PROCEDURAL rules in U.S. courts often have predictable and systemic substantive consequences. Yet the vast majority of procedural rules are drafted, debated, and ultimately enacted by a committee rulemaking process substantially removed from significant legislative or executive supervision. This Article explores the dynamics of the committee rulemaking process through a gametheoretical lens. The model reveals that inferior players in the committee rulemaking game—advisory committees, the Standing Committee on Rules of Practice and Procedure, the Judicial Conference, and the Supreme Court—are sometimes able to arbitrage congressional transaction costs to obtain results at odds with the results. Congress would prefer in a world without transaction costs. This Article presents two real-world examples of possible transaction-cost arbitrage, one involving the 1993 adoption of the “initial disclosures” requirement under the Federal Rules of Civil Procedure, and one involving the implementation of the “means test” requirement of the 2005 bankruptcy reform statute. Though the normative implications of committee rulemaking are ambiguous, the dynamics of the game suggest that a better preference fit between Congress and the membership of the various advisory committees would mitigate the risks of transaction cost arbitrage substantially, while retaining most of the advantages of the committee rulemaking system.
Issue 1
Placebo Ethics
ENACTED in response to abuses that led to Enron’s fall, Section 406 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley” or “SOX”) effectively requires every public company to disclose its code of ethics, and also to disclose immediately, via website or SEC filing, any waivers from the code that the company grants to its top three executives. These waivers offer a unique window not only into the ethical practices of public U.S. companies, but also into how disclosure works “on the ground”—whether companies are actually complying with disclosure rules.
Out of 200 randomly selected firms, we found only one waiver filed over five years disclosed pursuant to Section 406. By exploiting an overlap in disclosure regulations, we were able to crosscheck our sample companies’ waiver disclosures. We identified 33 instances in which companies appear to have violated Section 406, and another 70 instances in which companies evaded illegality by watering down their codes to such a degree that they no longer forbid the very En-ron-style conflicts of interest that led to the adoption of Section 406.
Finally, we studied all Section 406 waivers filed with the SEC in the six years following SOX’s passage—and found only 36 total. Event studies revealed that the market generally did not react to these transactions, suggesting that companies use waivers only to disclose innocuous, immaterial information, and disclose more problematic information, if at all, in more covert ways.
We draw two conclusions from our research. First, the current regime is unhelpful and inefficient, long on costly and burdensome disclosures, and short on demonstrable benefit. Section 406’s disclosure requirement is not functioning as intended. Either by mistake, manipulation, or indifference, companies are evading its requirements. We suggest eliminating the currently unenforced code-of ethics waiver disclosure mandate, and instead requiring immediate disclosure of related-party transactions involving the company’s CEO, CFO, or CAO, regardless of the firm’s internal ethics rules. Second, our study highlights the limited utility of regulation by mandated disclosure alone and the inadequacies of website disclosure for securities regulation.
Consumerism and Information Privacy: How Upton Sinclair Might Once Again Protect Us From Ourselves (And Why We Should Let Him)
This Note will address the salience of a simple analogy: will privacy law be for the information age what consumer protection law was for the industrial age? At the height of industrialization, the market faced instability caused by a lack of consumer competence, lack of disclosure about product defects, and advancements in technology that exacerbated the market’s flaws. As this Note will show, these same causes of market failure are stirring in today’s economy as well. The modern economy is not one of goods but of information, and although consumers have long been aware that their personal information may have marketing value, the internet has fundamentally changed the scope and depth of information collection, exposing more consumers than ever to injuries that require not just a more comprehensive remedy, but a wholesale change in the level of care for the information industry. Just as the mass-production economy precipitated a wave of reforms in consumer protection, in part thanks to a kick-start by author Upton Sinclair, so too must the mass-information economy adapt. After demonstrating the parallels between the problems of today with those of yesterday, this Note will propose parallel solutions, particularly a consolidation of regulatory power and a new tort for breach of information privacy, the latter of which draws its inspiration from general products liability. These proposals show that rather than reinvent the wheel, modern lawmakers can (and should) answer today’s problems with lessons from the last century.