Tuesday, May 29, 2007
An excerpt from SEC Chair Cox's April 26 address about convergence of accounting rules at the American Academy in Berlin and the American Chamber of Commerce in Germany:
Let's consider a concrete example: the move that's afoot here in Germany, throughout Europe, and around the world for a truly global set of high quality accounting standards. The vision behind International Financial Reporting Standards is that a single worldwide set of standards will permit investors around the world to benefit from a high level of comparability and a consistently high level of quality in financial reporting. It would eliminate the need for investors and analysts to try to understand financial statements that are prepared using the different accounting standards of many jurisdictions. And it would eliminate one of the significant barriers to raising capital outside one's borders.
IFRS promises to integrate our markets. But that promise is jeopardized if IFRS isn't applied faithfully and consistently across jurisdictions. Regulators must beware the impulse to develop nationally-tailored versions of IFRS, and we must cooperate with one another in implementing
In a Speech to the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition on May 18, Chairman Christopher Cox addressed the prolonged, and not yet concluded, process to adopt bank broker exceptions to implement Gramm-Leach-Bliley, adopted eight years ago.
The Securities and Exchange Commission announced today that it will host a roundtable discussion next month on issues surrounding Rule 12b-1 under the Investment Company Act of 1940. Rule 12b-1 permits mutual funds to use fund assets to finance the distribution of their shares. The roundtable will take place on June 19, 2007, and will consist of panels addressing
the historical circumstances that led to the promulgation of Rule 12b-1, and the original intended purpose of the rule;
the evolution of the uses of Rule 12b-1 and the rule's current role in fund distribution practices;
the costs and benefits of the current use of Rule 12b-1; and
the options for reform or rescission of Rule 12b-1.
NASD today announced that it has fined New York's HSBC Brokerage (HBI) $250,000 for failure to have adequate systems in place to supervise government securities transactions to ensure best execution. In addition, the firm routed orders to HSBC Securities (HSI), an affiliated firm, without taking adequate steps to ensure that customers would not be harmed in the pricing of these securities. HBI's inability to provide documentary evidence of its supervisory review for best execution of trades inhibited NASD's ability to review transactions for best execution. In April 2005, HBI merged with HSI. See NASD Fines HSBC Brokerage for Failure to Supervise Government Securities Transactions for Best Execution.
New York Governor Eliot Spitzer signed an executive order establishing a commission to identify ways for New York to maintain its position as the center of the financial markets. The panel, known as the New York State Commission to Modernize the Regulation of Financial Services, will review all current financial-services statutes, regulations, rules and policies and propose legislative and other necessary changes, Mr. Spitzer's office said Tuesday. WSJ, Spitzer Seeks Review Of Financial Regulations.
Next term the Supreme Court will hear argument, in the Charter Communications case, whether third parties can be liable as primary violators by participating in a scheme to defraud under Rule 10b-5(2), or or they simply aiders and abetters whom private parties cannot sue under Central Banks. Plaintiffs in a similar suit charging the investment banks involved in some Enron financings with fraud have asked the Supreme Court to take up their case as well. In the past few weeks William Lerach, attorney for the plaintiffs in the Enron case, and others have waged an intense lobbying campaign to persuade the SEC to file an amicus brief on the side of the investors. The SEC supported imposing scheme liability on the bankers at the district court level in the the Enron case, but the agency has taken positions contrary to private plaintiffs in Supreme Court amicus briefs in several major recent Supreme Court cases, including Tellabs. See WSJ, SEC's Allegiances Are Put to Test.
The insurance company Aflac is the first company voluntarily to adopt an advisory shareholder vote on executive compensation, beginning in 2009. A Washington Post column says that the company agreed to it because it prides itself on never having had a shareholder's proposal on its proxy statement. The article also highlights some of the votes on "say on pay" proposals at recent shareholders meetings. See WPost, Aflac Looks Smart on Pay.
Monday, May 28, 2007
The Seventh Circuit recently decided, in U.S. v. Evans, that a tippee can be found guilty of insider trading even though the tipper was acquitted in an earlier trial. The tipper was a financial analyst at Credit Suisse who apparently missed the orientation program about confidentiality and talked a lot about his work to his friends. The tippee, a college buddy, traded profitably in stocks of four companies involved in deals that Credit Suisse was working on. At the first trial, the jury acquitted the tipper on both substantive and conspiracy charges and acquitted the tippee on the conspiracy charge, but deadlocked on the substantive charges against the tippee. The government retried the tippee and won a conviction. On appeal the Seventh Circuit recognized the applicability of the Dirks two-part test for tippee liability, which requires, first and foremost, a breach of duty on the part of the insider and, secondly, the tippee's knowledge of the breach (or, at least, he should have known). Since the jury had acquitted the tipper, that would seem to foreclose tippee liability. The court, however, theorized that the tipper could have leaked the information negligently to his friend and thus would have lacked the requisite scienter in leaking the information to his friend. According to the Seventh Circuit, it was not essential to the tippee's conviction that the tipper know that his leaking of confidential information was improper. Indeed, the tippee could have induced the tippee's disclosure and then taken advantage of it, so he can be guilty of insider trading when the tipper is not. Frankly, the court's logic sounds wrong to me. While it is an attractive theory if, for example, the tippee plies the tipper with liquor so that he blurts out the company secrets and the tippee then trades on the information, I don't see how the first requirement of Dirks -- the breach of the duty -- is met. How is this case different from Dirks itself -- where the tippee is off the hook because the tipper is found to have done nothing wrong?
Sunday, May 27, 2007
An abstract of Law and Capitalism: What Corporate Crises Reveal About Legal Systems and Economic Development Around the World , by CURTIS J. MILHAUPT and KATHARINA PISTOR was recently posted on SSRN:
This book explores the relationship between legal systems and economic development by examining, through a methodology we call the institutional autopsy, a series of high profile corporate governance crises around the world over the past six years. We begin by exposing hidden assumptions in the prevailing view on the relationship between law and markets, and provide a new analytical framework for understanding this question. Our framework moves away from the canonical distinction between common law and civil law regimes. It emphasizes the constant, iterative, rolling relationship between law and markets, and suggests that how a given country's legal system rolls with economic changes depends significantly on its organization rather than its formal characteristics or legal origin. We find that legal systems around the world differ significantly along two crucial organizational dimensions: their degree of centralization of the lawmaking and enforcement processes, and the primary function law serves in support of market activity, ranging from protective functions to coordinative functions.
We use this analytical framework to understand why countries as diverse as the United States, Germany, Japan, Korea, China, and Russia have all experienced corporate crises in recent years, and to analyze the different institutional responses to these crises. These case studies provide insights into the diversity of legal systems and institutional arrangements that support capitalist activity over time and across a range of societies. They also suggest that systemic legal change is rarely achieved by changes in formal law alone, but is the result of changes in the composition and identity of core constituencies within a given system who use (or avoid) law to advance their position in the market. Among other things, our study suggests the need for new thinking about how and why legal systems change, the limits of convergence even in a world where national laws increasingly look alike, and a new emphasis on the demand for law in the process of legal adaptation and change.
Insider Trading Treatise (Second Edition) (excerpt from Vol. 1), The Practising Law Institute
SMU Dedman School of Law Legal Studies Research Paper No. 00-1, was recently posted on SSRN. Here is the abstract:
Professors Marc I. Steinberg and William K.S. Wang have coauthored the Second Edition of their Insider Trading Treatise published by The Practising Law Institute. The Treatise provides in depth analysis of the law of insider trading. An excerpt from Chapter One of the Treatise follows and is reprinted with permission of the Practising Law Institute.