3 posts

Socially Accountable Investing: Applying Gartenberg v. Merrill Lynch Asset Management

By Zachary Barker

In the past several years, the investment management industry has seen the tremendous growth of mutual funds that invest according to principles of socially responsible investment (SRI). What is missing from this growing sector, however, is any oversight as to whether these funds actually accomplish their socially conscious mission. With the Securities and Exchange Commission reluctant to police “social disclosure,” the unregulated promises of these SRI funds present a significant consumer protection risk.

This Note proposes that existing securities laws provide a potential avenue to effective SRI fund regulation without the need for new regulatory action. The rules of fiduciary obligation for mutual fund directors imposed by § 36(b) of the Investment Company Act and the landmark decision Gartenberg v. Merrill Lynch Asset Management, which until now have largely been applied to funds’ financial performance, could easily be adapted by SRI fund investors to ensure a modicum of oversight for those funds’ social performance. State laws governing the management of public benefit corporations, which impose on directors a duty to disclose and compare corporate social performance, can provide potential principles for evaluating social performance.

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Do Municipalities Need a Lender of Last Resort? Evaluating the Federal Reserve’s Pandemic-Era Municipal Lending Program

By Arpan Patel

In March 2020, the COVID-19 pandemic pushed the $4 trillion American municipal debt market—a critical source of funding for state and local governments—to the brink of collapse. On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, which in part empowered the Board of Governors of the Federal Reserve and the Department of the Treasury to establish a Municipal Liquidity Facility to “help state and local governments better manage cash flow pressures in order to continue to serve households and businesses in their communities.” Although the Federal Reserve authorized the Municipal Liquidity Facility to lend up to $500 billion to municipalities, only two borrowers, who drew on 1.27% of the total capacity, tapped the facility. The debates that sprang up around the Municipal Liquidity Facility demonstrate that scholars have yet to grapple with the institutional, legal, and historical constraints of Federal Reserve support for state and local governments.

This Note addresses that gap. It begins by situating the Municipal Liquidity Facility within the history of the Federal Reserve’s monetization of municipal bonds. The Note goes on to evaluate Congress’ legislative mandate for the Municipal Liquidity Facility and the operational, political, and legal dynamics of the program. Finally, based on the institutional history, legal authority, and politics of the Federal Reserve, this Note examines policy proposals to reform the Federal Reserve’s role for supporting municipalities during crises. Ultimately, this Note attempts to place the pandemic-era policy experiment in historical context, and then draw out lessons to help answer a critical question for policy makers: when municipal governments face financing crises, what is the proper role for the Federal Reserve?

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Don’t Break the Bank, Build a New One: How Investing in Public Banks Can Solve Pensions’ ESG Problem

By Geeta Minocha

Pension funds are significant institutional investors with massive capital. Attractive, prosocial investment opportunities abound. Nevertheless, several roadblocks limit American pension managers from engaging in ESG investing, including ERISA, fiduciary rules, anti-ESG state laws, and institutional inertia. This impasse creates an opportunity for public intervention because the private sector may be failing to meaningfully adjust to meet societal goals. This Note argues that public banking may be an appropriate tool to distribute some pension capital to ESG goals, effectively enabling pensions to outsource their present ESG burden. Though currently a rarity in the United States, public banks can serve as sound investments for pensions while in turn using this invested money for prosocial initiatives.

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