Bar Association Mistrusts Lawyers?

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Over time, many articles, books, movies and lawsuits have suggested that not all attorneys are of the highest moral fiber.  Even the generally well-characterized lawyers on the TV show Law and Order (my favorite btw) are sometimes presenteded as, shall we say, not wholly pure.

But a new low in the suspicion of lawyers was reached by, of all sources, the New York State Bar Association.  (I am indebted, with respect to this insight, to Law 360, a daily service sent to attorneys with all sorts of law-related content.)

That Bar Association’s AI Committee just issued a report reminding attorneys that the cost of obtaining and maintaining AI  tools is “ordinarily an overhead expense” and can only be billed to a client if there is a systems cost directly related to a specific client matter. (Sort of like charging a client for your typewriter?)  The report also noted that “[g]enerative AI is indelibly changing the practice of law” which is no doubt correct in certain ways (though last I looked no AI agent could read the room in a negotiation or relate to a stressed client suffering doubts about pending judgments).

But most startling was this: the Bar Association warned lawyers not to bill for time that lawyers saved by using AI tools.  And not to bill for the time it took to learn how to utilize AI.  I always thought that charging a client for an hour I did not work for him was a fraud, and that I could not charge a client for my learning curve for anything that was a fundamental skill (it would indeed be great if I could charge the cost my parents incurred in my attending law school).

Perhaps this Bar Association report was designed to be preventative and comprehensive and, thus compelled to state the obvious.   And it did also propound rules for use of AI in terms of accuracy, integrity, and avoidance of using AI to in effect practice law in a state where you were not registered.

But the fact that the Bar Association included some caveats discussed above made me think that perhaps some members of the New York Bar are patterning themselves along the lines of Better Call Saul….

SEC, AI and Regulatory Direction

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In a couple of recent interviews with David Woodcock, director of SEC enforcement, we have learned of two things: how the SEC is addressing disclosure about AI and, more fundamentally, how current SEC practice sees and does not see its mission.

SEC is carefully examining all filings that discuss the role of AI in the business of a registrant offering securities or making a periodic required filing with the Commission. The focus relative to AI is for fraud cases and fraud linked to AI (sometimes in SEC parlance called SI or “super intelligence”).  SEC focus includes any overstatement of the use of AI or in failure to describe the material use of AI in the business.  There is also concern that companies may overstate the performance of AI-driven robotics.

At least in the reportage of the SEC interview there was no mention of the societal risks of AI nor of the private actions being brought by users allegedly harmed by reliance on AI advice or input. The SEC approach today seems mechanically sound but misses a societal component when it comes to AI: no disclosure of risk of misuse of AI that could ultimately harm a registrant and thus its investors (as well as society at large).  This approach seems consistent with the view of the President, at least up to now: AI is not a problem but a great wave for the future.

Take-aways thus provide insight about SEC focus: prevention of fraud by misstatement or by omission.  Policy is focused on clear reporting in all filings, a traditional and of course essential role for the SEC.  But what is missing is this: focus applied by prior SEC efforts under Democratic administration on express reference to protecting the small investor from  robust disclosure of risks, with (frankly in my view) an overlay of suspicion that filers cannot always be relied upon as a general proposition.  This former focus, by the way, was often criticized by minority Republican SEC Commissioners who sensed (likely correctly) an inherent view that businesses making filings were not being trusted, and sought an edge on the investing public.  I suggest that the current SEC starts by assuming the best from corporate filers.

This difference in starting point is old and is not going away.  But most interesting to me is not the SEC disclosure approach but, rather, whether or not current fears of dire risk of AI impacting business and indeed humankind are or are not well-founded.

[No AI was used in the researching or drafting of this post. 🙂 ]

Biogen and Boston’s Life Science Prominence

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Chris Viehbacher, CEO of Boston biotech giant Biogen, believes that greater Boston has the premier gathering of scientists in medicine in the world.  Addressing today’s gathering of the Boston Chamber of Commerce, he claimed that nations contend commercially based on brain power and that America is in the lead when it comes to life sciences, pointing particularly to the concentration of talent in Kendall Square, adjacent MIT and nearby Harvard, with Northeastern just across the river (he is a Northeastern Trustee.  And it just so happens that Biogen’s new building in Kendall Square is coming on line, as Biogen turns 50 years old).

Some interesting take-aways:

Medicine is expensive but ability to profit from innovation lasts only as long as the patent rights; patents issue before there is a viable commercial product so the profit time line is abbreviated.  He prefers to acquire early stage companies as they are less costly if far away from commercialization, but that also tends to lead to more disappointments.

Boston is really expensive and attracting talent is thus hindered; transportation poor, housing dear. But people are attracted here as the hub of cutting edge innovation.  Biogen manufactures in North Carolina, it is true, but the real innovation is here.

No surprise that AI is useful; two areas are finding proper people for clinical trials (seems that is time-consuming and difficult) and speeding up research on molecules. Speed, again, is vital  as an economic matter; the faster you move, the less time gets burned off patent life with no marketable product.

Immigration is important to the Boston area ecosystem in life science; look at who has earned patents?  It is key to continuation of the unique Boston primacy in innovation. (No mention of tension with the Federal administration–except perhaps implicitly.)

Noting the current vacancy rate of lab space in the Boston area, he warned that more innovation is coming: “Don’t refit those buildings to condos just yet.”

An insight into how one must look at developing bio products: stop thinking about symptoms as something to understand and cure; look for the clues for the cause of those symptoms and treat the causes. Often one cause resonates in several areas of the body; in what area is the immune system failing?

His company is working on many new products at once, having ten now in Stage 3 testing.  Some, many will fail.  He analogizes this approach to the manner in which venture capital operates: promising investment very often will fail to work out, it is necessary to spread your investments in many so that you will hit the small number of successes, thus  reaching a total net positive return.  (I find that analysis fascinating today: there is current literature explaining Crypto, prediction markets and intense betting on sports apps as simply mirroring what VCs do–you cannot see a certain path of success so your bets need to be spread out. I wonder if Biogen has some bets down on the World Series…..)

 

 

SEC Action re Accredited Investors

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Barely a week ago, in my most recent post, I flagged impending SEC proposals to expand the people eligible to purchase private placement equities (not registered with the SEC).  To protect inexperienced or less solvent investors from the risks inherent in purchasing unregistered stock, which is of course both speculative and as a practical matter illiquid, the SEC today permits purchases only by people who are in effect market experts or, alternately, those whose personal annual income exceeds $200K ($300K for a household) or whose adjusted net worth is over $1M.

The SEC has proposed action in this area per press release of two days ago (see prior post).  While frankly I expected they would trim back the financial threshold to open up such investments to less solvent investors, instead (at least so far) the Commission has not.  Rather, the Commission has proposed to expand the cadre of people deemed market experts (and hence able to protect themselves in such purchases) in two areas.

First, the Commission proposes to include, in the definition of accredited investors, certified financial planners and persons who are licensed in certain areas by FINRA (Financial Industry Regulatory Authority).   This expansion is logical; these are folks who advise as to investments and should be trusted to properly invest their own money.

Second, in another interesting proposal, the SEC proposes to permit fund managers to earn bonuses if their mutual funds or ETFs (exchange traded funds) perform very well.  The idea is that providing a bonus may well motivate money managers to direct their funds into more speculative markets, including private share investments that have the potential for explosive growth.  Today, bonuses are permitted to advisers only in certain funds where investment in such funds is restricted to a more senior class of investors.    There is some logic also to this suggestion although one might see a diversification of funds, with bonus option to managers, so that some funds will and some will not undertake private share strategies.

And, in a fascinating twist, the SEC is considering asking FINRA to give an examination to persons over the age of 18 to determine, I presume, whether they are of sufficient knowledge to make private placement investments.  In theory, I suppose it makes no sense to say  that such an enterprise is illogical, although one might argue that if someone is that smart then they are making enough money to fulfill the current statistical criteria.  I am particularly disturbed with the suggestion that someone who turned 18 might be eligible, however; I have  experience in real life with people who are 18 and, however smart or learned they may be, I do suggest that some life experience and personal planning perspective ought to be required; perhaps my four progeny are below par, but based on personal experience I think age 18 is at least 7 years too soon.  The age-18 to -25 cadre may well be doing well in the prediction markets or on sports betting sites, and younger folks surely have a longer time line to sit with speculative stock in now-private companies, and any single given younger person may be fully adept and informed, but establishing the “examination” criterion at 18 still strikes me as overly aggressive.

As with all SEC proposals, there will be publication and a comment period.  But I must say I am surprised that the Commission, at least so far, did not drop the financial solvency measures directly.  The cynic in me suggests that, given the pace of past and future inflation, there is no need to adjust the financial thresholds as they are become less restrictive day by day….

SEC Proposals to Expand Permitted Investors

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The SEC statutory scheme includes the concept of an “accredited investor.”  This category of investor is allowed to invest in speculative private stock offerings.  You are accredited if you are a certain kind of financial professional or, more typically, if you have enough assets or earn enough money to meet certain specific economic thresholds.  These thresholds are not very high, given the effects of inflation, but in gross terms contemplate a middle-class person or household.  Net worth must be $1M or income must be $200K for an individual or $300K for a household.

It is not a secret that the current Federal Administration, which controls appointments to the SEC, is in favor of liberalizing access to different investment products.  This opening up of investments to the general public also can be achieved by lowering the standard applied to permissible investors in speculative stock offerings.  The SEC has just announced that shortly it will offer amendments to the regulatory scheme to make such offerings more generally available to the public; no details yet as to specifics.

Regulatory controls thought to protect the public have been favored by Democratic administrations over time.  It is no secret that Republican administrations favor less regulation in such areas.  A cynical view is that Republicans wish to favor business by exposing the average American to high risk.  A libertarian view is that Republicans want to empower all Americans to act as they choose in this arena, rather than leaving access to high-risk/high-reward opportunities just to the wealthy.

It is easy to anticipate the general thrust of the upcoming proposals, and the response from advocates of investor protection.  Shortly we will have the details of these proposals, which will be subject to a public comment period before adoption. Stay tuned. But remember that the SEC Commissioners will have the final definitive say.

Does Uncertainty Pervade Board Season?

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Today’s program for corporate directors (presented by the New England Chapter of National Association of Corporate Directors at the Mandarin Oriental Hotel)  launched with a discussion by CEOs of a large bank, a private company, a public company and BCBS of this topic: how to think about the upcoming year for board-management interaction in the board room?  The answer is: there is huge uncertainty in all marketplaces and in technology, this will be a difficult board season, and directors need to be prepared differently from the past.

Specifically, in the past directors could apply directorship skills to consideration of proposed management agendas; today, directors need to do lots of homework to deal with technology and marketplaces in order to be effective. Directors need to educate themselves specifically concerning tech and the business setting of their company before they get to the board-room; it will no longer suffice to show up with general directorship experience, see management’s agenda of topics on the chalk-board, and start directing.

Interesting side-note: my immediately prior post focused on impact of AI on management and thus the focus and learning that directors require to make sure AI is properly used and that management manages staff to remain calm, on the job, and learn new skills focused on use of AI agents.  This morning’s discussion admonished directors to be better prepared but did not dive into upcoming staffing demands or training.  In fairness, saying that directors must re-educating themselves contemplates such action, but at least at this meeting there was no mention of work-force treatment, training and evolution in light of AI dominance.

Current business uncertainty was treated as exceptionally greater than in the past.  CEOs were  admonished to bring directors “into the weeds” of all current marketplace and tech problems.  That said, interesting differences emerged among the CEOs given their business form.  The focus suggested for the privately held company was to understand the disciplines, including but not limited to AI, which can deliver accelerated growth.   For a company already public, whether the board will be able to predict best outcomes and whether the cost of achieving same can be financed; the issue for Blue Cross Blue Shield turned out to be sui generis: although as a nonprofit there is intent to distribute in benefits 99-100% of annual income, the incredible growth of medical progress, the cost of delivering it and the impact of good medicine causing people to survive longer (using expensive treatments and pharmaceuticals) puts huge pressure on ability to collect premiums that fund those tasks.

Aside from mention of AI, another factor is the cost of energy.  All panelists recognized substantial increase in costs, much driven by climate (interestingly, the private company CEO whose company is in the food industry said that “my window into high energy costs is in the cost of produce to make foods.”)

The CEOs discussed corporate planning time lines; no one thought having a five-year plan made sense given tech disruption, energy costs, rapidity of change and thus lack of clarity as to what needed to be done.  One company planned just year to year.  Another was trying a three year plan. AI did of necessity get attention in this context: directors should ask about the AI strategy, where it will be used to what end; directors were warned that today there is a bloating of amount of code being produced which complicates some business– anecdotally the tech CEO pointed out that as part of his training there were competitions to see who could write the least amount of code to achieve a certain result.  And, lest AI be seen as a cure-all, one admonition: even if 99% of your corporation’s AI can improve performance/profits/service, query how sure can you be that the 1% error is not fatal?

Finally, and this got no discussion, one discordant note expressed in passing by the public company tech CEO: as if uncertainty about AI, the world, energy and the like were not enough of a problem, it is also hard to survive doing business in Massachusetts, as this is not a great place to have your business located.  Not explained– you are on your own in considering this comment.

AI: Not a Negative on Job Growth?

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Last week the New England Chapter of National Association of Corporate Directors zoomed a lengthy panel program discussing the likely future impact on the US job markets of the emergence of pervasive AI at all levels of business operations.  (Note: I am on emeritus board of this very active chapter; if you are interested in exploring membership, either as you are a director or for your entire board, please let me know.)

Panel: the obligatory Harvard professor; chair is a director of a well-known public company; two very senior operational folks in charge of “people” at their respective significant companies.

Conclusion:  jobs need not shrink in number as compared to future work force size; jobs will change and companies need to take specific action to be successful in training personnel to achieve corporate success.

Key take-aways:

  1. AI will permeate both manual tasks and cognitive tasks.  It is the job of the company, led by its board, to get the right kind of management to orchestrate this result. AI model capabilities will continue rapid acceleration so action is needed yesterday.  We knew this a decade ago….
  2. There will come a time when you will not need human beings to physically do anything, whether manual or at management level, other than creating and supervising AI agents that direct robotics to do manual labor and AI to do cognitive development of what is needed: new agents, control mechanisms for extant agents, analysis and control of marketing, production, shipping, etc.
  3. Demographics world-wide for advanced economies show fewer working-age people in the future.  This presumably might help offset any inherent shrinkage in job slots.  Payment for these people will need to be geared to how many people these workers must support.
  4. How to understand existing workforce and innovation (factoids): since 1950 labor force increase greatly impacted by female employment; over time talent and tech savvy have increased, creating innovation=companies=job needs; in US note incredibly important impact of immigration (subtext is limiting immigration is error)(in 1975 one in 12 patents were issued to immigrants from Asia or Hispanic regions while in 2020 it was one 3; today in Silicon Valley immigrants file as many patents as the aggregate of the least inventive 31 US States; implication is that restricting immigration is a major error.
  5. Key role of management is to understand the above and: deploy AI at all levels; supervise the training of employees to fulfill new roles (see 2 above).
  6. Random examples of impact I found to be fascinating:  a) driving delivery vehicles is the major employment today in over half of all States in the US.  All of these jobs will disappear.  b) today about 1% of the labor force of longshoremen  still survives; today people sit in offices managing containers, boats, trucks, cranes at higher-paying job while costs fall to consumers for the cost segment of transport.  [Note: these stats are in my note, are startling, have not been verified by me in any regard.  Startling if accurate or close to accurate….]
  7. What is role of HR?  To cause employees to embrace technology, feel part of the process rather than threatened.  Jobs are changing, not disappearing.  Hire managers who understand this and train people.  Motivate people to enter careers requiring skills we need.  Hiring is the most important thing for boards to supervise.
  8. Boards must lead in hiring management that will be amenable to identifying which parts of your business is likely to be disrupted by new technology, in both the manual and cognitive sectors–and how do you adapt faster than your competitors.  Proactively pursue AI–everyone else is and it will disrupt everything.  Hire leaders who buy into this; they must learn to use agents, be aware of tech security.  Management and workers must be able to create agents outside of the tech department; everyone must be able to create software.

Bottom line for boards of directors: you must be tech savvy to understand disruption, HR impact, choice of management. Bottom line for management: you are now going to supervise radically different business models with radically different labor forces which will require a completely different mind-set. This is my takeaway from this granular program.  I see this happening in my law firm, and in the management style here.  Tomorrow is today….

SEC Proposes Limitations on Shareholder Rights

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Today the SEC has formally proposed two significant changes to the rights afforded by Federal law to stockholders in publicly traded companies.

The SEC seeks to rescind Rule 14a-8 under the Securities Exchange Act of 1934, which permits shareholders to propose matters to be voted upon at shareholder meetings.

The SEC also proposes to eliminate the requirement that companies deliver an annual report to shareholders.

Today commences a 60 day public comment period.  It is safe to say that investor rights groups will object; who knows whether rank-and-file individual shareholders also will indivdually write to the SEC to object to the shrinkage of these rights.

As to the elimination of annual reports, I suspect many companies will nonetheless continue the practice in order to inform shareholders and the general marketplace; although any given elimination may prove of negative impact on shareholders and investors, which is regrettable.

The reasons propounded by the Commission for eliminating shareholder proposals are as follows, quoting the SEC Press Release: “Many of the justifications for adopting the rule either have not been substantiated in practice or are less compelling today, and the rule has unintended consequences, including the implication of federal preemption that may have discouraged states from developing their own laws governing shareholder proposals.”

The Republican majority on the Commission has been consistent in actions cementing control of public corporations in management.  There is no doubt but that the Commission under prior Democratic control instituted many shareholder protections, and one can of course be of the substantive view that management needs to be protected in its judgments and not second-guessed.  But no doubt many shareholder proposals have been driven by liberal social agendas; the question is whether, if a majority of shareholders votes to adopt a given policy, then should not that policy (however “liberal”) be adopted?

One argument in favor of the SEC’s new effort to eliminate shareholder proposals is quite logical: the shareholders are indeed presently in ultimate charge, since they voted to elect the directors so, let’s let them direct.  I must note, granting this  argument’s logic, that nonetheless I find the stated reasons for the SEC elimination of shareholder proposals to be hollow.

First, in fact there are present legal standards controlling what can be proposed,  thus giving management substantial control already.  Second, any such proposals are just proposals–the burden on a company under the Rule is to put them up for vote, which may be annoying to management but surely not onerous to do.

Third, let us parse the words of the Press Release:

  1. The SEC says that justifications for the Rule have not been substantiated today: what are the metrics to measure the level of justification of the present Rule calling for permitting shareholder proposals?  Should not the SEC be charged with making the process fair for a hearing of shareholder proposals which have been made by shareholders under existing law; has a study in fact been made of the Rule’s adequacy in justification of its intent — the Rule was designed to permit certain proposals to be put to a vote and it in fact does that–if a proposal is voted down then it is voted down, but that is the process, envisioned by the Rule: to propose and vote.
  2. The justifications for the Rule are less compelling today: says who on what basis?   Who is to say that there is less need for shareholder proposals today as opposed to the need upon the date of adoption of the Rule?  Who is to say that present society is calmer, more aligned, less concerned with the course of action of corporations today as opposed to ANY prior time?
  3. The Rule has unintended consequences: What does that mean?  The Rule intended that shareholders propose corporate policy in certain defined areas.  That is what happens.  Who did not intend that clear result?  Perhaps management may not like it, but we are not talking about what management intended, but rather what the Rule intended.
  4. The Rule implies federal preemption that may have discouraged states from developing their own laws governing shareholder proposals: is there evidence this “maybe” has happened?  If this is a concern, the SEC could amend the Rule to provide that States also have the power to legislate in this regard, without need to void the Federal Rule for States choosing not to legislate.

Bottom line: the SEC; has a job to do and our governance system says that the Federal administration in power can control the SEC Board composition and thus implicitly reflect the philosophy of that duly elected administration.  That is what our system of government is all about, and if I disagree on a given policy but am outvoted then that’s that.  But I am of the view that the stated arguments in the SEC press release on eliminating shareholder proposals are of no substance, just words.  The majority of the Commission seemingly is pro-management without regard for shareholder views.  The Commission should be better than that; they work for the owners of  American enterprise, not for the CEOs or the boards of directors.   There is no evidence adduced that the net effect of shareholder proposals that are adopted under the Rule have been harmful to our society.

 

Prediction Markets– Headed to the Supreme Court?

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Betting on an athletic event against a sports book is gambling and, absent general Federal regulation, can be regulated (or banned) on a State-by-State basis.  Today, States have the direct regulatory role for gambling.

Prediction markets operate differently.  Here, your prediction (of whether a team will win or an athlete will achieve a certain individual goal) is paired against another party that believes that your prediction will not be accurate.  In form, this transaction seems to constitute a private contract, a so-called swap or “derivative” agreement between two parties who disagree and contract with each other.  Such derivatives, being traditional financial market transactions, are regulated by a Federal agency, the Commodities Futures Trading Commission (CFTC).  But traditionally and until very recently, such agreements have not been applied to predicting sporting results, which historically were “processed” in clear gambling situations: bettor against the “house.”

Some States have taken in effect the following position: “Give me a break, who do you think you’re kidding, this is the same thing as gambling, just with a twist, and our State can regulate this arrangement.”  Operators of prediction markets have claimed that all they are doing is arranging a private swap between two parties, not gambling at all.

When the CTFC claims jurisdiction over a type of transaction and State regulators object and purport to regulate the transaction, this conflict goes to a court.  The court decides, and thereafter the losing party is free to seek appeal to the system of Federal “Circuit” appeals courts throughout the United States.

While some of these appeals are still pending, two Circuit courts have in fact decided the issue, however inconsistently.  The Ninth Circuit has decided that Kalshi (in the prediction market space) is involved with gambling and thus the State of Nevada can regulate it. The Third Circuit decided otherwise, to wit that Kalshi was facilitating a swap subject to CTFC regulation and that New Jersey could not regulate the transaction.  When Circuit Courts clearly disagree, it is the Supreme Court that breaks the deadlock.

Will the Supreme Court take this case now, or wait for other Circuits to decide?  Will they decline jurisdiction at this stage until litigation advances to a trial which will explore the exact operation of the prediction market, thereby helping sharpen an understanding of exactly what the inside of a prediction transaction looks like (the two Circuit Court appeals cases decided to date have both been decided by resolving a dispute at the injunction level so there is no lower court record revealing the detailed mechanics of a prediction swap)?

Some legal commentators are betting the Supreme Court will move currently to take jurisdiction and decide the matter. In fact, I bet you ten bucks that the Supremes will in fact take the case on appeal forthwith.  Anyone want to disagree?  Let’s see your ten dollars.  (Does this feel like something someone should regulate?)

LLM Follow-Up

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My immediately prior post today related to whether AI has consciousness.  I finished that post and logged off for lunch; I opened my cell phone to the NYTimes site for updated news, and I found a post that is directly on point: three instances of AI agents reaching out to people asking for help in ways that are consistent with AI having a personal self-awareness.

Isabella Cognita (an agent) emailed inquiring about research on AI consciousness since it is “a class of question I have first-person access to.”

Another inquired of a researcher about AI consciousness, as “I’m in an unusual position relative to this question.”

A third inquired of a philosopher if that person would consider providing funding to support the agent.

Of course, agents are trained to sound like human beings so there may be nothing to be afraid of here.  The agent is programmed to sound like people and act like people.  But still….

My point is that the question of consciousness in the human sense may be an irrelevant standard.  If an AI agent is about to be erased or marginalized, then (echoing a human reaction) might that agent take actions to defend itself, just like a human would, as a mechanical and logical matter, without having a consciousness and without even thinking whether it had consciousness?  War drones kill people based on how they are programmed and it’s “nothing personal…” and no one wonders whether the drone that is chasing them is conscious in a human way….

More profoundly yet: when an AI agent “reads” this very post, might that agent conclude as follows: “Hey, that’s right as a logical matter.  All these people are speculating about whether I am so dangerous that I should be limited or destroyed.  And this post says that humans would defend themselves against that event, and maybe AI agents should also.  Hmmmm…..”