements of the framework would streamline and rationalize the creation, substantive operations, and disclosure of all ETFs. Such elements would include a shift away from ETFby- ETF discretionary review and toward written rules of general applicability. In terms of the creation of ETFs, we would narrow the range of ETFs subject to close substantive scrutiny while retaining some discretion for the SEC to address concerns related to the arbitrage mechanism or related structural engineering issues, risky or complex ETFs not adequately addressed by suitability rules and investor education, and large negative externalities. In terms of disclosure, we contemplate quantitative and qualitative information addressing what we here call "trading price frictions," such as those relating to the performance of the arbitrage mechanism and related engineering during the trading day, model-related complexities, and evolving understandings and conditions. [ABSTRACT FROM AUTHOR]

The article discusses the U.S. Securities and Exchange Commission's (SEC) promotion of an informational foundation for private decision makers as of June 2012, focusing on financial innovation and problems associated with bank disclosure activities. The disclosure regime promulgated by the SEC is also addressed, along with information on several pieces of U.S. legislation, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Troubled Assets Relief Program.

Suggests that respect for market primacy requires that the United States government take steps directly related to investor enthusiasm. Discussion on indeterminism, market primacy and government stasis; Role of the Securities and Exchange Commission.