Securities Law Prof Blog

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

Thursday, August 23, 2012

SEC Scraps Staff Proposal to Reform Money Market Funds

There will be no money market fund reform anytime soon, as SEC Chairman Schapiro released this statement yesterday:

Three Commissioners, constituting a majority of the Commission, have informed me that they will not support a staff proposal to reform the structure of money market funds. The proposed structural reforms were intended to reduce their susceptibility to runs, protect retail investors and lessen the need for future taxpayer bailouts.

August 23, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 22, 2012

SEC Will Take Up Money Market Funds, Solicitation Rule Next Week

Will the SEC propose next week to reform money market funds?  SEC Chairman Schapiro says changes are necessary to avoid the "break the buck" panic of the last financial crisis, but industry -- and at least two fellow Commissioners -- are opposed.  According to the Wall St. Journal, Commissioner Aguilar is the swing vote, and he's not talking.  WSJ, SEC to Confront the Money-Fund Dilemma

The SEC will also consider proposed rules that would implement the JOBS Act and allow solicitations under Reg D at its August 29 meeting

August 22, 2012 in SEC Action | Permalink | Comments (1) | TrackBack (0)

FAQs from SEC JOBS Act & Research Analysts & Underwriters

Jumpstart Our Business Startups Act: Frequently Asked Questions About Research Analysts and Underwriters, Division of Trading and Markets (August 22, 2012)

In these Frequently Asked Questions (“FAQs”), the Division of Trading and Markets (“staff”) is providing guidance on certain provisions of the Jumpstart Our Business Startups Act (“JOBS Act”) as they affect firms and their obligations with respect to securities analysts (“analysts”) and research reports. These FAQs are not rules, regulations or statements of the Commission. The Commission has neither approved nor disapproved these FAQs.

August 22, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

SEC Adopts Conflict Minerals & Resource Extraction Issuer Rules

The SEC approved today two disclosure rules that are required by Dodd-Frank: (1) the conflict minerals rule and (2) the resource extraction issuer rule.

(1) The conflict minerals rule requires companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country.  Dodd-Frank directed the Commission to issue rules requiring certain companies to disclose their use of conflict minerals that include tantalum, tin, gold, or tungsten if those minerals are “necessary to the functionality or production of a product” manufactured by those companies. Companies are required to provide this disclosure on a new form to be filed with the SEC called Form SD.  The SEC included a Fact Sheet in the release.  Chairman Schapiro's Opening StatementParedes' Dissenting Statement.

(2) The SEC also adopted rules requiring resource extraction issuers to disclose certain payments made to the U.S. government or foreign governments.  Dodd-Frank directed the Commission to issue these rules requiring companies engaged in the development of oil, natural gas, or minerals to disclose the information annually by filing a new form with the SEC called Form SD.

August 22, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

FINRA Fines Rodman & Renshaw for Interactions between Research and Investment Banking

FINRA announced that it fined Rodman & Renshaw LLC $315,000 for supervisory and other violations related to the interaction between the firm's research and investment banking functions. Rodman's former CCO, William A. Iommi Sr., was fined $15,000, suspended from acting in a principal capacity for 90 days and must requalify as a general securities principal.

FINRA found that, because of deficiencies in the firm's supervisory system, there were at least two incidents where a research analyst participated in efforts to solicit investment banking business, and another incident where a research analyst attempted to arrange a payment from a public company. FINRA also sanctioned the two research analysts involved. 

Rodman, the New York-based broker-dealer subsidiary of Direct Markets Holdings Corp., provides investment banking services, including Private Investments in Public Entities (PIPEs) and registered direct offerings, to public and private companies. It also provides research, sales and trading services to institutional investors and therefore must have supervisory and compliance procedures to monitor potential conflicts of interest between research and investment banking, given concerns that research analysts could be pressured to tailor their coverage to the interests of a firm's current or prospective investment banking clients.


August 22, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Tuesday, August 21, 2012

Interview with Professor Frankel on Ponzi Schemes

In case you missed it:  today's New York Times has an extensive interview with Professor Tamar Frankel (Boston University), in which she answers questions about her most recent book, The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims, which explores the psychology of con artists based on her analysis of 100 financial frauds around the world.  NYTimes, Examining the Ponzi Scheme Through the Mind of the Con Artist

August 21, 2012 in News Stories | Permalink | Comments (0) | TrackBack (0)

In Support of Judge Rakoff

Last week I filed, on behalf of a group of securities law scholars, an amicus brief in SEC v. Citigroup Global Markets Inc., in support of the district court's order that refused to approve the proposed settlement between the parties.  In the brief we express our concern about the SEC's settlement practices and the constraints on judicial discretion in approving consent settlements advocated by the parties, which, if adopted by the Second Circuit, will reduce the effectiveness of judicial review as an independent check on agency action. (Download Citigroup AmicusBrief Aug 15)

In addition, yesterday Harvey Pitt, who has served both as SEC Chairman and as its General Counsel, filed an amicus brief in support of Judge Rakoff's order.  Mr. Pitt asserts that the Commmission applies exacting standards before it approves the filing  or settlement of an enforcement action and therefore its attorneys should have no difficulty supplying the court with the information it needs in order to review the proposed consent judgment.  The questions posed by the district court, if answered, would have enabled the court to approve the settlement.  (Download Pitt.AmicusBrief)

August 21, 2012 in Judicial Opinions | Permalink | Comments (1) | TrackBack (0)

SEC Whistleblower Gets $50,000 in First Award

A whistleblower who helped the SEC stop a multi-million dollar fraud will receive nearly $50,000 — the first payout under the whistleblower program authorized by Dodd-Frank.  The award represents 30 percent of the amount collected in an SEC enforcement action against the perpetrators of the scheme, the maximum percentage payout allowed by the whistleblower law.

The award recipient, who does not wish to be identified, provided documents and other significant information that allowed the SEC’s investigation to move at an accelerated pace and prevent the fraud from ensnaring additional victims. The whistleblower’s assistance led to a court ordering more than $1 million in sanctions, of which approximately $150,000 has been collected thus far. The court is considering whether to issue a final judgment against other defendants in the matter. Any increase in the sanctions ordered and collected will increase payments to the whistleblower.


August 21, 2012 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASAA's Top Investor Threats

NASAA released its annual list of financial products and practices that threaten to trap unwary investors. State securities regulators are particularly concerned about two provisions of the recently passed JOBS Act that, NASAA says, "could unwittingly open a floodgate of fraud": the provisions to expand crowdfunding to allow businesses to raise money from investors and to allow the general solicitation and advertising of private placement offers.

The following list of the Top 10 financial products and practices that threaten to trap unwary investors was compiled by the securities regulators in NASAA’s Enforcement Section:

New Threats

Crowdfunding and Internet Offers
Inappropriate Advice or Practices from Investment Advisers
Scam Artists Using Self-Directed IRAs to Mask Fraud
EB-5 Investment-for-Visa Schemes

Persistent Threats

Gold and Precious Metals
Risky Oil and Gas Drilling Programs
Promissory Notes
Real Estate Investment Schemes
Reg D/Rule 506 Private Offerings
Unlicensed Salesmen Giving Liquidation Recommendations

August 21, 2012 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

Monday, August 20, 2012

Kaal on Hedge Fund Manager Registration

Hedge Fund Manager Registration under the Dodd-Frank Act: An Empirical Study, by Wulf A. Kaal, University of St. Thomas, Minnesota - School of Law, was recently posted on SSRN.  Here is the abstract:

For the last three decades, the SEC has repeatedly yet unsuccessfully attempted to register hedge fund managers. Resolving the tension between the industry and regulators regarding the appropriate level of regulatory oversight, the Dodd-Frank Act mandates hedge fund adviser registration as well as increased record-keeping and disclosure. To provide guidance for policy makers, this article presents the results of the first survey study after the SEC’s registration effective date, March 30, 2012.

The author and a team of four research assistants contacted a population of 1,264 private fund advisers that registered with the SEC before the registration effective date. The entire population was approached via fax, in an electronic survey via email, and in phone interviews. Respondents (n=[90]) answered questions designed to evaluate the long-term effect of reporting and disclosure rules on private funds and the private fund industry. The survey questions assess strategic responses of the hedge fund industry, investigate the possible long-term effects of hedge fund registration, quantify compliance cost, assess compliance measures, investigate the implications of disclosure requirements in the Dodd-Frank Act pertaining to hedge funds, evaluate effect of the regulatory regime on assets under management, and assess the effect of the regulatory regime on profitability.

The results reported in this study suggest that the Dodd-Frank Act registration and disclosure requirements and the SEC’s implementation of these requirements create several areas of concern for the hedge fund industry. Despite these concerns, the hedge fund industry appears to be only moderately affected by the Dodd-Frank reporting and disclosure requirements. The industry seems to be adapting well to the regulatory environment after the enactment of the Dodd-Frank Act.

August 20, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bratton & Levitin on SPEs and Scandals

A Transactional Genealogy of Scandal: From Michael Milken to Enron to Goldman Sachs, by William W. Bratton, University of Pennsyvlania Law School; European Corporate Governance Institute (ECGI), and Adam J. Levitin, Georgetown University Law Center, was recently posted on SSRN.  Here is the abstract:

Three scandals have fundamentally reshaped business regulation over the past thirty years: the securities fraud prosecution of Michael Milken in 1988, the Enron implosion of 2001, and the Goldman Sachs “Abacus” enforcement action of 2010. The scandals have always been seen as unrelated. This Article highlights a previously unnoticed transactional affinity tying these scandals together — a deal structure known as the synthetic collateralized debt obligation (“CDO”) involving the use of a special purpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’s accounting and regulatory benefit.

The SPE remains mysterious and poorly understood, despite its use in framing transactions involving trillions of dollars and its prominence in foundational scandals. The traditional corporate alter ego was a subsidiary or affiliate with equity control. The SPE eschews equity control in favor of control through pre-set instructions emanating from transactional documents. In theory, these instructions are complete or very close thereto, making SPEs a real world manifestation of the “nexus of contracts” firm of economic and legal theory. In practice, however, formal designations of separateness do not always stand up under the strain of economic reality.

When coupled with financial disaster, the use of an SPE alter ego can turn even a minor compliance problem into scandal because of the mismatch between the traditional legal model of the firm and the SPE’s economic reality. The standard legal model looks to equity ownership to determine the boundaries of the firm: equity is inside the firm, while contract is outside. Regulatory regimes make inter-firm connections by tracking equity ownership. SPEs escape regulation by funneling inter-firm connections through contracts, rather than equity ownership.

The integration of SPEs into regulatory systems requires a ground-up rethinking of traditional legal models of the firm. A theory is emerging, not from corporate law or financial economics but from accounting principles. Accounting has responded to these scandals by abandoning the equity touchstone in favor of an analysis in which contractual allocations of risk, reward, and control operate as functional equivalents of equity ownership, and approach that redraws the boundaries of the firm. Transaction engineers need to come to terms with this new functional model as it could herald unexpected liability, as Goldman Sachs learned with its Abacus CDO.

August 20, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Krug on Regulation of Mutual Funds

Corporations Beyond Corporate Law, by Anita K. Krug, University of Washington School of Law, was recently posted on SSRN.  Here is the abstract:

U.S. regulation of public investment companies (such as mutual funds) is based on a notion that, from a governance perspective, investment companies are simply another type of business enterprise, not substantially different from companies that produce goods or provide (non-investment) services. In other words, investment company regulation is founded on what this Article calls a “corporate governance paradigm,” in that it provides a significant regulatory role for boards of directors, as the traditional governance mechanism in business enterprises, and is “entity-centric,” focusing on intra-entity relationships to the exclusion of super-entity ones. This Article argues that corporate governance norms, which came to dominate U.S. investment company regulation as a result of the unique history of U.S. investment companies, are poorly-suited to achieve the goals of investment company regulation. In particular, the corporate governance paradigm has given rise to a number of regulatory weaknesses, which stem from investment advisers’ effective control over investment company boards of directors and courts’ deference to state corporate law doctrine in addressing investors’ grievances. Accordingly, investment company regulation should acknowledge that investment companies are not merely another type of business enterprise with the same challenges and tensions arising from the separation of ownership and control that appear in the traditional corporate context. Toward that end, this Article contends that policymakers should view, and regulate, investment companies as an avenue through which investment advisers provide financial services (investment advisory services, in particular) to investors — and should view investment company shareholders more as advisory customers than as equity owners of a firm. This “financial services” model of regulation moves past the entity-focus of corporate governance norms and, therefore, permits dispensing with governance by an “independent” body such as the board of directors. More importantly, if adopted, this model would remedy some of the more significant problems plaguing U.S. investment company regulation.

August 20, 2012 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)