Securities Law Prof Blog

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

Friday, March 9, 2012

Investment Advisers Plan Lobbying Efforts Against SRO

I have previously blogged on proposed legislation that would establish a SRO to regulate investment advisers, an initiative that had traction but has stalled in recent months.  Investment advisers generally are opposed to the idea of an SRO and the proposal that FINRA take over the responsibility for examining investment advisers.  The Investment Advisers Association is planning a "lobbying day" for June 7 and encouraging financial advisers to meet with members of Congress to discuss their concerns with the draft SRO bill.  IAA officials are concerned that Senator Bachus may soon issue a revised draft or introduce a formal bill soon.  InvNews, IAA, Finra rivalry hotting up as SRO bill nears

March 9, 2012 in News Stories, Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Thursday, March 8, 2012

SEC Commissioner Suggests Exempting Some Private Fund Advisers

The newest SEC Commissioner, Daniel Gallagher, has been speaking out lately about deregulating or slowing down regulation under Dodd-Frank.  In an address before the Investment Adviser Association Investment Adviser Compliance Conference/2012, he suggested that the SEC consider exempting some private fund advisers from the registration provisions that came in as part of Dodd-Frank since their clients are sophisticated investors that can fend for themselves.

Mr. Gallagher also discussed the extent of “failure to supervise” liability for compliance and legal personnel, an issue that has received much attention lately because of the Commission's 1-1 split in In re Theodore Urban.  He expressed concern that "continuing uncertainty as to the contours of supervisory liability for legal and compliance personnel will have a chilling effect on the willingness of such personnel to provide the level of engagement that firms need and that the Commission wants."



March 8, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Approves Changes to FINRA Rule 4240

The SEC granted accelerated approval to two FINRA proposed rule changes to FINRA Rule 4240, which implements an interim pilot program with respect to margin requirements for certain transactions in credit default swaps:

FINRA Rule 4240 (Margin Requirements for Credit Default Swaps) (limits the application of the rule at this time to certain transactions in credit default swaps that are security-based swaps and to make other revisions to update the rule.) Release No. 34-66527; File No. SR-FINRA-2012-015

FiNRA Rule 4240 (Margin Requirements for Credit Default Swaps) (extend to July 17, 2012 the implementation of FINRA Rule 4240, retroactively from January 17, 2012.) Release No. 34-66528;  

March 8, 2012 | Permalink | Comments (0) | TrackBack (0)

SEC Charges Former Exec at Coca-Cola Enterprises with Insider Trading

The SEC today charged Steve Harrold, a former executive at a Coca-Cola bottling company, with insider trading based on confidential information he learned on the job about potential upcoming business with The Coca-Cola Company.  According to the SEC, Harrold, who was a Vice President at Coca-Cola Enterprises Inc., purchased company stock in his wife’s brokerage account after learning that his company had agreed to acquire The Coca-Cola Company’s bottling operations in Norway and Sweden. The stock price jumped 30 percent when the deal was announced publicly the following day, enabling Harrold to make an illicit $86,850 profit.

Coca-Cola Enterprises is one of the world’s largest marketers, producers and distributors of Coca-Cola products, and its stock trades on the New York Stock Exchange under the stock symbol CCE. The Coca-Cola Company (ticker symbol: KO) develops and sells its products and syrup concentrate to Coca-Cola Enterprises and other bottlers.

The SEC alleges that Harrold, who lives in Los Angeles and London, was informed in early January 2010 that CCE was considering the acquisition of The Coca-Cola Company’s Norwegian and Swedish bottling operations. He signed a non-disclosure agreement requiring him to maintain the confidentiality of any nonpublic information he learned about the potential transaction. Harrold also received an e-mail from CCE’s legal counsel informing him that he was subject to a blackout period and was prohibited from trading in CCE stock “until further notice.”

Nevertheless, the SEC alleges that Harrold purchased 15,000 CCE shares in his wife’s brokerage account on Feb. 24, 2010, the day before the announcement of the transaction with The Coca-Cola Company. The insider trading was based on certain confidential information that Harrold learned in the days leading up to the announcement, including that the transaction was internally valued at more than $800 million and was viewed as creating significant positive growth opportunities for CCE.

March 8, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

House Passes Crowdfunding Legislation

The House passed the JOBS Act (Jumpstart Our Business Startups) by a vote of 390-23 today.  The bill would lift SEC restrictions on soliciting investors and would permit "crowdfunding" to permit entrepreneurs to raise funds from larger pools of small investors.  WPost, House passes jobs legislation

Unfortunately, as I have blogged previously, the legislation does little to protect investors who will receive pitches to invest not only from well-intended small business men, but also fraudsters always looking to prey on the gullible.  Moreover, there is no evidence that these measures will actually promote job growth.  Here is a statement from NASAA, regulators in the field who see the results of fraudulent schemes everyday:

“While well intentioned, the JOBS Act approved today by the House sacrifices essential investor protections without offering any prospects for meaningful, sustainable job growth. NASAA urges the Senate to craft legislation that balances economic growth with the protections that promote the necessary confidence investors must have in financial markets to sustain an economic climate that encourages job creation.

“State securities regulators are acutely aware of today’s difficult economic environment, and its effects on job growth. Small businesses are important to job growth and to improving the economy. However, by placing unnecessary limits on the ability of state securities regulators to protect retail investors from the risks associated with smaller, speculative investments, Congress risks enacting policies that, although intended to strengthen the economy, will likely have precisely the opposite effect.”





March 8, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 7, 2012

GAO Reports on How SIPC Selected Madoff Trustee

GAO released an Interim Report on the Madoff Liquidation Proceeding (GAO-12-14).  According to the report,  it conducted the investigation because:

With the collapse of Bernard L. Madoff Investment Securities, LLC—a broker-dealer and investment advisory firm with thousands of clients—Bernard Madoff admitted to reporting $57.2 billion in fictitious customer holdings. The Securities Investor Protection Corporation (SIPC), which oversees a fund providing up to $500,000 of protection to qualifying individual customers of failed securities firms, selected a trustee to liquidate the Madoff firm and recover assets for its investors. The method the Trustee is using to determine how much a customer filing a claim could be eligible to recover—an amount known as “net equity”—has been the subject of dispute and litigation. This report discusses (1) how the Trustee and trustee’s counsel were selected, (2) why the method for valuing customer claims was chosen, (3) costs of the liquidation, and (4) disclosures the Trustee has made about its progress. GAO examined the Securities Investor Protection Act; court filings and decisions; and SIPC, Securities and Exchange Commission (SEC), and Trustee reports and records. GAO analyzed cost filings and interviewed SIPC, SEC, and SEC Inspector General officials, and the Trustee and his counsel.

GAO recommends that:

SEC should advise SIPC to (1) document its procedures for identifying candidates for trustee or trustee’s counsel, and in so doing, to assess whether additional outreach efforts should be incorporated, and (2) document a process and criteria for appointment of a trustee and trustee’s counsel. SEC and SIPC concurred with our recommendations.



March 7, 2012 in Other Regulatory Action, SEC Action | Permalink | Comments (0) | TrackBack (0)

House Committee Says No More Money for SEC

Republican Members of the House Financial Services Committee voted on March 6 to reject an amendment to fund fully the President's request for the SEC's budget.  The vote was 25 Republicans against the amendment and 17 Democrats in favor of it.  According to a press release by Barney Frank,  

Republican Members spoke out against the amendment, claiming that recent financial scandals demonstrate that the SEC has done an inadequate job and thus doesn’t deserve the funding requested by the Obama administration. 

The SEC's budget has no impact on the government's bottom-line, because it is funded by industry fees.

March 7, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 6, 2012

Schapiro Asks Congress for $1.566 Billion Budget for SEC

SEC Chairman Mary L. Schapiro made her case for the SEC's FY 2013 budget today before the House Subcommittee on Financial Services and General Government Committee on Appropriations, providing additional information on how the SEC would make effective use of the $1.566 billion requested.  The request is an increase of $245 million over the FY 2012 appropriation and would permit the agency to add approximately 676 positions.  In her testimony, she stated:

The resources requested for FY 2013 would allow us to achieve four high-priority initiatives: (1) adequately staff mission-essential activities to protect investors; (2) prevent regulatory bottlenecks as new oversight regimes become operational and existing ones are streamlined; (3) strengthen oversight of market stability; and (4) expand the agency’s information technology systems to better fulfill our mission.

The SEC's funding is fully paid for by collections of fees on securities transactions, so that the agency's budget has no impact on government's bottom line. If Congress approves a lesser amount, the fees are reduced, so there is no excess that goes to Treasury.


March 6, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Stanford Convicted on 13 Counts of Fraud

A jury convicted R. Allen Stanford on 13 out of 14 counts of fraud in connection with a $7 billion Ponzi scheme, following a six-week trial.  He faces a possible life sentence.  His attorney announced there would be an appeal.

NYTimes, Stanford Convicted by Jury in $7 Billion Ponzi Scheme

WSJ, Stanford Guilty in Ponzi Scheme

March 6, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

Sunday, March 4, 2012

Langevoort on Janus and Conservative Securities Jurisprudence

Lies Without Liars? Janus Capital and Conservative Securities Jurisprudence, by Donald C. Langevoort, Georgetown University Law Center, was recently posted on SSRN.  Here is the abstract:

The Supreme Court’s recent Janus Capital case offers a reading of the word “make” in Rule 10b-5 that speaks to ultimate legal authority over the communication in question. This creates the real possibility that we can have lies without liars, an entirely perplexing result in terms of any purposive meaning of the rule. In so holding, Justice Thomas joined a seemingly short list of judges who suggest that legal formalism is a particularly good weapon with which to fight securities fraud. This paper explores Janus through the lens of conservative textualism, which takes us through a much longer intellectual history with respect to secondary liability (well beyond Central Bank of Denver) than is generally acknowledged. It makes two important claims: first, that a better reading of the opinion is one that limits it to private securities litigation, not SEC enforcement, even though the early precedent tilts in the other direction; and second, that Janus also plants seeds for a conservative retrenchment on the meaning of the “in connection with” requirement under Section 10(b) and Rule 10b-5, at least as applied to private securities litigation. It then examines some open questions under the “ultimate authority” test — the ability to reach officers and directors of the issuer, the problem of informal publicity, attribution of knowledge and “scheme” pleading, and considers whether the SEC can overturn Janus on its own by a simple clarifying amendment to its rule.

March 4, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Greenberger on Derivatives Clearing Market

Diversifying Clearinghouse Ownership in Order to Safeguard Free and Open Access to the Derivatives Clearing Market, by Michael Greenberger, University of Maryland Francis King Carey School of Law, was recently posted on SSRN.  Here is the abstract:

Implementing the rigorous governance and ownership standards established in the Dodd-Frank Wall Street Reform and Consumer Protection Act3 for derivatives clearing organizations (DCOs) will promote free and open access to clearing and reduce systemic risk within what is now the $700 trillion notional value derivatives market. Such standards are central to and advance the key regulatory tenants of Dodd-Frank: i.e., to restore transparency, capital adequacy, and accountability to what was the unregulated over-the-counter (OTC) derivatives market by ensuring that swaps are cleared through financially sound DCOs. Also, these rules will promote competition by curtailing large swap dealers‘ (SDs) control over these markets to the disadvantage of swaps users.

This article focuses on the importance of swaps clearing to Dodd-Frank-mandated market reforms and the need for fair and open access to that clearing. Specifically, it shows that implementing objective governance standards for DCOs that include maximum capital requirements for DCO membership will enhance market stability and efficiency. To this end, the article focuses exclusively on clearing as it lies at the heart of Dodd Frank market reforms. Also, although the article discusses the SEC‘s proposed rules on DCO governance and ownership, it primarily focuses on the CFTC‘s rulemaking for DCOs since the CFTC has jurisdiction over 85% of the derivatives market.

The article is divided into four parts. First, it shows that Congress intended the CFTC to adopt rigorous rules regarding DCO governance and ownership that eliminate the conflicts of interest that have allowed SDs to stifle competition for clearing services and to charge unnecessarily high transaction fees. Second, it explains how pre-Dodd-Frank market forces have limited access to clearing. Third, it shows that the CFTC‘s final rule on participant eligibility—particularly the rule establishing a $50 million threshold for DCO membership—promises to both improve swap users‘ access to clearing and ensure greater stability within the derivatives clearing market. Finally, the article argues that the CFTC should strengthen its proposed governance standards for DCOs in order to safeguard swap users‘ access to clearing against the possibility that the CFTC‘s participant eligibility requirements fail to increase DCO membership.

March 4, 2012 in Law Review Articles | Permalink | Comments (1) | TrackBack (0)