Corporate Governance

Henry Paulson and the Promise of Federal Incorporation

By J. Robert Brown

We have talked often on this Blog about federal intervention into the corporate governance process, something resulting from the lack of standards imposed under Delaware law.  Say on Pay is an example, as were numerous provisions in SOX.  Henry Paulson, however, has show how far this movement has progressed.  In his call for regulatory reform of the financial markets, one of the proposals is the formation of a regulator that he labels the "Conduct of Business Regulatory Agency" (CBRA), responsible for, among other things, business conduct regulation. 

One of the functions of this regulator? "First, as part of CBRA’s regulatory function, CBRA would be responsible for the chartering and licensing of a wide range of financial firms." There is already federal incorporation of some banks but Paulson's proposal would go much further.

• To implement the chartering function, the optimal structure should establish a new FFSP charter for all financial services providers that are not FIDIs or FIIs. The FFSP charter should be flexible enough to incorporate a wide range of financial services providers, such as broker-dealers, hedge funds, private equity funds, venture capital funds, and mutual funds. The establishment of a FFSP charter would result in the creation of appropriate national standards, in terms of financial capacity, expertise, and other requirements, that must be satisfied to enter the business of providing financial services.

In other words, federal incorporation of entities in the financial services industry.  Not just banks but brokers, private equity firms and so on.  In other words, this would entail the wholesale removal of these firms from the system of state regulation.  How explicit is this notion of displacement?  "In addition, field preemption would be provided . . . preempting state business conduct laws directly relating to the provision of financial services."

If the states were ousted for these entities, pressure could easily build for the same reform with respect to public companies.  In one of our recent posts, we noted that VC Strine of the Delaware Chancery Court was unconcerned about the likelihood of federal incorporation, indicating that the threat was notkeeping him awake at night. Perhaps these proposed reforms will in fact cause a sleepless night or two.

Full post as published by The Race to the Bottom on April 02, 2008 (boomark / email).