Securities Law Prof Blog

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

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Thursday, July 17, 2014

Chan, Chan & Ho on Insider Trading Law in Hong Kong

Hon Kiu Chan, Raymond Siu Yeung Chan, and Kong Shan John Ho have posted Enforcement of Insider Trading Law in Hong Kong: What Insights Can We Learn from Recent Convictions? on SSRN with the following abstract:

This study analyzes all insider trading cases in Hong Kong since a dual civil and criminal insider trading regime was implemented in 2003. The analysis reveals some significant findings. Firstly, the successful cases prosecuted under the criminal provisions outnumber those brought as civil cases, suggesting that the regulator did not sacrifice the deterrent effect of criminal convictions by using the easier procedures under the civil regime. Secondly, the largest number of insider trading contraventions occurred in 2008 when stock markets around the globe were volatile and had a significant downward adjustment. During this period, many people had significant losses, motivating them to cover their losses by illegal means. Thirdly, the most popular corporate information that triggered insider trading activities came from takeovers, as knowledge of these events before their formal announcements enabled insiders and their tippees to reap handsome profits. Finally, the monetary fines imposed on criminal offenders were generally the same as the actual profits obtained or loss avoided with the purpose of disgorging all their benefits. In contrast, imprisonment was positively related to the notional profit (i.e. the maximum potential profit that the offender could obtain from trading). These findings suggest that regulators need to be more vigilant during economic downturns and to pay particular attention to takeover and share placement activities in listed companies. For senior corporate insiders, and investment bankers and lawyers handling their corporate clients, a clear message emerges from our findings is that it does not pay to get involved in illegal insider trading.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Rapp on SOX and Dodd-Frank

Geoffrey Christopher Rapp has posted Are SOX and Dodd-Frank Securities Laws? The Answer is 'Up in the Air' on SSRN with the following abstract:

This contribution to the 2013 Instittue for Investor Protection Conference poses and addresses the question of whether the whistleblower provisions of SOX and Dodd-Frank raise the same set of policy concerns as private securities litigation, which have undergirded an increasingly skeptical approach from the bench over the past 20 years. Using the Court's recent decision in Lawson v. FMR LLC, the essay argues that the whistleblower provisions of SOX and Dodd-Frank do not raise the same set of concerns that have justified courts' hostile treatment of securities litigation.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Wang & Sallehu on Available-for-Sale Securities of US Banks

Richard Zhe Wang and Menghistu Sallehu have posted The Hidden Message in AFS Securities of US Banks on SSRN with the following abstract:

We examine US banks’ use of available-for-sale (“AFS”) securities to smooth their earnings during the most recent macroeconomic business cycle from 2001 to 2010. We contribute to the accounting literature by investigating the interaction between the macroeconomic environment and the income smoothing activities of US banks, and find four main results: First, our empirical results show evidence that US banks use AFS securities to smooth earnings. Second, we find that the realized gains and losses on AFS securities can predict the future core earnings of a bank, consistent with the signaling hypothesis of income smoothing (e.g. Barnea et al., 1975; Bartov, 1993). Third, we report evidence that US banks are more likely to smooth income when the general macroeconomic environment is favorable (“good times”) than when it is unfavorable (“bad times”). Fourth, our tests demonstrate that the signaling power of AFS securities for future core earnings tend to be higher during bad times than good times.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Bhattacharya & O'Brien on Market Efficiency

Rajeev R. Bhattacharya and Stephen O'Brien have posted Arbitrage Risk and Market Efficiency - Applications to Market Efficiencyon SSRN with the following abstract:

Measuring the efficiency of the market for a stock is important for a number of reasons. For example, it determines the necessity for an investor to acquire expensive additional information about a firm, and it is a critical factor in class certification in a securities class action. We provide a general methodology to measure the arbitrage risk, which is a negative proxy for the market efficiency, of a stock for any relevant period. We apply this methodology to calculate the arbitrage risk of each U.S. exchange-listed common stock for every calendar year from 1988 to 2010. We find that market efficiency is significantly affected by turnover (negatively), the number of market makers for Nasdaq stocks (negatively), and serial correlation in the Capital Asset Pricing Model of the stock (positively). These findings seem inconsistent with “conventional wisdom,” but we show that our findings are consistent with economic logic. The relations between market efficiency and market capitalization (positive), bid-ask spread (negative) and institutional ownership (positive) are consistent with conventional wisdom. The impact on market efficiency of the number of securities analysts following a stock and the public float ratio of a stock are of ambiguous significance.


July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Fisch on Money Market Funds

Jill E. Fisch has posted The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform on SSRN with the following abstract:

Since the 2008 financial crisis, in which the Reserve Primary Fund “broke the buck,” money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis, in part because widespread redemption demands during the days following the Lehman bankruptcy led to a freeze in the credit markets. The response has been to deem MMFs a component of the nefarious shadow banking industry and to target them for regulatory reform.

Determining the appropriate approach to MMF reform has proven difficult. Banks regulators prefer a requirement that MMFs trade at a floating NAV rather than a stable $1 share price. By definition, a floating NAV would prevent future MMFs from breaking the buck, but it is unclear that it would eliminate the risk of large redemptions in a time of crisis. Other reform proposals have similar shortcomings. More fundamentally, pending reform proposals could substantially reduce the utility of MMFs for many investors, which could, in turn, dramatically reduce the availability of short term credit.

The complexity of regulating MMFs has been exacerbated by a turf war among regulators. The Securities and Exchange Commission has battled with bank regulators both about the need for additional reforms and about the structure and timing of any such reforms. Importantly, the involvement of bank regulators has shaped the terms of the debate. To justify their demands for greater regulation, bank regulators have framed the narrative of MMF fragility using banking rhetoric. This rhetoric masks critical differences between banks and MMFs, specifically the fact that, unlike banks, MMF sponsors have assets and operations that are separate from the assets of the MMF itself. Because of this structural difference, sponsor support is not a negative for MMFs but a stability-enhancing feature.

The difference between MMFs and banks provides the basis for a simple yet unprecedented regulatory solution: requiring sponsors of MMFs explicitly to guarantee a $1 share price. Taking sponsor support out of the shadows provides a mechanism for enhancing MMF stability that embraces rather than ignoring the advantage that MMFs offer over banks through asset partitioning.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Bradford on Crowdfunding

C. Steven Bradford has posted Shooting the Messenger: The Liability of Crowdfunding Intermediaries for the Fraud of Others on SSRN with the following abstract:

The new federal crowdfunding exemption in section 4(a)(6) of the Securities Act requires that securities be sold only through regulated intermediaries—brokers and funding portals. Much of the information appearing on those crowdfunding intermediaries’ platforms will be provided by someone other than the intermediary. Crowdfunding intermediaries must post extensive disclosure provided by issuers of the securities being sold. Under the SEC’s proposed rules, they must also provide communication channels where prospective investors and others may post comments.

Neither the statute nor the proposed rules say much about the intermediary’s obligation to verify the information posted by others or its liability if that information is false or misleading. The result under the securities antifraud rules is unclear. Unless the law is clarified, crowdfunding intermediaries face a significant risk of liability that could make crowdfunded securities offerings unfeasible.

I argue that crowdfunding intermediaries should be liable for information provided by others in only three circumstances: (1) if they knew the posted information was false; (2) if they were aware of red flags that should have alerted them to the fraud; or (3) if they recommend a particular security or offering without an adequate investigation.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Mooney on Bankruptcy and Securities Contracts

Charles W. Mooney Jr. has posted The Bankruptcy Code's Safe Harbors for Settlement Payments and Securities Contracts: When Is Safe Too on SSRN with the following abstract:

This Article addresses insolvency law-related issues in connection with certain financial-markets contracts, such as securities contracts, commodity contracts, forward contracts, repurchase agreements (repos), swaps and other derivatives, and master netting agreements. The Bankruptcy Code provides special treatment — safe harbors — for these contracts (collectively, qualified financial contracts or QFCs). This special treatment is considerably more favorable for nondebtor parties to QFCs than the rules applicable to nondebtor parties to other contracts with a debtor. Yet even some strong critics of the safe harbors concede that some special treatment may be warranted. This Article offers a critique of the safe harbor for settlement payments, as interpreted by the courts, and the safe harbor for transfers in connection with securities contracts that is clearly written into the Bankruptcy Code. It provides an overview of the legislative history, describes the scope and operation of the statutory components of the safe harbors, briefly describes the various academic critiques, and offers my general views on revisions that should be made to the safe harbor provisions. It questions the quite expansive interpretation given by some courts to the safe harbor for settlement payments. It then explains how the safe harbor for transfers made in connection with security contracts could be used to protect from the avoidance powers payments and collateralizations of ordinary debt, transactions that have nothing to do with the QFC markets.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Park on Targeted Social Transparency Regimes

Stephen Park has posted Targeted Social Transparency as Global Corporate Strategy on SSRN with the following abstract:

Multinational enterprises (MNEs) are subject to a variety of U.S. laws that require public disclosure of their cross-border activities. Recent years have seen the emergence of mandatory disclosure regimes under U.S. federal securities law with the express purpose of advancing international human rights in the context of geographically-defined, issue-specific non-economic public policy objectives, which I collectively refer to as “targeted social transparency” (or “TST”) regimes. This Article addresses the appeal and shortcomings of mandatory disclosure as a means of regulating global corporate conduct, focusing on the unique challenges posed by TST. Two contemporary examples of TST are analyzed: (i) the “conflict minerals” provisions in the Dodd-Frank Act, which require the disclosure of minerals whose mining is associated with human rights violations in the Democratic Republic of Congo; and (ii) disclosure requirements under the Iran Threat Reduction and Syria Human Rights Act with respect to commercial activities associated with the Iranian government’s suppression of human rights. I present the concept of constructive discourse, which seeks to enhance the effectiveness of mandatory disclosure by addressing two related objectives: (a) how TST can catalyze internally-driven changes in corporate behavior to the mutual benefit of MNEs and stakeholders; and (b) how MNEs can use TST for strategic purposes. Using the concept of constructive discourse, this Article identifies and explores specific ways that TST regimes can shape socially-beneficial, strategically-rational corporate conduct.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Stratmann & Welborn on Short Selling

Thomas Stratmann and John W. Welborn have posted Informed Short Selling in High Fail-to-Deliver Stocks on SSRN with the following abstract:

We find that stocks with high fails-to-deliver (FTDs) experience abnormal negative returns, both in future and present periods. These findings come from both an event study and a portfolio returns analysis using Fama-French factors. They are consistent with previous research documenting that high short interest stocks experience abnormal negative returns. Using proprietary data on stock borrow costs, we also show evidence that short sellers of high FTD stocks, on average, obtain economic profits from their trades. These findings provide support for the hypothesis that high FTD levels reflect a nonbinding short sale constraint that does not restrict informed short selling.

July 17, 2014 | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 16, 2014

Couture on PLRSA Discovery

Wendy Gerwick Couture has posted The PSLRA Discovery Stay Meets Complex Litigation: Five Questions Answered on SSRN with the following abstract:

The Private Securities Litigation Reform Act (“PSLRA”) was enacted nearly 20 years ago in order to combat perceived abuses in private securities litigation. One key provision of the Act is the discovery stay, which applies in any private action under the Securities Act of 1933 or the Securities Exchange Act of 1934 and which states that “all discovery and other proceedings shall be stayed during the pendency of any motion to dismiss.” Congress enacted the discovery stay to prevent the perceived abuses of fishing-expedition and extortive discovery. This stay, which applies in a straightforward fashion in simple cases, raises myriad issues in complex cases with multiple defendants, multiple claims, and staggered briefing schedules. The application of the discovery stay in complex cases is often outcome-determinative because, absent discovery, it is extraordinarily difficult for a plaintiff to meet the PSLRA’s heightened pleading standards. Yet, these complexities are rarely addressed by the appellate courts, leaving the district courts in disarray. In this essay, I seek to answer the following five questions that arise when the PSLRA discovery stay meets complex litigation: (1) When does the discovery stay begin? (2) Does the discovery stay apply to successive motions to dismiss, even if the first motion to dismiss was denied in part? (3) Does the discovery stay apply to 12(c) motions for judgment on the pleadings? (4) Does the discovery stay apply to the entire case, even if only a subset of defendants have pending motions to dismiss? (5) After the discovery stay has been lifted, does the PSLRA prevent the plaintiff from relying on discovered materials to assert additional claims against existing, new, or previously dismissed defendants?

I hope that this essay will help guide litigants and courts as they seek to apply the PSLRA discovery stay in complex litigation. I also hope that this essay will encourage other scholars and commentators to delve into this messy and unsettled, yet frequently outcome-determinative, area of securities litigation.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Dharmapala & Khanna on the JOBS Act

Dhammika Dharmapala and Vikramaditya S. Khanna have posted The Costs and Benefits of Mandatory Securities Regulation: Evidence from Market Reactions to the JOBS Act of 2012 on SSRN with the following abstract:

The effect of mandatory securities regulation on firm value has been a longstanding concern across law, economics and finance. In 2012, Congress enacted the Jumpstart Our Business Startups ("JOBS") Act, relaxing disclosure and compliance obligations for a new category of firms known as "emerging growth companies" (EGCs) that satisfied certain criteria (such as having less than $1 billion of annual revenue). The JOBS Act’s definition of an EGC involved a limited degree of retroactivity, extending its application to firms that conducted initial public offerings (IPOs) between December 8, 2011 and April 5, 2012 (the day the bill became law). The December 8 cutoff date was publicly known prior to the JOBS bill’s key legislative events, notably those of March 15, 2012, when Senate consideration began and the Senate Majority Leader expressed strong support for the bill. We analyze market reactions for EGCs that conducted IPOs after the cutoff date, relative to a control group of otherwise similar firms that conducted IPOs in the months preceding the cutoff date. We find positive and statistically significant abnormal returns for EGCs around March 15, relative to the control firms. This suggests that the value to investors of the disclosure and compliance obligations relaxed under the JOBS Act is outweighed by the associated compliance costs. The baseline results imply a positive abnormal return of between 3% and 4%, and the implied increase in firm value is at least $20 million for an EGC with the median market value in our sample.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Singal & Tayal on Short Selling

Vijay Singal and Jitendra Tayal have posted Does Unconstrained Short Selling Result in Unbiased Security Prices? Evidence from Futures Markets on SSRN with the following abstract:

We examine whether unconstrained short selling can result in unbiased security prices. Since constraints on short selling cannot be eliminated in equity markets, we use trades from futures markets where there is no distinction between short positions and long positions. We find that in those markets, even with unconstrained short selling, there is an upward bias in prices around weekends. The bias is stronger in periods of high volatility when short sellers are unwilling to accept higher levels of risk. On the other hand, riskiness of long positions does not seem to have a similar impact on prices. Thus, evidence in the paper shows that security prices may be biased upwards even without constraints on short selling, with greater overvaluation in the more volatile securities.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Ali, Ramsay & Saunders on Securities Lending

Paul Ali, Ian Ramsay, and Benjamin Saunders have posted Securities Lending, Empty Voting and Corporate Governance on SSRN with the following abstract:

This paper examines the corporate governance implications of securities loans, in particular the impact of securities loans on shareholders’ voting rights and the control of listed Australian companies. The paper considers whether the current regulatory framework for securities loans in Australia adequately addresses the concerns associated with securities loans and whether reform is required in order to protect the interests of shareholders in listed Australian companies and to ensure that the governance of these companies is not undermined by securities loans.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Sulkowski & Waddock on Reporting

Adam J. Sulkowski and Sandra Waddock have posted Beyond Sustainability Reporting: Integrated Reporting is Practiced, Required & More Would Be Better on SSRN with the following abstract:

Ninety-five percent of the Global Fortune 250, along with thousands of other companies worldwide, voluntarily report on their environmental, societal, and economic impacts. The practice is variously known as sustainability reporting, corporate responsibility (CR) reporting, corporate social responsibility (CSR) reporting, citizenship reporting, environmental, societal, and governance (ESG) reporting, or triple bottom line (TBL) reporting. A growing number of countries now mandate or provide guidance related to this practice to some extent. For example, in the United States, the Dodd-Frank Wall Street Reform and Consumer Protection Act explicitly requires publicly traded companies to disclose data related to their supply chains of certain minerals.

Should greater disclosures be explicitly and specifically required? Should companies begin greater disclosures for their own benefit? Do the basic principles of existing laws already require a greater amount of disclosure in our current context? If so, what would be gained from greater and more explicit guidance from legislators or regulators such as the SEC? We seek to answer these questions.

This article summarizes the history, current state, and motivations and impacts of sustainability reporting and regulation-by-disclosure, along with data on the present needs of investors and recent market trends. It also reviews the definition of materiality under U.S. securities laws and regulations – the key to understanding what data a company must publicly disclose for the benefit of investors. Based on our review of recent history, the current needs of investors, and the definition of materiality, it is clear that existing laws and related rules already require greater disclosure of data on environmental and societal impacts than commonly understood. The article concludes with recommendations for managers, their attorneys, accountants, and policymakers, and provokes further questions for constructive scholarship in the fields of business and law.

July 16, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 15, 2014

Hoesli, Kadilli & Kustrim on Real Estate Securities

Martin Hoesli, Anjeza Kadilli, and Reka Kustrim have posted Commonality in Liquidity and Real Estate Securities on SSRN with the following abstract:

We conduct an empirical investigation of the pricing and economic sources of commonality in liquidity in the U.S. REIT market. Taking advantage of the specific characteristics of REITs, we analyze three types of commonality in liquidity: within-asset commonality, cross-asset commonality (with the stock market), and commonality with the underlying property market. We find evidence that the three types of commonality in liquidity are priced in REIT returns but only during bad market conditions. We also find that using a linear approach, rather than a conditional, would have underestimated the role of commonality in liquidity risk. This explains (at least partly) the small impact of commonality on asset prices documented in the extant literature. Finally, our analysis of the determinants of commonality in liquidity favors a demand-side explanation.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Bisetti, Nocera, Favero & Tebaldi on Longevity and Asset Allocation

Emilio Bisetti, Giacomo Nocera, Carlo A. Favero, and Claudio Tebaldi have posted A Multivariate Model of Strategic Asset Allocation with Longevity Risk on SSRN with the following abstract:

This paper proposes a framework to evaluate the impact of longevity-linked securities on the risk-return trade-off for traditional portfolios. Generalized unexpected raise in life expectancy is a source of aggregate risk in the insurance sector balance sheets. Longevity-linked securities are a natural instrument to reallocate these risks by making them tradable in the financial market. This paper extends the strategic asset allocation model of Campbell and Viceira (2005) to include a longevity-linked investment in addition to equity and fixed income securities and describe the resulting term structure of risk-return trade-offs. The model highlights an unexpected predictability pattern of the survival probability estimates. The empirical valuation of the market price of longevity risk, based on prices for standardized annuities publicly offered by US insurance companies, confirms that longevity linked securities offer cheap funding opportunities to asset managers willing to leverage their investment portfolio.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Barry, Hatfield & Kominers on Empty Voting

Jordan M. Barry, John William Hatfield, and Scott Duke Kominers have posted Shareholder Decisionmaking in the Presence of Empty Voting and Hidden Ownership on SSRN with the following abstract:

We consider securities markets in which economic interests in firms and shareholder voting rights are traded independently; such markets allow for "empty voters" who hold voting rights in a firm that exceed their economic interests. We demonstrate that, in such settings, competitive equilibria generally do not exist and may be inefficient even when they do exist. As the competitive equilibrium solution concept does not provide useful predictions in the presence of empty voting, we focus on cooperative game-theoretic "core outcomes." We show that core outcomes always exist, are always efficient, and can be reached from any initial allocation through voluntary trading; moreover, at a core outcome, agents have efficient incentives with regards to information revelation.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Coates on Mergers, Acquisitions, and Restructuring

John C. Coates, IV has posted Mergers, Acquisitions and Restructuring: Types, Regulation, and Patterns of Practice on SSRN with the following abstract:

An important component of corporate governance is the regulation of significant transactions – mergers, acquisitions, and restructuring. This paper (a chapter in Oxford Handbook on Corporate Law and Governance, forthcoming) reviews how M&A and restructuring are regulated by corporate and securities law, listing standards, antitrust and foreign investment law, and industry-specific regulation. Drawing on real-world examples from the world’s two largest M&A markets (the US and the UK) and a representative developing nation (India), major types of M&A transactions are reviewed, and six goals of M&A regulation are summarized – to (1) clarify authority, (2) reduce costs, (3) constrain conflicts of interest, (4) protect dispersed owners, (5) deter looting, asset-stripping and excessive leverage, and (6) cope with side effects. Modes of regulation either (a) facilitate M&A – collective action and call-right statutes – or (b) constrain M&A – disclosure laws, approval requirements, augmented duties, fairness requirements, regulation of terms, process and deal-related debt, and bans or structural limits. The paper synthesizes empirical research on types of transactions chosen, effects of law on M&A, and effects of M&A. Throughout, similarities and differences across transaction types and countries are noted. The paper concludes with observations about what these variations imply and how law affects economic activity.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Steinitz on Securitizing Legal Claims

Maya Steinitz has posted Incorporating Legal Claims on SSRN with the following abstract:

Recent years have seen an explosion of interest in commercial litigation funding which is regarded as a new phenomenon in the United States. Whereas the judicial, legislative and scholarly treatment of litigation finance has regarded litigation finance first and foremost as a form of champerty and sought to regulate it through rules of legal professional responsibility (hereinafter, the ‘legal ethics paradigm’) this Article suggests that the problems created by litigation finance are all facets of the classic problems created by ‘the separation of ownership and control’ that have been a focus of business law since the advent of the corporate form. Therefore, an ‘incorporation paradigm,’ offered here, is more appropriate. ‘Incorporating legal claims’ means conceiving of the claim as an asset with an existence wholly separate from the plaintiff. This can be done by issuing securities tied to litigation proceed rights. Such securities can be issued with or without the use of various business entities.

Indeed, in certain real life deals, previously overlooked by scholars, creative lawyers used securities tied to litigation proceed rights. The Article analyzes and then expands upon such instances of financial–legal innovation suggesting how various business entities can be used to deal with the core challenges presented by the separation of ownership of and control over legal claims. Specifically, the litigation funding problems being addressed by the incorporation of legal claims are (1) extreme agency problems; (2) extreme information asymmetries; (3) extreme uncertainty; and (4) commodification. In addition, the Article discusses how incorporation of legal claims can reduce various costs that litigation imposes in other transactions, such as mergers & acquisitions.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Nelson & Pritchard on Disclosure of Risk Factors

Karen K. Nelson and Adam C. Pritchard have posted Carrot or Stick? The Shift from Voluntary to Mandatory Disclosure of Risk Factors on SSRN with the following abstract:

This study investigates risk factor disclosures under the voluntary, incentive-based disclosure regime provided by the safe harbor provision of the Private Securities Litigation Reform Act and the SEC’s subsequent disclosure mandate. Firms subject to greater litigation risk disclose more risk factors, update the language more from year-to-year, and use more readable language than firms with lower litigation risk. These differences in the quality of disclosure are pronounced in the voluntary disclosure regime, but converge following the SEC mandate. Consistent with these findings, the risk factor disclosures of high litigation risk firms are significantly more informative about systematic and idiosyncratic firm risk when disclosure is voluntary but not when disclosure is mandated. Overall, the results suggest that for some firms voluntary disclosure of risk factors is not a substitute for a regulatory mandate.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Lubben on Clearinghouses

Stephen J. Lubben has posted Nationalize the Clearinghouses! on SSRN with the following abstract:

Given the vital place of clearinghouses in Dodd-Frank, it is perhaps surprising that Dodd-Frank makes no provision for the failure of a clearinghouse. Indeed, it is arguable that the United States is not in compliance with its commitment to the G-20 on this point.

Clearinghouses are presently excluded from the new Orderly Liquidation Authority under title II, title II and titles VII and VIII do not work well together in any event, and the notion that a derivatives clearinghouse might file a regular bankruptcy petition is farcical, given that Congress previously decided to exclude derivatives, and most securities trades, from the most important parts of the Bankruptcy Code. A clearinghouse might file, but there would be little point.

And because clearinghouses are oddly defined as "commodities brokers" under the Bankruptcy Code, they are only permitted to file a chapter 7 liquidation cases.

In this paper I suggest two likely outcomes upon the onset of clearinghouse financial distress. First, Congress will be tempted to adopt an ad hoc statutory solution. The fate of Fannie Mae and Freddie Mac, the two mortgage companies who were placed in a conservatorship in September 2008, shortly after Congress had created that possibility under the Housing and Economic Recovery Act of 2008, looms large here. But ad hoc solutions simply exacerbate uncertainty in times of financial distress, and are subject to litigation risk too. And the sudden creation of a specialized resolution process is really not anything more than a bailout, since any solution will require massive capital injections to save the clearinghouses. Again consider the mortgage companies, and the U.S. Treasury’s large preferred share holdings therein.

So there will be a temptation to engage in direct bailout, despite Dodd-Frank’s claim to have ended bailouts. Bailouts of individual financial institutions may end, but bailouts of clearinghouses might become more common in a post-Dodd-Frank world. Given that most clearinghouses are themselves publicly traded companies, with strong connections to all the major banks, there are good reasons to wonder if we will not simply be bailing out a new type of financial institution in the future.

What to do? I suggest that the government should nationalize the clearinghouses upon failure, and the intention to exercise this option should be made clear ex ante. That is, the government should expressly state that clearinghouses designated under title VIII of Dodd-Frank that ultimately fail will be nationalized, with specific consequences to investors, and an expectation of member participation in the recapitalization of the clearinghouse, once that becomes systemically viable. This should provide stakeholders in the clearinghouses with strong incentives to oversee the clearinghouse’s management, and avoid such a fate.

July 15, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, July 14, 2014

Commissioner Aguilar on Protecting Older Investors

On July 10, 2014 at a meeting of the Investor Advisory Committee in Washington, D.C., Commissioner Luis A. Aguilar delivered remarks on Combating the Financial Exploitation of Older Adults.



July 14, 2014 | Permalink | Comments (0) | TrackBack (0)

This Week in Securities Litigation

New in Print

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

Oscar Bernal, Astrid Herinckx & Ariane Szafarz, Which Short-Selling Regulation Is the Least Damaging to Market Efficiency? Evidence from Europe, 37 Int'l Rev. L. & Econ. 244 (2014).

Latoya C. Brown, Rise of Intercontinental Exchange and Implications of its Merger with NYSE Euronext, 32 J.L. & Com. 109 (2013).

Jeffrey M. Colon, Oil and Water:  Mixing Taxable and Tax-Exempt Shareholders in Mutual Funds, 45 Loy. U. Chi. L.J. 773 (2014).

David Hamid, Note, Substance vs. Form:  Rethinking the Scope of Dodd-Frank's End-User Clearing Exception in Light of Systemic Risk, 12 Cardozo Pub. L. Pol'y & Ethics J. 183 (2013).

Debby Van Geyt, Philippe Van Cauwenberge & Heidi Vander Bauwhede, Does High-Quality Corporate Communication Reduce Insider Trading Profitability?, 37 Int'l Rev. L. & Econ. 1 (2014).

Thomas John Walker, et al., The Role of Aviation Laws and Legal Liability in Aviation Disasters:  A financial Market Perspective, 37 Int'l Rev. L. & Econ. 57 (2014).

Third Annual Institute for Investor Protection Conference: Strategies for Investigating and Pleading Securities Fraud Claims. Introduction by Michael J. Kaufman; keynote address by Mark Whitacre; remarks by Wendy Gerwick Couture and Hon. Jed. S. Rakoff; essay by Geoffrey Christopher Rapp; articles by Gideon Mark, Marc I. Steinberg, Charles W. Murdock, Sharon Nelles, Hilary Huber, Steven A. Ramirez and John M. Wunderlich. 45 Loy. U. Chi. L.J. 525-772 (2014).

July 14, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 8, 2014

Basel Committee on Banking Supervision and IOSCO Task Force Conducts a Survey on Securitization Markets

Details available here.

July 8, 2014 | Permalink | Comments (0) | TrackBack (0)

New in Print

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

Neil Auerbach, The Future of Clean Energy Finance, 20 N.Y.U. Envtl. L.J. 363 (2014).

Chad Bonstead, Comment, Removing the FCPA Facilitation Payments Exception:  Enforcement Tools for a Cleaner Business As Usual, 36 Hous. J. Int'l L. 503 (2014).

Alexandros Seretakis, Taming the Locusts? Embattled Hedge Funds in the E.U., 10 N.Y.U. J.L. & Bus. 115 (2013).

Tyce Walters, Comment, Regulatory Lies and Section 6 (c)(2):  The Promise and Pitfalls of the CFTC's New False Statement Authority, 32 Yale L. & Pol'y Rev. 335 (2013).

July 8, 2014 | Permalink | Comments (0) | TrackBack (0)