Person-to-Person Financing for Development: Governing the Intermediaries The Privatization of Development Assistance NYU School of Law December 4-5, 2009 Kevin E. Davis NYU School of Law Anna Gelpern American University Washington College of Law

Alternative business models

- Charity Funder Home country Intermediary Host country Intermediary Recipient

- Charity for social enterprise Funder Home country Intermediary Host country firm

– Investment funds Funder Home country Intermediary Host country Intermediary Recipient

Funder Home country Intermediary Host country Intermediary Recipient

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Funder Home country Intermediary Host country Intermediary Recipient

The future Funder Home country Intermediary Host country Intermediary Recipient Bank? Mutual fund?

Potential problems Funder Home country Intermediary Host country Intermediary Recipient Credit risk

Potential problems Funder Home country Intermediary Host country Intermediary Recipient Currency risk Credit risk

Potential problems Funder Home country Intermediary Host country Intermediary Recipient Currency risk Regulatory concerns: Credit risk Uninformed funders Uninformed recipients Home country foreign policy interests Host country institutional development Host country development Systemic risk

Existing regulatory framework

Regulation of charities  Must be nonprofits  Must be organized under US law.  Restrictions on non-charitable activities and on risky investments* *Not applicable to “program-related investments.”  Administered by IRS and state attorneys general

Regulation of financial institutions  For investment companies: Disclosure, semi-annual reporting, conflict of interest regulation  For banks: Chartering rules, activities restrictions, minimum capital requirements, supervision, and deposit insurance  Robust cross-border co-operation

Private ordering Examples:  CGAP Microfinance Consensus Guidelines: Good Practice Guidelines for Funders of Microfinance  CGAP Microfinance Investment Vehicles Disclosure Guidelines for Reporting on Performance Indicators (2007)

Recommendations

Motivating insights  Many of these transactions ought to be regulated like financial products.  Regulation of international finance should be integrated.  Regulatory framework should accommodate interests of both home states and host states.  No single state-sponsored regime will be capable of accommodating diverse needs of parties to these transactions.

Specific recommendations 1.Reform charities laws to permit international regulatory competition 2.Apply securities law to all actors that promise financial returns, regardless of charitable status or level of returns. 3.Enhance monitoring. 4.Promote regulation by host states. 5.Promote private ordering as a supplement to legal regulation.