October 29, 2007
New Trading Rules Go into Effect in EU
New rules that will eliminate many of the barriers to trading securities within the European Union will go into effect this week. The Markets in Financial Instruments Directive (MiFID) is expected to reduce the customers' costs in trading securities, which today are substantially higher in Europe than in the US. In addition, firms will owe their customers a duty of best execution. Firms, however, are complaining about compliance costs. WSJ, New Rules to Cut Hassle, Expense Of Trades in EU.
The Growth of Private Markets and Rule 144A Sales
The proliferation of private securities markets operated by the big investment banks shows the increasing importance of Rule 144A offerings as businesses seek to raise funds through sales of unregistered securities. Multiple underwriters on deals, and investment firms' willingness to participate in offerings in rivals' markets, are also common. The Wall St. Journal asks if it will lead to consolidation of the private markets. WSJ, Rival Bankers Teaming Up In Private Securities Sales.
October 28, 2007
Kaufman on Ethical Standards
Nationalizing Ethical Standards for Securities Lawyers, by MICHAEL J. KAUFMAN, was recently posted on SSRN. Here is the abstract:
In his article, The Corporate/Securities Attorney as a Moving Target - Client Fraud Dilemmas, Marc Steinberg does an outstanding job of identifying the complex and significant ethical issues currently confronting securities lawyers. In this article, I attempt to explore the important legal and political implications of Professor Steinberg's salient points. First, the article places the absence of an independent obligation of an attorney to blow-the-whistle on a client in the context of evolving federal securities law precedent. Although the Seventh Circuit was unwilling to create a federal common law obligation to blow the whistle, other circuits have come close to doing so, creating a patchwork of judicial authority on ethical questions. Second, the article argues that the Sarbanes-Oxley Act, and the SEC Rules promulgated pursuant to its authority, may indeed impose upon attorneys a federal duty to disclose client confidences in certain situations. Third, the article observes that the creation of such a federal duty is consistent with a broader trend in securities law jurisprudence toward the creation of national standards. Finally, the article also suggests that an attorney's breach of the newly-created federal duty to blow-the-whistle on the client could itself give rise to a viable private right of action for securities fraud.
Tsuk Mitchell on Shareholder Democracy
Shareholders as Proxies: The Contours of Shareholder Democracy, by DALIA TSUK MITCHELL, The George Washington University Law School, was recently posted on SSRN. Here is the abstract:
This article explores the long-standing suspicion of the individual shareholder and the corresponding ambivalence about shareholder democracy as it is seen in conversations about the shareholder's role in the modern public corporation throughout the twentieth century.
The article examines two competing conceptions of the shareholder's role in the corporation: one focuses on the role of shareholders as investors, the other emphasizes the role of shareholders as potential participants in corporate management. I argue that scholars and reformers who have conceived of shareholders as investors limited the locus of shareholder democracy to the market. The writings of Louis Brandeis, Henry Manne, and Chancellor Allen offer examples of this vision. At the same time, scholars and reformers who argued that shareholders should have a more active role in corporate management (including William Ripley, Adolf Berle, William Douglas, and the early New Dealers) were reluctant to give shareholders meaningful access to the corporate decision-making processes. They feared not only that shareholders were too passive to participate in corporate management, but also that they could not be trusted to make the correct decisions. For the most part, these scholars ended up using the rhetoric of shareholder democracy (and the shareholders) as a proxy to achieving other goals. In the course of the twentieth century, these scholars' goals shifted from taming the power of the control group to constraining management to legitimating managerial power. More important, because they refused truly to empower shareholders, these scholars' attempts presumably to promote shareholder democracy ultimately emptied the idea of shareholder democracy of content. Gradually, the rhetoric of democracy became an apology for the status quo.
Gross on Securities Arbitration
McMahon Turns Twenty: The Regulation of Fairness in Securities Arbitration, by JILL GROSS, Pace Law School, was recently posted on SSRN. Here is the abstract:
In light of the twentieth anniversary of the Supreme Court's decision in Shearson v. McMahon enforcing a pre-dispute arbitration clause in a brokerage customer's account agreement, the author revisits the asuumptions of the McMahon Court supporting its conclusion that arbitration is fair to investors. The article first explores the various sources of law, including the Federal Arbitration Act, which could require fairness in securities arbitration. The article then examines the Securities and Exchange Commission's oversight of securities arbitration, particularly in the last ten years. The article concludes that the SEC sufficiently regulates the fairness of securities arbitration, and thus the McMahon paradigm appears to be working.
Cunningham on Board Expertise
Rediscovering Board Expertise: Legal Implications of the Empirical Literature, by LAWRENCE A. CUNNINGHAM, George Washington University Law School, was recently posted on SSRN. Here is the abstract:
This paper reviews and draws insights from recent empirical research in financial accounting on the value of director expertise for financial reporting quality. Among important consequences of Sarbanes-Oxley is an increase in the percentage of accounting experts on boards of directors, particularly on audit committees.
The research reviewed here documents the value of this expertise in promoting financial reporting quality measured in terms of “accounting earnings management” (artificial bookkeeping manipulations). These findings contrast with well-known evidence showing little value arising from director independence.
The research holds numerous implications and raises important questions, including the following:
1. It shows that accounting expertise is more valuable than other kinds of financial expertise, suggesting that the SEC should reconsider its definition of this concept.
2. Although accounting earnings management has declined since SOX, real earnings management (substantive business decisions taken to achieve accounting results, like delaying or accelerating investment in a new plant) may be rising. Do audit committee financial experts have a role to play in policing the latter?
3. What role do such experts have in determining the degree of conservatism that a firm uses in its financial reporting, demand for which may differ as among shareholders, bondholders, employees and others?
4. It is customary to see independence and expertise as trade offs. This may be correct when expertise arises from insider status, but incorrect when the expertise is substantive knowledge in a discipline, such as accounting.
5. Law has traditionally encouraged director independence and discouraged expertise but, this research suggests, that may be backwards and certainly requires reconsideration.