Securities Law Prof Blog

Choudhary et al. on Compliance with SEC Disclosure Rules

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.

Roe on Short-Termism

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.

Morley on Separation of Investments and Management

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.

Sitkoff on Fiduciary Obligations of Financial Advisors

The Fiduciary Obligations of Financial Advisors Under the Law of Agency, by Robert H. Sitkoff, Harvard Law School, was recently posted on SSRN.  Here is the abstract:

This paper considers how agency fiduciary law might be applied to a financial advisor with discretionary trading authority over a client's account. It (i) surveys the agency problem to which the fiduciary obligation is directed; (ii) examines the legal context by considering how the fiduciary obligation undertakes to mitigate this problem; and (iii) examines several potential applications of agency fiduciary law to financial advisors, including principal trades and the role of informed consent by the client, organizing the discussion under the great fiduciary rubrics of loyalty and care. This paper was sponsored by Federated Investors, Inc.

Fleischer & Staudt on The Supercharged IPO

The Supercharged IPO, by Victor Fleischer, University of Colorado Law School; University of San Diego, and Nancy C. Staudt, USC Gould School of Law, was recently posted on SSRN.. Here is the abstract:
 
A new innovation on the IPO landscape has emerged in the last two decades, allowing owner-founders to extract billions of dollars from newly-public companies. These IPOs — labeled supercharged IPOs — have been the subject of widespread debate and controversy: lawyers, financial experts, journalists, and Members of Congress have all weighed in on the topic. Some have argued that supercharged IPOs are a “brilliant, just brilliant,” while others have argued they are “underhanded” and “bizarre.”

In this article, we explore the supercharged IPO and explain how and why this new deal structure differs from the more traditional IPO. We then outline various theories of financial innovation and note that the extant literature provides useful explanations for why supercharged IPOs emerged and spread so quickly across industries and geographic areas. The literature also provides support for both legitimate and opportunistic uses of the supercharged IPO.

With the help of a large-N quantitative study — the first of its kind — we investigate the adoption and diffusion of this new innovation. We find that the reason parties have begun to supercharge their IPO is not linked to a desire to steal from naïve investors, but rather for tax planning purposes. Supercharged IPOs enable both owner-founders and public investors to save substantial amounts of money in federal and state taxes. With respect to the spread of the innovation, we find that elite lawyers, especially those located in New York City, are largely responsible for the changes that we observe on the IPO landscape. We conclude our study by demonstrating how our empirical findings can be used to 1) advance the literature on innovation, 2) assist firms going public in the future, and 3) shape legal reform down the road.

Bruner on Director's Duty of Care

Is the Corporate Director's Duty of Care a 'Fiduciary' Duty? Does it Matter?, by Christopher M. Bruner, Washington and Lee University - School of Law, was recently posted on SSRN.  Here is the abstract:

 While reference to "fiduciary duties" (plural) is routinely employed in the United States as a convenient short-hand for a corporate director's duties of care and loyalty, other common-law countries generally treat loyalty as the sole "fiduciary duty." This contrast prompts some important questions about the doctrinal structure for duty of care analysis adopted in Delaware, the principal jurisdiction of incorporation for U.S. public companies. Specifically, has the evolution of Delaware's convoluted and problematic framework for evaluating disinterested board conduct been facilitated by styling care a "fiduciary" duty? If so, then how should Delaware lawmakers and judges respond moving forward?

I argue that styling care a "fiduciary" duty has impacted Delaware's duty of care analysis in ways that are not uniformly positive. Historically, loyalty has been aggressively enforced, while care has hardly been enforced at all - the former approach aiming to deter conflicts of interest through probing analysis of "entire fairness," while the latter aims to promote entrepreneurial risk-taking through a hands-off judicial posture embodied in the business judgment rule. Conflation of these differing concepts as "fiduciary duties," however, has facilitated a tendency toward over-enforcement of care, periodically threatening to impair entrepreneurial risk-taking until arrested by a countervailing legislative or judicial response. Additionally, their conflation threatens to erode the duty of loyalty by fueling the contractarian argument that the sole utility of such "fiduciary duties" is to fill contractual gaps, and that corporations therefore ought to possess latitude to "opt out" of loyalty to the degree already permitted with respect to care.

While I concede that there may be good reasons not to abruptly recharacterize Delaware's duty of care as "non-fiduciary," I conclude that the analytical problems described in this essay can otherwise be remedied only through a statutory provision more clearly distinguishing these differing duties and enforcement strategies. Specifically, I advocate a statutory damages rule declaring once and for all that monetary damages may be imposed on a corporate director for care, but not loyalty, breaches - an approach effectively discarding much of Delaware's multi-layered and convoluted mode of care analysis, while insulating the duty of loyalty from future erosion.

Taub on the London Whale

Jennifer Taub (Vermont Law School) recently posted an insightful blog on the Senate Committee hearing on the JP Morgan Chase London Whale trading loss and the disturbing truths about the post-financial crisis state of risk management controls, too-big-to-fail and regulatory constraints.  Check it out here.

UCincinnati Symposium on Enforcement Practices in the Post-Financial Crisis Era

On March 15 the Corporate Law Center at the University of Cincinnati College of Law presented the 26th Annual Corporate Law Symposium, which focused on Addressing the Challenges of Protecting the Public: Enforcement Practices and Policies in the Post-Financial Crisis Era.  The webcast with be posted on the CLC website in a few days; meanwhile, here's the list of the speakers and the titles of the papers they presented.  The papers will be published in a forthcoming issue of the University of Cincinnati Law Review.

Panel I: Securities Enforcement: the SEC and FINRA
 
Moderator:  Verity Winship
 ■Douglas Branson, SEC Enforcement: A New Era for Broker-Dealer Regulation
 ■Jennifer Johnson, Sinking in the Sea Change?  FINRA and the Regulation of Non-Public Offerings
 ■Renee Jones, Utilizing the Director Bar to Enforce Corporate Accountability
 ■Geoffrey Rapp, An Analysis of the SEC’s New Office of Market Intelligence

Distinguished Guest Speaker: David M. Becker; Cleary, Gottlieb

 
Mr. Becker discussed the challenges facing the SEC from the vantage point of his many years of experience both in private practice and in senior policy positions at the SEC.
 
Panel II: Policy Implications in Public Enforcement
 
Moderator:  Amanda M. Rose
 ■Samuel Buell,  Liability and Admissions of Wrongdoing in Public Enforcement of Law (posted on SSRN)
 ■J.W. Verret, Overcriminalization and its Consequences
 ■Adam Zimmerman, Executive Branch Compensation Settlements      

State Securities Regulation Roundtable
 
A panel discusses cutting-edge issues that especially concern state securities regulators.    

 Moderator: Jennifer Johnson  
 ■Joseph Brady, General Counsel, North American Securities Administrators Association
 ■Chris Naylor, Indiana Securities Commissioner
 ■Andrea L. Seidt, Commissioner, Ohio Dept. of Commerce, Division of Securities

 

Rose & Walker on Cost Benefit Analysis in Financial Regulation

The Importance of Cost-Benefit Analysis in Financial Regulation, by Paul Rose, Ohio State University (OSU) - Michael E. Moritz College of Law, and Christopher J. Walker, Ohio State University (OSU) - Michael E. Moritz College of Law, was recently posted on SSRN.  This is a Report for U.S. Chamber of Commerce & Law and Capital Markets @ Ohio State, 2013.  Here is the abstract:

This report reviews the role, history, and application of cost-benefit analysis in rulemaking by financial services regulators.

For more than three decades — under both Democratic and Republican administrations — cost-benefit analysis has been a fundamental tool of effective regulation. There has been strong bipartisan support for ensuring regulators maximize the benefits of proposed regulations while implementing them in the most cost-effective manner possible. In short, it is both the right thing to do and the required thing to do.

Through the use of cost-benefit analysis in financial services regulation, regulators can determine if their proposals will actually work to solve the problem they are seeking to address. Basing regulations on the best available data is not a legal “hurdle” for regulators to overcome as they draft rules, as some have described it, but rather a fundamental building block to ensure regulations work as intended.

Not only do history and policy justify the use of cost-benefit analysis in financial regulation, but the law requires its use. In a trio of decisions culminating in its much-publicized 2011 decision in Business Roundtable and U.S. Chamber of Commerce v. SEC, the D.C. Circuit has interpreted the statutes governing the Securities and Exchange Commission (SEC) to require the agency to consider the costs and benefits of a proposed regulation. Thus, the SEC’s failure to adequately conduct cost-benefit analysis, the D.C. Circuit has held, violates the Administrative Procedure Act. These judicial decisions have supporters as well as critics. However, the SEC’s response is telling: the SEC did not seek further judicial review, but instead issued a guidance memorandum in March 2012 that embraced virtually all of the instructions the D.C. Circuit had provided in its decisions. It remains to be seen whether the SEC will put its new guidance memorandum into practice.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) only elevates the importance of cost-benefit analysis in financial regulation. By requiring nearly 400 rulemakings spread across more than 20 regulatory agencies, implementing Dodd-Frank is an unprecedented challenge for both regulators and regulated entities. The scale and scope of regulations have made it even more important, despite the short deadlines, for regulators to ensure they adequately consider the effectiveness and consequences of their proposals.

Accordingly, we recommend that all financial services regulators should follow similar protocols found in the SEC guidance memorandum and apply rigorous cost-benefit analysis to improve rulemaking and put in place more effective regulations. These steps also promote good government and improve democratic accountability.

There is widespread agreement that ineffective and outdated financial regulation contributed to the financial crisis. As regulators seek to address that, they must take every reasonable step to ensure that their proposals work. This starts with grounding all proposals in an economic analysis to better achieve the desired benefits and better understand the possible consequences and costs that may result from their actions.

Buell on the White Collar Offender

Is the White Collar Offender Privileged?, by Samuel W. Buell , Duke University School of Law, was recently posted on SSRN.  Here is the abstract:

For at least a decade, and especially since the banking catastrophe, much public commentary has asserted or implied that the American criminal justice system unjustly privileges individuals who commit crimes in corporations and financial markets. This Article demonstrates that this claim is not so, at least not in the ways commonly believed. Law and practice controlling sentencing, evidence, and criminal procedure cannot persuasively be described as privileging the white collar offender. Substantive criminal law makes charges easier to bring and harder to defend against in white collar cases. Enforcement institutions, and the political economy in which they exist, include features that both shelter corporate offenders and heighten their exposure. Corporate actors enjoy a large advantage in legal defense resources relative to others. That advantage, however, does not pay off as measurably as one might expect. Both in general and as applied to recent events in the banking sector, the claim of privilege can be sustained only by showing that basic American arrangements of criminal law and policing have been misguided. A fully developed argument would fault the justice system for failing to treat illegal behavior within firms as requiring omnipresent policing, looser definitions of criminality, the harshest of punishments, and rethinking of rights to counsel. Those who believe corporate offenders are privileged might have a cause. But they should confront the magnitude of their claims. And they should be aware of complications that follow from overreliance on punishment to deal with intractable problems of regulatory control.

Lin on the New Investor

The New Investor, by Tom C. W. Lin, University of Florida - Fredric G. Levin College of Law, was recently posted on SSRN.  Here is the abstract:

 
A sea change is happening in finance. Machines appear to be on the rise and humans on the decline. Human endeavors have become unmanned endeavors. Human thought and human deliberation have been replaced by computerized analysis and mathematical models. Technological advances have made finance faster, larger, more global, more interconnected, and less human. Modern finance is becoming an industry in which the main players are no longer entirely human. Instead, the key players are now cyborgs: part machine, part human. Modern finance is transforming into what this Article calls cyborg finance.

This Article offers one of the first broad, descriptive, and normative examinations of this sea change and its wide-ranging effects on law, society, and finance. The Article begins by placing the rise of artificial intelligence and computerization in finance within a larger social context. Next, it explores the evolution and birth of a new investor paradigm in law precipitated by that rise. This Article then identifies and addresses regulatory dangers, challenges, and consequences tied to the increasing reliance on artificial intelligence and computers. Specifically, it warns of emerging financial threats in cyberspace, examines new systemic risks linked to speed and connectivity, studies law’s capacity to govern this evolving financial landscape, and explores the growing resource asymmetries in finance. Finally, drawing on themes from the legal discourse about the choice between rules and standards, this Article closes with a defense of humans in an uncertain financial world in which machines continue to rise, and it asserts that smarter humans working with smart machines possess the key to better returns and better futures.

Fried on Favoring Long-Term Shareholders

The Uneasy Case for Favoring Long-Term Shareholders, by Jesse M. Fried, Harvard Law School, was recently posted on SSRN.  Here is the abstract:

Proposals to favor long-term shareholders of public firms are based on a widely-held belief: that long-term shareholders, unlike short-term shareholders, benefit from managers maximizing the long-term economic value generated by the firm. This belief, I show, is mistaken. Long-term shareholders, like short-term shareholders, can benefit from managers destroying economic value. My analysis suggests that the case for shifting power from short-term to long-term shareholders is substantially weaker than it might appear.

Bruner on Corporate Purpose in Post-Crisis Financial Firms

Conceptions of Corporate Purpose in Post-Crisis Financial Firms, by Christopher M. Bruner, Washington and Lee University - School of Law, was recently posted on SSRN.  Here is the abstract:

American "populism" has had a major impact on the development of U.S. corporate governance throughout its history. Specifically, appeals to the perceived interests of average working people have exerted enormous social and political influence over prevailing conceptions of corporate purpose - the aims toward which society expects corporate decision-making to be directed. This article assesses the impact of American populism upon prevailing conceptions of corporate purpose - contrasting its unique expression in the context of financial firms with that arising in other contexts - and then examines its impact upon corporate governance reforms enacted in the wake of the financial and economic crisis that emerged in 2007.

I first explore how populism has historically shaped conceptions of corporate purpose in the United States. While the "employee" conceptual category best encapsulates the perceived interests of average working people in the non-financial context, the "depositor" conceptual category best encapsulates their perceived interests in the financial context. Accordingly, American populism has long fostered strong emphasis on the interests of bank depositors, resulting in striking corporate architectural strategies aimed at reducing risk-taking to ensure firm sustainability - notably, imposing heightened fiduciary duties on directors and personal liability on shareholders. I then turn to the crisis, arguing that growing shareholder-centrism over recent decades goes a long way toward explaining excessive risk-taking in financial firms - a conclusion rendering post-crisis reforms aimed at further strengthening shareholders a surprising and alarming development. While populism has remained a powerful political force, it has expressed itself differently in this new environment, fueling a crisis narrative and corresponding corporate governance reforms that not only fail to acknowledge the role of equity market pressures toward excessive risk-taking in financial firms, but that effectively reinforce such pressures moving forward.

I conclude that potential corporate governance reforms most worthy of consideration include those aimed at accomplishing precisely the opposite, which may require resurrecting corporate architectural strategies embraced in the past to reduce risk-taking in financial firms. As a threshold matter, however, we must first grapple effectively with a more fundamental and pressing social and political problem - the popular misconception that financial firms exist merely to maximize stock price for the short-term benefit of their shareholders.

Laby on Regulatory Implications of Morrison

Regulation of Global Financial Firms after Morrison v. National Australia Bank, by Arthur B. Laby, Rutgers University School of Law - Camden, was recently posted on SSRN.  Here is the abstract:

In 2010, the U.S. Supreme Court decided Morrison v. National Australia Bank Ltd., which rewrote the law of extraterritoriality, shattering decades of precedent. After Morrison was decided, Congress, the U.S. Securities and Exchange Commission, and commentators have focused on the case's enforcement implications. This Article is different. This Article focuses not on enforcement but rather on the regulatory implications of the decision, arguing that Morrison calls into question the SEC’s ability to regulate and require registration of non-U.S. domiciled firms. By asserting a strong presumption against extraterritorial application of the securities laws and invalidating the conduct and effects test, the Court overturned doctrines the SEC has relied on for many years when regulating non-U.S. domiciled broker-dealers and investment advisers. These regulatory implications are of paramount importance to the SEC’s regulatory program and to investor protection, but they have gone largely unnoticed in Morrison’s aftermath. The goal of this symposium contribution is to identify the regulatory implications and the challenges they pose.

Coffee on the Future of Insider Trading

Mapping the Future of Insider Trading Law: Of Boundaries, Gaps, and Strategies, by John C. Coffee Jr., Columbia Law School; European Corporate Governance Institute (ECGI); American Academy of Arts & Sciences, was recently posted on SSRN.  Here is the abstract:

The current law on insider trading is arbitrary and unrationalized in its limited scope in a number of respects. For example, if a thief breaks into your office, opens your files, learns material, nonpublic information, and trades on that information, he has not breached a fiduciary duty and is presumably exempt from insider trading liability. But drawing a line that can convict only the fiduciary and not the thief seems morally incoherent. Nor is it doctrinally necessary.

The basic methodology handed down by the Supreme Court in SEC v. Dirks and United States v. O’Hagan dictates (i) that a violation of the insider trading prohibition requires conduct that is 'deceptive' (the term used in Section 10(b) of the Securities Exchange Act of 1934), and (ii) that trading that amounts to an undisclosed breach of a fiduciary duty is 'deceptive.' This formula illustrates, but does not exhaust, the types of duties whose undisclosed breach might also be deemed deceptive and in violation of Rule 10b-5. Many forms of theft or misappropriation of confidential business information could be deemed sufficiently deceptive to violate Rule 10b-5. More generally (and more controversially), the common law on finders of lost property might be used to justify a duty barring recipients from trading on information that has been inadvertently released or released to them without lawful authorization. Still, current law has stopped short of generally prohibiting the computer hacker and other misappropriators who make no false representation.

This article surveys possible means by which to rationalize current law and submits that the SEC can and should expand the boundaries of insider trading by promulgating administrative rules paralleling and extending the rules it issued in 2000 (namely, Rules 10b5-1 and 10b5-2). Specific examples are suggested.

At the same time, this article acknowledges that the goal of reform should not be to achieve parity of information and that there are costs in attempting to extend the boundaries of insider trading to reach all instances of inadvertent release. Deception, it argues, should be the key, both for doctrinal and policy reasons.

Cain & Davidoff on 2012 Takeover Litigation

Takeover Litigation in 2012, by Matthew D. Cain, University of Notre Dame - Department of Finance, and Steven M. Davidoff, Ohio State University (OSU) - Michael E. Moritz College of Law; Ohio State University (OSU) - Department of Finance, was recently posted on SSRN.  Here is the abstract:

Takeover litigation continues to be a much discussed issue in Delaware and among the corporate bar. This report provides preliminary statistics for takeover litigation in 2012. Based on preliminary statistics, takeover litigation continued to be brought at a high rate in 2012. 92% of all transactions experienced litigation. Similar to last year, half of all transactions experienced multi-jurisdictional litigation with the average transaction attracting 5 lawsuits. Median attorneys’ fees for settlements inched slightly higher to $595 thousand per settlement while the average attorneys’ fee declined substantially reflecting a fewer number of large settlements in 2012. Further information and numbers are contained in the report.

McDonnell on Financial Regulatory Cycles

Dampening Financial Regulatory Cycles, by Brett McDonnell, University of Minnesota Law School, was recently posted on SSRN.  Here is the abstract:

Financial regulation should be countercyclical, strengthening during speculative booms to contain excessive leverage and loosening following crises so as to not limit credit extension in hard times. And yet, financial regulation in fact tends to be procyclical, strengthening following crises and loosening during booms. This paper considers competing descriptive and normative analyses of that procyclical tendency. All of the models and arguments considered are rooted in a public choice perspective on financial regulation, i.e. rational choice ideas drawn from economics and applied to politics, but with that perspective modified to take account of behavioralist biases in rationality, particularly the availability bias. That bias helps explain the procyclical tendency in financial regulation, as both the public and regulators ignore the threat of financial crises during boom times and become very focused on that threat when crises actually occur. The normal dominance of concentrated interest groups temporarily shifts as public attention turns to financial regulation following a crisis.

The models considered here, though differ greatly in their normative conclusions, with some mainly criticizing the deregulation which occurs during booms, others mainly criticizing the regulation which occurs following crises, and yet others critical of the timing of both. The models differ in how they understand the balance of interest groups outside of crises and how likely that balance is to lead to outcomes that reflect the public interest, in how well they think the crisis-related public attention can be channeled to reflect the public interest, and in how they analyze the underlying vulnerability of financial institutions and markets and the intellectual difficulty of regulation. After analyzing these differing models, the paper considers historical evidence to try to choose among them, and then considers various administrative mechanisms which might help dampen the procyclical tendencies of financial regulation. Some of the procedures considered include bicameralism and the committee system in Congress, notice-and-comment rulemaking, hard look judicial review, independent agencies, sunset clauses, mandated agency studies, regulatory “contrarians,” and automatic triggers for various rules

Litov et al. on Lawyer-Directors in Public Corporations

Lawyers and Fools: Lawyer-Directors in Public Corporations, by Lubomir P. Litov, University of Arizona - Department of Finance; University of Pennsylvania - Wharton Financial Institutions Center; Simone M. Sepe, University of Arizona - James E. Rogers College of Law; and Charles K. Whitehead, Cornell Law School, was recently posted on SSRN.  Here is the abstract:

The accepted wisdom — that a lawyer who becomes a corporate director has a fool for a client — is outdated. The benefits of lawyer-directors in today’s world significantly outweigh the costs. Beyond monitoring, they help manage litigation and regulation, as well as structure compensation to align CEO and shareholder interests. The results have been an average 9.5 percent increase in firm value and an almost doubling in the percentage of public companies with lawyer-directors.

This Article is the first to analyze the rise of lawyer-directors. It makes a variety of other empirical contributions, each of which is statistically significant and large in magnitude. First, it explains why the number of lawyer-directors has increased. Among other reasons, businesses subject to greater litigation and regulation, and firms with significant intangible assets (such as patents) value a lawyer-director’s expertise. Second, this Article describes the impact of lawyer-directors on corporate monitoring. Among other results, it shows that lawyer-directors are more likely to favor a board structure and takeover defenses that reduce shareholder value — balanced, however, by the benefits of lawyer-directors, such as the valuable advice they can provide. Finally, this Article analyzes the significant reduction in risk-taking and the increase in firm value that results from having a lawyer on the board.

Our findings fly in the face of requirements that focus on director independence. Our results show that board composition — and the training, skills, and experience that directors bring to managing a business — can be as or more valuable to the firm and its shareholders.

Grundfest on Reg FD and Netflix

Regulation FD in the Age of Facebook and Twitter: Should the SEC Sue Netflix?, by Joseph Grundfest,
Stanford University Law School, was recently posted on SSRN.  Here is the abstract:

The Staff of the Securities and Exchange Commission has announced its intention to recommend to the Commission that enforcement proceedings alleging a violation of Regulation FD be instituted against Netflix, Inc. and its CEO, Reed Hastings, because of a posting on Mr. Hastings’ personal Facebook page. Mr. Hastings’ webpage had more than 200,00 followers, including reporters who covered the posting in the traditional press. The posting was also the subject of a tweet by TechCrunch, which has approximately 2.5 million followers on Twitter.

This article is in the form of an amicus Wells Submission suggesting that the Commission would, for nine distinct reasons, be prudent not to initiate an action on the facts of the Netflix posting. In particular, the public record suggests that the posting did not contain material information, was not a selective disclosure, and because of its spread through social media constituted a “broad non-exclusionary distribution” that did not violate Regulation FD. A prosecution would also diverge dramatically from all prior Regulation FD enforcement proceedings, and would violate the Commission’s prior representations not to “second guess” good faith efforts to comply with Regulation FD. In addition, the posting is not inconsistent with the Commission’s 2008 Guidance on the Use of Company Webpages - - guidance that is seriously outdated because of the emergence of social media.

The enforcement action on the facts of the Netflix posting would, moreover, raise serious constitutional questions. Regulation FD is a restraint on truthful speech and, as applied on the facts of a Netflix prosecution, would involve discrimination against social media and in favor of more traditional media channels. There is also doubt that Regulation FD would pass muster as a restraint on commercial speech, particularly in light of the Supreme Court’s recent decision in Sorrell and the Second Circuit’s decision in Caronia. A loss on constitutional grounds would also call into question a large panoply of Commission regulations that act as restraints on truthful speech, including, without limitation, quiet period restrictions and restriction on communications with analysts.

Further, the issuance of the Wells Notice has already chilled the use of social media as a form of corporate communication absent the filing of a Form 8-K with the Commission. It also constitutes a questionable allocation of scarce Commission resources and raises questions that should be addressed through rulemaking and not through prosecution. The submission closes with suggestion for a reformulated Regulation FD that should be better able to pass constitutional muster and that would embrace social media technology rather than confront it.

 

Heminway on Definition of Security Post- JOBS Act

What is a Security in the Crowdfunding Era?, by Joan MacLeod Heminway, University of Tennessee College of Law, was recently posted on SSRN.  Here is the abstract:

With the advent of the crowdfunding era, financial interests in business enterprises may look less like investment instruments commonly known as common stock or debentures, and more like loans, gambling bets, rights to consumable products or services or charitable or other nonprofit donations. A closer look at innovations in interests, instruments and offerings in the crowdfunding era preceding the enactment of the Jumpstart Our Business Startups Act (JOBS Act) offers a basis for comparisons and contrasts that raises questions about the categorization of instruments regulated as securities. These and other questions are important to a rethinking of the structure of financial and financially related regulation in and outside the realm of U.S. securities law.

Specifically, innovations in financial interests and instruments that immediately preceded the JOBS Act raise a number of important questions about regulatory authority and interpretation. How do we classify the instruments that represent complex or hybrid financial interests in business enterprises? What area of regulation should apply to them? Why? What do the answers to those questions tell us, if anything, about the current (and possible future) structure and function of domestic and international financial regulation? This essay preliminarily explores the features of certain financial instruments in an effort to begin to answer these questions by focusing on what a security — a statutory and regulatory category including specific financial instruments — is and should be under federal securities law.