Securities Law Prof Blog

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

A Member of the Law Professor Blogs Network

Friday, March 22, 2013

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.

March 22, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, March 17, 2013

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

 

March 17, 2013 in Law Review Articles, Professional Announcements | Permalink | Comments (0) | TrackBack (0)

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.

March 17, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

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.

March 17, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, March 10, 2013

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.

March 10, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

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.

March 10, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

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.

March 10, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Saturday, March 2, 2013

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.

March 2, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Friday, March 1, 2013

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.

March 1, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, February 17, 2013

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.

February 17, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

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

February 17, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

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.

February 17, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, February 3, 2013

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.

 

February 3, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

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.

February 3, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Bainbridge on Reforming LIBOR

Reforming LIBOR: Wheatley versus the Alternatives, by Stephen M. Bainbridge, University of California, Los Angeles (UCLA) - School of Law, was recently posted on SSRN.  Here is the abstract:

The London Interbank Offered Rate (LIBOR) is the trimmed average interest rate for interbank loans by a panel of leading London banks. LIBOR is the most widely used benchmark rate. An estimated $350 trillion in financial products are based on the LIBOR rate.

In late June 2012, a major scandal broke when Barclays PLC — one of the panel banks whose rates went into calculating LIBOR — agreed to pay $453 million in fines to UK and US regulators to settle allegations that Barclays had attempted to manipulate the LIBOR rate. The probe by multiple national regulators around the world quickly spread to include several other global banks.

In response, the United Kingdom’s Chancellor of the Exchequer charged a commission led by Martin Wheatley with conducting an independent review of the setting and usage of LIBOR. In September 2012, Wheatley released a report proposing a comprehensive 10-point reform plan. In October, the UK Government announced that it accepted “the recommendations of Martin Wheatley’s independent review of LIBOR in full.”

Even though Wheatley’s recommendations likely will have been implemented by the time this article appears in print, they are still deserving of analysis. First, changes and amendments may be necessary to further improve the process, perhaps including some of those suggested in this Article. Second, while LIBOR is one of the most important benchmark rates, it is not the only such rate. Some of these other benchmarks are already under scrutiny. Assessing the merits of various LIBOR reforms therefore may be helpful as regulators evaluate whether these other benchmark rates require similar reform.

In light of LIBOR’s systemic importance as a global interest rate benchmark and the compelling evidence of rate manipulation by panel banks, reforming LIBOR was both a political and economic incentive. This Article explores a number of alternatives that were available to the UK government.

The Article concludes that leaving the problem to market forces had failed and, moreover, was politically unfeasible. Switching to a government-supplied alternative benchmark was both impractical and unwise as a policy matter, as was installing a government agency as a replacement for BBA as the LIBOR administrator. Although vesting the LIBOR administrator with sufficiently strong intellectual property rights to ensure an adequate stream of licensing fees to provide adequate incentives for the administrator and panel banks is an important part of a reform package, but — contrary to what some commentators have suggested — is not viable as a stand-alone reform.

In contrast to the alternatives, the Wheatley Review provides a comprehensive reform package that has proven politically attractive and seems likely to significantly enhance LIBOR’s credibility and attractiveness as a interest rate benchmark. To be sure, the Wheatley regime is not perfect. To the contrary, this Article suggests a number of ways in which it can be expanded and improved. Over all, however, the analysis of the Wheatley Review herein strongly suggests that it will prove a viable starting point as a blueprint for reforming LIBOR and other interest rate benchmarks.

February 3, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Saturday, January 26, 2013

Gilson & Gordon On Activist Investors

The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights, by Ronald J. Gilson, Stanford Law School; Columbia Law School, and Jeffrey N. Gordon, Columbia Law School; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

Equity ownership in the United States no longer reflects the dispersed share ownership of the canonical Berle-Means firm. Instead, we observe the reconcentration of ownership in the hands of institutional investment intermediaries, which gives rise to what we call “the agency costs of agency capitalism.” This ownership change has occurred because of (i) political decisions to privatize the provision of retirement savings and to require funding of such provision and (ii) capital market developments that favor investment intermediaries offering low cost diversified investment vehicles. A new set of agency costs arise because in addition to divergence between the interests of record owners and the firm’s managers, there is divergence between the interests of record owners – the institutional investors – and the beneficial owners of those institutional stakes. The business model of key investment intermediaries like mutual funds, which focus on increasing assets under management through superior relative performance, undermines their incentive and competence to engage in active monitoring of portfolio company performance. Such investors will be “rationally reticent” – willing to respond to governance proposals but not to propose them. We posit that shareholder activists should be seen as playing a specialized capital market role of setting up intervention proposals for resolution by institutional investors. The effect is to potentiate institutional investor voice, to increase the value of the vote, and thereby to reduce the agency costs we have identified. We therefore argue against recent proposed regulatory changes that would undercut shareholder activists’ economic incentives by making it harder to assemble a meaningful toe-hold position in a potential target.

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

Friday, January 25, 2013

Wrona on Standards of Conduct for Investment Advisers and Broker-Dealers

The November 2012 issue of The Business Lawyer features an article entitled The Best of Both Worlds: A Fact-Based Analysis of the Legal Obligations of Investment Advisers and Broker-Dealers and a Framework for Enhanced Investor Protection by James S. Wrona, Vice President and Associate General Counsel at FINRA.   The author provides an indepth analysis of the development of the standards of conduct for investment advisers and broker-dealers and the current debate that is usually referred to the dichotomy between the fiduciary standard required of investment advisers and the suitability standard applicable to broker-dealers.  The article concludes with a framework for robust investor protection and recommends additional obligations on both financial advice providers "to achieve truly universal standards of conduct that are in investors' best interests."  The citation is 68 Bus. Law. 1 (2012), and it is available in hard copy or at the ABA website.

January 25, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Sunday, January 20, 2013

Sjostrom on Private Placement Regulation

Rebalancing Private Placement Regulation, by William K. Sjostrom Jr., University of Arizona - James E. Rogers College of Law, was recently posted on SSRN.  Here is the abstract: 

The Article examines the investor protection/capital formation balance with respect to private placements of securities. Specifically, it details various rule changes that were implemented over the years to enhance capital formation and other events that have occurred over the same timeframe that have weakened investor protection. The Article submits that the latest round of capital formation enhancements has tilted the balance too far in favor of capital formation and away from investor protection, especially given the size of the private placement market today. Hence, the Article puts forth a proposal for strengthening private placement investor protection. The proposal is meant to serve as a starting point for debate if policy makers conclude rebalancing is needed.

January 20, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Colesanti on Rajaratnam Conviction

Wall Street as Yossarian: The Other Effects of the Rajaratnam Insider Trading Conviction, by Scott Colesanti, Hofstra University - Maurice A. Deane School of Law, was recently posted on SSRN.  Here is the abstract:

Without warning, the patient sat up in bed and shouted, ‘I see everything twice!’

And thus Yossarian, the war-weary bomber pilot of the masterful novel, Catch-22, was able to malinger in an Italian hospital even longer while nervous doctors attended to the strange malady of his neighbor.

The storied literary diversion may highlight the good fortune of those evading government prosecution of financial crimes in 2011, a year that fulfilled the promise that observers of hedge fund discipline would similarly see things twice. To wit, in May 2011, a Manhattan jury convicted billionaire hedge fund entrepreneur Raj Rajaratnam of fourteen counts of conspiracy and securities fraud. Chief among these convictions was the crime of insider trading. The case punctuated two years of criminal actions based upon insider trading allegations by the U.S. Attorney for the Southern District of New York, who had called Rajaratnam “the modern face of illegal insider trading.” Perhaps more significantly, five months later, Judge Richard J. Holwell sentenced Rajaratnam to eleven years in prison, in handing down the harshest sentence ever in such a case.

The Rajaratnam trial was the climax to a prolonged investigation that resulted in the conviction of over two dozen hedge fund workers and public company/financial firm employees for their roles in a $50 million scheme. The case also emphasized the unforgiving nature of securities fraud accusations where those who should know better (for example, attorneys) were concerned, as lawyers ensnared in the net cast at the fallen Galleon Management, LP (“Galleon”) received consistently glaring prison sentences. Further, the Rajaratnam conviction seemingly reverberated through the courts, leading to strict interpretations of procedural rules attending unrelated insider trading cases
.
But the celebrated conviction failed to end the parallel U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) investigation, litigation, or its pursuit of both fine and disgorgement. Thus, while commentators accurately noted that the use of Department of Justice (“DOJ”) wiretaps changed the nature of both the game and the results for Wall Street’s illegal players, receiving less attention is the delaying effect the trial had — both on clarifying insider trading law and questioning the unchecked use of government resources. While no one could quibble with the efficiency of the DOJ’s results, this Article seeks to reveal their equally significant effects on the government’s ongoing crusade against insider trading. Born via an administrative decision, decades after the adoption of the securities laws themselves, the uniquely American insider trading prohibition (and the attendant efforts of its chief enforcer) became perhaps a little more unique and problematic with the U.S. Attorney’s 2011 conviction of Rajaratnam.

January 20, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)

Strine et alia on Putting Stockholders First

Putting Stockholders First, Not the First-Filed Complaint, by Leo E. Strine Jr., Government of the State of Delaware - Court of Chancery; Lawrence A. Hamermesh, Widener University School of Law; Matthew Jennejohn, Shearman & Sterling LLP, was recently posted on SSRN.  Here is the abstract:

The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction, and the historical development of doctrines limiting parallel state court litigation — the doctrine of forum non conveniens and the “first-filed” doctrine — this article suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.

January 20, 2013 in Law Review Articles | Permalink | Comments (0) | TrackBack (0)