About

Henry T. C. Hu holds the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas Law School. His scholarly work and public service focus on the law and finance of capital markets and corporate governance, with particular emphasis on financial innovation. Hu has served as the founding Director of the SEC's Division of Economic and Risk Analysis, and has held leadership roles such as chair of the Business Associations Section of the Association of American Law Schools, and membership on various regulatory and advisory boards including the Legal Advisory Board of NASD (now FINRA) and the NASDAQ Market Regulation Committee. Recognized as one of the 100 most influential people in corporate governance by the NACD, he has testified before Congress and consulted for major law firms and governmental authorities. His research has significantly contributed to understanding systemic risk, financial innovation, and corporate governance, with numerous influential publications and policy insights. Hu's academic background includes a B.S., M.A., and J.D. from Yale University, and he has taught at Harvard Law School as the Bruce W. Nichols Visiting Professor of Law.

Research topics

• Political Science
• Finance
• Business
• Accounting
• Law
• Engineering
• Computer Science
• Business administration
• Psychology
• Public relations
• Financial system
• Economics
• Telecommunications

Selected publications

• The Shareholder Franchise, Transformative Investor Changes, and Motivational Misalignments

  SSRN Electronic Journal · 2024

  1st authorCorresponding
  • Business
  • Accounting
  • Business administration
  PublisherDOI

• Governance and the decoupling of debt and equity: the SEC moves

  Capital Markets Law Journal · 2022 · 1 citations

  1st authorCorresponding
  • Political Science
  • Business
  • Financial system

  INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412 I. DECOUPLING AND DEBT AND CORPORATE GOVERNANCE . . . . . . . . . . . . . . . 418 A. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .418

  PublisherDOI

• The Disclosure Paradigm

  Oxford University Press eBooks · 2020

  1st authorCorresponding
  • Political Science
  • Computer Science
  • Business

  Abstract This chapter focuses on the United States' (US) disclosure paradigm. It explains that the disclosure paradigm contemplates a unique regulatory role for the Securities and Exchange Commission (SEC). Here, the fulfilment of its core mission is essential not only to investor protection and market efficiency, but to a wide variety of transparency-dependent corporate governance mechanisms. Financial innovation is contributing to a ‘too complex to depict’ problem that brings into question the sufficiency of the core approach to information that the SEC has used since its creation. Moreover, particular financial innovations pose product-specific challenges to the fulfilment of the SEC's mission. Additionally, changing conceptions of the ends to be achieved by public disclosure, within the SEC disclosure system itself and pursuant to a new disclosure system driven by regulators with far different mindsets, raise new issues. It is now demonstrable that the new modes of information and the alternative data made possible by technological innovation can help address some of the disclosure challenges posed by financial innovation. At the same time, these new modes and alternative data introduce regulatory complexities. The chapter thus concludes that modern divergences are making life interesting for regulators, practitioners, and academics alike.

  PublisherDOI

• The SEC and Regulation of Exchange-Traded Funds: A Commendable Start and a Welcome Invitation

  SSRN Electronic Journal · 2019-09-18 · 3 citations

  articleOpen access1st authorCorresponding

  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. This new Article thus considers the SEC proposal and the 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 self-identification (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.

  Publisher

• Corporate Distress, Credit Default Swaps, and Defaults: Information and Traditional, Contingent, and Empty Creditors

  SSRN Electronic Journal · 2018-01-01 · 1 citations

  articleOpen access1st authorCorresponding

  Federal securities law seeks to ensure the quality and quantity of information that corporations make publicly available. Informational asymmetries associated with companies in financial distress, but not in bankruptcy, have received little attention. This Article explores some important asymmetries in this context that are curious in their origin, nature, and impact. The asymmetries are especially curious because of the impact of a world with credit default swaps (CDS) and CDS-driven debt “decoupling.” The Article explores two categories of asymmetries. The first relates to information on the company itself. Here, the Article suggests there is fresh evidence for the belief that troubled companies may prove lax in securities law compliance and for the existing “final period” explanation for such laxity. The Article also offers two new explanations: one based on the requirements for class action certification in Rule 10b-5 litigation and the other based on uncertainties as to private enforceability of “Management’s Discussion and Analysis” disclosure requirements. Building on the existing analytical framework for decoupling, the Article also examines a less obvious category of asymmetries: “extra-company” informational asymmetries flowing from the CDS and CDS-driven debt decoupling activities of third parties. Such third-party activities can be determinative of a company’s prospects, but reliable public information on the presence, nature, and magnitude of such activities tends to be scant. Here, even the company itself, not just investors, may not have the requisite information, including information on the highly counterintuitive and unusually complex incentives that such third parties may have. Unlike traditional creditors, “empty creditors with a negative economic ownership” as well as certain other buyers of CDS protection can have strong incentives to intentionally cause corporations to go bankrupt even when bankruptcy would make little sense. Such third parties may profit not only from actual defaults on financial covenants—at just the right times—but also from artificially manufacturing “faux” defaults or seizing on real, but largely technical, defaults. The Article examines such CDS and “net short” creditor matters through the lens of four examples. The three most important and recent of these examples have not previously been considered in the academic literature: Norske Skog (a Norwegian lumber company) (involving Blue Crest and GSO Capital Partners), Hovnanian (an American home builder) (involving GSO Capital Partners), and Windstream Services (an American telecommunications company) (involving Aurelius).

  Publisher

• A Regulatory Framework for Exchange-Traded Funds

  SSRN Electronic Journal · 2018-07-01 · 8 citations

  articleOpen accessSenior 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.

  Publisher

• Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency

  SSRN Electronic Journal · 2015-03-20 · 21 citations

  articleOpen access1st authorCorresponding

  Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (e.g., “empty voting”), the control rights of debtholders (e.g., “empty crediting” and “hidden interests”/“hidden non-interests”), and of takeover practices (e.g., “hidden (morphable) ownership” to avoid Schedule 13D blockholder disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used — the “descriptive mode,” which relies on “intermediary depictions” of objective reality — is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges — a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC — also creates difficulties. This new parallel public disclosure system, developed by bank regulators in the shadow of Basel and the Dodd-Frank Act and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006-2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012-2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.As to decoupling, the Article proceeds to analyze some key post-2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS Corp. opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The analytical framework's voter with negative economic exposure concept is addressed in a dual class share context. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts — and the pressing need for more action by the SEC. In addition, at the time the debt decoupling research was introduced, available evidence as to the significance of empty creditor, related hidden interest/hidden non-interest matters, and hybrid decoupling was limited. This Article helps address that gap.As to information, the Article begins by outlining the calls for reform associated with the 2012-2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information — consisting of two parallel regulatory universes with divergent ends and means — is unsustainable in the long run and involve certain matters that need statutory resolution. In the interim, however, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken.

  Publisher

• Disclosure Universes and Modes of Information: Banks, Innovation, and Divergent Regulatory Quests

  Yale journal on regulation · 2014-01-01 · 17 citations

  articleOpen access1st authorCorresponding

  In 2013, a new system for mandatory public disclosure came into effect, the first since the creation of the Securities and Exchange Commission (SEC) in 1934. Today, major banks and certain other entities must make disclosures mandated not only by the SEC, but also by a new system developed by the Federal Reserve Board and other U.S. bank regulators acting in the shadow of the Basel Committee on Banking Supervision and the Dodd-Frank Act. Already, this parallel system, which stemmed in large part from a belief that disclosures as to the complex risks flowing from modern financial innovation were manifestly inadequate, dwarfs the SEC system in sophistication as to the quantitative aspects of market risk and the impact of economic stress. The overall morphology of mandatory public information has changed in elemental ways, spanning two parallel regulatory universes with divergent ends and means. The SEC system is directed at the interests of investors and market efficiency, while the bank regulator system is directed at the well-being of the entities themselves and the stability of the financial system. The regulatory means diverge as well, not only as to specific risk-related disclosures, but even as to overarching concepts like "materiality" and the availability of private enforcement. This Article is the first academic work to consider the new morphology of public information.

  PublisherOA PDF

• Systemic Risk and Financial Innovation

  2013-01-01

  book-chapter1st authorCorresponding
  PublisherDOI

• Too Complex to Depict? Innovation, 'Pure Information,' and the SEC Disclosure Paradigm

  SSRN Electronic Journal · 2012-05-30 · 59 citations

  articleOpen access1st authorCorresponding

  Since the Depression, the SEC’s totemic philosophy has been to promote a robust informational foundation, furthering efficiency and governance. As a corollary, the SEC’s approach has been incremental, generally not venturing beyond information to substantive decision making. The Article starts by showing that this disclosure philosophy has always been largely implemented through what can be conceptualized as an “intermediary depiction” model. An intermediary — e.g., a corporation issuing shares — stands between the investor and an reality. The intermediary observes that reality, crafts a depiction of the reality’s pertinent aspects, and transmits the depiction to investors. The Article proceeds to show that the intermediary depiction model is increasingly undermined by modern financial innovation. Financial innovation is creating realities far more complex than in the past, often beyond the capacity of the English language, accounting, visual, risk measurement, and other tools on which depictions rely. The characteristics of some financial innovations can sometimes be so complex that even objective can be subject to multiple meanings. With such complex realities and such rudimentary tools, the depictions may offer shadowy outlines of reality, however that reality might be conceived. The Article illustrates, such as with asset-backed securities (ABS). Financial innovation sometimes poses a second roadblock to depictions: even a well-intentioned intermediary either may not truly understand (i.e., suffer from what can be termed true misunderstandings) or may not function as if he understands the reality he is charged with depicting (i.e., suffer from what can be termed functional misunderstandings). This second roadblock can flow both from complexities of financial innovation and organizational complexities associated with the intermediary itself. Depictions of major banks involved in financial innovation activities can suffer from both roadblocks. An afterword (Section IV(C)(3)) on the now-unfolding JPMorgan Chase Chief Investment Office derivatives hedging situation illustrates. Technological innovation can help. With advances in computer and Internet technologies, it is no longer essential to rely exclusively on intermediary depictions. Figuratively, the inntermediary can step out of the way. Such “disintermediation” and “pure information” have advantages — and disadvantages. A disclosure paradigm relying on both the intermediary depiction model and the pure information model — and the full spectrum of strategies between these extremes — is necessary. The Article outlines possible strategies that, e.g., would generate “moderately pure” bank information and possible strategies for the “simplification of reality” itself. Substantive questions, including “too big to fail,” are implicated. If a bank is “too complex to depict” and pure information-type models are insufficient, should we consider if it is also “too complex to exist”? The Article also suggests that challenges to the SEC disclosure paradigm extend to the paradigm’s philosophy, in particular, the philosophy’s incrementalist component. Departures such as the 2008 SEC short-selling ban raise SEC independence issues and the need to consider the proper relationship between the paradigm’s traditional efficiency goals and the truly rare situations in which, e.g., short-term financial stability ought also be considered. Other departures, such as responses to the 2010 “flash crash,” raise questions as to how high frequency trading and other innovations might conflict with the paradigm’s traditional goals. A fundamental rethinking of the SEC disclosure paradigm is now essential.

  Publisher

Frequent coauthors

• Bernard S. Black

  Medical College of Wisconsin

  11 shared

• Jay Lawrence Westbrook

  The University of Texas at Austin

  2 shared

• Darrell Duffie

  National Bureau of Economic Research

  2 shared

• Richard A Booth

  1 shared

• Michael DeGeorge

  Collegium Pharmaceutical (United States)

  1 shared

• Joseph Hardiman

  1 shared

• William H. Foulk

  1 shared

• Susan Smith Nash

  American Association of Petroleum Geologists

  1 shared

Education

• B.A., Government

  Harvard University

  1985

• Other

  Harvard Law School

  1988

• Ph.D., Government

  Harvard University

  1993

Awards & honors

• Massey Prize for Research in Law, Innovation, and Capital Ma…
• The 'HUI' index for gold mining stocks (1996)
• The 'Directorship 100' (National Association of Corporate Di…
• Fellow of The American Law Institute