Thursday, April 24, 2014
João Pinto has posted The Economics of Securitization: Evidence from the European Markets on SSRN with the following abstract:
Securitization is the process whereby financial assets are pooled together, with their cash flows, and sold to a specially created third party that has borrowed money to finance the purchase. The borrowed funds are raised through the sale of securities, in the form of debt instruments, into the market. Securitization is thus a technique used to transform illiquid assets into securities.
Securitization creates value by increasing liquidity and funding, reducing the cost of funding, allowing originators to reach a funding sources diversification, improving originators’ risk management, increasing the segmentation between the origination and investment functions, and allowing originators to benefit from regulatory (and/or tax) arbitrage and to improve key financial ratios.
Although the economic advantages, securitization also has problems, especially when used inappropriately. Considering the important role played by securitization in the development and propagation of the 2007/2008 financial crisis, the most commonly referred problems of securitization are complexity, off-balance sheet treatment, asymmetric information problems, agency problems, and higher transaction costs.
Besides describing the economic motivations and problems of securitization, this paper provides details on asset securitization characteristics and players, presents the recent trends of securitization markets, describes the role played by securitization in the 2007/2008 financial crisis, and provides some statistics of asset securitization activity in Western Europe between 2000 and 2013.
Ciara Torres-Spelliscy, Kathy Fogel, and Rwan El-Khatib have posted Running the D.C. Circuit Gauntlet on Cost Benefit Analysis after Citizens United: Empirical Evidence from SOX and the JOBS Act on SSRN with the following abstract:
To require disclosure or not to require disclosure; that is the question faced by regulators, including the Securities and Exchange Commission (SEC), in light of the Supreme Court’s 2010 Citizens United decision, which allows anew free flow of corporate money into the political system.
Pending before the SEC since 2011 is a petition by 10 law professors asking for transparency of corporate political spending. We write this article in anticipation of the SEC’s eventual promulgation of rules requiring disclosure of corporate political spending. Many of the core questions about the market’s reaction to increased regulation of listed companies that we can study now are likely to be implicated in the debate about regulation within the narrower subset of corporate political spending.
Corporations who do not want to disclose their political spending are likely to challenge any rule that the SEC issues on the subject. Such a legal challenge is destined to be heard by the D.C. Circuit Court, which examines federal regulations with an increasingly jaundiced eye. One of the ground on which the D.C. Circuit can dispose of a new regulation is by finding that the SEC did not do a sufficiently rigorous cost-benefit analysis.
This article addresses the potential hostility that the D.C. Circuit may harbor against a new SEC rule requiring greater corporate transparency in election activities and provides some data that might assist the SEC in navigating this gauntlet.
In summary, our data showed that the market reacted positively to the new regulations in SOX and reacted negatively to the deregulations embodied in the JOBS Act. In short, and as discussed more fully below, the data demonstrate that the market values transparency and distrusts opaqueness. We hope that the D.C. Circuit will find these data useful in illuminating the larger debate over what securities regulations are allowable.
Wendy Gerwick Couture has posted Materiality and a Theory of Legal Circularity on SSRN with the following abstract:
This Article argues that the materiality doctrine, which lies at the heart of securities fraud, has the potential to operate as a self-fulfilling prophecy. This Article labels this phenomenon "legal circularity." In order to place the potential legal circularity of materiality in context among the various other legal doctrines that share this potential, this Article proposes a two-part Theory of Legal Circularity. First, this Article proposes the following Legal Circularity Test to identify potentially circular doctrines: A legal doctrine is potentially circular if: (1) the legal doctrine incorporates the behavior or attitude of a population or person, either hypothetical or real; and (2) the subject population or person either would (if hypothetical) or does (if real) consider prior precedent interpreting the legal doctrine when choosing said behavior or when adopting said attitude. Materiality, among other legal doctrines, arguably satisfies this test because (1) the materiality standard focuses on whether there is a substantial likelihood that a hypothetical "reasonable investor" would consider information important when making an investment decision, and (2) a reasonable investor would arguably consider prior materiality precedent when assessing whether information is important to his or her investment decision. Second, this Article proposes a Framework to Assess Legal Circularity, with the goal of providing guidance about whether to embrace a doctrine’s potential legal circularity. Under this framework, which draws from the rich scholarship on the related but distinct concepts of stare decisis, substantive law heuristics, and precedential herding, courts and scholars should weigh (1) the risk of a "wrong" rule; (2) the effects of greater predictability; and (3) the import of reconceiving the courts’ role. Finally, this Article applies this framework to materiality, concluding that courts and scholars should explicitly embrace the legal circularity of materiality, coupled with increased investor education about materiality and absent any clarifying guidance from the Securities and Exchange Commission about the scope of the doctrine.
Wednesday, April 23, 2014
Verity Winship has posted Policing Compensatory Relief in Agency Settlements on SSRN with the following abstract:
High profile rejections of proposed agency settlements have drawn new attention to judicial review of agency settlements, particularly in the context of the Securities and Exchange Commission. The discussion, however, generally ignores one important function of these settlements: compensation. When an agency acts as “public class counsel” by seeking compensatory relief, it represents two overlapping groups: the public and the injured individuals or entities that are being compensated. This essay argues that, as is the case with private representative actions, protections should be triggered when the rights of absent represented parties to their “day in court” are compromised. This may happen when, for instance, absent “class members” are precluded from bringing other related actions or their potential recovery is limited by the agency’s action. This essay does not propose a wholesale import of private litigation mechanisms to the agency context or suggest that compensation is the sole or primary function of agency settlements. Rather, it provides content for the broad “fair, reasonable, and adequate” standard that judges currently use to review agency settlements, proposing that judicial review of compensatory relief focus on the adequacy of representation.
Conference of State Bank Supervisors (CSBS) and NASAA Release Model State Consumer and Investor Guidance on Virtual Currency
The University of Richmond School of Law and the University of Illinois College of Law are currently inviting submissions for the Second Annual Workshop for Corporate & Securities Litigation. The workshop will be held on Friday, October 24 and Saturday, October 25, 2014, in Richmond, Virginia. More details and the call for papers are available here.
Tuesday, April 22, 2014
Karen E. Woody has posted Securities Laws as Foreign Policy on SSRN with the following abstract:
The SEC was founded in 1934 and bestowed by Congress with a three-pronged mission: (a) protecting investors; (b) maintaining fair, orderly, and efficient markets; and (c) facilitating capital formation. Markedly absent from this congressional mandate is any administrative authority or charge to engage in international, diplomatic, or human rights-oriented goals. Instead, the focus of the mandate is the creation and preservation of market integrity to assure investors that their investments are safe. Despite this clear, financial-based mission of the SEC, Congress has co-opted the agency and its regulatory resources to achieve decidedly non-financial, extraterritorial goals related to foreign policy. This article analyzes three statutory provisions that represent congressional misappropriation of the SEC’s resources and expertise: (1) the Foreign Corrupt Practices Act; (2) the conflict minerals disclosure requirement of Dodd-Frank; and (3) the extractive industries payment disclosure requirement of Dodd-Frank. Using the economic theory of opportunity cost, this article explores the inherent risks in an agency operating outside of its mission and expertise, arguing that the risks depend on the amount of authority granted to the agency and the tasks involved in enforcement.
Robert W. McGee has posted Is the SEC Guilty of Insider Trading? on SSRN with the following abstract:
This article reviews the literature on insider trading by SEC employees and discusses ethical issues. It also provides links to more than 20 insider trading articles. Recent research has indicated that some employees of the Securities and Exchange Commission might have engaged in insider trading. They are in a unique position to do so, since they have access to nonpublic information, and know that an investigation of a particular company is about to be launched. This information, if made public, could have an effect on the company’s stock price.
Steven A. Ramirez has posted The Virtues of Private Securities Litigation: An Historic and Macroeconomic Perspective on SSRN with the following abstract:
In the wake of the Great Depression, the federal securities laws operated to mandate disclosure of material facts to investors and extend broad private remedies to victims of securities fraudfeasors. The revelation of massive securities fraud underlying the Great Depression animated the federal securities laws as investment plunged after 1929 and failed to recover for years. For over sixty years after the enactment of the federal securities laws, no episode of massive securities fraud with significant macroeconomic harm occurred. The federal securities laws thereby operated to facilitate financial stability and prosperity, in addition to a superior allocation of capital. Unfortunately, as memories faded and inequality soared, corporate and financial elites (with the active aid of lawmakers) launched a sustained attack upon private enforcement of the securities laws. Soon thereafter the horrors of the Great Depression returned and massive securities fraud triggered the Great Recession of 2008 as economists would predict. This Article argues for a rollback of the war on private securities litigation to at least the 1980s based upon history and economic science. This would at least restore sensible pleading standards, impose liability on all participants in securities frauds (including aiders and abettors) and allow the states to impose more demanding standards of liability on wrongdoers in financial markets.
On April 21, 2014 at the Emory University School of Law Corporate Governance Lecture Series in Atlanta, Georgia, Commissioner Luis A. Aguilar gave remarks on Looking at Corporate Governance from the Investor’s Perspective.
Saturday, April 19, 2014
Anita K. Krug has posted Downstream Securities Regulation on SSRN with the following abstract:
Securities regulation wears two hats: Its “upstream” side governs firms in connection with their obtaining financing in the securities markets. That is, it regulates firms’ — issuers’ — offers and sales of securities, whether in public offerings to retail investors or in private offerings to institutional investors. Its “downstream” side, by contrast, governs financial services providers, who assist with investors’ activities in those markets: Their services include providing advice as to securities investments, as investment advisers do; aggregating investors’ assets for purposes of enabling those investors to invest their assets collectively, as mutual funds do; and acting as “middlemen” between buyers and sellers of securities, as broker-dealers do. Yet neither scholars nor policymakers have adequately understood that the regulation of financial services providers under the securities laws is substantively different from the regulation of issuers. They have not, in other words, adequately understood downstream securities regulation.
The problems arising from this oversight are evident in laws and rules designed to protect investors from the excesses of brokerage firms, fraudulent conduct in the mutual fund industry, and hedge-fund managers’ self-interested conduct, as well as in those enacted in the wake of Enron’s bankruptcy and other corporate scandals. Moreover, the harm to investors is real: Brokerage firm customers have struggled for the return of their deposited funds after the firm’s bankruptcy; mutual fund shareholders have suffered from market timing scandals; when tasked with remedying harms to shareholders of financial services firms, the potency of antifraud statutes has been muted. This Article is the first scholarly work to articulate how securities regulation encompasses two distinct spheres of regulation, each of which is based on its own core principles — and, importantly, each of which necessitates its own regulatory approaches. The Article contends that policymakers’ longstanding failure to recognize that securities regulation is bimodal has produced a securities regulatory regime scattershot with flaws and vulnerabilities. Securities regulation could become substantially better with a more complete understanding of how it works — how all parts of it work.
Thomas K. Kick, Enrico Onali, Benedikt Ruprecht, and Klaus Schaeck have posted Wealth Shocks, Credit-Supply Shocks, and Asset Allocation: Evidence from Household and Firm Portfolios on SSRN with the following abstract:
We use a unique dataset with bank clients’ security holdings for all German banks to examine how macroeconomic shocks affect asset allocation preferences of households and non-financial firms. Our analysis focuses on two alternative mechanisms which can influence portfolio choice: wealth shocks, which are represented by the sovereign debt crisis in the Euro area, and credit-supply shocks which arise from reductions in borrowing abilities during bank distress. While households with large holdings of securities from stressed Euro area countries (Greece, Ireland, Italy, Portugal, and Spain) decrease the degree of concentration in their security portfolio as a result of the Euro area crisis, non-financial firms with similar levels of holdings from stressed Euro area countries do not. Credit-supply shocks at the bank level result in lower concentration, for both households and non-financial corporations. Only shocks to corporate credit bear ramifications on bank clients’ portfolio concentration. Our results are robust to falsification tests, and instrumental variables estimation.
Cécile Carpentier and Jean-Marc Suret have posted Business Angels’ Perspectives on Exit by IPO on SSRN with the following abstract:
We analyze exit-related perceptions of the members of a large, well-structured Canadian angel group. Because they invest in high tech deals larger than CAN$1.2 million, together with venture capitalists and a matching fund, these angels should consider the initial public offering (IPO) as a possible exit mode. However, they show a strong preference for the trade sale. This preference is consistent with the economies of scope hypothesis: getting big fast has become more important because large firms can fully and rapidly exploit innovations, resulting in more small firm acquisitions. Securities regulation is also perceived as a major impediment to exiting onto the stock market. Both reasons explain why IPOs are not considered an exit mode. Reluctance to exit through an IPO increases with angels’ experience. Our observations have implications for entrepreneurs, business angels and policy makers.
Friday, April 18, 2014
On April 16, 2014, Commissioner Daniel M. Gallagher delievered Closing Remarks at the SEC's 24th Annual International Institute for Market Development.
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending April 17, 2014).
Tuesday, April 15, 2014
Li Ong and Fabian Lipinsky have posted Asia's Stock Markets: Are There Crouching Tigers and Hidden Dragons? on SSRN with the following abstract:
Stock markets play a key role in corporate financing in Asia. However, despite their increasing importance in terms of size and cross-border investment activity, the region’s markets are reputed to be more “idiosyncratic” and less reliant on economic and corporate fundamentals in their pricing. Using a model that draws on international asset pricing and economic theory, as well as accounting literature, we find evidence of greater idiosyncratic influences in the pricing of Asia’s stock markets, compared to their G-7 counterparts, beyond the identified systematic factors and local fundamentals. We also show proof of a significant relationship between the strength of implementation of securities regulations and the “noise” in stock pricing, which suggests that improvements in the regulation of securities markets in Asia could enhance the role of stock markets as stable and reliable sources of financing into the future.
Carlos Berdejo has posted Going Public After the JOBS Act on SSRN with the following abstract:
The Jumpstart Our Business Startups Act of 2012 (JOBS Act) represents one of the most comprehensive overhauls of the securities laws in recent years. The principal legislative goal of the JOBS Act is to improve the access to the capital markets for smaller issuers, which are referred to in the act as emerging growth companies, or EGCs. To accomplish this goal, the JOBS Act seeks to reduce the costs of conducting a public offering and complying with the ensuing reporting obligations by making certain disclosure requirements voluntary for EGCs. This Article examines whether these scaled disclosure rules have increased the number of small issuers conducting an initial public offering (IPO) of their equity securities and the extent to which these issuers have taken advantage of the various exemptions available to them under the JOBS Act.
The evidence presented in this Article indicates that EGCs have increasingly taken advantage of several of the scaled disclosure provisions of the JOBS Act during the course of their IPOs. However, the number of EGCs accessing the public capital markets has not increased as a result. The Article explores two explanations for these seemingly contradictory findings. First, the evidence suggests that the direct costs of conducting an IPO have not decreased for EGCs and that some indirect costs may have increased following the enactment of the JOBS Act. Second, certain issuers that qualify for EGC status (particularly the largest ones) may be choosing to pursue private offerings instead. EGCs that take advantage of the scaled financial disclosure available under the JOBS Act are smaller, younger and more likely to belong to R&D-intensive industries, a pattern supporting the adoption of a more flexible securities regulation framework that allows issuers to select from a menu of disclosure regimes.
Jenice J. Prather-Kinsey and Paul Tanyi have posted The Market Reaction to SEC IFRS-Related Announcements: The Case of American Depository Receipt (ADR) Firms in the U.S. on SSRN with the following abstract:
The objective of our study is to test whether the adoption of International Financial Reporting Standards (IFRS) in the United States (U.S.) is perceived positively by American Depository Receipt (ADR) firms’ equity market participants. We conduct our tests by studying market reactions to the Securities and Exchange Commission’s (SEC) IFRS-related press releases between 2007 and 2011 regarding potential adoption of IFRS in the U.S. Using a sample of ADR firms and multivariate regression analyses, we test the 3-day cumulative abnormal returns (CAR) of investors of ADR firms in response to SEC announcements on potential IFRS adoption. We find a significant and positive market reaction to the SEC’s announcements related to the potential adoption of IFRS in the U.S. for ADR firms reporting their financial statements using IFRS, especially in the industry where IFRS is the globally predominant accounting standard. Conversely, we find a significantly negative market reaction to SEC related announcements of potential adoption of IFRS in the U.S. for ADR firms currently reporting their financial statements using U.S. generally accepted accounting principles (GAAP). We conclude that the SEC’s adoption of IFRS may benefit global and U.S. equity market participants relative to Local GAAP reporting (reporting using domestic GAAP that is not IFRS or U.S. GAAP) by providing a common basis for investors, issuers and others to evaluate investment opportunities.
On April 15, 2014 at the North American Trading Architecture Summit in New York, Gregg E. Berman, Associate Director of the SEC's Office of Analytics and Research of the Division of Trading and Markets delivered remarks on What Drives the Complexity and Speed of our Markets.
On April 15, 2014 as part of the MIT Sloan School of Management’s Center for Finance and Policy’s Distinguished Speaker Series, Craig M. Lewis, Chief Economist and Director of the SEC's Division of Economic and Risk Analysis delivered remarks on The Future of Capital Formation.
Monday, April 14, 2014
Omri Y. Marian has posted Reconciling Tax Law and Securities Regulation on SSRN with the following abstract:
Issuers in registered securities offerings are required to disclose, among other tax matters, the expected tax consequences to investors that result from investing in the offered securities (“nonfinancial tax disclosure”). I advance three arguments in this regard. First, nonfinancial tax disclosure practice, as sanctioned by the SEC, does not achieve its intended regulatory purposes. Nonfinancial tax disclosures provide irrelevant information, sometimes fail to provide material information, create unnecessary transactions costs, and divert valuable administrative resources to the enforcement of largely-meaningless requirements. Second, I suggest that the practical reason for this regulatory failure is an unsuccessful attempt by tax practitioners and the SEC to address investors’ heterogeneous tax preferences. Specifically, nonfinancial tax disclosure practice assumes the existence of a “reasonable investor” who is also an “average taxpayer”, and tax disclosures are drafted for the benefit of such average taxpayer. The “average taxpayer”, however, is not a defensible construct. Third, the theoretical reason for the dysfunctionality of the regulatory regime is misapplication of mandatory disclosure theory to tax rules. I argue that given the special nature of tax laws, mandatory disclosure theory — even if accepted at face value — does not support current regulatory framework. To remedy this failure, I describe the types of tax-related disclosures that would be supported by mandatory disclosure theory. Under my suggested regulatory reform, nonfinancial tax disclosure will only include issuer-level tax items, (namely, items at the company level not otherwise disclosed in the financial statements), that affect how “reasonable investors” calculate their own individual tax liabilities. Under such a regime, there is no need to rely on the “average taxpayer” construct.
Robert W. McGee has posted Applying Utilitarian Ethics and Rights Theory to the Regulation of Insider Trading in Transition Economies on SSRN with the following abstract:
The press has given the public the impression that insider trading is evil, unethical and illegal, when in fact such is not always the case. In some cases, insider trading is beneficial to the economy and to shareholders. Whether insider trading is harmful, unethical or illegal depends on many factors.
Policymakers in transition economies are trying to reform their legal and economic systems to more closely reflect those of the developed market economies. However, those policies are often flawed because they tend to outlaw some forms of insider trading that are beneficial to the economy and not unethical in nature. This paper examines recent trends in the regulation of insider trading in transition economies, then applies utilitarian ethics and rights theory to determine which policies are appropriate. More than 35 links to other insider trading articles and World Bank studies are also provided.
Louis R Piccotti has posted An ETF Premium Puzzle and a Market Segmentation Explanation on SSRN with the following abstract:
This paper shows that exchange traded funds (ETFs) persistently trade at a premium to net asset value (NAV) and that market segmentation can explain this puzzling regularity. Tracking error standard deviation is used as the measure of market segmentation. ETFs with larger tracking error standard deviations trade at higher premiums, consistent with the notion that investors are willing to pay a premium to receive liquidity and diversification benefits from holding ETFs rather than the underlying securities directly. These results are robust to investor sentiment effects. Further tests validate that tracking error standard deviation has the desirable properties of a market segmentation measure.
Luca Enriques and Sergio Gilotta have posted Disclosure and Financial Market Regulation on SSRN with the following abstract:
This is a draft chapter for a forthcoming volume, The Oxford Handbook on Financial Regulation, edited by Eilís Ferran, Niamh Moloney, and Jennifer Payne, (Oxford University Press). It provides an overview of the role of mandatory disclosure in financial markets. Focusing mainly on issuer disclosure, we discuss the various goals that academics and policymakers associate to disclosure-based regulatory techniques and the rationales in support of mandatory, as opposed to voluntary, disclosure. We highlight the limits of disclosure as a regulatory technique and the costs – both direct and indirect – it involves. We conclude by addressing a few selected issues that, in our view, are particularly representative of the challenges that today’s policymakers face in the area of mandatory disclosure.
Joan MacLeod Heminway has posted Business Lawyering in the Crowdfunding Era on SSRN with the following abstract:
The advent of crowdfunding (and crowdfund investing, in particular) has put strain on business lawyering. This paper identifies and comments on professional responsibility and professionalism issues in the current rapidly changing business finance and regulatory environment -- an environment in which crowdfunded businesses and projects have become a reality. Traps for the unwary exist in a number of areas ranging from the unlicensed practice of law, through matters of competence and diligence, to compliance with a lawyer's public duties. By appreciating these issues and being attentive to these observations, legal counsel should be better able to engage in productive, valued, ethical lawyering in the crowdfunding era and beyond.
Jerry Brito, Houman B. Shadab, and Andrea Castillo have posted Bitcoin Financial Regulation: Securities, Derivatives, Prediction Markets, & Gambling on SSRN with the following abstract:
The next major wave of Bitcoin regulation will likely be aimed at financial instruments, including securities and derivatives, as well as prediction markets and even gambling. While there are many easily regulated intermediaries when it comes to traditional securities and derivatives, emerging bitcoin-denominated instruments rely much less on traditional intermediaries. Additionally, the block chain technology that Bitcoin introduced for the first time makes completely decentralized markets and exchanges possible, thus eliminating the need for intermediaries in complex financial transactions.
In this article we survey the type of financial instruments and transactions that will most likely be of interest to regulators, including traditional securities and derivatives, new bitcoin-denominated instruments, and completely decentralized markets and exchanges. We find that bitcoin derivatives would likely not be subject to the full scope of regulation under the Commodities and Exchange Act because such derivatives would likely involve physical delivery (as opposed to cash settlement) and would not be capable of being centrally cleared. We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area.
Following the approach to Bitcoin taken by FinCEN, we conclude that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of the regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation.
Sunday, April 13, 2014
Urska Velikonja has posted Public Compensation for Private Harm: Evidence from the SEC's Fair Fund Distributions on SSRN with the following abstract:
The SEC’s primary goal is enforcing compliance with securities laws. Almost as important but less visible is the SEC’s rise as a source of compensation for defrauded investors. The Sarbanes-Oxley Act in 2002 expanded the SEC’s ability to compensate investors by allowing the agency to distribute collected civil fines through fair funds.
Based on a couple of well-known cases, fair fund distributions have been derided as a smaller, feebler version of private securities litigation — a waste of the SEC’s resources on repetitive cases. This is the first empirical study to examine the population of 236 fair funds created between 2002 and 2013, through which the SEC will distribute $14.33 billion to defrauded investors. Contrary to conventional wisdom, the study finds that the SEC’s distributions are neither small nor, for the most part, circular transfers from shareholder victims to themselves. Two-thirds of fair funds compensate investors for what can best be described as consumer fraud or anticompetitive behavior by securities markets intermediaries.
Importantly, the study also reveals that private and public compensation for securities fraud are not coextensive. More than half of the time, the SEC compensates investors for losses where a private lawsuit is either unavailable or impractical. The Article thus exposes the limits of private securities litigation as an investors’ remedy. The rise of public compensation, such as the SEC’s distribution funds, fills a void in securities laws, which leaves many victims with no private remedy.
The following law review articles relating to securities regulation are now available in paper format:
Matthew Aglialoro, Note, The New Group Pleading Doctrine, 99 Cornell L. Rev. 457 (2014).
John Arganbright, Comment, No Loss, No Problem: How the Second Circuit Altered Dura and the Concept of Economic Loss in Securities Fraud Cases in ... (Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 2005; Acticon AG v. China North East Petroleum Holdings, Ltd., 692 F.3d 34, 2012.), 44 Seton Hall L. Rev. 279 (2014).
Charles R. Korsmo, High-Frequency Trading: A Regulatory Strategy, 48 U. Rich. L. Rev. 523 (2014).
Jennifer O'Hare, Synthetic CDOs, Conflicts of Interest, and Securities Fraud, 48 U. Rich. L. Rev. 667 (2014).
Junsun Park, Global Expansion of National Securities Laws: Extraterritoriality and Jurisdictional Conflicts, 12 U.N.H. L. Rev. 69 (2014).
Financial Innovation in a Changing World, Keynote by Ethiopis Tafara; articles by Gabriel V. Rauterberg, Andrew Verstein, W. Mark C. Weidemaier, Mitu Gulati, Galit A. Sarfaty, Philip M. Nichols & Richard C. Smith, 54 Va. J. Int'l L. 1-171 (2013).
Friday, April 11, 2014
Eva Micheler has posted Custody Chains and Remoteness - Disconnecting Investors from Issuers on SSRN with the following abstract:
The article shows that the current market infrastructure systemically prevents investors, both shareholders and bondholders, from exercising their rights against issuers. Equity and debt securities are now normally held through a chain of custodians. These custodians are connected with each other through contract law. There also exists legislation determining the relationship between custodians and their clients.
It will be shown in the paper that custody chains have become independent from investors and issuers. Neither issuers nor investors are able to control the length of the chain or the content of the legal arrangements that governs the custody chain. Custodians are connected through a series of bilateral links that are independent of each other. This erodes the rights of investors. The paper will illustrate this by reference to the liability of custodians for their services and by reference to the ability of custodians to contract with sub-custodians on terms that are independent from the terms that they have entered into with their customers.
Custody chains affect securities markets at a very fundamental level. Securities are a bundle of rights that investor have against issuers. Market participants assume that these rights are enforceable against the issuer. There is always a risk that an issuer defaults and becomes unable to meet claims. Otherwise, however, the market is entitled to expect that its infrastructure will make it possible to enforce claims where an investor takes the view that the issuer does not comply with the terms of an issue.
If the enforcement of claims is significantly compromised this can affect the value of securities. Investors will only enforce claims if the cost of enforcement is outweighed by the benefits. If the market infrastructure is set up in way that makes enforcement systematically very expensive investors will refrain from enforcing claims and that has implication for the value of those claims. This can have systemic implications.
Custody chains not only affect securities values in the portfolios of investors. They also cause problems for issuers. They pose a significant hurdle preventing individual and institutional investors from exercising rights against issuers when they wish to do so and as a result deprive issuers of oversight from the shareholders.
This problem cannot be overcome by contract law, corporate law or property law. The thesis of this paper is that structural reform is required to reduce the number of intermediaries that operate between issuers and investors. A central, direct and transparent mechanism should be created through which investors hold securities. The paper observes that in the past incumbent market participants have lobbying intensively to preserve the exiting structure and predicts that they are likely to oppose any change that will be proposed in the future.
Felix B. Chang has posted The Systemic Risk Paradox: Banks and Clearinghouses Under Regulation on SSRN with the following abstract:
Consolidation in the financial industry threatens competition and increases systemic risk. Recently, banks have seen both high-profile mergers and spectacular failures, prompting a flurry of regulatory responses. Yet consolidation has not been as closely scrutinized for clearinghouses, which facilitate trading in securities and derivatives products. These nonbank intermediaries can be thought of as middlemen who collect deposits to ensure that each buyer and seller has the wherewithal to uphold its end of the deal. Clearinghouses mitigate the credit risks that buyers and sellers would face if they dealt directly with each other.
Yet here lies the dilemma: large clearinghouses reduce credit risk, but they heighten systemic risk since the collapse of one such entity threatens the entire financial system. While the systemic risks posed by large banks have been tackled by regulators, the systemic risks of these nonbank intermediaries have received less attention. In fact, clearinghouses have been cloaked with a regulatory mantle which encourages unchecked growth.
This Article examines the paradoxical treatment of regulators toward the systemic risks of clearinghouses and banks. It explores two fundamental questions: Why does the paradox exist, and who benefits from it? Borrowing from antitrust, this Article offers a framework for ensuring that the entities which control a large clearinghouse (the big banks) do not abuse its market dominance.
Nadelle Grossman has posted The Sixth Commissioner on SSRN with the following abstract:
The federal securities laws grant broad rulemaking authority to the Securities and Exchange Commission (SEC). In promulgating rules, the SEC must not only ensure that its rules protect investors and the public interest, but also consider the effects of its rules on efficiency, competition, and capital formation (the ECCF mandate).
However, the SEC’s rulemaking authority has recently been frustrated. In two decisions striking down SEC rules, the D.C. Circuit held that the ECCF mandate requires a quantitative cost-benefit analysis. This contrasts with the SEC’s historic practice of qualitatively assessing the effects of its rules.
While these D.C. Circuit decisions have been criticized for applying an inappropriately high standard of review to SEC rulemaking, this article identifies a more fundamental problem with these decisions: they interfere with the SEC’s power to administer the securities laws. This interference frustrates administrative law principles that lie at the heart of the division of power among the three branches of government.
Requiring the SEC to engage in a quantitative analysis in rulemaking is especially troubling in a context where the SEC must pass numerous rules under the Dodd-Frank and JOBS Acts. These analyses will surely fail to capture the unquantifiable effects of SEC rules, such as their effect on firm wealth-creating strategic management processes. For these reasons, this article urges the SEC to exert its authority under securities laws and issue an explicit interpretation of the ECCF mandate in a way that best captures the full impact of its rules.
Rui A. Albuquerque, Raquel M. Gaspar and Allen Michel have posted Investment Analysis of Autocallable Contingent Income Securities on SSRN with the following abstract:
Autocallable contingent income securities are a relatively new type of structured finance security that gives investors an opportunity to earn high yields in a low interest environment. We collect data on autocallable contingent income securities listed on SEC’s EDGAR from June of 2009 through June of 2013 and describe the properties of autocallable products and of the underlying assets used. We model a typical autocall and show that the unconditional annualized internal rate of return of such a security is often surprisingly low and highly negatively skewed. Our model predicts that by choosing to write the autocall on underlying securities that trade at high prices and display high volatility, the autocall will generate low rates of return for the investor despite the high offered coupons. We provide evidence that underwriting banks design autocalls in a way consistent with our predictions.
Robert W. McGee and Walter E. Block have posted An Ethical Look at Insider Trading on SSRN with the following abstract:
This paper examines the objections that have been raised with regard to insider trading and applies utilitarian ethics and rights theory to determine when insider trading is ethical and when it is not. It also provides a list for further reading, along with links.
Elisabeth de Fontenay has posted Do the Securities Laws Matter? The Rise of the Leveraged Loan Market on SSRN with the following abstract:
One of the enduring principles of federal securities regulation is the mantra that bonds are securities, while commercial loans are not. Yet the corporate bond and loan markets in the U.S. are rapidly converging, putting significant pressure on the disparity in their regulatory treatment. As securities, corporate bonds are subject to onerous public disclosure obligations and liability regimes, which corporate loans avoid entirely. This longstanding regulatory distinction between loans and bonds is based on the traditional conception of a commercial loan as a long-term relationship between the borrowing company and a single bank, in contrast to bonds, which may be issued to widely dispersed retail investors and are traded in a liquid market. Today, however, not only are loans funded by dispersed, non-bank creditors, but the pricing, terms, participants, and liquidity in the two markets are rapidly converging. Logically, securities regulators should respond to this functional convergence by treating loans and bonds as one and the same. While the regulatory disparity persists, however, it provides a rare natural experiment testing the effectiveness of the securities laws. That the loan market has achieved comparable depth and liquidity to the bond market, even in the absence of mandatory disclosure and robust antifraud provisions, suggests that the securities laws are not doing the work for which they were intended.
Barbara G. Katz and Joel Owen have posted An Evaluation of Shareholder Activism on SSRN with the following abstract:
We develop a method to evaluate shareholder activism when an activist targets firms whose shareholders are diversified portfolio holders of possibly correlated firms. Our method of evaluation takes the portfolios of all of the shareholders, including the activist, as its basis of analysis. We model the activist from the time of the acquisition of a foothold in the target firm through the moment when the activist divests the newly acquired shares. We assume that during this period, all exchanges of securities, and their corresponding prices, are achieved in Walrasian markets in which all participants, including the activist, are risk-averse price-takers. Using the derived series of price changes of all the firms in the market, as well as the derived series of changes in all the portfolio holdings over this period, we evaluate the impact of activism on the activist, on the group of other shareholders, and on the combined group. We show that when activism is beneficial to the activist, the group of other investors may not benefit; furthermore, even when the activist benefits from activism, the value of the market may decrease. When the activist benefits from activism, an increase in the value of the market is a necessary but not sufficient condition for the group of other investors to benefit also from activism. In addition, we show that the combined group, the activist plus the group of other investors, benefits if and only if the value of the market increases and, under this condition, either the activist or the group of other investors, but not necessarily both, benefits.
NASAA President Andrea Seidt’s Remarks at the 2014 SIFMA Compliance and Legal Society Annual Meeting
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending April 11, 2014).