February 1, 2010
SEC and UK FSA Heads Meet to Discuss Cooperative Regulation
SEC Chairman Mary Schapiro and UK Financial Services Authority (FSA) Chairman Adair Turner and Chief Executive Hector Sants met in London today as part of the SEC-FSA Strategic Dialogue. The purpose of the Dialogue, established in 2006, is to engage at the senior levels of the two agencies on current matters affecting the U.S. and UK capital markets and areas of future collaboration. This was the fifth meeting of the Dialogue.
Some of the areas of mutual interest discussed during today's meeting included:
- Corporate governance and executive compensation
- Disclosure regimes around client asset risk
- Regulation of hedge funds and investment advisers and the protection of customer assets
- Market infrastructure, particularly relating to central counterparties for OTC derivatives
- Market supervision
- Cooperation on cross-border supervision
According to the SEC's release, cooperative efforts between the staffs of the two agencies are increasing in areas such as oversight of credit rating agencies, hedge fund advisers and the clearing of OTC derivatives. Today's Dialogue meeting also provided the opportunity for the SEC and the FSA to continue discussions in the areas of corporate governance, particularly board risk oversight, and executive compensation. Consistent with the emerging international consensus, both agencies' current efforts seek to address, among other things, the intrinsic links between the types and degree of risk a regulated entity/registrant assumes and their corporate governance and compensation policies.
January 31, 2010
Karmel on Systemic Risk Regulation
The Controversy Over Systemic Risk Regulation, by Roberta S. Karmel, Brooklyn Law School, was recently posted on SSRN. Here is the abstract:
There is widespread support for a systemic risk regulator, in the United States and in Europe, but little agreement on which existing or new organization(s) should assume the task of regulating against systemic risk, the authority such a regulator should have, or the work such a regulator should undertake. In general, the debate about enhanced systemic risk regulation has been about whether central banks or other regulators should be required to assess systemic risk or such an assessment should be the job of others; whether a systemic risk regulator should also be a prudential regulator; and whether the regulator that assesses systemic risk should also have the authority to mandate changes in the financial markets or by financial institutions when dangers to the markets emerge. Much of this debate has been in the form of turf warfare between central banks and other regulators, and therefore the discussions have been less enlightened than one would have hoped given the magnitude of the problems uncovered during the financial meltdown of 2008.
The author believes that any systemic risk regulator should be an independent agency without responsibilities that would conflict with its duties to examine and make recommendations with regard to systemic risks. Accordingly, the author recommends the creation of a new agency, independent of the Executive and Congressional Branches, which could investigate and analyze systemic risks and make recommendations to the President, Congress or individual regulatory agencies, including the Fed, for action. Given the complex structure of the European Union (“EU”), it would seem that a systemic risk regulator for Europe would similarly have to be an advisory body within the framework of the EU. The EU Commission has proposed such a regulator.
This paper discusses what systemic risk is and the various proposals that have been made for a systemic risk regulator in the United States. Also discussed are the conflicts of interest between assessing systemic risk and acting as a prudential regulator. The consideration of similar issues in Europe are also addressed.
Pritchard on Populist Retribution
Populist Retribution and International Competition in Financial Services Regulation, by Adam C. Pritchard
University of Michigan Law School, was recently posted on SSRN. Here is the abstract:
This essay compares the current effort to reform financial services regulation with the regulatory initiatives that come out of the Great Depression. Unlike the 1930s, policymakers today must account for the impact of regulatory competition in crafting responses to the financial crisis. The available evidence suggests that jurisdictional competition is no match for the forces of populist retribution in modern democratic states.
Brummer on International Financial Law
How International Financial Law Works (and How it Doesn't), by Chris Brummer, Georgetown University Law Center, was recently posted on SSRN. Here is the abstract:
The “Great Recession” has given way to a dizzying array of international agreements aimed at strengthening the prudential oversight and supervision of market participants. How these international financial rules operate is, however, deeply misunderstood. Theorists of international law view international financial rules as merely coordinating mechanisms in light of their informal “soft law” quality. Yet these scholars ignore the often steep distributional implications of financial rules that may favor some countries over others and thus fail to explain why soft law would be employed where losers to agreements can strategically defect from their commitments. Meanwhile, political scientists, though aware of the distributional dynamics of financial rule-making, rarely, if ever, examine international law as a category distinct from international politics. Law is instead cast as an inert, dependent variable of power, as opposed to an independent factor that can inform the behavior of regulators and market participants.
This Article presents an alternative theory for understanding the purpose, operation and limitations of international financial law. It posits that international financial regulation, though formally “soft,” is a unique species of cross-border cooperation bolstered by reputational, market and institutional mechanisms that have been largely overlooked by theorists. As a result, it is more coercive than classical theories of international law predict. The Article notes, however, that these disciplinary mechanisms are hampered by a range of structural flaws that erode the “compliance pull” of global financial standards. In response to these shortcomings, the Article proposes a modest blueprint for regulatory reform that eschews more drastic (and impractical) calls for a global financial regulator and instead aims to leverage transparency in ways that more effectively force national authorities to internalize the costs of their regulatory decision-making.
Fox et alia on Short Selling and the News
Short Selling and the News: A Preliminary Report on an Empirical Study, by Merritt B. Fox, Columbia University - Law School, Lawrence R. Glosten, Columbia Business School - Department of Finance & Economics, and Paul C. Tetlock, Columbia Business School, was recently posted on SSRN. Here is the abstract:
This paper examines the so far unexplored relationship between short selling and news. It starts with a theoretical analysis of short selling’s potentially beneficial and harmful effects, a brief history of its regulation and a review of the existing empirical literature. The study that follows uses daily NYSE short sale trading data representing a total of 2.3 million firm days and a measure negativity of firm news based on a content analysis of the Dow Jones Newswires. One major finding is that on trading days when there is an abnormally high level of short selling, there is a heightened level of negative news about the issuer in the non-trading hours that follow. A second finding is that where an issuer is the subject of negative news in the non-trading hours between one trading day and the next, the share price reaction when trading resumes is less pronounced where there has been an abnormally high level of short selling the day before. An analysis of our findings suggests that three news related types of short selling - traders who sell short after obtaining confidential information that an issuer is about to make a negative announcement, traders who sell short and then spread false stories, and traders who, by collecting and analyzing publicly available data, detect that an issuer’s share price exceeds its fundamental value, sell short and then truthfully spread their conclusions - are, in the aggregate, significant relative to the total amount of short selling in the market. This aggregate significance appears to come at least in part from the true and false news spreading types of short selling, not just from short selling based on confidential information concerning an impending corporate announcement.
Davis on the SEC & Foreign Companies
The SEC and Foreign Companies – A Balance of Competing Interests, by Kenneth B. Davis Jr., University of Wisconsin Law School, was recently posted on SSRN. Here is the absract:
Foreign private issuers sell their securities to US investors principally in one of three ways – a public offering registered in the US under the 1933 Act, sales to US qualified institutional buyers under Rule 144A, and offshore transactions within the requirements of Regulation S. US investors also have access to foreign securities through the domestic and international trading markets. The first part of this article examines the evolution, regulation and current importance of each of these investment settings. The inherent mobility of capital, coupled with the dramatic growth of international capital markets over the last two and a half decades, have substantially expanded the opportunity for issuers, financial intermediaries, and investors to shift their activities from jurisdiction to jurisdiction in search of regulatory advantage. This necessarily complicates the task of securities regulators, both in the US and abroad. To identify and evaluate the principal issues that the SEC will likely face in the years ahead, the second part of the article separately considers the (often conflicting) interests of the three U.S. groups with the biggest stakes in the outcome of this process – issuers, investors and the financial services industry.
SEC Expands Insider Trading Charges Against Rajaratnam and Kumar
The United States District Court for the Southern District of New York has authorized the SEC to file a Second Amended Complaint ("SAC"), containing new allegations of insider trading in the securities of two additional companies by Raj Rajaratnam ("Rajaratnam") and Anil Kumar ("Kumar"). The insider trading now alleged in the Commission's enforcement action cumulatively generated more than $52 million in illicit trading profits or losses avoided. The SAC also alleges details of an illicit payment scheme between Rajaratnam and Kumar, in which Rajaratnam paid Kumar for material non-public information that Rajaratnam then used to trade on behalf of his hedge fund, Galleon Management, LP ("Galleon"), generating almost $20 million in illicit profits. From 2003 to October 2009, Rajaratnam paid Kumar $1.75 to $2 million for inside information, and Kumar reinvested some of those funds in a nominee account at Galleon, earning, together with the profits on such reinvestments, a combined total of roughly $2.6 million for his participation in the scheme.
The SEC's initial Complaint, filed on October 16, 2009, alleged that six individuals, including Rajaratnam and Kumar, and two hedge funds, engaged in widespread and repeated insider trading that generated over $25 million in profits. Rajaratnam is the founder and a Managing General Partner of Galleon, a New York hedge fund which at the time had billions of dollars under management. When the complaint was filed, Kumar, a friend of Rajaratnam's and a Galleon investor, was a director at the global consulting firm McKinsey & Co. ("McKinsey"). The Commission's complaint alleged that Rajaratnam unlawfully traded based on inside information involving eight different companies. It further alleged that Kumar acquired material non-public information while working as a McKinsey consultant and passed that information to Rajaratnam, who traded on it. The complaint charged Rajaratnam and Kumar with violations of Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder, and Rajaratnam with violations of Section 17(a) of the Securities Act. On November 5, 2009, the SEC filed a First Amended Complaint charging an additional ten individuals and four entities with illegal insider trading that generated nearly $8 million more in unlawful profits.