Monday, August 4, 2014
Philipp Paech has posted Intermediated Securities and Conflict of Laws on SSRN with the following abstract:
In developed financial markets securities are held through banks, brokers and other intermediaries. The question of which law governs the proprietary aspects in respect of securities in cross-jurisdictional holdings is subject of a fierce debate for about 10 years. There is agreement that the so called PRIMA approach is better than the older 'look-though approach'. However, PRIMA in itself is unclear as the concept is divided into a factual version of PRIMA and a consensual one. This dichotomy is perfectly reflected by the fact that the EU (using a fact based PRIMA in several instruments) is unlikely to implement the Hague Securities Convention which proposes a choice of law approach. This paper will look at the debate from a policy angle, analysing a number of issues which have probably fundamentally informed the earlier debate.
Zsuzsa R. Huszar, R.S.K. Tan, and Weina Zhang have posted Stock Lending from Lenders’ Perspective: Are Lenders Price Takers? on SSRN with the following abstract:
This study provides new insights about the source of short sale constraints, by showing that lending fees predict future returns beyond shorting demand in recent years. Focusing on lenders’ perspective, we reveal that lending fees are on average significantly higher for stocks with large active institutional ownership. For stocks with high active institutional ownership lending fees not only respond to shorting demand but are raised in anticipation of new future shorting demand. Specifically, fees are about 8% higher before earnings announcements and 15% higher before dividend declaration dates for stocks with 50% active institutional ownership than for stocks without active institutional ownership. Lastly, we find that the negative relationship between future returns and lending fees strengthens after the Lehman Brothers collapse as active institutions’ likely become more proactive in capitalizing lending fee revenues in the newly transparent and automated stock lending market.
Jeff Schwartz has posted The Corporatization of Personhood on SSRN with the following abstract:
This Article explores the burgeoning practice of investing in people as if they were corporations. Sometimes pitched as a way to pay-off student loans or fund a business idea, people now have the opportunity to sell shares of their future income to investors in exchange for cash today. Such transactions create a financial relationship closely analogous to that of a corporation and its shareholders. This Article considers how existing law applies to this new practice and whether today’s rules are responsive to the unique challenges these arrangements present. I argue that, despite raising both constitutional and public-policy concerns, these transactions should be permitted. Rather than outlaw such dealings, the nature of the financial relationships at issue means that they should be subject to securities regulation. Securities law alone, though, is insufficient. It is solely focused on protecting investors, leaving the broader social concerns raised by investing in people unaddressed and the more vulnerable parties to these transactions — those selling shares of themselves — without protection. To respond to these issues, I set forth a complementary regulatory template that would, among other things, require certain disclosures and set certain boundaries on these novel financial relationships.
Joan MacLeod Heminway has posted How Congress Killed Investment Crowdfunding: A Tale of Political Pressure, Hasty Decisions, and Inexpert Judgments That Begs for a Happy Ending on SSRN with the following abstract:
In April 2012, President Obama signed into law the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (the “CROWDFUND Act”) as Title III of the Jumpstart Our Business Startups Act. The U.S. Securities and Exchange Commission (“SEC”) was compelled to promulgate enabling regulation to effectuate the CROWDFUND Act. That rulemaking has been slow in coming.
During this period of delay, commentators have routinely denounced the postponement and expressed fear that the SEC’s rulemaking would unduly limit investment crowdfunding. This Article demonstrates, however, that it is principally the U.S. Congress that has limited the capacity of the CROWDFUND Act to foster capital formation for small businesses through investment crowdfunding. The provisions of the CROWDFUND Act, as enacted by Congress, create a significant cost structure that is not likely to be outweighed by the benefits of a crowdfunded offering conducted under the Act. Building on earlier work by Professors C. Steven Bradford and Stuart Cohn, this article explains the history and current status of the regulation of investment crowdfunding under the Securities Act of 1933, as amended (the "1933 Act"), identifies and describes reasons for despair about the current regulatory environment, and suggests a way forward. The way forward assumes, without further analysis, that the CROWDFUND Act demonstrates the inevitability — even if not the desirability — of a viable 1933 Act registration exemption for investment crowdfunding.
Brent J. Horton has posted For the Protection of Investors and the Public: Why Fannie Mae’s Mortgage-Backed Securities Should Be Subject to the Disclosure Requirements of the Securities Act of 1933 on SSRN with the following abstract:
Despite the fact that Fannie Mae’s creation of mortgage-backed securities (MBS) played a major role in causing the 2008 financial crisis, the issue of reforming Fannie Mae’s securitization activities was ignored by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress’ legislative response to the crisis. Former Secretary of the Treasury Henry Paulson said in a February 5, 2014 interview with the Washington Times, “[i]t perplexes me that nothing has been done." Paulson worries that if nothing is done, any future failure of Fannie Mae — a very real possibility absent reform — will lead to what he calls a financial “horror show,” and that the “ensuing crisis [will be] much bigger than the financial collapse in the wake of the Lehman bankruptcy.”
Given the urgency of the matter, it is surprising that post-2008 financial crisis scholarship — much like Congress — has largely ignored the need to reform Fannie Mae. The scholarship that does exist on the topic tends to recommend abolishing Fannie Mae (allowing the private sector to fill the hole). This Article fills a major gap in the scholarly debate. This Article recognizes that Fannie Mae plays an important role in financing home ownership, and accordingly, proposes a solution that will maintain Fannie Mae, but constrain its risk taking in the future. Because as Louis Brandeis famously stated, “sunlight is said to be the best of disinfectants; electric light the most efficient policeman,” this Article proposes that the best way to reduce risk taking at Fannie Mae is to subject its MBS offerings to the disclosure requirements of the Securities Act of 1933. As this Article explains, right now — as was the case in 2008 — Fannie Mae only engages in ad-hoc voluntary disclosure, which is void of substance, and entirely inadequate given the number of investors that purchase its MBS daily.
In arguing that Fannie Mae’s MBS should be subject to the disclosure requirements of the Securities Act of 1933, this Article moves beyond the traditional justification — investor protection — and argues that disclosure can protect the taxpaying public. After all, in 2008, it was the taxpaying public that was called upon to bailout investors in Fannie Mae’s MBS. The bill was $116 billion. While subjecting Fannie Mae to the disclosure requirements of the Securities Act of 1933 to protect the taxpaying public is a novel application of the law, it is not without support. It is supported by the language of the Securities Act itself, which calls in several places for the “protection of the public.”
Abbey Stemler has posted The JOBS Act and Crowdfunding: Harnessing the Power – and Money – of the Masses on SSRN with the following abstract:
On April 5, 2012, President Barack Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, dramatically changing the landscape for many companies raising capital. One of the most interesting sections of the Act is Title III, the CROWDFUND Act, which enables entrepreneurs and small business owners to sell limited amounts of equity in their companies to a large number of investors via social networks and various Internet platforms. Prior to the CROWDFUND Act, selling equity interests in companies via crowdfunding was for all practical purposes illegal under United States securities laws. The Act attempts to exempt crowdfunding from expensive registration requirements and allow crowdfunding websites to avoid the classification of broker, which would impose substantial registration costs on such sites. Through the CROWDFUND Act, equity-based crowdfunding has the potential to open funding opportunities to countless underfunded entrepreneurs and small businesses. In addition, it can provide investors with new ways to diversify their portfolios. However, the benefits of crowdfunding do not come without substantial risks. Given the combination of unsophisticated investors, inherently risky businesses, and the zeitgeist that changed regulations quickly, crowdfunding must be approached with caution.
Asaf Eckstein has posted Great Expectations: The Peril of an Expectations Gap in Proxy Advisory Firm Regulation on SSRN with the following abstract:
Large, institutional investors have come to wield great power over the shareholder votes in publicly held companies. These investors, with their enormous ownership shares, can dramatically influence issues put to a shareholder vote. And when deciding how to cast their ballots, institutional investors look to proxy advisory firms. These are entities that advise investors on which actions to take in shareholder votes. Because institutional investors prefer to focus on building portfolios, rather than on researching shareholder votes, they often outsource these duties to proxy advisory firms. As a result, financial industry and government leaders have voiced concern that proxy advisory firms exert too much power over corporate governance to operate unregulated. The Securities and Exchange Commission as well as the U.S. Congress have investigated and debated the merits of proxy advisory regulation. The U.S. House of Representatives held a hearing on the matter in June of 2013, and the SEC followed this hearing with a roundtable discussion in December of 2013. On June 30, 2014, the Investment Management and Corporate Finance Divisions of the SEC issued a bulletin outlining the responsibilities of proxy advisors and institutional investors when casting proxy votes. As of yet, no binding regulation has been promulgated, despite repeated calls for it. Rather than commenting on that debate, this Article urges policymakers to consider the potential for an Expectations Gap if proxy advisory regulation is adopted. An Expectations Gap arises when the parties interested in regulation, in this case particularly the mass media, academics, politicians and the general public, inaccurately estimate the efficacy of a regulatory regime. They typically overestimate a regulation’s effectiveness, which in the proxy advisory context could actually lead to a responsibility deficit. Both proxy advisory firms and institutional investors could shift blame away from themselves in the event of a corporate governance failure stemming from poorly-cast shareholder votes or a lack of oversight. This deficit would severely hamper the effect of any future regulation, and steps must be taken to reduce the possibility of that occurrence. This Article is the first to examine this potentially serious negative consequence of proxy advisory regulation. It is also the first comprehensive scholarly writing to propose solutions for minimizing an Expectations Gap arising from new regulation. This Article applies the Expectations Gap theory to the current proxy advisor debate taking place, and uses the theory to develop mechanisms for making potential regulation more effective. Additionally, these suggestions are applicable to any new regulation that is susceptible to an Expectations Gap. Taken together or individually, these suggestions could improve information symmetry in the financial market and help prevent serious corporate governance failures.
Thursday, July 31, 2014
Tuesday, July 29, 2014
Matthew C. Turk has posted The Convergence of Insurance with Banking and Securities Industries, and the Limits of Regulatory Arbitrage in Finance on SSRN with the following abtract:
This Article explores recent overlooked innovations in insurance — namely, the widespread convergence of the insurance industry with other financial services traditionally performed by banking and securities firms — and argues that they present dramatic illustrations of the two fundamental “boundary problems” that afflict all financial regulation. The first problem is a question of jurisdictional boundaries: to what degree should diverse regulations be harmonized across jurisdictions? The second concerns definitional boundaries: within a given jurisdiction, how should distinctions be drawn among financial products and firms that perform similar economic functions? The Article then employs the framework of regulatory boundaries to evaluate a number of policy issues raised by insurance-related reforms in Dodd-Frank and various international initiatives that followed the 2008 financial crisis, both of which represent first steps towards a potentially bold new regulatory approach.
At bottom, both boundary problems are a product of the possibility for regulatory arbitrage across jurisdictions or industry definitions, and the potential inevitably of a loosely regulated “shadow finance” sector. The opportunity for regulatory arbitrage is a key variable in assessing financial reforms that draw regulatory boundaries, yet reliable empirical estimates of its magnitude are largely unavailable. For this reason, recent proposals to require federal agencies to apply quantitative cost-benefit analysis to financial regulations may fall short of expectations. Sensitive to this uncertainty, this Article presents an analytical framework that provides some tentative policy prescriptions and, at a minimum, sheds greater light on the tradeoffs involved in the regulation of insurance and finance in a post-2008 Crisis world.
A reader submitted the following fellowship announcement:
The Lowell Milken Institute for Business Law and Policy at UCLA School of Law is now accepting applications for the Lowell Milken Institute Law Teaching Fellowship. This fellowship is a full-time, year-round, one or two academic-year position (approximately July 2015 through June 2016 or June 2017). The position involves law teaching, legal and policy research and writing, preparing to go on the law teaching market, and assisting with organizing projects such as conferences and workshops, and teaching. No degree will be offered as part of the Fellowship program. Only one fellowship will be offered.
Fellowship candidates must hold a JD degree from an ABA accredited law school and be committed to a career of law teaching and scholarship in the field of business law and policy. Applicants should have demonstrated an outstanding aptitude for independent legal research, preferably through research and/or writing as a law student or through exceptional legal experience after law school. Law Teaching Fellowship candidates must have strong academic records that will make them highly competitive for law teaching jobs.
More information on the fellowship can be found at http://lowellmilkeninstitute.law.ucla.edu/lowell-milken-institute-business-law-and-policy-teaching-fellowship/. Applications must be submitted by November 14, 2014.
The University of California is an Equal Opportunity/Affirmative Action Employer. All qualified applicants will receive consideration for employment without regard to race, color, religion, sex, national origin, disability, age or protected veteran status. For the complete University of California nondiscrimination and affirmative action policy see: UC Nondiscrimination & Affirmative Action Policy.
The University of California seeks candidates committed to the highest standards of scholarship and professional activities and to a campus climate that supports equality and diversity.
The following law review articles relating to securities regulation are now available in paper format:
Nicholas D. Horner, Note, If You Rate It, He Will Come: Why Uncle Sam's Recent Intervention with the Credit Rating Agencies Was Inevitable and Suggestions for Future Reform, 41 Fla. St. U. L. Rev. 489 (2014).
Stephanie Ray, Comment, Getting Caught Between the Borders: the Proposed Exemption of the Canadian Mutual Fund from the Passive Foreign Investment Company Rules, 37 Fordham Int'l L.J. 823 (2014).
Tom Wentzell, Comment, The JOBS Act: Effects on Capital Market Competition in Both Public and Private Markets, 10 U. St. Thomas L.J. 892 (2013).
Yesha Yadav, The Case for a Market in Debt Governance, 67 Vand. L. Rev. 771 (2014).
Katherine T. Zuber, Note, Breaking Down a Great Wall: Chinese Reverse Mergers and Regulatory Efforts to Increase Accounting Transparency, 102 Geo. L.J. 1307 (2014).
Thursday, July 17, 2014
Hon Kiu Chan, Raymond Siu Yeung Chan, and Kong Shan John Ho have posted Enforcement of Insider Trading Law in Hong Kong: What Insights Can We Learn from Recent Convictions? on SSRN with the following abstract:
This study analyzes all insider trading cases in Hong Kong since a dual civil and criminal insider trading regime was implemented in 2003. The analysis reveals some significant findings. Firstly, the successful cases prosecuted under the criminal provisions outnumber those brought as civil cases, suggesting that the regulator did not sacrifice the deterrent effect of criminal convictions by using the easier procedures under the civil regime. Secondly, the largest number of insider trading contraventions occurred in 2008 when stock markets around the globe were volatile and had a significant downward adjustment. During this period, many people had significant losses, motivating them to cover their losses by illegal means. Thirdly, the most popular corporate information that triggered insider trading activities came from takeovers, as knowledge of these events before their formal announcements enabled insiders and their tippees to reap handsome profits. Finally, the monetary fines imposed on criminal offenders were generally the same as the actual profits obtained or loss avoided with the purpose of disgorging all their benefits. In contrast, imprisonment was positively related to the notional profit (i.e. the maximum potential profit that the offender could obtain from trading). These findings suggest that regulators need to be more vigilant during economic downturns and to pay particular attention to takeover and share placement activities in listed companies. For senior corporate insiders, and investment bankers and lawyers handling their corporate clients, a clear message emerges from our findings is that it does not pay to get involved in illegal insider trading.
Geoffrey Christopher Rapp has posted Are SOX and Dodd-Frank Securities Laws? The Answer is 'Up in the Air' on SSRN with the following abstract:
This contribution to the 2013 Instittue for Investor Protection Conference poses and addresses the question of whether the whistleblower provisions of SOX and Dodd-Frank raise the same set of policy concerns as private securities litigation, which have undergirded an increasingly skeptical approach from the bench over the past 20 years. Using the Court's recent decision in Lawson v. FMR LLC, the essay argues that the whistleblower provisions of SOX and Dodd-Frank do not raise the same set of concerns that have justified courts' hostile treatment of securities litigation.
Richard Zhe Wang and Menghistu Sallehu have posted The Hidden Message in AFS Securities of US Banks on SSRN with the following abstract:
We examine US banks’ use of available-for-sale (“AFS”) securities to smooth their earnings during the most recent macroeconomic business cycle from 2001 to 2010. We contribute to the accounting literature by investigating the interaction between the macroeconomic environment and the income smoothing activities of US banks, and find four main results: First, our empirical results show evidence that US banks use AFS securities to smooth earnings. Second, we find that the realized gains and losses on AFS securities can predict the future core earnings of a bank, consistent with the signaling hypothesis of income smoothing (e.g. Barnea et al., 1975; Bartov, 1993). Third, we report evidence that US banks are more likely to smooth income when the general macroeconomic environment is favorable (“good times”) than when it is unfavorable (“bad times”). Fourth, our tests demonstrate that the signaling power of AFS securities for future core earnings tend to be higher during bad times than good times.
Rajeev R. Bhattacharya and Stephen O'Brien have posted Arbitrage Risk and Market Efficiency - Applications to Market Efficiencyon SSRN with the following abstract:
Measuring the efficiency of the market for a stock is important for a number of reasons. For example, it determines the necessity for an investor to acquire expensive additional information about a firm, and it is a critical factor in class certification in a securities class action. We provide a general methodology to measure the arbitrage risk, which is a negative proxy for the market efficiency, of a stock for any relevant period. We apply this methodology to calculate the arbitrage risk of each U.S. exchange-listed common stock for every calendar year from 1988 to 2010. We find that market efficiency is significantly affected by turnover (negatively), the number of market makers for Nasdaq stocks (negatively), and serial correlation in the Capital Asset Pricing Model of the stock (positively). These findings seem inconsistent with “conventional wisdom,” but we show that our findings are consistent with economic logic. The relations between market efficiency and market capitalization (positive), bid-ask spread (negative) and institutional ownership (positive) are consistent with conventional wisdom. The impact on market efficiency of the number of securities analysts following a stock and the public float ratio of a stock are of ambiguous significance.
Jill E. Fisch has posted The Broken Buck Stops Here: Embracing Sponsor Support in Money Market Fund Reform on SSRN with the following abstract:
Since the 2008 financial crisis, in which the Reserve Primary Fund “broke the buck,” money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis, in part because widespread redemption demands during the days following the Lehman bankruptcy led to a freeze in the credit markets. The response has been to deem MMFs a component of the nefarious shadow banking industry and to target them for regulatory reform.
Determining the appropriate approach to MMF reform has proven difficult. Banks regulators prefer a requirement that MMFs trade at a floating NAV rather than a stable $1 share price. By definition, a floating NAV would prevent future MMFs from breaking the buck, but it is unclear that it would eliminate the risk of large redemptions in a time of crisis. Other reform proposals have similar shortcomings. More fundamentally, pending reform proposals could substantially reduce the utility of MMFs for many investors, which could, in turn, dramatically reduce the availability of short term credit.
The complexity of regulating MMFs has been exacerbated by a turf war among regulators. The Securities and Exchange Commission has battled with bank regulators both about the need for additional reforms and about the structure and timing of any such reforms. Importantly, the involvement of bank regulators has shaped the terms of the debate. To justify their demands for greater regulation, bank regulators have framed the narrative of MMF fragility using banking rhetoric. This rhetoric masks critical differences between banks and MMFs, specifically the fact that, unlike banks, MMF sponsors have assets and operations that are separate from the assets of the MMF itself. Because of this structural difference, sponsor support is not a negative for MMFs but a stability-enhancing feature.
The difference between MMFs and banks provides the basis for a simple yet unprecedented regulatory solution: requiring sponsors of MMFs explicitly to guarantee a $1 share price. Taking sponsor support out of the shadows provides a mechanism for enhancing MMF stability that embraces rather than ignoring the advantage that MMFs offer over banks through asset partitioning.
C. Steven Bradford has posted Shooting the Messenger: The Liability of Crowdfunding Intermediaries for the Fraud of Others on SSRN with the following abstract:
The new federal crowdfunding exemption in section 4(a)(6) of the Securities Act requires that securities be sold only through regulated intermediaries—brokers and funding portals. Much of the information appearing on those crowdfunding intermediaries’ platforms will be provided by someone other than the intermediary. Crowdfunding intermediaries must post extensive disclosure provided by issuers of the securities being sold. Under the SEC’s proposed rules, they must also provide communication channels where prospective investors and others may post comments.
Neither the statute nor the proposed rules say much about the intermediary’s obligation to verify the information posted by others or its liability if that information is false or misleading. The result under the securities antifraud rules is unclear. Unless the law is clarified, crowdfunding intermediaries face a significant risk of liability that could make crowdfunded securities offerings unfeasible.
I argue that crowdfunding intermediaries should be liable for information provided by others in only three circumstances: (1) if they knew the posted information was false; (2) if they were aware of red flags that should have alerted them to the fraud; or (3) if they recommend a particular security or offering without an adequate investigation.
Charles W. Mooney Jr. has posted The Bankruptcy Code's Safe Harbors for Settlement Payments and Securities Contracts: When Is Safe Too on SSRN with the following abstract:
This Article addresses insolvency law-related issues in connection with certain financial-markets contracts, such as securities contracts, commodity contracts, forward contracts, repurchase agreements (repos), swaps and other derivatives, and master netting agreements. The Bankruptcy Code provides special treatment — safe harbors — for these contracts (collectively, qualified financial contracts or QFCs). This special treatment is considerably more favorable for nondebtor parties to QFCs than the rules applicable to nondebtor parties to other contracts with a debtor. Yet even some strong critics of the safe harbors concede that some special treatment may be warranted. This Article offers a critique of the safe harbor for settlement payments, as interpreted by the courts, and the safe harbor for transfers in connection with securities contracts that is clearly written into the Bankruptcy Code. It provides an overview of the legislative history, describes the scope and operation of the statutory components of the safe harbors, briefly describes the various academic critiques, and offers my general views on revisions that should be made to the safe harbor provisions. It questions the quite expansive interpretation given by some courts to the safe harbor for settlement payments. It then explains how the safe harbor for transfers made in connection with security contracts could be used to protect from the avoidance powers payments and collateralizations of ordinary debt, transactions that have nothing to do with the QFC markets.
Stephen Park has posted Targeted Social Transparency as Global Corporate Strategy on SSRN with the following abstract:
Multinational enterprises (MNEs) are subject to a variety of U.S. laws that require public disclosure of their cross-border activities. Recent years have seen the emergence of mandatory disclosure regimes under U.S. federal securities law with the express purpose of advancing international human rights in the context of geographically-defined, issue-specific non-economic public policy objectives, which I collectively refer to as “targeted social transparency” (or “TST”) regimes. This Article addresses the appeal and shortcomings of mandatory disclosure as a means of regulating global corporate conduct, focusing on the unique challenges posed by TST. Two contemporary examples of TST are analyzed: (i) the “conflict minerals” provisions in the Dodd-Frank Act, which require the disclosure of minerals whose mining is associated with human rights violations in the Democratic Republic of Congo; and (ii) disclosure requirements under the Iran Threat Reduction and Syria Human Rights Act with respect to commercial activities associated with the Iranian government’s suppression of human rights. I present the concept of constructive discourse, which seeks to enhance the effectiveness of mandatory disclosure by addressing two related objectives: (a) how TST can catalyze internally-driven changes in corporate behavior to the mutual benefit of MNEs and stakeholders; and (b) how MNEs can use TST for strategic purposes. Using the concept of constructive discourse, this Article identifies and explores specific ways that TST regimes can shape socially-beneficial, strategically-rational corporate conduct.