Wednesday, August 27, 2014
Thanks for your informative post, Anne. I started drafting this post as a comment to yours, and then I realized it was its own post. [sigh]
It seems to me that the U.S. Department of HHS and any commentators must grapple with what has been a difficult, fact-based question in determining how to define “closely held” to effectuate the Supreme Court’s intent in as expressed in the Hobby Lobby opinion. That question? What "control" means in this context.
The Court said in the Hobby Lobby opinion: “The companies in the cases before us are closely held corporations, each owned and controlled by members of a single family, and no one has disputed the sincerity of their religious beliefs.” More specifically, the Court notes that the Hahns (owners of shares in Conestoga) “control its board of directors and hold all of its voting shares” and notes that Hobby Lobby and Mardel “remain closely held, and David, Barbara, and their children retain exclusive control of both companies.” [Emphasis has been added by me in each quote.]
The definition of “control” primarily has been a question of fact in business law, making the task of defining it here somewhat difficult. Some questions and considerations to grapple with are set forth below the fold. I am sure that others can come up with more. I am posting these as a way of getting the collective juices flowing.
Monday, August 25, 2014
This follows on Ann's post yesterday on Gender and Crowdfunding. Ann, so glad you've joined me and Steve Bradford as securities crowdfunding watchers! Delighted to have you in that informal, somewhat disgruntled "club."
I have been interested in whether securities crowdfunding will democratize business finance. (I note here that Steve Bradford's comment to Ann's post raises the broader question of crowdfunding's ability to better engage underrepresented populations in general.) My interest has, however, been more on the investor (backer) side of the crowdfunding equation than on the business (entrepreneur) side.
As Ann notes, given the delay in the Securities and Exchange Commission (SEC) rulemaking under Title III of the Jumpstart Our Business Startups (JOBS) Act, the information on gender and crowdfunding that we have so far comes from other types of crowdfunding. This information may or may not map well to markets in securities crowdfunding. But it's still worth reviewing the information that we do have.
Monday, August 18, 2014
OK. So, I am stretching a bit here. But yoga may be considered a sport, athletic clothing is a kind of fashion, and securities fraud prohibitions and corporate director fiduciary duty involve law. So, I stand by my blog title in the face of any criticism that may follow this post.
I do yoga four times a week when I am not traveling. I also work out, sometimes on days when I am not doing yoga. So, I have a fair number of pieces of yoga wear and other athletic clothing. This means that I get regular mail and email solicitations from the firms that purvey these clothing items.
I recently received a catalog from one of my favorite athletic clothing brands, Sweaty Betty, which I discovered originally when I was teaching in Cambridge, England in one of our study abroad programs a few years ago. I noticed, with some amusement, that the new catalog harps on the opacity of the firm's yoga bottoms or trousers (as the British like to call them). The website does the same--"100% opaque" labels abound. As an astute consumer and securities lawyer, I immediately jumped to the conclusion, whether right or wrong, that this yoga-bottoms advertising campaign is a reaction to the see-through yoga pants debacle of one of Sweaty Betty's competitors, Lululemon (another of my favorite brands).
What does business law have to do with this (apart from the many standard legal angles on the recall of products generally)? As my securities regulation students from last spring well know (since it was the subject of part of their final exam), stockholders of Lululemon brought a securities fraud class action suit against Lululemon, after the recall of the see-through pants, based on alleged misrepresentations of material fact in public disclosures touting the high quality of its yoga pants. Predictably (at least imho), the District Court dismissed the action back in April. The court's opinion and order resulted in a few interesting online law firm commentaries with colorful titles (including posts from, e.g., Orrick and Weil). The public fallout also includes (as most would guess) allegations of breaches of fiduciary duty and observations about insider trading and Rule 10b5-1 plans because of some well-timed trades by Lululemon's founder and then-CEO.
As we think about the new semester (ours starts on Wednesday), the Sweaty Betty catalog reminded me to bring the Lululemon matter to the attention of our law faculty readers. The facts and public reactions make for a nice case study of risk management in the context of securities regulation and fiduciary duty law. A Stanford "Closer Look" piece, as well as many news reports, make the use of the case reasonably easy. And for those of you who want to take a peak at my exam question, just ask . . . .
Monday, August 11, 2014
Ah, yes . . . . The public/private divide . . . . My co-blogger Ann Lipton fairly begged me to write about this topic today, given that she had to miss the discussion session on the subject (entitled "Does The Public/Private Divide In Federal Securities Regulation Make Sense?") convened by me and Michael Guttentag at last week's Southeastern Association of Law Schools (SEALS) annual conference. Arm-twisting aside, however, this is a topic of current interest (and actively engaged scholarship) for me.
The discussion session allowed a bunch of our corporate and securities law colleagues to explore historical, present, and projected future distinctions between public and private offerings and public and private companies/firms. The discussion ranged widely, as did the short papers submitted by the participants. Some topics of conversation were oriented in part toward corporate governance concerns--comments from Lisa Fairfax on linkages to shareholder empowerment and from Jill Fisch on executive compensation in the post-Dodd-Frank public environment come to mind in this regard. Other discussion topics engaged securities regulation more centrally, including by, e.g., questioning the coherence of the rationale underlying the Section 12(g) and 15(d) reporting thresholds (with interesting commentary from Amanda Rose and Usha Rodrigues); offering historical observations about the difference between public offerings and private placements and how that history does, should, and may play out in offering markets (Dale Oesterle and Wulf Kaal); expressing concern about accredited investor status in the wake of the new Rule 506(c) under the Securities Act of 1933, as amended (Jonathan Glater); and analyzing the CROWDFUND Act at the public/private offering and company divides (me).
Different notions of "publicness" and "privateness" were offered up, dissected, and used in the discussion. Many pointed to the formative work of Hillary Sale (The New 'Public' Corporation, Public Governance, and J.P. Morgan: An Anatomy of Corporate Publicness) and Don Langevoort and Bob Thompson (Redrawing the Public-Private Boundaries in Entrepreneurial Capital-Raising and 'Publicness' in Contemporary Securities Regulation after the JOBS Act) as important touchstones. Both sets of papers address issues involving the publicness of firms. The Langevoort and Thompson Redrawing article also addresses public and private offerings of securities on a detailed level.
Yet, not everyone anchored their ideas to these existing works. One participant (Ben Means) provocatively suggested, for example, analyzing public disclosure rules using the bumpy-versus-smooth taxonomy for legal rules described in Adam Kolber's recent California Law Review article. I was not familiar with this piece. I now plan to read it.
Many discussants denied the continued existence or salience of a public/private divide in securities regulation, believing instead that there is a sliding scale or continuum between public and private. Although this argument has more traction after the JOBS Act and the Dodd-Frank Act, evidence of an indistinct line both in finance and entity law predates those legislative initiatives. Some of us were uncomfortable in declaring the death of the public/private divide--or in letting go of the analytical distinction between publicness and privateness because of the role that it serves in scholarship and teaching. The public/private divide has been a heuristic in securities regulation that people find hard to abandon . . . .
My paper, which is founded on the works of Professors Langevoort, Sale, and Thompson, is forthcoming in the University of Cincinnati Law Review. Although the draft is not "ready for Prime Time" yet, I am happy to share it with anyone who may be interested in it. Other papers submitted for the discussion group may or may not be precursors to works in process. But you can contact any discussion group participant (or ask me to contact one or more participants on your behalf) if you want to explore their ideas further.
Although I am not yet fully ready to step back into the classroom to teach next week, I am better prepared for the experience (and for the research and writing I am doing) thanks to the SEALS conference. And now, to finish that syllabus . . . .
Monday, August 4, 2014
Many of us are in the process of (perhaps frantically) wrapping up our summer scholarly activity and re-focusing our primary professional attention on teaching. As always, I am using the annual conference sponsored by the Southeastern Association of Law Schools (SEALS) to help me make this transition. Yesterday, I attended a discussion session led by law school associate deans and faculty who focus on faculty development--scholarship and teaching. It was an incredibly interesting and wide-ranging discussion.
Part of the conversation centered around summer research stipends, a topic that has been in the national news a bit over the past few years. Various participants in the discussion session addressed, each from his or her individual institution's vantage point, the reasons for/purposes of summer research stipends (which not every school represented at the session currently has) and how summer stipends actually work or should/could optimally work. I was surprised by the variations in approaches and ideas from school to school. While the individual models are too numerous to capture here, I summarize below the fold some of the top-level points made and thoughts shared during the discussion.
Thursday, July 31, 2014
Warning- do not click on the first link if you do not want to see nudity.
Dov Charney founded retailer American Apparel in 1998 and it became an instant sensation with its 20-something year old consumer base. He mixed a "made in America- sweatshop free" CSR focus with a very sexy/sexual set of ads (hence the warning- - when I first created the link, the slideshow went from a topless “Eugenia in disco pants in menthe” (seriously) to a shot of adorable children’s clothing in about 10 seconds). No wonder my 18-year old son, who leaves for art school in two weeks, appreciates the ad campaigns. Most of his friends do too- both the males and females. In fact, he indicated that although they all know about the “sweatshop free” ethos, because “it’s in your face when you walk in the stores,” that’s not what draws them to the clothes. As a person who blogs and writes about human rights and supply chains, I almost wish he had lied to me. But he’s no different than many consumers who over-report their interest in ethical sourcing, but then tend to buy based on quality, price and convenience. I am still researching this issue for my upcoming article on CSR, disclosure regimes and human rights but see here, here, here and here for some sources I have used in the past. My son’s friends--the retailer’s target demographic-- appreciate that the clothes are “sweatshop free” but don’t make their buying decisions because of it. They buy because of the clothes and to a lesser extent, the ads.
The first time I ever really thought about the store was after a 2005 20/20 expose about Charney, who was accused of, among other things, sexually harassing and intimidating numerous employees. At the time I was a management-side employment lawyer and corporate compliance officer and thought to myself “what a nightmare for whomever has to defend him.” It’s pretty hard to shock an employment lawyer, but the allegations, which continued until his ouster last month, were pretty egregious. After over 10 years of lawsuits, the company terminated him for breaching his fiduciary duty, violating company policy, and misusing corporate assets.
Recently, American Apparel’s employment practices liability insurance rose from $350,000 to $1 million, I can only assume, because of his actions and not due to the other 10,000 company employees. The company has been sued repeatedly by the EEOC and not just for sexual allegations. Purportedly, the company, which has never traded above $7.00 a share and today is a steal at $.97, could not get financing from some sources as long as Charney was at the helm.
My son and his friends did not know about the termination or the harassment allegations over the years, but he says that the nature of the allegations could have caused some of his friends to stop and think about whether they wanted to patronize the stores. I have some 30-something friends who refuse to shop there. Could this be why the store chose to add a female director? As I explained to a reporter last week, the company shouldn’t need a female perspective to realize that the founder is, to put it mildly, a risk. And in fact, as studies cited by my co-blogger Josh Fershee noted earlier this week, being the “woman’s voice” may minimize her perceived effectiveness. Yes, it’s true that American Apparel took more decisive action than the NFL last week, as Joan Heminway observed, but what took them so long? Is it too little too late? Where was the general counsel when Charney allegedly refused to take his sexual harassment training, which is required by law in California every two years? Where were the other board members who allowed the settlement of case after case involving Charney? I have often found that some of the most vigilant supporters of women in the workplace, especially in harassment matters, are older males who have daughters and wives and who know what it’s like for them. When did the board worry about whether the CEO's well-publicized alleged attacks on employees contradicted the heavy corporate responsibility branding? Did the board meet its Caremark duties?
Ironically, the company’s 10-K filed two months before his termination indicated that, “In particular, we believe we have benefited substantially from the leadership and strategic guidance of Dov Charney. The loss of Dov Charney would be particularly harmful as he is considered intimately connected to our brand identity and is the principal driving force behind our core concepts, designs and growth strategy.”
So at what point between April and June did Charney’s actions go off the scale on the enterprise risk management heat map? COSO, the standard bearer for ERM, encourages boards to focus on: what the firm is willing to accept as it pursues shareholder value; a knowledge of management’s risk management processes that have identified and assessed the most significant enterprise-wide risks; a review of the risk portfolio compared to the risk appetite; and whether management is properly responding to the most significant risks and apprising the board of those risks. Could such an objective risk assessment have even occurred with Charney (the risk) in the room? How could the company have the right tone at the top when the founder/CEO failed to comply with Code of Ethics Rule #2 --“service to the Company never should be subordinated to personal gain and advantage”? The stock price has been falling for years and the company has been struggling. Did the high rates to insure Charney’s conduct finally become too hot to handle? On the other hand, would the directors have made the same decision if the shares were trading at $97 instead of .97? Some shareholders are raising concerns too about why any of the original board members remain given the appalling financial performance.
The board now has a “suitability committee,” which will review the results of an independent investigation into Charney’s actions. Even if the report clears Charney and he’s brought back, the new independent directors will have a lot of questions to answer. The question of whether there is a woman on the board seems to be almost irrelevant given the history. For the record, even though the literature is mixed on the financial benefits of gender and racial diversity, I am a strong proponent of the diversity of viewpoints, particularly those that the underrepresented can bring to the table.
But this board needs to re-establish trust among its investors and funders and then focus on what any retailer should- potential supply chain disruptions, the impact of any immigration reform, currency fluctuations, and keeping their customer base happy and out of competitors H & M and Forever 21. The last thing they need to worry about is how to pay off the victims of their founder’s latest escapades.
Monday, July 28, 2014
As many readers (and all of my friends) know, I am a bit of a sports fan. Having been a college athlete (field hockey, at Brown University, for trivia buffs), I focus most of my attention on college games. I even served on The University of Tennessee's Athletics Board for a few years. But my Dad and I used to watch professional football and baseball a lot together when I was a kid (still do, when we are in the same place at the right time), so I also maintain a casual interest in professional sports.
I also have an interest in fashion, especially women's fashion (maybe less well known, except by close friends). I have friends in the industry and find aspects of it truly fascinating. I even used to subscribe to Women's Wear Daily, the fashion industry trade rag. I am the faculty advisor to the College of Law's Fashion and Business (FAB) Law student organization.
This personal background is prelude to my interest in two current events stories that I see as parallels. I am trying to sort them through on a number of levels. Maybe you can help. Here are the top lines of each story.
- Last Thursday, the National Football League (NFL) suspended Baltimore Ravens running back Ray Rice for two games, fined him $58,000 dollars, and asked him to seek counseling after its investigation of an incident relating to a video in which Rice was depicted dragging his then-fiance, now wife, by her hair after punching her in the face (allegedly rendering her unconscious).
- The very same day, American Apparel (AA) announced a new slate of directors who will assume positions on the AA board in early August as a result of investor intervention and a boardroom blood bath following on lagging profits and continuing investigations of allegations of sexual misconduct (most of it, as I understand it, not new news) against AA's founder and former CEO and director, Dov Charney, whose management roles at the firm were suspended by the board back in June.
Friday, July 18, 2014
At the risk of overdoing what may have been a good thing, I contributed a disclosure-oriented post to the Hobby Lobby symposium on The Conglomerate earlier today. It includes new information about a U.S. Department of Labor Q&A posted yesterday, among other things. Enjoy or not, as you so please . . . .
Monday, July 14, 2014
My post last week spawned more commentary than usual--on the BLPB site and off. So, I am regrouping on the same issue for my post today and plan to push forward a bit on some of the areas of commentary. Also, since The Conglomerate is running a Hobby Lobby symposium this week, I thought it might be nice to offer some thoughts on disclosure up here and (maybe) later chime in at The Conglomerate on this or other issues relating to the Hobby Lobby case later in the week . . . .
Monday, July 7, 2014
The Court's Hobby Lobby decision, as noted in post-decision commentary (see, e.g., Sarah Hahn's guest post earlier this week), apparently relies in part on the fact that shareholders (and, potentially, employees and other relevant constituents of the firm) know that the firm has sincerely held religious beliefs and what those beliefs mean for business operations and legal compliance. The Court does not directly address this in its opinion. Rather, the opinion includes various references to owner engagement that imply buisness owner awareness. The Court states:
- For-profit corporations, with ownership approval, support a wide variety of charitable causes . . . . (Op. 23, emphasis added)
"So long as its owners agree, a for-profit corporation may take costly pollution-control and energy conservation measures that go beyond what the law requires." (Op. 23, emphasis added)
In making these statements and reasoning through this part of the opinion, the Court relies on state corporate law principles and allusions.
Importantly, the Court also indicates its views on how the policy underlying the RFRA favors an interpretation that includes corporations as persons:
An established body of law specifies the rights and obligations of the people (including shareholders, officers, and employees) who are associated with a corporation in one way or another. When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of these people. For example, extending Fourth Amendment protection to corporations protects the privacy interests of employees and others associated with the company. Protecting corporations from government seizure of their property without just compensation protects all those who have a stake in the corporations’ financial well-being. And protecting the free-exercise rights of corporations like Hobby Lobby, Conestoga, and Mardel protects the religious liberty of the humans who own and control those companies.
(Op. 18, emphasis in original) Note how the last sentence reduces the protected category of persons under the RFRA to those who "own and control" the firm at issue. This represents an interesting narrowing of constituency groups from the more inclusive treatment in the first sentence of the paragraph. The reason for this narrowing may be (likely is) a practical one, evidencing judicial restraint. The plaintiffs in the Hobby Lobby actions were those who owned or controlled the corporation, and the decision likely will be limited in its application accordingly.
Given these breadcrumbs from the Court's opinion, should disclosure to shareholders or other constituencies be required, and if so, where would those disclosure rules reside as a matter of positive law? A blog post may be the wrong place to begin to address this issue (which is admittedly complex and involves, potentially, areas of law somewhat unfamiliar to me). But indulge me in a thought experiment here for a minute.
Saturday, July 5, 2014
The blogosphere has been a-twitter with commentary on Jamie Dimon's revelation earlier this week that he has throat cancer and will be undergoing treatments in the hope of eradicating it. From the public news, his prognosis sounds good. For that, I am sure all are grateful.
As some of you may know, my interest in issues relating to disclosures of facts from executives' private lives stems from my fascination, starting about 12 years ago, with the Martha Stewart disclosure cases (about which I wrote in law journals and in several chapters of a book that I edited). After co-writing the book about the basic concerns in Stewart's insider trading, misstatements/omissions securities fraud, and derivative fiduciary duty actions, I focused in additional articles on some finer points relating to her case. Two of these works covered the disclosure of private facts. Among the types of private facts covered are those relating to executive health concerns.
Monday, June 30, 2014
Today, the body of former Senator Howard H. Baker Jr. lay in repose across the street from my office in the building that houses the academic center benefacted by and named after him. (The building itself also bears his name.) His coffin, draped elegantly in the American flag, is a reminder of a political era essentially gone--but not forgotten (at least by me).
Senator Baker was a distinguished alumnus and benefactor of The University of Tennessee and the College of Law. Our main rotunda on the first floor of the law building is named for him. I dropped by today at the Baker Center for Public Policy to say goodbye to this revered statesman. I did not make the trip across the street to pay my respects primarily because he was a UT alumnus or benefactor--or even because I knew him (although we shook hands and chatted pleasantly at least once that I can remember) or knew any member of his family. I went because I deeply admire him and what he did with his public life. He was the kind of guy--known as "The Great Conciliator"--who exhibited political patience, valued compromise, and didn't let party politics or ideology stand in the way of what he knew in his gut was right.
In the obituary published by the American Bar Association in the ABA Journal, the following quote caught my eye:
“We are doing the business of the American people,” Baker said in a 1998 speech to members of Congress, explaining his philosophy of government. “And if we cannot be civil to one another, and if we stop dealing with those with whom we disagree, or that we don’t like, we would soon stop functioning altogether.”
Of course, the last bit stings a bit in light of the recent government shutdown. But . . . doing the business of the American people. Hmm. This part of the quote reminded me of the public fiduciary arguments that Donna Nagy raises in her 2011 Boston University Law Review article entitled "Insider Trading, Congressional Officials, and Duties of Entrustment." A great read, for those who haven't yet set aside the time.
However, the quote also made me think about Senator Baker's engagements over the years with legal issues impacting businesses. He was certainly pro-business, but he also fought for environmental protection and civil rights, among other things, even when those issues appeared, at least in the short term, to be a net negative for businesses. What, then, would Senator Baker have said about today's decision in Hobby Lobby? Well, we'll never know. But I will take a few guesses, and those who knew him or know his politics better than I can feel free to question and correct my prognostications.
Wednesday, June 25, 2014
Harumph. Business as usual at the SCOTUS . . . . As a student and teacher of Basic v. Levinson and its progeny, I guess I had hoped for more from the U.S. Supreme Court's opinion in Halliburton, released two days ago. I haven't yet read all the articles on the case that were published since the release of the opinion (as usual, quite a number), so my thoughts here represent my personal reflections.
After engaging in some self-analysis, I have determined that my disappointment with the Court's opinion stems from the fact that I am a transactional lawyer . . . and the Court's opinion is about procedure. Not that civil and criminal procedure do not impact transactional law. Au contraire. The procedure and substance of Section 10(b)/Rule 10b-5 claims are intertwined in many fascinating ways. I will come back to that somewhat in a minute. But the Court's opinion in Halliburton just doesn't satisfy the transactional lawyer in me.
This also is somewhat true of the SCOTUS opinions in both Dura Pharmaceuticals and Tellabs, which deal with pleading (in)sufficiencies in Section 10(b)/Rule 10b-5 litigation rather than (as in Halliburton) class certification questions. In its class certification focus, Halliburton is much more the sibling of Amgen, which I find infinitely more satisfying because it (like Basic and Matrixx) focuses on materiality, which infuses all disclosure decisions. All of these cases, however, center on a defendant's ability to get dismissal of an action at an early stage, something that defendants in Section 10(b)/Rule 10b-5 cases desperately want to do. The longer the case goes on, the more incentive defendants have to settle--oftentimes (in my experience) foregoing the opportunity to defend themselves against specious claims because of the ongoing drain on financial and human resources.
Monday, June 23, 2014
This past week, I joined a group of our business law prof colleagues at the National Business Law Scholars Conference out at Loyola Law School in Los Angeles. Headlined by a keynote presentation on "the audience" for business law scholarship from Frank Partnoy and an author-meets-reader session on Michael Dorff's new book, Indispensable and Other Myths: The True Story of CEO Pay, the conference featured a staggeringly interesting array of panels on everything from standard corporate governance to financial regulation. Kudos to the planning committee.
Steve Bainbridge presented Must Salmon Love Meinhard? Agape and Partnership Fiduciary Duties in an opening concurrent panel. If you haven't read it yet, I recommend it. Admittedly (as I told Steve), I have an especial interest in the Meinhard case and in the expressive function of decisional law. But most of us in the business law professor group teach the case in one course or another, and his paper is relevant to many in that context.
Monday, June 16, 2014
I have been working on a draft article for the University of Cincinnati Law Review based on a presentation that I gave this spring at the annual Corporate Law Symposium. This year's topic was "Crowdfunding Regulations and Their Implications." My draft article addresses the public-private divide in the context of the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act--more commonly known as the CROWDFUND Act. I am using two pieces coauthored by Don Langevoort and Bob Thompson (here and here), as well as three works written by Hillary Sale (here, here, and here) to engage my analysis.
I also will be participating in a discussion group at the Southeastern Association of Law Schools annual conference in August on the publicness theme. That session is entitled "Does The Public/Private Divide In Federal Securities Regulation Make Sense?" and is scheduled for 3:00 pm on Augut 6th, for those attending the conference. Michael Guttentag was good enough to recruit the group for this discussion.
All this work on publicness has my head spinning! There are a number of unique conceptions of pubicness, some overlapping or otherwise interconnected, with different conceptions being useful in different circumstances. I am attracted to a number of observations in both the Langevoort/Thompson and Sale bodies of work, but there's clearly a lot more to think about from the standpoint of both scholarship and teaching.
So, today I ask: What does publicness mean to you? Does there continue to be salient meaning in the distinction between piublic and private (offerings, companies, etc.)? If so, what should publicness mean in these contexts? I am curious to see what others think.
Monday, June 9, 2014
Today, we finished two days of amazingly rich discourse on business law issues at the Association of American Law Schools (AALS) Workshop on Blurring Boundaries in Financial and Corporate Law in Washington, DC. (Full disclosure: I chaired the planning committee for this AALS midyear meeting.) All of the proceedings have been phenomenally interesting. I have learned so many things and been forced to think about so much . . . . For those of you who couldn't be there, I tried to faithfully pick up a bunch of salient points from the talks and discussions on Twitter using #AALSBB2014. Moreover, some of the meeting was recorded. I will try to remember to let you know when, to whom, and how those recordings are being made available. (Feel free to remind me if I forget . . . .)
One idea shared at the workshop that I am particularly intrigued by is the use of a new standard in federal securities regulation, suggested by Tom Lin in his talk as part of this morning's plenary panel on "Complexity". He argues for an "algorithmic investor" standard (working off/refining the concept of the reasonable investor) in light of the growth of algorithmic trading. It's predictable that I would be interested in this idea, given that I write about materiality in securities regulation (especially insider trading law, in articles posted here and here), in which the reasonable investor standard is central. (In fact, Tom was kind enough to mention my work on the resonable investor standard in his talk.)
Tom is not the first to argue for a securities regulation standard that better serves specific investor populations. Memorable in this regard, at least for me, is Maggie Sachs's paper arguing for a standard focused on the "least sophisticated investor". But many other fine works contending with materiality or the concept of the reasonable investor in securities regulation also question (among other things) the clarity and efficacy of the reasonable investor standard in specific contexts.
Monday, June 2, 2014
Thanks for the warm welcome to the Business Law Prof Blog, Stefan et al. Having avoided a regular blogging gig for many years now (little known fact: I was the first guest blogger on The Conglomerate – or at least the first one formally listed as a guest – back in 2005), I recently determined that I should sign on to work with this band of thieves scholars on a regular basis. I appreciate the invitation to do so.
I already feel right at home, given that my post for today, like Steve Bradford's, is on mandatory disclosure. Unlike Steve, however, my focus is on the creep of mandatory disclosure rules in U.S. securities regulation into policy areas outside the scope of securities regulation. I think we all know what "creep" means in this context. But just to clarify, my definition of "creep" for these purposes is: "to move slowly and quietly especially in order to not be noticed." I participated in a discussion roundtable in which I raised this subject at the Law and Society Association annual meeting and conference last week.
My concerns about this issue were well expressed by Securities and Exchange Commission Chair Mary Jo White back in early October 2013 in her remarks at the 14th Annual A.A. Sommer, Jr. Corporate Securities and Financial Law Lecture at Fordham Law School:
When disclosure gets to be too much or strays from its core purposes, it can lead to “information overload” – a phenomenon in which ever-increasing amounts of disclosure make it difficult for investors to focus on the information that is material and most relevant to their decision-making as investors in our financial markets.
To safeguard the benefits of this “signature mandate,” the SEC needs to maintain the ability to exercise its own independent judgment and expertise when deciding whether and how best to impose new disclosure requirements.
For, it is the SEC that is best able to shape disclosure rules consistent with the federal securities laws and its core mission. But from time to time, the SEC is directed by Congress or asked by interest groups to issue rules requiring disclosure that does not fit within our core mission.
She goes on to note that some recent disclosure rules mandated by Congress:
. . . seem more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions.
That is not to say that the goals of such mandates are not laudable. Indeed, most are. Seeking to improve safety in mines for workers or to end horrible human rights atrocities in the Democratic Republic of the Congo are compelling objectives, which, as a citizen, I wholeheartedly share.
But, as the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.
Parts of these remarks—those on information overload—were echoed in a speech that Chair White gave to the National Association of Corporate Directors Leadership Conference.
Chair White's words ring true to me. I derive from them two main contestable points for thought and commentary.