Monday, November 7, 2016
Tim Leung and Jamie Juhee Kang have posted Asynchronous ADRs: Overnight vs Intraday Returns and Trading Strategies on SSRN with the following abstract:
American Depositary Receipts (ADRs) are exchange-traded certificates that represent shares of non-U.S. company securities. They are major financial instruments for investing in foreign companies. Focusing on Asian ADRs in the context of asynchronous markets, we present methodologies and results of empirical analysis of their returns. In particular, we dissect their returns into intraday and overnight components with respect to the U.S. market hours. The return difference between the S&P500 index, traded through the SPDR S&P500 ETF (SPY), and each ADR is found to be a mean-reverting time series, and is fitted to an Ornstein-Uhlenbeck process via maximum-likelihood estimation (MLE). Our empirical observations also lead us to develop and backtest pairs trading strategies to exploit the mean-reverting ADR-SPY spreads. We find consistent positive payouts when long position in ADR and short position in SPY are simultaneously executed at selected entry and exit levels.
Stewart L. Brown has posted Mutual Funds and the Regulatory Capture of the SEC on SSRN with the following abstract:
Regulatory agencies are created to act in the public interest but often end up acting in the interests of those regulated. This is known as regulatory capture. The mutual fund industry is the custodian of massive levels of wealth of the investing public and is regulated by the Securities Exchange Commission (“the SEC”). Mutual fund assets are currently in the neighborhood of $16 trillion and these assets generate revenues in excess of $100 billion per year for the firms that manage mutual funds. The investment management industry is incentivized to influence the regulators by whatever means available to maximize profits for their owners. This paper documents how the investment management industry has captured the SEC in certain key policy areas. As a result, the industry is able to siphon off billions of dollars per year in excessive and often hidden fees. The SEC has within its power to unilaterally blunt some of the worse abuses if it was willing to act in the public interest.
Friday, November 4, 2016
The following law review articles relating to securities regulation are now available in paper format:
Thomas S. Green, Comment, An Analysis of the Advantages of Non-Market Based Approaches for Determining Chapter 11 Cramdown Rates: A Legal and Financial Perspective, 46 Seton Hall L. Rev. 1151 (2016).
Hester Peirce, Derivatives Clearinghouses: Clearing the Way to Failure, 64 Clev. St. L. Rev. 589 (2016).
Moses M. Tincher, Casenote, Timber! The SEC Falls Hard as the Georgia District Court in Timbervest Finds the Appointment of the SEC ALJs "Likely Unconstitutional", 67 Mercer L. Rev. 459 (2016).
Friday, October 28, 2016
John C. Coffee Jr. has posted The Globalization of Entrepreneurial Litigation: Law, Culture, and Incentives on SSRN with the following abstract:
Entrepreneurial litigation is litigation in which the plaintiff’s attorney functions as a risk-taking entrepreneur, financing, organizing, managing, and settling the litigation on behalf of numerous clients (who generally hold “negative value” claims), but with only modest oversight from the clients. Although well established in the United States (and to a lesser extent in Australia, Canada, and Israel), it has long been resisted in Europe, the U.K., and elsewhere, where local rules both preclude the opt-out class action, contingent fees, and jury trials in civil cases, and mandate a “loser pays” rule with respect to legal fees. Yet, despite these obstacles, entrepreneurial litigation appears now to be coming to both Europe and Japan, with large settlements having recently been struck in securities litigation (most notably $1.4 billion this year in the Fortis litigation). Perhaps surprisingly, the driving force leading this transition has been American plaintiff law firms, who do not litigate the action, but do organize it, using third party funding and litigation insurance as functional substitutes for the contingent fee and the American Rule on fee shifting.
Some have explained this phenomenon as a response to the U.S. Supreme Court’s decision in Morrison v. National Australia Bank Ltd., which barred U.S. courts from exercising extraterritorial jurisdiction over the federal securities laws, and thereby arguably encouraged other jurisdictions to compete for the cases that formerly were litigated in the U.S. Although the Morrison decision was a catalyst, this article rejects the claim that foreign jurisdictions are engaged in any competition for securities litigation, finding instead that defense counsel have found that they can sweep absent class members into a low cost settlement class action under The Netherland’s WCAM statute by discriminating between “active” and “non-active” class members.
This article examines these developments and the issues they pose for Europe and Japan. Ultimately, despite early successes, the long-term question becomes: How successful can legal entrepreneurs be when operating in a different and skeptical legal culture?
Ramin Baghai and Bo Becker have posted Reputation and Competition in the Credit Ratings Market - Evidence from Commercial Mortgage-Backed Securities on SSRN with the following abstract:
We examine a quasi-experimental setting where a rating agency (S&P) is completely shut out of a large segment of the commercial mortgage-backed securities market for more than one year, following a procedural mistake. We exploit the fact that many tranches of CMBS deals have multiple ratings. Subsequent to the drop in its business volume (but not before), S&P assigned higher ratings than other raters, in particular for large deals and for deals from important issuers. The results suggest that issuing optimistic ratings is a strategy that can be used by a rating agency with a weak reputation to gain market share in a market with strong competition.
Wednesday, October 26, 2016
SEC Proposes Amendments to Require Use of Universal Proxy Cards that Would Include All Board Nominees
Tuesday, October 25, 2016
Darian M. Ibrahim has posted Crowdfunding Without the Crowd on SSRN with the following abstract:
The final crowdfunding rules took three years for the SEC to pass, but crowdfunding — or offering securities over the Internet — is now a reality. Will crowdfunding be a wasteland of startups who cannot find other funding, only to be floated until failure by rubes who are easily parted with their money? This Essay argues that crowdfunding has a much better chance of success if we abandon the idea that it does (and should) employ “crowd-based wisdom” at all. Instead, crowdfunding needs intermediation by experts just like the successful forms of entrepreneurial finance (e.g., angel investing and venture capital) that have preceded it.
The final SEC rules move us in the right direction. At the heart of the crowdfunding experience lies the “funding portal,” or the website that will actually list the startup as an investment opportunity. As originally promulgated, funding portals were to be almost completely passive entities who could not subjectively “curate” (or screen) the startups that wished to list on the site. The final SEC rules permit some funding portal curation, which will allow funding portals to list better quality startups.
As I will argue, however, this permitted curation does not go far enough, given a funding portal’s justified concern over becoming a broker-dealer. Thus, I suggest ways in which expert investors participating in crowdfunding offerings can and should use message boards and investment clubs to further guide unsophisticated investors toward better investment choices. At the same time, I acknowledge potential liability concerns for experts who do so. Together, on balance, careful curation by funding portals and expert investors will give crowdfunding a better chance of success.
Tobias Adrian, Michael J. Fleming, and Erik Vogt have posted Market Liquidity after the Financial Crisis on SSRN with the following abstract:
This paper examines market liquidity in the post-crisis era, in light of concerns that regulatory changes might have reduced banks’ ability and willingness to make markets. We begin with a discussion of the broader trading environment, including a discussion of regulations and their potential effect on dealer balance sheets and market making, but also considering plausible alternative drivers of market liquidity. Using both high- and low-frequency data on U.S. Treasury securities and corporate bonds, we then investigate empirically whether liquidity has in fact deteriorated, and we review market behavior around three key post-crisis events. Overall, our findings, and those of recent papers we survey, do not suggest a significant decline in bond market liquidity. We conclude with ideas for future research, including the evaluation of additional data, methodological improvements, and closer analyses of liquidity risk and the interplay between market liquidity and funding liquidity.
Elisabeth de Fontenay, Josefin Meyer and G. Mitu Gulati have posted The Sovereign-Debt Listing Puzzle on SSRN with the following abstract:
The claim that stock exchanges perform certification and monitoring roles in securities offerings is pervasive in the legal and financial literatures. This article tests the validity of this “bonding hypothesis” in the sovereign-bond market — one of the oldest and largest securities markets in the world. Using data on sovereign-bond listings for the entire post-World War II period, we provide the first comprehensive report on sovereigns’ historical listing patterns. We then test whether a sovereign bond issue’s listing jurisdiction affects its yield at issuance, as the bonding hypothesis would predict. We find little evidence of bonding in today’s sovereign-debt market. Instead, we hypothesize that sovereign-bond listings are primarily a form of regulatory arbitrage. Because certain investors may be restricted to investing abroad only in listed securities, sovereigns are incentivized to list their bonds, but to seek out the least restrictive exchange that qualifies.
On October 21, 2016 at the Midwest Region Meeting of the American Accounting Association in Chicago, Illinois, Scott W. Bauguess, Deputy Director and Deputy Chief Economist of the SEC's Division of Economic and Risk Analysis delivered a speech entitled Has Big Data Made Us Lazy?, as part of the event.
Monday, October 24, 2016
The following law review articles relating to securities regulation are now available in paper format:
Sang Yop Kang, 'Generous Thieves': The Puzzle of Controlling Shareholder Arrangements in Bad-Law Jurisdictions, 21 Stan. J.L. Bus. & Fin. 57 (2015).
Joseph Quincy Patterson, Note, Many Key Issues Still Left Unaddressed in the Securities and Exchange Commission's Attempt to Modernize Its Rules of Practice, 91 Notre Dame L. Rev. 1675 (2016).
Susanna Kim Ripken, Paternalism and Securities Regulation, 21 Stan. J.L. Bus. & Fin. 1 (2015).
Michael Vignone, Note, Inside Equity-Based Crowdfunding: Online Financing Alternatives for Small Businesses, 91 Chi.-Kent L. Rev. 803 (2016).
Informing Investors of Climate Risk: The Impact of Securities Laws in the Environmental Context, Tom Mounteer, moderator; Leah A. Dundon, Kevin A. Ewing, Elizabeth Lewis, panelists. 46 Envtl. L. Rep. News & Analysis 10455-10465 (2016).
On October 24, 2016 at the The Evolving Structure of the U.S. Treasury Market Second Annual Conference in New York, New York, Chair Mary Jo White delivered a keynote address on Prioritizing Regulatory Enhancements for the U.S. Treasury Market.