Securities Law Prof Blog

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

Friday, May 31, 2013

Money Market Fund Reform on Agenda for SEC's June 5 Meeting

The SEC will consider money market fund reform again.  Its agenda for its June 5 meeting is:

•The Commission will consider a recommendation to propose amendments to certain rules under the Investment Company Act that govern the operation of money market funds and related amendments to Form PF under the Investment Advisers Act. 


May 31, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Former Broker Charged with Obstructing Justice for Lying to SEC Investigators

The SEC announced that the subject of an enforcement inquiry in Florida has has been criminally charged with obstructing justice and lying to SEC investigators looking into his real estate securities offerings to investors.  

The U.S. Attorney’s Office for the Southern District of Florida has filed criminal charges against former broker Robert J. Vitale.  According to the criminal information filed in U.S. District Court for the Southern District of Florida, the SEC issued subpoenas to Vitale and his investment company Realty Acquisitions & Trust in order to identify investor funds and assets related to the securities offerings. The SEC investigators subpoenaed Vitale for all related bank records and took his sworn testimony.

The criminal information alleges that Vitale lied about the existence of two separate bank accounts that he did not disclose to the SEC. Vitale was charged by the SEC several years ago for participating in a pump-and-dump market manipulation scheme. Vitale later settled the charges in federal district court and was barred from the brokerage industry.

May 31, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Wednesday, May 29, 2013

Financial Capability Survey Finds Many Americans Struggle with Finances

The FINRA Investor Education Foundation released the results of America's State-by-State Financial Capability Survey. The survey features a clickable map of the United States and allows the public, policymakers and researchers to delve into and compare the financial capabilities of Americans across all 50 states and the nation as a whole.  

The State-by-State Financial Capability Survey, which surveyed more than 25,000 respondents, was developed in consultation with the U.S. Department of the Treasury, other federal agencies and the President's Advisory Council on Financial Capability.  It found a significant disparity in financial capability across state lines and demographic groups.

The five measures of financial capability used to rank the states measure how well Americans are managing their day-to-day finances and saving for the future. The national averages among survey respondents for these key measures are below.

Fewer than half (41 percent) of Americans surveyed reported spending less than their income.
Over a quarter (26 percent) of Americans reported having unpaid medical bills.
More than half of Americans (56 percent) do not have rainy-day savings to cover three months of unanticipated financial emergencies.
Over a third of Americans (34 percent) reported paying only the minimum credit card payment during the past year.
On a test of five basic financial literacy questions, the national average was 2.88 correct answers.

 "This survey reveals that many Americans continue to struggle to make ends meet, plan ahead and make sound financial decisions—and that financial literacy levels remain low, especially among our youngest workers. No matter how you slice and dice it, this rich, new dataset underscores the need for us to continue to explore innovative ways to build financial capability among consumers," said FINRA Foundation Chairman Richard Ketchum.



May 29, 2013 in Other Regulatory Action | Permalink | Comments (0) | TrackBack (0)

SEC Charges French Oil & Gas Company with Bribing Iranian Official

The SEC charged France-based oil and gas company Total S.A. with violating the Foreign Corrupt Practices Act (FCPA) by paying $60 million in bribes to intermediaries of an Iranian government official who then exercised his influence to help the company obtain valuable contracts to develop significant oil and gas fields in Iran.  Total, whose securities are publicly traded on the New York Stock Exchange, agreed to pay more than $398 million to settle the SEC’s charges and a parallel criminal matter announced today by the U.S. Department of Justice.

The SEC alleges that Total made more than $150 million in profits through the bribery scheme. Total attempted to cover up the true nature of the illegal payments by entering into sham consulting agreements with intermediaries of the Iranian official and mischaracterizing the bribes in its books and records as legitimate “business development expenses” related to the consulting agreements. Total had inadequate systems to properly review the consulting agreements and lacked sufficient internal controls to comply with federal laws prohibiting bribery.

May 29, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

NASDAQ Pays $10 Million Fine to Settle Facebook Offering Violations

The SEC and NASDAQ settled charges relating to the initial public offering (IPO) and secondary market trading of Facebook shares, with NASDAQ agreeing to settle the SEC’s charges by paying a $10 million penalty – the largest ever against an exchange.

According to the SEC’s order instituting settled administrative proceedings, despite widespread anticipation that the Facebook IPO would be among the largest in history with huge numbers of investors participating, a design limitation in NASDAQ’s system to match IPO buy and sell orders caused disruptions to the Facebook IPO.

NASDAQ then made a series of ill-fated decisions that led to the rules violations.  According to the SEC’s order, several members of NASDAQ’s senior leadership team decided not to delay the start of secondary market trading in Facebook with the expectation that they had fixed the system limitation by removing a few lines of computer code. However, they did not understand the root cause of the problem. NASDAQ’s decision to initiate trading before fully understanding the problem caused violations of several rules, including NASDAQ’s fundamental rule governing the price/time priority for executing trade orders. The problem caused more than 30,000 Facebook orders to remain stuck in NASDAQ’s system for more than two hours when they should have been promptly executed or cancelled.

The SEC’s order also charges NASDAQ’s affiliated third party broker-dealer NASDAQ Execution Services (NES) with failing to maintain sufficient net capital reserves on the day of the Facebook IPO as a result of NASDAQ’s own Facebook trading through the unauthorized error account.

The SEC’s order finds that NASDAQ violated Section 19(g)(1) of the Securities Exchange Act of 1934 by not complying with several of its own rules, and that NES violated Section 15(c)(3) of the Exchange Act and Rule 15c3-1 thereunder by failing to maintain sufficient net capital reserves on May 18, 2012. NASDAQ and NES agreed to a settlement without admitting or denying the SEC’s findings. The order censures NASDAQ and NES, imposes a $10 million penalty on NASDAQ, and requires both NASDAQ and NES to cease and desist from committing or causing these violations and any future violations. The order also requires NASDAQ and NES to complete numerous undertakings.

May 29, 2013 in SEC Action | Permalink | Comments (0) | TrackBack (0)

Sunday, May 26, 2013

Schwartz on Disclosing Corporate Disclosure Policies

Disclosing Corporate Disclosure Policies, by Victoria L. Schwartz, University of Chicago - Law School; Pepperdine University School of Law, was recently posted on SSRN.  Here is the abstract:

Between Steve Jobs’ diagnosis of pancreatic cancer in 2003 and his death in 2011, Apple struggled to respect the privacy of its CEO while disclosing relevant information to its shareholders. The existing rules that govern corporate disclosure were of little help. They offer no mechanism for taking into account privacy considerations; nor do they provide any clear guidance regarding whether, when, and under what circumstances a corporation must disclose personal information about its executives. Existing privacy laws also fail to comprehensively address this problem. This legal void has created widespread uncertainty for executives, corporations, and shareholders. Scholars have also struggled to identify solutions that appropriately account for both privacy and disclosure. Their attempts have been hindered by the difficulty of estimating the respective values of disclosure to investors and of privacy to executives, especially to the extent that the value of privacy varies widely across individuals and depends on the type of personal information.

This Article offers one solution for accounting for this privacy-disclosure problem. First, corporations and executives should contract for a disclosure policy that takes into consideration the individual executive’s privacy preferences. The corporation should then be required to disclose the contracted-for disclosure policy to its shareholders. The use of a contractual menu approach would allow for the possibility of executives’ heterogeneous privacy preferences, while minimizing transaction and other costs of traditional default rules. At the same time, disclosure of the policy allows shareholders to indirectly exert influence on the corporation’s negotiations. In addition, the creation and disclosure of the disclosure policy increases certainty for all the parties involved.

May 26, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Heminway on SEC Reform

Desire, Conservatism, Underfunding, Congressional Meddling, and Study Fatigue: Ingredients for Ongoing Reform at the Securities and Exchange Commission?, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

This article suggests the use of program evaluation -- a branch of social science research designed to assess organizations and their activities -- to analyze continued reform efforts at the Securities and Exchange Commission ("SEC") under Section 967 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 967 compelled the SEC to retain an independent consultant to evaluate and issue a report on its structure and operations and mandated that the SEC engage in post-study reporting to Congress over a two-year period on its implementation of resulting reforms. The article concludes that program evaluation techniques are useful in this context and identifies, based on program evaluation literature, both positive and negative aspects of the study and reporting required under Section 967.

May 26, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Colesanti on Plain English

Demanding Substance or Form? The SEC's Plain English Handbook as a Basis for Securities Violations, by Scott Colesanti, Hofstra University - Maurice A. Deane School of Law, was recently posted on SSRN.  Here is the abstract:

In 1998, the United States Securities and Exchange Commission (“SEC” or “Commission”) released a style manual titled “The Plain English Handbook.” The culmination of a drive by its Chairman, Arthur Levitt, the Handbook drew upon the rules of grammar, best industry practice, and even the support of billionaire Warren Buffett in calling for a layman’s translation of corporate disclosure documents.

To varying degrees, commentators noted the significance of the Handbook. Initial textual studies provided mixed results. The press marveled at its novelty, but securities regulation experts were less sanguine, chiding Commission members for naming themselves “language czars of the universe.”

Meanwhile, the cause of corporate disclosure – a mission long defined by federal case law – continued its second phase as the SEC, the courts, and stock issuers sought to strike a balance between financial expertise and consumer satisfaction. From this effort came the separate but related causes of evaluating substantive content and delivering it in good faith. These causes eventually morphed, however, forcing jurists to locate further authority animating the remedial securities laws. Consequentially the Handbook, at times, tipped this balance of corporate disclosure.

Accordingly, this Article traces the gradual yet impressive growth in importance of a nearly 15-year old exhortation. To be sure, the authoritative value of a style manual is a topic of great moment. In the Fall of 2012, changes implemented by the controversial federal healthcare law required insurers to publish marketing materials in “plain language.” Further, the Commission itself is gradually expanding the Handbook’s application to additional mutual fund disclosures, proxy materials, and investment adviser communications. Those commenting on the rule's primacy will undoubtedly note the lessons of indirect agency rulemaking. Of more immediate consideration, this Article seeks to examine the subtle means by which a call for simplicity may have become grounds for violations of securities law, in the eyes of the government and others. Ultimately, the SEC’s continuing emphasis on simplicity begs the question of which shareholder communications are being read at all.

May 26, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)