Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Saturday, October 3, 2015

New in Print

The following law review articles relating to securities regulation are now available in paper format:

Tapas Agarwal, Anti-Retaliation Protection for Internal Whistleblowers under Dodd-Frank Following the Fifth Circuit's Decision in Asadi, 46 St. Mary's L.J. 421 (2015).

Jill E. Fisch, The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform, 93 N.C. L. Rev. 935 (2015).

M. Saleh Jaberi & Bruno Zeller, How Much Can It Be Bent Before Breaking? Changing the Foundations of Arbitration in Securities Disputes, 15 Pepp. Disp. Resol. L.J. 317 (2015).

Andrew Verstein, Benchmark Manipulation, 56 B.C. L. Rev. 215 (2015).

Twenty-Seventh Annual Corporate Law Symposium: Crowdfunding Regulations and Their Implications. Articles by C. Steven Bradford, Joseph J. Dehner, Jin Kong, Tianlong Hu, Dong Yang, Joan MacLeod Heminway, David J. Willbrand, Medha Kapil and Andrew A. Schwartz. 83 U. Cin. L. Rev. 371-528

October 3, 2015 | Permalink | Comments (0)

Wednesday, September 30, 2015

Shelby on Hedge Funds

Cary Martin Shelby has posted Are Hedge Funds Still Private? Exploring Publicness in the Face of Incoherency on SSRN with the following abstract:

Academics have frequently noted that the term “public” is one of the most under theorized concepts under our federal securities laws. It has never been sufficiently defined by Congress, and issuers must instead rely on various indicators of publicness gleaned from an extensive patchwork of rules and exemptions. A prevalent indicator of publicness includes the status of investors, where investment companies that broadly offer investments to the general public, such as mutual funds and money-market funds, are required to register under a complex web of federal legislation. Relatedly, private investment companies such as hedge funds and private equity funds, which restrict offerings to elite investors, are typically considered private and are thus exempt from federal regulation. Other historical indicators include advertising, size of pool, and number of investors/clients. However, these historical indicators of publicness did not capture the increasing effect that private funds were having on the general public, such as systemic risk, retailization, and participation in the shadow banking industry. Congress responded by expanding indicators of publicness through the Dodd-Frank Act of 2010, which created new registration requirements for private funds irrespective of the status of such underlying investors.


Nevertheless, this article argues that Congress has improperly focused on ancillary laws, such as the Investment Advisers Act of 1940 and the Commodity Exchange Act of 1936, to integrate evolving notions of publicness in the regulation of investment companies. Congress should instead focus on the Investment Company Act of 1940 (“1940 Act”), which is the primary legislation tailored to the industry. In focusing on these ancillary laws, Congress has effectively expanded and complicated the patchwork of regulation that applies to these entities, which has further complicated the examination of publicness from a theoretical, regulatory, and practical perspective. This improper focus has also resulted in under-inclusive and over-inclusive indicators of publicness under the 1940 Act, further compromising investor protection in these burgeoning markets. An alternative framework should include the following tasks: (1) integrate emerging indicators of publicness under the 1940 Act; (2) conduct a wholesale review of the 1940 Act; and (3) monitor other strategies that could invoke public concerns such as hedge fund activism, third-party litigation funding, and investment in distressed economies such as Detroit, Puerto Rico, and Greece. This article builds on the current literature on this topic which has largely focused on the incoherency of publicness in the context of the Securities Act of 1933 and the Securities Exchange Act of 1934. This article is the first to assess whether emerging notions of publicness have been properly incorporated under the 1940 Act.

Cary Martin Shelby

September 30, 2015 | Permalink | Comments (0)

Monday, September 28, 2015

Yadav on Insider Trading

Yesha Yadav has posted Insider Trading and Market Structure on SSRN with the following abstract:

This Article argues that the emergence of algorithmic trading raises a new challenge for the law and policy of insider trading. It shows that securities markets comprise a cohort of algorithmic “structural insiders” that – by virtue of speed and physical proximity to exchanges – systematically gain first access to information and play an outsize role in price formation. This Article makes three contributions. First, it introduces and develops the concept of structural insider trading. Securities markets increasingly rely on automated traders utilizing algorithms – or pre-programmed electronic instructions – for trading. Policy allows traders to enjoy important structural advantages: (i) to physically locate on or next to an exchange, shortening the time it takes for information to travel to and from the marketplace; and (ii) to receive feeds of richly detailed data directly to these co-located trading operations. With algorithms sophisticated enough to respond instantly and independently to new information, co-located automated traders can receive and trade on not-fully-public information ahead of other investors. Secondly, this Article shows that structural insider trading exhibits harms that are substantially similar to those regulated under conventional theories of corporate insider trading. Structural insiders place other investors at a persistent informational disadvantage. Through their first sight of market-moving data, structural insiders can capture the best trades and erode the profits of informed traders, reducing their incentives to participate in the marketplace. Despite the similarity in harms, however, this Article shows that doctrine does not apply to restrict structural insider trading. Rather, structural insiders thrive in full view and with regulatory permission. Thirdly, the Article explores the implications of structural insider trading for the theory and doctrine of insider trading. It shows them to be increasingly incoherent in their application. In protecting investors against one set of insiders but not another, law and policy appear under profound strain in the face of innovative markets.

September 28, 2015 | Permalink | Comments (0)

Zaring on SEC Enforcement

David T. Zaring has posted Enforcement Discretion at the SEC on SSRN with the following abstract:

The Dodd-Frank Wall Street Reform Act allowed the Securities & Exchange Commission to bring almost any claim that it can file in federal court to its own Administrative Law Judges. The agency has since taken up this power against a panoply of alleged insider traders and other perpetrators of securities fraud. Many targets of SEC ALJ enforcement actions have sued on equal protection, due process, and separation of powers grounds, seeking to require the agency to sue them in court, if at all.

This article evaluates the SEC’s new ALJ policy both qualitatively and quantitatively, offering an in-depth perspective on how formal adjudication – the term for the sort of adjudication over which ALJs preside – works today. It argues that the suits challenging the SEC’s ALJ routing are without merit; agencies have almost absolute discretion as to who and how they prosecute, and administrative proceedings, which have a long history, do not threaten the Constitution. The controversy illuminates instead dueling traditions in the increasingly intertwined doctrines of corporate and administrative law; the corporate bar expects its judges to do equity, agencies, and their adjudicators, are more inclined to privilege procedural regularity.

September 28, 2015 | Permalink | Comments (0)

Velikonja on SEC Enforcement

Urska Velikonja has posted Reporting Agency Performance: Behind the SEC's Enforcement Statistics on SSRN with the following abstract:

Every October, after the end of its fiscal year, the Securities and Exchange Commission releases its annual enforcement report, detailing its activity for the year. The report boasts record enforcement activity, often showing significant increases over the prior fiscal year in the number of enforcement actions brought and monetary penalties ordered. The numbers suggest that the SEC is ever tougher on securities violators. The SEC includes these statistics in its budget requests; the figures are repeated in congressional testimony, scholarship, policy proposals, and the business press.

Yet the SEC’s metrics are deeply flawed. The Article reviews fifteen years of enforcement actions and demonstrates that the widely-circulated statistics are invalid because they do not measure what they purport to measure, and unreliable because they can be manipulated all too easily. The SEC double and triple counts many of its cases and overstates the fines it orders. This Article constructs better measures. These measures reveal that the SEC’s statistics mask the fact that core enforcement has remained steady since 2002, and obscure a shift in enforcement towards easier-to-prosecute strict-liability violations.

The SEC is not alone in using misleading statistics to report its performance. Multiple reporting statutes authorize Congress to cut agencies’ budgets for failing to meet performance targets. In response, agencies report flawed metrics to protect their ability to continue enforcing the law. The Article suggests that Congress should not threaten to reduce an agency’s budget because of year-to-year fluctuations in enforcement. In addition, to make reported numbers more reliable, non-financial performance measures should not be developed by the agency. Instead, the selection and development of performance indicators should be standardized across agencies, much like financial reporting has already been standardized. Doing so would depoliticize reporting, as well as enable comparisons among agencies, both domestically and internationally.

September 28, 2015 | Permalink | Comments (0)

New in Print

The following law review articles relating to securities regulation are now available in paper format:

Robert P. Bartlett, III, Do Institutional Investors Value the Rule 10b-5 Private Right of Action? Evidence from Investors' Trading Behavior Following Morrison v. National Australia Bank Ltd., 44 J. Legal Stud. 183 (2015).

Allan Gustin, Comment, Investors Beware: How California Municipalities Get Away with Defrauding Investors after Nuveen Municipal High Income Opportunity Fund v. City of Alameda, 48 Loy. L.A. L. Rev. 277 (2014).

The Administrative Law of Financial Regulation, Foreword by James D. Cox & Steven L. Schwarcz; articles by John C. Coates IV, James D. Cox, Kathryn Judge, Steven L. Schwarcz, Gillian E. Metzger and David Zaring; responses by Ryan Bubb, Robert J. Jackson, Jr., Michael S. Barr and Thomas W. Merrill. 78 Law & Contemp. Probs. 1-204 (2015).

September 28, 2015 | Permalink | Comments (0)

Tuesday, September 22, 2015

New in Print

The following law review articles relating to securities regulation are now available in paper format:

Kevin Kearney, Note, A Proposal to Modernize Shareholder Lists and Simplify Shareholder Communications, 37 Hastings Comm. & Ent. L.J. 391 (2015).

Tabetha Martinez, Note, Amending Rule 10b-5: SAC Capital and the Willfully Blind Financial Executive, 37 T. Jefferson L. Rev. 447 (2015).

David M. Reeb, Yuzhao Zhang & Wanli Zhao, Insider Trading in Supervised Industries, 57 J.L. & Econ. 529 (2014).

September 22, 2015 | Permalink | Comments (0)