Thursday, April 4, 2013
The Second Circuit recently reviewed a broker-dealer's disclosure obligations to its customers regarding margin maintenance requirements for margin accounts. In WC Capital Management, LLC v. UBS Securities, LLC (Docket No. 11-122-cv, decided Apr. 1, 2013) (Download WCCapitalvWillowCreek), the court held that a broker satisfies its disclosure obligations under Rule 10b-16(a) to disclose "conditions under which additional collateral can be required" when it discloses its generally applicable margin policies regarding the circumstances that may lead it to reevaluate the adequacy of the collateral in a customer's account and also indicates that more specific information about its margin policies is available. In particular, the broker does not have to disclose "the precise, complex formulas it uses to calculate its collateral requirements." Finally, Rule 10b-16(b)-- which requires brokers to provide at least 30 days written notice in advance of "any changes in the terms and conditions under which credit charges will be made" -- does not require the broker to provide advance notice before changing its margin policies. The court specifically did not address whether customers have a private right of action under Rule 10b-16.
The SEC filed an amicus brief in support of UBS's interpretation of Rule 10b-16. It explained that the Rule is purely a disclosure rule that does not require broker-dealers to adopt particular margin policies; it only requires that firms that do adopt such policies provide "useful guidance" to investors. More detailed information about margin policies may not, in fact, be useful to investors because brokerage firms may change their margin policies without notice. Hence, investors are "better served by the disclosure of relevant factors with an explicit warning that the brokerage firms can impose different requirements at any time."
With respect to the Rule 10b-16(b) claim, the court relied on the Rule's plain meaning, as well as the SEC's long-held interpretation, that margin policies and credit charges are two separate concepts.
Tuesday, April 2, 2013
The SEC issued a Report of Investigation over whether Netflix and its CEO Reed Hastings violated Reg FD when Hastings posted corporate information on his personal Facebook page last July. The SEC has determined not to pursue an enforcement action. The report concludes that companies can use social media outlets like Facebook and Twitter to announce key information in compliance with Regulation FD so long as investors have been alerted about which social media will be used to disseminate such information.
According to the report:
The SEC’s report of investigation confirms that Regulation FD applies to social media and other emerging means of communication used by public companies the same way it applies to company websites. The SEC issued guidance in 2008 clarifying that websites can serve as an effective means for disseminating information to investors if they’ve been made aware that’s where to look for it. Today’s report clarifies that company communications made through social media channels could constitute selective disclosures and, therefore, require careful Regulation FD analysis.
The report goes on to state that :
although every case must be evaluated on its own facts, disclosure of material, nonpublic information on the personal social media site of an individual corporate officer — without advance notice to investors that the site may be used for this purpose — is unlikely to qualify as an acceptable method of disclosure under the securities laws. Personal social media sites of individuals employed by a public company would not ordinarily be assumed to be channels through which the company would disclose material corporate information.
Sunday, March 31, 2013
The JOBS Act: Rule 506, Crowdfunding, and the Balance between Efficient Capital Formation and Investor Protection, by Daniel H. Jeng, Boston University School of Law, was recently posted on SSRN. Here is the abstract:
With great fanfare, the Jumpstart Our Business Startups Act, popularly known as the "JOBS Act", passed through Congress and, on April 15, 2012, earned President Obama's approval. This paper offers a review of the Act, delving into its historical background, purpose, and important titles. Title II amends Rule 506 of Regulation D to lift the prohibition of general solicitation and general advertising. Title III enables "equity crowdfunding", a novel and controversial fundraising method. These two titles expand capital formation channels to both accredited investors and to the "ordinary American investor". The struggle to strike the optimal balance between efficient capital formation and strong investor protection animates both Title II and Title III provisions as well as rule-making by the Securities and Exchange Commission. This paper offers four qualities that characterize the "ideal JOBS Act startup": 1) a smaller capital requirement; 2) a shorter timeline for success and product development; 3) a simple fundamental idea and business model; and 4) the elusive human element.
Boards, Auditors, Attorneys, and Compliance with Mandatory SEC Disclosure Rules, by Preeti Choudhary, Georgetown University; Jason D. Schloetzer, Georgetown University - McDonough School of Business; and Jason Sturgess, Georgetown University - Robert Emmett McDonough School of Business, was recently posted on SSRN. Here is the abstract:
We survey the empirical literature on the determinants of firms’ compliance with mandatory SEC disclosure rules. We begin with a discussion of the role of boards of directors, public accounting firms, and corporate attorneys in the preparation and review of mandatory disclosures. We then organize current research into three broad types of variation in compliance: completeness, timeliness, and readability. Our review highlights three interesting areas for future research: (1) studies that examine the relations between completeness, timeliness, and readability within the same research design, (2) studies that assess whether boards of directors, public accounting firms, and corporate attorneys view disclosure compliance as a general firm policy, and (3) studies that investigate the influence of corporate attorneys on mandatory disclosure, as well as studies of disclosure issues that require collaboration between auditors and corporate attorneys. As a first step to address the latter agenda, we provide new empirical evidence regarding the impact of corporate attorneys on disclosure compliance.
Corporate Short-Termism - In the Boardroom and in the Courtroom, by Mark J. Roe, Harvard Law School; European Corporate Governance Institute (ECGI), was recently posted on SSRN. Here is the abstract:
A long-held view in corporate circles has been that furious rapid trading in stock markets has been increasing in recent decades, justifying more judicial measures that shield managers and boards from shareholder influence, so that boards and managers are freer to pursue sensible long-term strategies in their investment and management policies.
Here, I evaluate the evidence in favor of that view and find it insufficient to justify insulating boards from markets further. While there’s evidence of short-term distortions, the view is countered by several under-analyzed aspects of the American economy, each of which alone could trump the board isolation prescription. Together they make the case for further judicial isolation of boards from markets untenable. First, even if the financial markets were, net, short-term oriented, one must evaluate the American economy from a system-wide perspective. As long as venture capital markets, private equity markets, and other conduits mitigate, or reverse, much of any short-term tendencies in public markets, then the purported problem is local but not systemic. Second, the evidence that the stock market is, net, short-termist is inconclusive, with considerable evidence that stock market sectors often overvalue the long term. Third, mechanisms inside the corporation are important sources of short-term distortions and the impact of these internal short-term favoring mechanisms would be exacerbated by further judicial insulation of boards from markets. Fourth, courts are not well positioned to make this kind of basic economic policy, which if determined to be a serious problem is better addressed with policy tools wider than those available to courts. And, fifth, the widely held view that short-term trading has increased dramatically in recent decades may over-interpret the data; the duration for holdings of many of the country’s major stockholders, such as mutual funds like Fidelity and Vanguard, and major pension funds, does not seem to have shortened. Rather, a high-velocity trading fringe has emerged, and its rise affects average holding periods, but not the holding period for the country’s ongoing major stockholding institutions.
The view that stock market short-termism should affect corporate lawmaking fits snugly with two other widely supported views. One is that managers must be isolated from stock markets to run the firm well. Whatever the value of this view, short-termism provides no further support for managerial insulation from financial markets. The insulation argument must stand or fall on its own. Similarly, those who argue that employees, customers, and other stakeholders are due more consideration in corporate governance point to pernicious short-termism to further support their view. Again, the best view of the evidence is that the pro-stakeholder view must stand on its own. It gains no further evidence-based, conceptual support from a purported short-termism in financial markets. Overall, system-wide short-termism in public firms is something to watch for carefully, but not something that today should affect corporate lawmaking.
The Separation of Investments and Management, by John Morley, University of Virginia School of Law, was recently posted on SSRN. Here is the abstract:
This paper suggests a basic shift in the way we think about investment funds. The essence of these funds and their regulation lies not just in the nature of their investments, as is widely supposed, but also and more importantly in the nature of their organization. All types of investment funds — including hedge funds, private equity funds, venture capital funds, mutual funds, exchange-traded funds and closed-end funds — adopt a structure that I term “the separation of investments and management.” Investment enterprises place all of their investment assets into a “fund” with one set of owners, and all of their managers, workers and operational assets into a “management company” or “adviser” with a different set of owners. Investment funds also radically limit investors’ control, sometimes eliminating voting rights and boards of directors entirely. This pattern of organization has never been clearly explained or identified as a common feature of investment funds, but it has often worried and confused commentators and was recently the subject of a case in the U.S. Supreme Court. This paper explains this pattern by showing how it limits fund investors’ control over their managers and exposure to their managers’ profits and liabilities. Investors benefit from these limits for a combination of reasons having to do with exit rights, risk management and the economies of scale that managers can achieve by operating multiple funds. This pattern of organization is a large part of what defines investment funds and animates their regulation.