Securities Law Prof Blog

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

Saturday, May 26, 2007

Perspectives on The Past Week's Stories

The biggest stories include the SEC's deregulatory efforts on behalf of small companies.  The SEC has been under tremendous pressure to exempt small public companies from SOX section 404.  Instead, on Wednesday, it approved interpretive guidance that it expects will allow for reduced costs in implementing internal controls, particularly at smaller public companies.  The SEC says that companies should focus on what really matters -- risk and materiality.  It also said that smaller companies, which become subject to SOX 404 this year for the first time, should benefit from the "scalability" (I didn't know that was a word!) and flexibility of the new approach.  PCAOB provided similar relief for auditors at its Thursday meeting.

The SEC this week also proposed rules on capital-raising by small companies.  The proposed rules address recommendations made by the SEC's Advisory Committee on Smaller Public Companies and include:  a new system of securities regulation for smaller public companies (up to $75 million in public float); availability of shelf registration to companies with a float below $75 million; and a shortened holding period of six months under Rule 144 for restricted securities.

The other big news item is China's decision to invest in something other than U.S. Treasury bills.  It will purchase $3 billion of non-voting securities in private equity firm The Blackstone Group.  This will constitute a less than 10% stake in the firm, which is going public soon.

May 26, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Dombalagian on Regulating Information

Licensing the Word on the Street: The SEC's Role in Regulating Information, by ONNIG H. DOMBALAGIAN, Tulane Law School, was recently posted on SSRN.  Here is the abstract:

Information is said to be the lifeblood of financial markets. Securities markets rely on corporate disclosures, quotes, prices, and indices, as well as the market structures, products and standards that give them meaning, for the efficient allocation of capital. The availability of and access to such information on reasonable terms is one of the essential characteristics of strong financial markets. And yet because information is a commodity, policymakers must balance the desire to provide access to such public goods against the need to maintain appropriate incentives for information producers.

The Securities and Exchange Commission faces the primary challenge of regulating the balance between the commercial and social value of information in securities markets. In some areas, the Commission has all but extinguished private rights. In other areas, it has deferred to federal or state intellectual property doctrines. In yet other areas, the SEC has created intricate entitlements tailored to historical market structures. Against this backdrop, self-regulatory bodies, securities intermediaries, and other entities have staked out proprietary claims in their information products as permitted by state and federal law.

Today, with the demutualization of the New York Stock Exchange and the Nasdaq Stock Market, as well as the completed and impending mergers of various national and international exchanges, we are rapidly moving away from the paradigm of the dominant national exchange to the reality of competing national and global trading venues. These changes in securities market structure are likely to generate numerous disputes over the allocation of rights and interests in securities information. It is thus increasingly urgent that the Commission articulate some statement of policy to govern the regulation of information rights.

May 26, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Johnson & Brunet on Securiites Arbitration

Substantive Fairness in Securities Arbitration, by JENNIFER J. JOHNSON and EDWARD BRUNET, Lewis & Clark College - Law School, was recently posted on SSRN.  Here is the abstract:

Securities arbitration today is premised on the cliche that arbitrators will apply undefined "fair and equitable" standards of decision. We contend that fairness and equity cannot exist in a vacuum and that the rule of law provides the only sensible standard to guide securities arbitrators. Moreover, we argue that the rule of law provides the legitimizing foundation under which securities arbitration must occur.

We will develop two related propositions in this essay. The first is that to achieve fairness, securities arbitration needs procedures that apply substantive legal principles. We call this the need for substantive fairness.The second proposition, much more embedded in the real world, asserts that application of substantive law occurs sporadically and inconsistently in present-day securities arbitration.

We first set forth a theory of substantive adjudicatory fairness relying on mainstream modern legal philosophers such as John Rawls, Lon Fuller, Harry Jones, and Joseph Raz. In addition to unequivocally advocating a rule of law approach for adjudication, these theorists emphasize the relationship of the application of legal rules to notions of fair notice.

This essay next chronicles and critiques developments regarding standards of decision in modern securities arbitration. We examine the work of securities arbitration administrators and regulators as it relates to the goal of substantive fairness. We show that NASD has equivocated between allowing the arbitrators complete discretion to decide cases on any grounds they choose and providing directives for selected questions that only sometimes facilitate the application of legal principles. NASD has flirted with substantive law but intentionally avoided fully embracing it. We advocate a change in securities arbitration -- that of publically and systematically mandating application of the rule of law in NASD awards. Such a change is long overdue and would facilitate a shift to a fairer, less standardless arbitration of customer-broker dispute resolution.

May 26, 2007 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

A Slow News Day

Both the New York Times and the Wall St. Journal have long articles on big stories that do not, however, contain much new information.  If these stories particularly interest you or you think there's a detail you have missed, the Times highlights the dueling lawsuits at Dow Chemical relating to the conmpany's firing of two executives for allegedly shopping the company to private equity firms without board authorization; see A Duel at Dow Chemical.  The WSJ focuses on former SEC Chief Accountant Lynn Turner's recent departure from Glass Lewis because the firm was sold to a Chinese media company, Xinhua Financial.  Turner learned about the sale when he received an angry phone call from former SEC Chair Arthur Levitt asking Turner about it.  See A Star's Bombshell Exit From Glass Lewis.

May 26, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Prevails in Accounting Fraud Case Involving Insurance

Timothy Harcharik, director of risk management at Brightpoint Inc., was found liable for violating the securities laws because of his involvement in the company's use of insurance to hide the company's losses.  AIG previously settled DOJ and SEC charges that it sold insurance products to companies, including Brightpoint, to inflate earnings.  See NYTimes, S.E.C. Wins Verdict on Insurance Abuse

May 26, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC's Donohue Speaks on Hedge Fund Regulation

Andrew J. Donohue, Director, Division of Investment Management, U.S. Securities and Exchange Commission, spoke at a SIFMA conference on regulatory developments in the hedge fund industry.

May 26, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Friday, May 25, 2007

Overstock Directors Resign Because of Lawsuit

Two directors have now resigned from Inc.'s board of directors because of CEO Patrick Byrnes's $3.5 billion lawsuit against several major brokerage firms alleging a market manipulation scheme that drove down the price of the company's stock.  Ray Groves was the latest, resigning Thursday.  Byrnes calls the lawsuit his "jihad," other executives have spoken out against the lawsuit, including Byrnes's father, who had been chair.  See WSJ, Overstock Director Resigns,Citing Suit Against Brokers.

May 25, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

SEC Investigation into Dow Chemical

Remember the recent firing by Dow Chemical of two longtime executives, Romeo Kreinberg and J. Pedro Reinhard, for allegedly engaging in unauthorized talks to sell the company?  That has led to suits and counter-suits between Dow Chemical and the former executives.  Now the SEC has opened an inquiry into the matter and is also investigating suspicious trading in the stock of both Dow Chemical and DuPont last fall when Dow Chemical was making undisclosed overtures to take over DuPont.  See NYTimes, Investigation Is Said to Open on Dow Chemical.

May 25, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

PCAOB Eases Auditing Standard on internal Controls

PCAOB voted to reduce the costs of auditors' internal controls reviews mandated by Sarbanes Oxley section 404.  The changes are subject to SEC approval, which earlier this week issued management guidance reducing the burdens of complying with section 404.  See WSJ, Sarbanes-Oxley Audit Rules Likely to Ease.

May 25, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

NYSE Proposal to End Broker Voting Excludes Mutual Funds

Last fall the NYSE proposed a controversial change that would change current practice and bar brokers from voting shares when shareholders do not in uncontested directors' elections. Yesterday it announced that it has been revised to exclude mutual funds, in response to objections by the mutual fund industry based on the increased costs that would result from requiring shareholder solicitation to vote.  Smaller companies, however, who raised similar concerns, are not exempted from the proposal.  See WSJ, Mutual Funds Sway NYSE on Vote Plan.

May 25, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

NASDAQ Will Acquire Nordic Exchange

NASDAQ failed in its attempt to buy the London Stock Exchange, so instead it's buying Nordic exchange operator OMX AB?  OMX operates exchanges in Scandanavia and the Baltic region and also operates trading systems for other exchanges, including the Hong Kong exchange.  The acquisition may be a prelude to a renewed effort by NASDAQ to acquire LSE.  See WSJ, For Nasdaq, a Nordic Track.

May 25, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

House Continues Investigation into Sallie Mae Stock Sale

The House Education Committee has been investigating Sallie Mae head Alfred Lord's sale of 400,000 shares in February, just days before President Bush announced cuts in government subsidies and a resulting drop in the stock price.  Yesterday it released a Sallie Mae document disclosing a December meeting between Sallie Mae mid-level executives and government budget officials.  The company maintains that budget cuts were not discussed, Lord was not briefed on the meeting, and the timing of the stock sale was coincidence.  In recent months Sallie Mae agreed to a private equity deal for $25 billion.  It also replaced its CEO Thomas Fitzpatrick in an effort to improve its dealings with the Democratic majority.  See WPost, OMB Talks Preceded Sallie Mae Stock Sale

May 25, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Thursday, May 24, 2007

SEC Proposed Rules for Smaller Company Capital-Raising


On May 23, the Commission proposed a series of six  measures  to  modernize  and  improve  its capital  raising  and reporting requirements for smaller companies. Many  of  the  proposals address key recommendations made by the SEC's  Advisory  Committee  on Smaller Public Companies in its final report. They include:

        * A new  system  of  securities  regulation  for  smaller  public companies that would make scaled regulation available to  a  much larger group of smaller public companies;

        * Modified eligibility requirements so companies  with  a  public float below $75 million can take advantage  of  the  benefits  of shelf registration;

        * A new exemption from Securities Act  registration  requirements for sales of securities to a newly defined category of "qualified purchasers" in which limited advertising would be permitted;

        * Shortened holding periods under Securities  Act  Rule  144  for restricted securities to  reduce  the  cost  of  capital  and  to increase access to capital;

        * New exemptions  for  compensatory  employee  stock  options  so Exchange Act registration requirements  would  not  be  triggered solely by a company's compensation decisions; and

        * Electronic filing of the form filed by companies making private or limited offerings to ease burdens  for  filers  and  make  the information filed more readily available.

May 24, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Roundtable with Former SEC Chairs

I wanted to find out what Chair Cox and five former SEC chairs talked about in last night's Roundtable.  The only account I could find is posted on which says they chatted about international accounting standards and hedge funds and agreed that problems with hedge funds are sure to come.

May 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Corp Fin Guidance Updated

The SEC's Division of Corporation Finance has updated its guidance under Exchange Act Section 16 and Related Rules and Forms.

May 24, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Announces Roundtable on Selective Mutual Recognition

The Securities and Exchange Commission announced today that it will host a roundtable discussion in June on the topic of selective mutual recognition. Selective mutual recognition would involve the SEC permitting certain types of foreign financial intermediaries to provide services to U.S. investors under an abbreviated registration system, provided those entities are supervised in a foreign jurisdiction under a securities regulatory regime substantially comparable (but not necessarily identical) to that in the United States. The roundtable will explore whether selective mutual recognition would benefit U.S. investors by providing greater cross-border access to foreign investment opportunities while preserving investor protection.

The roundtable will take place on June 12, 2007, and will consist of a series of panels designed to reflect the views of different constituencies, including investors, exchanges, and broker-dealers. A separate panel also will consider the issue of how the SEC can best assess regulatory comparability and convergence.

May 24, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Adopts Final Rules under Credit Rating Agency Reform Act

The Securities and Exchange Commission today voted to adopt final rules to implement provisions of the Credit Rating Agency Reform Act of 2006 (Public Law No. 109-291), which was enacted on Sept. 29, 2006. The Credit Rating Agency Reform Act defines the term "nationally recognized statistical rating organization" (NRSRO), provides authority for the Commission to implement registration, recordkeeping, financial reporting, and oversight rules with respect to registered credit rating agencies, and directs the Commission to issue final rules no later than 270 days after its enactment (or by June 26, 2007).

"The goal of this new law is to improve credit ratings quality by fostering competition, accountability, and transparency in the credit rating industry," said SEC Chairman Christopher Cox. "The heart of the Act calls on the Commission to replace the barriers to entry that had previously existed. The replacement is a transparent and voluntary Commission registration system that favors no particular business model."

May 24, 2007 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Dow Jones Director States Opposition to Murdoch Bid

There hasn't been much to report about Rupert Murdoch's bid for Dow Jones lately.  A branch of the Bancroft family (the controlling shareholders, in case anyone has forgotten) called a family meeting for Wednesday to discuss options, but many did not attend.  One of the non-attendees, Christopher Bancroft, who is a Dow Jones director and a trustee of one of the family trusts, made his first public statement about the bid, saying he opposes it because he fears loss of journalistic independence.  See WSJ, Key Dow Jones Holder Cites Opposition To Murdoch Bid.

May 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Qwest Shareholders Vote Down "Say on Pay"

Qwest Communications shareholders voted down three shareholders' proposals relating to executive compensation, including a "say on pay" proposal that was defeated 67% to 20%.  See NYTimes, Qwest Holders Reject Proposals on Pay.

May 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)

Warren Buffett's Search for a Successor Turns into The Apprentice

Austan Goolsbee, economics professor at the University of Chicago Graduate School of Business, has a column in today's New York Times in which he expresses his disillusionment about Warren Buffet.   Mr. Buffett has announced a competition to pick his successor.  The top candidates will have a $5 billion portfolio to manage for two years, and the best performer gets the job.  This defies the empirical evidence that incentives skew performance and makes Mr. Buffett seem as cheesy as Donald Trump.  In addition, Berkshire Hathaway's publicly traded Class B shares have not outperformed the S&P 500, says Professor Goolsbee.  See NYTimes, ‘The Apprentice: Omaha Edition,’ Starring Warren Buffett.

May 24, 2007 in News Stories | Permalink | Comments (0) | TrackBack (0)