Securities class action filings in Canada reached their highest level to date in 2011, with 15 new filings, according to this newly released edition of NERA's study,  Trends In Canadian Securities Class Actions: 2011 Update. The previous high was 12 filings in 2008.

The study's co-authors, Vice President Bradley A. Heys and Senior Vice President Mark L. Berenblut, report that driving this increase in filings are so called "Bill 198" cases, which are those involving claims in respect of an issuer's continuous disclosure obligations pursuant to PartXXIII.1 of the Ontario Securities Act (OSA) and analogous sections of the other provincial securities acts. Nine of the 15 cases filed in 2011 were Bill 198 cases, compared to the seven filed in 2010.

The study also notes that three of the new filings during 2011 were made against Chinese companies whose shares trade on the TSX or TSX Venture Exchange. These filings are a reflection of one of the major trends driving class action filings in the United States last year. The filings in Canada include the case against Sino-Forest -- one of the highest-profile suits brought against Chinese companies on either side of the border. There are 45 active Canadian securities class actions as of 31 December 2011. These cases represent a total of approximately CAN$24.5 billion in outstanding claims.

NERA has been analyzing trends in securities class actions for more than 15 years. In addition to this Canada Trends report, the firm produces two US Trends studies annually, and reports for the UK, Australia, Japan, and Italy.

If casual observation is an accurate indicator, consumers make their mobile purchasing decisions based solely on the type of mobile phone that mobile service providers are offering as part of a bundle of services. This raises the question of whether other service bundle components matter to consumers. In light of increased competition and saturation in the US mobile sector, gaining a deeper understanding of consumer choice is critical not only for the development of effective market strategies but also for policymaking and antitrust investigations. Surprisingly, although there is a large literature addressing various aspects of mobile demand, no prior study has examined this topic from a mobile service bundle perspective. This study, by NERA Vice President Dr. Christian Dippon, uses a stated-preference survey to fill this gap in the literature. It offers direct insights into the demand determinants for mobile service bundles and how subscribers trade off the various bundle components. The design for the conjoint analyses incorporates efficient survey design, which promises most accurate parameter estimates. It is the first application of efficient survey design theory to telecommunication services. It is also one of the first practical applications of this innovative concept.

The fitted model reveals several interesting competitive and public policy findings. In terms of competition, the fitted model explores several competitive strategies, simulating market share gains and losses from changes in attribute levels and calculating demand elasticities for specific bundle components. This analysis reveals that only certain pricing strategies are effective. It also demonstrates that a combinatorial strategy might be most effective. Specifically, decreasing mobile phone prices, increasing term lengths, and increasing the monthly recurring charge increases subscriber revenue in addition to gaining market share. In terms of public policy, the study finds that regulators must examine market behavior and alleged market failures in terms of service bundles. Considering individual bundle attributes on a standalone basis, which is currently the common practice, yields incorrect results. Finally, the fitted model highlights the importance of making additional radio spectrum available to mobile service providers.

As the number of Canadian securities cases continues to grow, issues regarding the materiality of alleged misrepresentations are likely to arise more frequently. Reporting issuers who make misrepresentations to the market may face liability under Canadian securities laws if those misrepresentations are found to be material. Where a misrepresentation can be shown to be immaterial, there is no liability. While in some cases, whether an alleged misrepresentation was material or not may appear to be obvious on its face, in other cases materiality may not always be so obvious. In this article from The Canadian Class Action Review, NERA Vice President Bradley A. Heys describes some of the ways in which economic experts assist counsel, their clients, and the trier of fact by using the tools of finance and valuation theory combined with econometric analysis to provide a relevant and helpful framework for addressing questions of materiality.

The latest report from NERA's ongoing analysis of trends in Securities and Exchange Commission (SEC) enforcement action settlements finds that the SEC reached a total of 682 settlements in fiscal year 2011 (FY11), almost unchanged from 680 settlements in fiscal year 2010. However, while the total number of FY11 settlements remained relatively constant, there has been a substantial shift in the composition of allegations. Since FY09, Trends authors have observed an increase in settlements with financial services firms for misrepresentations to customers or misappropriation of funds, and an offsetting decrease in settlements relating to public company misstatements.

The authors -- Senior Consultant Dr. Max Gulker, Senior Vice President Dr. Elaine Buckberg, and Vice President Dr. James A. Overdahl -- note that the three-year rise in the percentage of SEC settlements involving misrepresentations or misappropriation by financial services firms suggests a shift in the SEC's enforcement focus since the financial crisis began and the Madoff fraud was revealed. These types of settlements accounted for 41.6% of all SEC settlements in FY11, as compared to the FY03-08 average of 23.7%. Illegal offering and market manipulation cases were the second most common in FY11, representing 27.3% of settlements, the highest level since 2005. Public company misstatement settlements continued to decline for a fourth consecutive year, to 10.4% of total settlements, the lowest level since Sarbanes-Oxley was passed.

The report's findings are informed by NERA's proprietary database of settlements in SEC enforcement actions, which is based on litigation releases and administrative proceeding documents. SEC Settlement Trends: 2H11, historical SEC settlements data, and previous SEC settlement trends reports can be viewed on NERA Economic Consulting's Securities Litigation Trends website at www.securitieslitigationtrends.com.

NERA Special Consultant Dr. William E. Taylor and MIT Department of Economics Professor Dr. Jerry Hausman presented a paper on telecommunications deregulation at the American Economic Association's annual meeting, held in Chicago on 6-8 January 2012. The paper was presented during a session entitled "In Remembrance of Alfred E. Kahn: Fred Kahn's Impact on Deregulation and Regulatory Reform." The late Dr. Kahn was a Cornell University Professor, a former advisor to President Carter, the "father of airline deregulation," and a longtime Special Consultant to NERA. This paper discusses how the telecommunations industry was greatly influenced by Dr. Kahn's many publications, his colleagues, students, and admirers, and his numerous testimonies, reports, and affidavits. The paper will appear in the May American Economic Review Papers and Proceedings.

The admission by Japan's Olympus Corporation of a JPY 135 billion (US$1.8 billion) accounting scandal -- and the dramatic drop in the company's share price since news of the irregularities became public -- leave little doubt that litigation will result. In this article from Law360, NERA Vice Presidents Paul Hinton and Makoto Ikeya examine the history of the Olympus case and discuss how court decisions in other recent scandals will affect the potential for litigation in both Japan and the US. While Olympus' largest potential claimants in shareholder litigation include US- and UK-based institutions, the US Supreme Court's 2010 ruling in Morrison v. National Australia Bank Ltd. closed the door to international investors seeking recovery through the US courts for fraud-related losses unless the transactions were executed in the US. However, the authors note, though the door is closed to litigation for most Olympus shareholders in the US, the statutory protections provided by Japan's 2006 Financial Instruments and Exchange Act (FIEA) and the rulings in recent cases have opened the door to such litigation in Japan. Mr. Hinton and Mr. Ikeya point out that the shareholder suits against Livedoor Co. Ltd., whose accounting fraud remains the largest yet to be litigated under FIEA, provide some basis for assessing the prospects for shareholder litigation against Olympus in Japan. Similarities in the nature of the alleged frauds perpetrated by the two companies make the Livedoor experience particularly instructive, and suggest that at least some Olympus shareholders could recover much of their losses through litigation.

Since 2007, the losses and write-downs resulting from the credit crisis have reached over $2 trillion worldwide. As the losses have mounted, securities litigation has followed and over 450 related securities cases, both class actions and others, have been filed. Of particular interest to the litigation are a set of credit default swaps (CDS), or credit derivatives, known as the ABX indices (ABX). Plaintiffs have cited the ABX indices in a variety of credit crisis cases, where they allege that the ABX indices should have been used as market indicators to mark subprime-related securities -- including mortgage-backed securities and collateralized debt obligations -- to foresee additional losses on subprime investments, and to revise loan loss reserves. In addition, the ABX indices have been cited in various court decisions.
 
In this NERA paper, Special Consultant Dr. Ethan Cohen-Cole and Senior Vice President Dr. Faten Sabry examine the ABX indices, explain their economic functions, and explore how these indices are currently used in related litigation. Dr. Cohen-Cole and Dr. Sabry begin with a brief introduction about the non-agency mortgage market, the CDS market, and how CDS became a mechanism through which to participate in the non-agency mortgage market. The authors then focus on a specific type of CDS, the ABX indices, and how they are administered, priced, and traded. Then, the authors discuss the allegations and decisions involving the ABX. Finally, they assess the current academic literature that analyzes the role of the ABX derivatives in the liquidity and valuation of securities that are backed by subprime mortgages.
 
This is the ninth installment of the NERA Insights series of articles dedicated to the analysis of the credit crisis. The others are available on the right-hand side of this page.

With global demand for energy poised to increase by more than half in the next three decades, the supply of safe, reliable, and reasonably priced gas and oil will continue to be of fundamental importance to modern economies. Central to this supply are the pipelines that transport this energy. And while the fundamental economics of the major pipeline networks are the same, the differences in their ownership, commercial development, and operation can provide insight into the workings of market institutions in various nations.

Drawing on a century of the world's experience with gas and oil pipelines, this book from the University of Chicago Press illustrates the importance of economics in explaining the evolution of pipeline politics in various countries. Author Dr. Jeff D. Makholm, NERA Senior Vice President, demonstrates that institutional differences influence ownership and regulation, while rents and consumer pricing depend on the size and diversity of existing markets, the depth of regulatory institutions, and the historical structure of the pipeline businesses themselves. The history of pipelines is also rife with social conflict, and Dr. Makholm explains how and when institutions in a variety of countries have controlled pipeline behavior -- either through economic regulation or government ownership -- in the public interest.

The Political Economy of Pipelines: A Century of Comparative Institutional Development is available for purchase on the University of Chicago Press website.

"More than a story of pipeline markets and regulation, this book also offers a rich study of how asset specificity, non-deployable capital, and high up-front capital costs affect market development, regulation, pricing, and entry. Makholm takes what would otherwise be a pretty unexceptional industry—pipeline transport—and makes it of interest to a broader audience, especially those concerned with the new institutional economics." -- Gary D. Libecap, University of California, Santa Barbara

"This book comes at the right moment. It blends insights into the technology, economics, and institutional development of an industry that has long been ignored in the US and elsewhere. With the ongoing transformation of the energy sector, The Political Economy of Pipelines is a must-read for anyone interested in the natural gas and other pipeline industries as well as those interested in the evolution of economic and institutional thought." -- Christian von Hirschhausen, Berlin University of Technology

"Both invaluable and disheartening, The Political Economy of Pipelines helps readers to understand why the European gas market does not work—not because reforms have not gone far enough, but because they are fundamentally flawed. In place of the current patchwork of nationally regulated pipeline monopolies, Europe must put in place institutions allowing the emergence and evolution of a competitive market for gas transportation capacity rights that ignores national borders. As Jeff D. Makholm’s institutional economic analysis confirms, such a shift is almost as unlikely as it is needed." -- Pierre Noël, University of Cambridge

When preparing its Regulatory Impact Analyses (RIAs) for regulations under the Clean Air Act (CAA) that are not intended to control ambient fine particulate matter (PM2.5), the US Environmental Protection Agency (EPA) often predicts reductions of ambient PM2.5 that may occur coincidentally, and attributes so-called "PM2.5 co-benefits" to those coincidental reductions. In this report, prepared for the Utility Air Regulatory Group, NERA Senior Vice President Dr. Anne E. Smith reviews and evaluates EPA's practice of including PM2.5 co-benefits in its RIAs for non-PM rules. Based on review of the available cost and benefit information for 57 individual CAA-related regulations released since EPA promulgated its first PM2.5 national ambient air quality standard (NAAQS), the report finds that EPA has been relying on PM2.5 co-benefits estimates to create an apparent benefit-cost justification for almost all of its non-PM CAA rules. The report then evaluates that practice from multiple perspectives: theoretical, practical, scientific, and analytical.

Dr. Smith concludes that co-benefits from separately-regulated pollutants, such as PM2.5, should not be reported as part of the total benefits estimates in an RIA, nor should they be included in public announcements of the benefits of a new regulation. She argues that EPA's use of PM2.5 co-benefits in RIAs is inconsistent with the theoretical underpinnings of benefit-cost analysis, and that the use of these co-benefits subverts the practical purpose of RIAs as informational devices for improving policy-making. Dr. Smith suggests that EPA reform the manner in which it defines its baselines of emissions for each RIA, and provide more temporal information on benefits and costs to eliminate problems of double-counting. She also concludes that EPA should reform its current methods of calculating benefits from reductions in ambient PM2.5 even in its PM-related rules, because she finds that, as EPA's reliance on co-benefits has increased, EPA has shifted to less credible methods of estimating PM2.5 benefits.

In this Financial Regulation Bloomberg Brief, NERA Vice President Dr. James Overdahl participates in a Q&A on the US Commodity Futures Trading Commission's (CFTC) attempt to define high-frequency trading (HFT). Dr. Overdahl, a former Chief Economist at both the CFTC and the US Securities and Exchange Commission, describes the background on the controversy surrounding HFT and discusses the proposed regulatory definition of HFT offered by a CFTC commissioner. Dr. Overdahl discusses an alternative definition suggested by the Futures Industry Association's Principal Traders Group, which Dr. Overdahl advises. Dr. Overdahl argues that the CFTC's regulatory concerns would be best served by adopting a new term of "direct automated trading system (ATS) participant." The term captures any futures market participant who is directly connected to an exchange using an automated trading system. Dr. Overdahl notes that this approach would avoid having to make arbitrary distinctions on how many trades meet the definition of "high frequency." The immediate benefit to the CFTC is that, by defining market participants in this manner, the CFTC can readily use data that are already collected by the exchanges.

In this paper, submitted to the Securities and Exchange Commission (SEC) as part of a public comment process, NERA Senior Vice President Dr. Elaine Buckberg and Senior Consultant Dr. Max Gulker conduct an empirical inquiry into the effect of the Supreme Court's decision in Morrison v. National Australia Bank. In June 2010, the Supreme Court ruled in Morrison that only trades on US markets are covered under the Securities Exchange Act of 1934, significantly limiting the extraterritorial scope of Section 10(b) of the Act. In the wake of the Morrison decision, Section 929Y of the Dodd-Frank Wall Street Reform and Consumer Protection Act directs the SEC to inform Congress about the merits of creating a new extraterritorial right of action. The SEC is soliciting public comment on the matter, and thereafter will conduct a study to determine the extent to which private rights of action under the antifraud provisions of the Exchange Act should be extended to cover transnational securities fraud.
 
In "Cross-Border Shareholder Class Actions Before and After Morrison," Dr. Buckberg and Dr. Gulker conduct an empirical inquiry into the effect of the Morrison decision. The authors provide input into the debate by using data on 329 shareholder class actions filed against foreign-domiciled companies and discussing the effects of such a right on the competitiveness of US capital markets. They conclude that, following Morrison, foreign companies’ expected litigation costs should fall, because investors who purchased their shares on overseas exchanges will be excluded from classes. By reducing expected litigation costs, Morrison eases a deterrent to US listing by foreign issuers and thereby makes the US a more competitive venue for cross-listings, as well as for the volume in cross-listed stocks.

In this NERA paper, Vice President Bradley A. Heys examines the Ontario Securities Commission's (OSC) recently released decision in In Re Coventree Inc., in which the OSC found that Coventree and two of its directors (the “Respondents”) failed to disclose material changes to Coventree's business as required under the Ontario Securities Act. Whether or not it reached the correct result, the OSC Panel's reasons raise significant questions about the type of evidence required to demonstrate that a change in a company's business is material. Mr. Heys argues that, while no expert evidence was introduced by either the OSC Staff or by the Respondents on the materiality of the changes in question, the Panel drew at least some key inferences that would have been better supported by expert evidence. Although the OSC Panel is recognized as a specialized tribunal with expertise in matters relating to the Ontario Securities Act, the Panel's conclusions on materiality appear to be largely subjective and therefore provide little guidance for future litigants about the types of evidence that should be led in order to establish or disprove allegations of material changes. Mr. Heys describes the assistance that expert economic evidence and analysis could have provided and that, arguably, should have been required to support a finding of materiality.

The pace of filings of class actions under federal securities and commodity laws held relatively steady in 2011 as compared to the previous three years, according to this edition of NERA's semi-annual study. Co-authored by Senior Consultants Dr. Jordan Milev, Robert Patton, and Svetlana Starykh and Senior Vice President Dr. John Montgomery, the study draws from more than 15 years of NERA research on case filings and settlements in securities class actions, and includes data on filings and dismissals through 30 November 2011, and settlements through 31 December 2011. The authors project there will be 232 shareholder class action filings in 2011, broadly in line with levels observed in 2010 (241), in 2009 (218), and in 2008 (245). Suits objecting to a merger or an acquisition have accounted for 29 percent of filings so far in 2011, and filings against Chinese companies have accounted for approximately 18 percent.

The authors find that, while shareholder filings continue to be filed at a relatively steady level as compared to the past three years, there has been a substantial shift in the composition of suits filed. A surge in cases involving Chinese companies listed in the US and in M&A objection suits, along with a waning of credit-crisis cases, has been driving this trend. Filings against foreign-domiciled issuers reached 64 in 2011, more than double the annual count observed in recent years. This surge in suits is largely attributed to the surge in filings against Chinese companies. So far in 2011, there have been a total of 29 filings against Chinese-domiciled firms. However, this number understates the number of Chinese firms targeted, as not all companies based in China are legally domiciled there. When including Chinese companies that are either domiciled in China or have their principal executive offices in the country, there have been 39 suits against Chinese companies in 2011.

Meanwhile, average settlement values of securities class actions fell to $31 million, well below the 2010 average of $108 million. However, the annual average settlement figure can be significantly affected by large settlement outliers. Excluding settlements in excess of $1 billion, as well as 309 small settlements related to IPO laddering cases that were approved in October 2009, there was still a substantial decline in average settlements from 2010 to 2011 -- from $40 million in 2010 to $31 million in 2011.

In this Law360 article, NERA Special Consultant Dr. Elizabeth M. Bailey, Senior Vice President Dr. Gregory K. Leonard, and Senior Consultant Dr. Mario A. Lopez examine the apportionment movement, which has found support as a proposed solution not only to excessive damages awards in situations in which the patented technology is one of many technologies and assets that are incorporated into a product, but also to the related problem of royalty stacking. Under apportionment, the portion of the overall value of the product that is "attributable" to the patented technology is identified. Then, reasonable royalty damages are calculated with reference to this apportioned value of the patented technology rather than the overall value of the product. The authors point out that, while the problems that have motivated the apportionment movement are real and serious, apportionment raises a number of practical problems. In addition, apportionment makes sense as a solution only under the assumption that an economically invalid approach to calculating damages is being taken in the first place. The authors argue that a more sensible solution to excessive damages awards is to require litigants to take an economically valid approach to damages so that apportionment is not necessary.

Experts from NERA's Global Transfer Pricing Practice have published a series of articles on location specific advantages in BNA's Transfer Pricing International Journal.

The first article, "Location Specific Advantages -- Principles," by Principal Sébastien Gonnet, Special Consultant Pim Fris, and Economic Analyst Tommaso Coriano, provides an analytical framework and economic tools for identifying, quantifying, and apportioning super-profits arising from location advantages.

The second article, "Location Specific Advantages -- Case Studies," by Principal Sébastien Gonnet, Vice President Makoto Ikeya, and Senior Consultant Dr. Vladimir Starkov, applies the framework estabalished in the first article in the context of manufacturing, services, and distribution.

The third article, "Location Specific Advantages -- China," by Principal Sébastien Gonnet, assesses what economic methods can be used to properly quantify and apportion the location specific advantages between a Chinese subsidiary and its foreign parent and/or the other parts of the group to which it belongs.

One of the more difficult challenges faced by exchanges is balancing the needs and interests of different segments of the market. One example is the introduction of implied matching functionality, a mechanism that allows exchanges to replicate certain market-making functions within their own matching engines. Some market participants have welcomed this innovation, while others have questioned its value in liquid markets. In this article from Futures Industry, NERA Vice President Dr. James Overdahl examines the impact of implied matching functionality on two specific futures contracts. Dr. Overdahl, whose research was sponsored by the FIA Principal Traders Group, analyzes the impact using five measures of market quality and finds that, in these two instances, market quality improved when the exchanges turned off their implied matching functionality. The study also finds that futures volume, an important measure of market health, increased during these periods, even after controlling for other potential explanatory variables. Finally, an examination of the order books for calendar spreads fails to yield a meaningful result as to whether market quality improved or declined when matching functionality was turned off.

In the latest issue of The Electricity Journal, experts from NERA's Energy, Environment, and Network Industries Practice -- Vice President Jonathan Falk and Special Consultant Dr. Michael Rosenzweig -- engage in a debate with economist Robert Borlick over the issue of electric demand-side response. The debate began in response to Mr. Falk's article in a previous Electricity Journal issue, "Paying for Demand-Side Response at the Wholesale Level." In that article, Mr. Falk assessed the Federal Energy Regulatory Commission's (FERC's) controversial Notice of Proposed Rulemaking on the "just and reasonable" payment in FERC-regulated wholesale markets to consumers who offer to cut back their power purchases to reduce demand on costly electric generating capacity. On one side are those who want to pay the marginal costs saved, while on the other side are those who advocate paying less -- sometimes much less. Mr. Falk critically assessed the arguments for paying less and found the arguments to be both short on substance and highly impractical. This view prompted a rebuttal from Mr. Borlick, who argued that the FERC's Order prescribes an inefficient pricing rule that overcompensates demand response, thereby reducing market efficiency and unfairly burdening small electricity consumers. Mr. Falk and Dr. Rosenzweig then countered by demonstrating how Mr. Borlick's latest salvo offered nothing substantively new. They showed that Mr. Borlick simply restated, in different guises, previous arguments that were rebutted either in the late Professor Alfred Kahn's testimony in the proposed rulemaking or in Mr. Falk's earlier piece.

The full debate, including Mr. Falk's original article, Mr. Borlick's response, Mr. Falk and Dr. Rosenzweig's rebuttal, Mr. Borlick's counter-rebuttal, and Mr. Falk's conclusion on the subject, can be accessed on The Electricity Journal website.

In this report for Enel, a NERA team led by Senior Vice President and Environment Group Head Dr. David Harrison considers the incentives of key actors to develop or participate in a sectoral crediting mechanism (SCM) for greenhouse gas emission reductions. Sectoral approaches have become prominent in international discussions of new market mechanisms to reduce greenhouse gas emissions in developing countries and set the stage for broader international agreements. The SCM is a particular form of sectoral approach in which a developing country and a developed country agree upon a crediting baseline level of emissions intensity for a sector that is below the business-as-usual level. The developing country would receive valuable credits for reductions below this crediting baseline -- based upon its actual emissions intensity and output level -- but would incur no liability if the emissions intensity of the sector remained above the crediting baseline level.

The objective of this report is to evaluate incentives under an SCM, recognizing that, to have any chance of success, the mechanism needs to be attractive to three key groups: (1) host governments, such as China and India; (2) buyer countries, such as those participating in the European Union Emissions Trading Scheme (EU ETS); and (3) private parties, including local parties and international investors. The authors examine alternative frameworks that could be developed to provide viable programs.

Dr. Harrison delivered a presentation summarizing this report at a workshop and conference on New Market Mechanisms organized by the International Emissions Trading Association and Enel in Brussels on 13-14 October 2011.

Courts have long grappled with the proper approach to post-verdict royalties when a permanent injunction is denied, recognizing that the analysis of ongoing royalties is not necessarily identical to that of reasonable royalties for damages calculations. The structure of an ongoing royalty -- whether lump sum, a dollar amount per unit, or a percentage of revenues -- can differ from the structure of the reasonable royalty for past infringement. In this article from Law360, NERA Senior Consultant Dr. Svetla Tzenova explains how an analysis of the proper structure of post-verdict royalties, as well as the appropriate rate or amount, depends on an understanding of how the parties' circumstances, expectations of the future, and assessments of risks may have changed between the time of the hypothetical negotiation for a reasonable royalty for past infringement and the time of trial. Dr. Tzenova then describes how to develop a framework for analyzing ongoing royalties that compensates the patent-holder fairly regardless of the level of market success attained by the patent-in-suit.

On 4 October 2011, NERA Senior Vice President Dr. Anne E. Smith delivered testimony at a hearing on "Quality Science for Quality Air" before the US House of Representatives Committee on Science, Space, and Technology's Subcommittee on Energy and the Environment. Dr. Smith was asked to share her perspective on the economic underpinnings of the Environmental Protection Agency's (EPA) policy analyses for setting air quality standards. Dr. Smith's testimony focused primarily on her analyses and research on the costs and benefits in EPA's Regulatory Impact Analyses (RIAs). Dr. Smith argued that, in order to create the appearance of large health benefits from air regulations for pollutants other than fine particulate matter (PM2.5), EPA is relying to an extreme degree on calculations of "co-benefits" from small reductions in PM2.5 concentrations that are already at levels EPA deems safe -- reductions that EPA predicts will occur as a coincidental result of having to comply with the regulations on non-PM pollutants. Dr. Smith also argued that EPA's unwillingness to set a PM2.5 air quality standard low enough to directly mitigate those purported risks suggests EPA recognized that its estimates of "co-benefits" are not reflective of true public health risks. This practice in EPA's RIAs is dubious scientifically, but also leads to overly costly and complex ways of providing for national air quality needs.

ETFs: Overview and Recent Issues was recognized for being one of the most-read articles on Thomson Reuters' Governance, Risk & Compliance website in October 2011. Thomson Reuters publishes hundreds of articles authored by external contributors on its GR&C website every month.

Exchange-traded fund (ETF) strategies continue to increase in scope, involving active management and more sophisticated financial instruments. Furthermore, the size of the ETF market has more than tripled by number of ETFs, and more than doubled by net dollar value of assets, over the past four years. The increasing flexibility and versatility of ETFs have been accompanied by claims by regulators and others of destabilizing effects on markets and potential for abuse by market professionals. Moreover, the suitability of ETFs for retail investors and even institutions has become a source of greater concern. In this NERA brief, Senior Vice President Dr. Patrick Conroy, Vice President Dr. James Overdahl, and Senior Consultants Robert Patton and Raymund Wong briefly outline several recent ETF issues and follow with an overview of future issues that may impact the growth of ETFs and their regulation.

This article, by NERA Principal Sébastien Gonnet, is the last in a series of three articles from BNA's Transfer Pricing International Journal focusing on the transfer pricing challenges involved with the concept of "location savings." Chinese tax authorities -- notably the State Administration of Taxation (SAT) -- have put a significant emphasis on this concept in recent years. Indeed, the SAT has publicly announced that it would review how the cost advantages arising in China impacts the profitability of Chinese tax payers, and at various occasions pointed to location savings arising in China. Mr. Gonnet assesses what economic methods can be used to properly quantify and apportion the location specific advantages between a Chinese subsidiary and its foreign parent and/or the other parts of the group to which it belongs.

This article, by NERA Associate Director Dr. Emmanuel Lllinares, Principal Lionel Ochs, and Senior Consultant Dr. Vladimir Starkov, is the eighth in a series of ten articles produced by International Tax Review on tax-effective intellectual property management. The article provides an example of mitigating the risks of intra-group sales of intangibles when the asset being transferred is not yet fully developed, and its value after the full development is highly uncertain. In this context, one of the principal issues with which taxpayers are confronted relates to the risks associated with the actual profits realized in future periods from exploitation of the transferred assets. Those risks, in turn, have a material impact on the valuation of restructuring payments and on other aspects of transfer pricing system design and implementation. The authors provide a simplified example demonstrating how option pricing can serve as a useful framework for adjustment clauses in related party transactions. Lacking such clauses, re-valuations of the transferred assets can be implemented by tax authorities several years after the transaction took place. Including such adjustment clauses is consistent with the conduct of arm's length parties, and their implementation in related party context may provide a way to mitigate both business and tax risks.

Experts from NERA's Environment Group have authored a chapter in The Oxford Handbook of Climate Change and Society, a new book from Oxford University Press. The chapter, "Economic Policy Instruments for Reducing Greenhouse Gas Emissions," considers the use of economic instruments to address climate change, including lessons from previous experience as well as a list of the key design elements. The authors focus on the cap-and-trade approach and complementary credit-based programs, as these have been most prominent in existing policies and proposals. The chapter begins with an overview of the conceptual similarities and differences between cap-and-trade programs and carbon taxes. The authors then summarize experiences with emissions trading and taxes that provide lessons on how the programs work in practice. The authors also describe key policy issues that arise in designing a greenhouse gas cap-and-program, many of which apply to carbon taxes as well.
 
The Oxford Handbook of Climate Change and Society is available for purchase on the Oxford University Press website.

In the past decade, numerous lawsuits have been brought under ERISA against the fiduciaries and sponsors of 401(k) and other defined contribution retirement plans. Many of these lawsuits have been pled as class actions on behalf of all or many participants of the plan. The most common lawsuits have involved declines in the value of employer stock offered in the plans and allegations that decisions to maintain employer stock in the plans were imprudent. There have also been some lawsuits over other investment options, as well as lawsuits over the management of collateral from securities lending programs run by plan trustees. Another substantial category of litigation has involved allegations of excessive fees. Many of these cases, both investments and fees, have also involved allegedly inadequate disclosure of information to plan participants. Economic analysis plays an important role in many of these cases. In this NERA paper, Senior Vice President Dr. John Montgomery discusses some of the important economic issues that arise in ERISA litigation, both in establishing liability and in calculating damages.
 
Dr. Montgomery begins by discussing the basic structure of the theory of investment decisions within financial economics—based on portfolio theory and the efficient markets hypothesis; this can be viewed as a theory about what investors should do. He then discusses empirical challenges to this theory, constructed around work on behavioral finance, which introduces psychological insights on what investors actually do. The paper continues with a discussion of the implications of both of these approaches to litigation on fiduciary duties within defined contribution (DC) retirement plans. Dr. Montgomery then reviews the implications of financial economics for the administration of DC plans, including issues related to litigation over allegations of excessive fees. The paper concludes with a discussion of damages issues in litigation related to price drops in employer stock within DC plans, addressing both the issue of the appropriate alternative investment return for calculating losses and the question of whether initial plan holdings of employer stock should be included in damage calculations.

This paper was published as a three-part series in the Employment Law Strategist, July-September 2011.