Wednesday, November 23, 2016
Jill E. Fisch, Jonah B. Gelbach, and Jonathan Klick have posted After Halliburton: Event Studies and Their Role in Federal Securities Fraud Litigation on SSRN with the following abstract:
Event studies have become increasingly important in securities fraud litigation after the Supreme Court’s decision in Halliburton II. Litigants have used event study methodology, which empirically analyzes the relationship between the disclosure of corporate information and the issuer’s stock price, to provide evidence in the evaluation of key elements of federal securities fraud, including materiality, reliance, causation, and damages. As the use of event studies grows and they increasingly serve a gatekeeping function in determining whether litigation will proceed beyond a preliminary stage, it will be critical for courts to use them correctly.
This Article explores an array of considerations related to the use of event studies in securities fraud litigation. It starts by describing the basic function of the event study: to determine whether a highly unusual price movement has occurred and the traditional statistical approach to making that determination. The Article goes on to identify special features of securities fraud litigation that distinguish litigation from the scholarly context in which event studies were developed. The Article highlights the fact that the standard approach can lead to the wrong conclusion and describes the adjustments necessary to address the litigation context. We use the example of six dates in the Halliburton litigation to illustrate these points.
Finally, the Article highlights the limitations of event studies – what they can and cannot prove – and explains how those limitations relate to the legal issues for which they are introduced. These limitations bear upon important normative questions about the role event studies should play in securities fraud litigation.
Itzhak Ben-David, Francesco A. Franzoni, and Rabih Moussawi have posted Exchange Traded Funds (ETFs) on SSRN with the following abstract:
Over two decades, ETFs have become one of the most popular investment vehicle among retail and professional investors due to their low transaction costs and high liquidity, taking market share from traditional investment vehicles such as mutual funds and index futures. Research has shown that in addition to the benefits of enhanced price discovery, ETFs add noise to the market: prices of underlying securities have higher volatility, greater price reversals, and higher correlation with the index. Arbitrage activity is a necessary component in minimizing the price discrepancy between ETFs and the underlying securities. During turbulent market episodes, however, arbitrage is limited and ETF prices diverge from those of the underlying securities.
Tuesday, November 22, 2016
The following law review articles relating to securities regulation are now available in paper format:
Andrew C. Baker, Note, Single-Firm Event Studies, Securities Fraud, and Financial Crisis: Problems of Inference, 68 Stan. L. Rev. 1207 (2016).
Sarah Dotzel, Note, Unsponsored ADRs Falling Through the Cracks: Adapting a Domestic Securities Regime to a Global Marketplace, 18 Vand. J. Ent. & Tech. L. 849 (2016).
Yuliya Guseva, Destructive Collectivism: Dodd-Frank Coordination and Clearinghouses, 37 Cardozo L. Rev. 1693 (2016).
Michael Halberstam, The American Advantage in Civil Procedure? An Autopsy of the Deutsche Telekom Litigation, 48 Conn. L. Rev. 817 (2016).
Erich L. Schmitz, Halliburton II: A Missed Opportunity to Right the Wrong in Rule 10b-5 Based Class Actions, 14 DePaul Bus. & Com. L.J. 249 (2015).
Alexander R. Tiktin, Note, Broker-Dealer Law Reform: Financial Intermediaries in a State of Limbo, 81 Brook. L. Rev. 1205 (2016).
Chang-hsien Tsai, Legal Transplantation or Legal Innovation? Equity-Crowdfunding Regulation in Taiwan after Title III of the U.S. JOBS Act, 34 B.U. Int'l L.J. 233 (2016).
The Penn State Journal of Law & International Affair (“JLIA”) is conducting a call for papers for an upcoming publication in spring 2017. The publication will focus on areas of taxation, corporate law, banking and finance, and related subject areas. Current papers accepted for publication cover areas of international taxation, international financial regulation for cryptocurrencies, and regulations resulting from the global financial crisis.
JLIA is an interdisciplinary journal that is jointly published by Penn State’s Law School and the Penn State School of International Affairs. As a result, deference will be given to papers that incorporate international elements. However, papers with a purely domestic focus will be given full consideration based on their fit within the publication.
Submissions will be considered for publication on a rolling basis. Authors interested in submitting papers should refer to http://elibrary.law.psu.edu/jlia/policies.html for submission procedures and policies. Please note that text and citations should conform to The Bluebook: A Uniform System of Citation, and that submissions through ExpressO are the best way to ensure quick response times as it is the internal platform for reviewing all official submissions to JLIA.
Please direct all questions regarding this Call for Papers to Zach Bollman, Editor-in-Chief, at email@example.com or Camman Piasecki, Managing Editor of Articles, at firstname.lastname@example.org.
Thursday, November 17, 2016
Cary Martin Shelby has posted Closing the Hedge Fund Loophole: The SEC as the Primary Regulator of Systemic Risk on SSRN with the following abstract:
The 2008 financial crisis sparked a flurry of regulatory activity and enforcement in an attempt to reign in activity by banks, but other institutions have also been identified as potentially threatening to the stability of the financial markets. In particular, several empirical studies have revealed that systemic risk can be created and transmitted by hedge funds, which are private investment funds that have historically evaded regulation under the federal securities laws. In response to the risk created by hedge funds, Congress granted the Financial Stability Oversight Council (“FSOC”) authority under the Dodd-Frank Act of 2010 to designate hedge funds as Systemically Important Financial Institutions (“SIFIs”). Such a designation would automatically result in stringent capital constraints and limitations on liquidity risk on these nonbank institutions. However, in the over six years since FSOC has been granted this authority, it has failed to identify even one hedge fund as a SIFI. The council has encountered a variety of challenges such as criticisms to systemic risk studies sanctioned by FSOC, and massive resistance to the SIFI designation process by numerous industry participants. If this designation were applied to hedge funds it would severely limit the abilities of hedge fund advisers to pursue certain strategies. For these reasons, it is highly unlikely that FSOC will designate a hedge fund as a SIFI.
The inability of FSOC to regulate systemically harmful funds is particularly troubling because several post-financial crisis studies have revealed that systemic risk can still be created and transmitted by hedge funds. Given FSOC’s inability to close this hedge fund loophole, this Article argues that Congress should explore appointing the SEC as the primary regulator of systemically harmful funds because; (1) the transparency framework inherent in the federal securities laws can supply a more effective means for mitigating systemic risk than the prudential framework currently mandated for SIFIs, and (2) appointing the SEC in this regard would reduce the fragmentation of our current regulatory structure which has been extended and complicated by the creation of FSOC. While the federal securities laws are typically used to promote investor protection, this Article posits that enhancing transparency to hedge fund counterparties and investors can decrease systemic risk by empowering such market participants to better protect themselves against risk. Enhancing protection in this manner could in-turn weed out systemically harmful funds from the marketplace, without imposing the severe capital constraints that would be mandated under FSOC’s model. With respect to reducing the fragmentation of our current regulatory structure, this Article argues that lawmakers should dedicate resources to reforming our existing agencies instead of creating additional layers of ineffective regulation that could lead to repeated failures, undue complexities, and wasted resources.
Wednesday, November 16, 2016
Tuesday, November 15, 2016
Monday, November 14, 2016
The following law review articles relating to securities regulation are now available in paper format:
Frances S. Fendler & Heath Abshure, Private Civil Liability under the Arkansas Securities Act, 38 U. Ark. Little Rock L. Rev. 125 (2016).
Yesha Yadav, The Failure of Liability in Modern Markets, 102 Va. L. Rev. 1031 (2016).
Thursday, November 10, 2016
Veronica Root has posted Coordinating Compliance Incentives on SSRN with the following abstract:
In today’s regulatory environment, a corporation engaged in wrongdoing can be sure of one thing: regulators will point to an ineffective compliance program as a key cause of institutional misconduct. The explosion in the importance of compliance is unsurprising given the emphasis that governmental actors—from the Department of Justice, to the Securities and Exchange Commission, to even the Commerce Department—place on the need for institutions to adopt “effective compliance programs.” The governmental actors that demand effective compliance programs, however, have narrow scopes of authority. DOJ Fraud handles violations of the Foreign Corrupt Practices Act, while the SEC adjudicates claims of misconduct under the securities laws, and the Federal Trade Commission deals with concerns regarding anticompetitive behavior. This segmentation of enforcement authority has created an information and coordination problem amongst regulators, resulting in an enforcement regime where institutional misconduct is adjudicated in a piecemeal fashion. Enforcement actions focus on compliance with a particular set of laws instead of on whether the corporate wrongdoing is a result of a systematic compliance failure that requires a comprehensive, firm-wide, compliance overhaul. As a result, the government’s goal of incentivizing companies to implement “effective ethics and compliance programs” appears at odds with its current enforcement approach.
Yet governmental actors currently have the tools necessary to provide strong inducements for corporations to, when needed, engage in restructuring of their compliance programs. This Article argues that efforts to improve corporate compliance would benefit from regulatory mechanisms that
(i) recognize when an institution is engaged in recidivist behavior across diverse regulatory areas and
(ii) aggressively sanction institutions that are repeat offenders. If governmental actors adopt a new enforcement strategy aimed at “Coordinating Compliance Incentives,” they can more easily detect when an institution is suffering from a systemic compliance failure, which may deter firms from engaging in recidivist behavior. If corporations are held responsible for being repeat offenders across diverse regulatory areas, it may encourage them to implement more robust reforms to their compliance programs and, ultimately, lead to improved ethical conduct and more effective compliance programs within public companies.
Mercer Bullard has posted Mandatory Third Party Compliance Examinations for Investment Advisers: An SEC Waterloo? on SSRN with the following abstract:
The Securities and Exchange Commission (SEC or Commission) appears to be on the verge of requiring investment advisers to undergo third party examinations. One justification for the rulemaking is that the Commission lacks sufficient resources to examine advisers frequently enough. Another is to create indirectly a self-regulatory organization (SRO) for investments advisers. Both may leave a rulemaking particularly vulnerable to challenge as arbitrary and capricious under the Administrative Procedures Act. This Article considers three novel grounds on which a rulemaking may be successfully challenged. Congress has repeatedly rejected SEC requests to provide additional funding for examinations or to create an adviser SRO. This Article speculates that the rulemaking could be successfully challenged on the grounds that it usurps Congress’s power of the purse by imposing an unauthorized tax on investment advisers, and/or Congress’s authority to authorize the creation of an adviser SRO. On firmer ground, the Article discusses the risk that Section 206(4) of the Investment Advisers Act of 1940, under which a third party examination rule would likely be adopted, does not authorize such broad rulemaking. Such a challenge could not only defeat the rulemaking, but also undermine the viability of other rules adopted under Section 206(4). This Article also considers some of the numerous examples of third party examiners that could provide useful models for a third party examination rule for advisers. It surveys seven types of third party examiners in order to provide a framework for thinking about how a third party compliance rule might be designed: nationally recognized statistical rating organizations, proxy firm advisors, the CFA Institute, public company auditors, compliance consultants, chief compliance officers, and surprise and internal controls auditors. Each examiner serves a distinctly different third party examination role and their regulation is equally varied, if not always consistent.