Business Law Scholar Joins Faculty
by Rob Seal
Morley was previously an associate research scholar at Yale Law School and John R. Raben/Sullivan & Cromwell Executive Director of the school’s Center for the Study of Corporate Law. At the Law School he is teaching Trusts and Estates, and Securities Regulation, as well as a course on business associations. “I’m particularly excited about working with UVA students,” Morley said. “UVA students have a reputation for being incredibly bright and intellectually engaged, but also for being personable and friendly.”
Morley majored in economics at the University of Utah and graduated from Yale Law School in 2006. Afterward, he spent a year practicing corporate and securities law at Covington and Burling in New York. He spent much of the past two years researching the regulation of mutual funds, and has completed two papers on the topic, with a third in the works. The first, which was co-authored with Quinn Curtis and will be published in the Yale Law Journal, argues that mutual funds are unlike conventional companies and are not well served by the current regulation system, which requires shareholder governance.
The mutual fund industry holds about $12 trillion in assets, which makes it comparable in size to the commercial banking industry, but regulations have remained largely unchanged since around 1940 and often ignore the realities of the modern mutual fund industry, Morley said. Current mutual fund regulations are similar to those governing conventional companies, which require a degree of shareholder governance. Though shareholders in traditional companies can sell their shares, the underlying value remains invested in the company.
As a result, shareholders in conventional companies have an interest in making sure the companies are governed properly; poor company operation results in declining stock value, Morley said. In contrast, shareholders in open-end mutual funds can redeem their shares directly for cash, and therefore don’t vote or become active in fund governance.
“The reason is that if you don’t like what’s going on in a mutual fund you can just take your ball and go home,” Morley said. “You take your money out and that’s that.” This causes mutual funds to resemble consumer products more than ordinary companies, he said. “Just as I can sever my relationship with a manufacturer of auto tires or breakfast cereal by refusing to buy its products, I can sever my relationship with the managers of a mutual fund by pulling my money out.”
This means that mutual funds should be regulated like products rather than like companies, Morley said, as it does no good to give shareholders voting rights or other rights to participate in fund governance. There’s never been a vote contested by shareholders in an open-end mutual fund, he said.
“The more sensible way of regulating mutual funds is to impose regulations that apply automatically rather than requiring shareholder involvement to trigger them,” he said.
Morley also wrote an article on the historical origins of the current mutual fund regulatory and tax regime. The prevailing wisdom for a long time was that the regulations that now differentiate mutual funds from hedge funds—such as limits on mutual funds’ ability to borrow and to exercise influence over the companies in which they invest—originated with populist forces in the Roosevelt administration that were opposed to Wall Street.
“But it turns out that these regulations were mostly sought by the mutual fund industry itself,” Morley said. Many of the current regulations’ key features—which originated between 1935 and 1940—were created at the behest of a handful of large Boston funds, he said.
“Many of the choices made in 1940 have deeply affected the way the world works today,” he said. “For example, an arbitrary decision was made by a handful of funds in Boston to ask for sharp limits on mutual funds’ ability to borrow money. But nobody anticipated the emergence of hedge funds that would become super-leveraged, like we see today. And the limits on borrowing in mutual funds helped to produce the strange capital structure that made money market funds unstable during the financial crisis of 2008.”
Morley is also working on an empirical study of excessive fee litigation in mutual funds, and said he has scholarly interests in household finances, trusts and estates, securities regulation and financial institutions.