Securities Law Prof Blog

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

Tuesday, October 10, 2017

New Securities Law Articles in Print

The following law review articles relating to securities regulation are now available in paper format:

Carlos Berdejo, Small Investments, Big Losses: The States' Role In Protecting Local Investors From Securities Fraud, 92 Wash. L. Rev. 567 (2017).

Matthew R. Stock, Student Article, Dodd-Frank Whistleblower Statute: Determining Who Qualifies as a "Whistleblower", 16 Fla. St. U. Bus. Rev. 131 (2017).

Zachary J. Gubler, A Unified Theory of Insider Trading Law, 105 Geo. L.J. 1225 (2017).

Andrew S. Hovestol, Comment, To Fund Or Not to Fund: Deficiencies in the Wisconsin Crowdfunding Act That Hamper the Viability of Intrastate Crowdfunding, 100 Marq. L. Rev. 1063 (2017).

Tom C.W. Lin, The New Market Manipulation, 66 Emory L.J. 1253 (2017).

Kenneth Oshita, Note, Home Court Advantage? The SEC and Administrative Fairness, 90 S. Cal. L. Rev. 879 (2017).

Victoria Pearce, Note, A Family Affair: Presumption of Benefit If Family Member?, 16 Fla. St. U. Bus. Rev. 175 (2017).

A. Joseph Warburton, Mutual Fund Capital Structure, 100 Marq. L. Rev. 671 (2017).

October 10, 2017 | Permalink | Comments (0)

Sunday, October 1, 2017

Au on SEC Enforcement

Shiu-Yik Au has posted The Effectiveness of SEC Enforcement in Deterring Financial Misconduct on SSRN with the following abstract:

This paper examines how the Securities and Exchange Commission’s (SEC) enforcement actions and whom they target deter future financial misconduct. An enforcement action reduces the incidence of misconduct in other firms in the same industry and metropolitan statistical area (MSA) in the future. Furthermore, an enforcement that punishes a guilty company has a larger deterrence effect on future misconduct than punishing an officer, auditor, attorney, or other entity. In addition, the results are robust to using alternative measures of financial misconduct such as restatements and Fscore. These results have several policy implications on how regulatory agencies can maximize the value of their enforcements.

October 1, 2017 | Permalink | Comments (0)

Goeman on Shareholder Proposals

Carly Goeman has posted The Price Isn't Right: Shareholder Proposals as Opportunities for Institutional Investors to Restore Firm Value and Reduce Pharmaceutical Prices on SSRN with the following abstract:

Surging pharmaceutical prices in the United States create financial strain for patients, insurance companies, and state and federal governments. Regulatory delays and coverage denials due to product prices can also affect shareholders of pharmaceutical companies by depressing stock prices. While a number of industry leaders have acknowledged that dramatic price hikes can damage their businesses, many pharmaceutical companies have not demonstrated a willingness to scale back prices.

This Note considers the use of shareholder proposals to address drug pricing policies at the company level. While shareholders of most companies are generally unable to address pricing policies, a carve-out created by the Securities and Exchange Commission allows shareholders of publicly traded pharmaceutical companies to do so. This Note studies how shareholders can use the carve-out to push for price restraint by either causing a company to include a price restraint proposal in its proxy materials and annual meeting or causing management to negotiate with proponent shareholders in order to convince the shareholders to withdraw their proposals. By evaluating the success of prior attempts to impact drug prices through shareholder proposals, this Note concludes that institutional investors are the linchpin of shareholder success, whether that success is through a vote at the annual meeting or a compromise at the negotiation table. This Note therefore calls on institutional investors to evaluate their portfolios and consider using shareholder proposals to unlock firm value and relieve the financial pressure created by rapidly rising drug prices.

October 1, 2017 | Permalink | Comments (0)

Anderson on Insider Trading

John P. Anderson has posted Insider Trading and the Myth of Market Confidence on SSRN with the following abstract:

Promoting public confidence in securities markets is a policy goal that is frequently cited by commentators, Congress, the courts, regulators, and prosecutors for the adoption and vigorous enforcement of insider trading laws. For example, in describing the motivating purpose and need for the Insider Trading and Securities Enforcement Act of 1988, Congress explained that insider trading “diminishes the public’s faith” in capital markets, adding that “the small investor will be—and has been—reluctant to invest in the market if he feels it is rigged against him.” In the seminal insider trading case United States v. O’Hagan, the U.S. Supreme Court explained that “investors likely would hesitate to venture their capital in a market where [insider trading] is unchecked by law.” More recently, Preet Bharara, who earned the title of “Wall Street Sheriff” by successfully prosecuting over seventy insider trading cases in the wake of the 2008 financial crisis, emphasized that part of his job as the U.S. Attorney for the Southern District of New York was to aggressively prosecute insider trading cases “to bring people back to a level of confidence in the market.” Such expressions of the link between insider trading and market confidence, however, assume far more than they explain.

At least three claims seem implicit in the market confidence argument. First, a large portion of the general public shares the perception that insider trading is economically harmful and morally wrong. Second, this perception will lead potential market participants to stand on the sidelines of any market in which insiders are free to trade on their material nonpublic information. Third, this chilling effect upon market participation will be significant enough to result in an appreciable decrease in market liquidity and therefore an increase in the cost of capital for those who would put it to socially beneficial uses.

This Article challenges the validity of the market confidence claim as a justification for the regulation of insider trading on two grounds. First, insofar as it relies on a sociopsychological claim—that most investors perceive insider trading as economically harmful or morally wrong—it is subject to the problem of false consciousness (i.e., the psychological claim could be true though the shared belief is demonstrably false).

Second, even if the problem of false consciousness is set aside, the market confidence argument’s empirical claims must be proven. Empirical evidence for the market confidence theory is, however, decidedly weak. Studies testing public attitudes concerning insider trading have reflected more ambivalence than fear or indignation. Moreover, there is no clear pattern of market reaction to major insider trading prosecutions, news of pervasive insider trading highlighted by the press, major court decisions affecting the government’s power to enforce against insider trading, or the adoption of insider trading regulations in countries that did not previously regulate it. Perhaps more concerning for the market confidence theory, however, is the ease with which its proponents explain away data that conflicts with its claim by shifting explanations. The impression emerges that the market confidence theory is not just unproven, but worse, unprovable.

The Article concludes by cautioning against relying upon such an unproven or unfalsifiable claim as a justification for existing or expanded civil and criminal insider trading enforcement powers.

October 1, 2017 | Permalink | Comments (0)

Patel on Insider Trading

Menesh Patel has posted Does Insider Trading Law Change Behavior? An Empirical Analysis on SSRN with the following abstract:

Few issues in securities law have excited the popular imagination and generated scholarly interest like insider trading. Yet, a simple but foundational question about insider trading law has received relatively little scholarly attention: Does insider trading law actually influence the amount of insider trading that occurs? This Article tackles this question in the context of one of the highest-profile changes in insider trading law in decades — the Second Circuit’s seminal 2014 decision in United States v. Newman, which substantially weakened insider trading law concerning so called “tippee” liability. The Article’s empirical approach exploits Newman’s change in law to empirically evaluate the effects of changes in insider trading law on insider trading. The Article focuses on insider trading in advance of mergers announced in periods before and after Newman and, for its measure of the extent of insider trading, uses the runup in the stock price of the merger target in advance of the merger’s public announcement. Based on that measure, the Article finds that Newman had a dramatic effect on insider trading, with significantly greater insider trading occurring after Newman than before, thereby providing empirical evidence that insider trading is responsive to changes in insider trading law. The Article provides the first empirical analysis of whether and the extent to which a specific judicial change in insider trading law can influence the amount of insider trading beyond just the trading of corporate insiders. The Article’s empirical findings advance our understanding of the functioning of securities law and inform important policy debates concerning insider trading.

October 1, 2017 | Permalink | Comments (0)

Ibrahim on Crowdfunding

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 — the offering securities over the Internet — is now a reality. But now that crowdfunding is legal, will it be successful? Will crowdfunding be a regular means by which new companies raise money, or will it be relegated to a wasteland of the worst startups and foolish investors? This Article argues that crowdfunding has greater chance of success if regulators abandon the idea that the practice does (and should) employ “crowd-based wisdom.” Instead, I argue that crowdfunding needs intermediation by experts that mirrors 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. Funding portals were originally conceived of as almost completely passive entities who could not subjectively “curate” (or screen) the startups that wished to list on the sites. The final SEC rules permit some funding portal curation, which will allow funding portals to list, on the whole, companies with a better chance of success for investors to choose from.

This Article argues, 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 a site’s 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 nudging from expert investors will give crowdfunding a better chance of facilitating market successes while improving investor transparency by offering heightened guidance from industry experts.


October 1, 2017 | Permalink | Comments (0)

NASAA Releases Annual Enforcement Report

Details are available here.

October 1, 2017 | Permalink | Comments (0)

SEC Exposes Two Initial Coin Offerings Purportedly Backed by Real Estate and Diamonds

Details are available here.

October 1, 2017 | Permalink | Comments (0)

Tuesday, September 26, 2017

Reuters: U.S. SEC Chair Grilled by Senate Panel Over Cyber Breach, Equifax

Michelle Price and Pete Schroeder of Reuters have authored an article, U.S. SEC Chair Grilled by Senate Panel Over Cyber Breach, Equifax, reporting on Chair Clayton's testimony today before the Senate Banking Committee.  Their story states in part:

The chairman of the U.S. Securities and Exchange Commission (SEC) told a congressional committee on Tuesday he did not believe his predecessor Mary Jo White knew of a 2016 cyber breach to the regulator’s corporate disclosure system, the exact timing of which could not be known “for sure.”

Jay Clayton, who was formally appointed to his role in May, also said listed companies should disclose more detailed information on cyber breaches “sooner,” and that the U.S. regulator was working on new guidelines to ensure this.

September 26, 2017 | Permalink | Comments (0)

Monday, September 25, 2017

SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors

The press release states in part:

The Securities and Exchange Commission today announced two new initiatives that will build on its Enforcement Division’s ongoing efforts to address cyber-based threats and protect retail investors. The creation of a Cyber Unit that will focus on targeting cyber-related misconduct and the establishment of a retail strategy task force that will implement initiatives that directly affect retail investors reflect SEC Chairman Jay Clayton’s priorities in these important areas.

September 25, 2017 | Permalink | Comments (0)

New Securities Law Articles in Print

The following law review articles relating to securities regulation are now available in paper format:

S. Burcu Avci & H. Nejat Seyhun, Why Don't General Counsels Stop Corporate Crime?,19 U. Pa. J. Bus. L. 751 (2017).

Lucian A. Bebchuk & Kobi Kastiel, The Untenable Case for Perpetual Dual-Class Stock, 103 Va. L. Rev. 585 (2017).

Stewart L. Brown, Mutual Funds and The Regulatory Capture of the SEC, 19 U. Pa. J. Bus. L. 701 (2017).

Herve Gouraige, Do Federal Courts Have Constitutional Authority to Adjudicate Criminal Insider-Trading Cases?, 69 Rutgers U. L. Rev. 47 (2016).

Virginia Harper Ho, "Comply or Explain" and the Future of Nonfinancial Reporting, 21 Lewis & Clark L. Rev. 317 (2017).

Darian M. Ibrahim, Crowdfunding Without the Crowd, 95 N.C. L. Rev. 1481 (2017).

Katherine A. Pancak & Thomas J. Miceli, Just Compensation for the Taking of Mortgage Loans, 13 J.L. Econ. & Pol'y 143 (2017).

Alexander D. Selig, A Practitioner's Guide to When Real Estate Becomes a Security, 9 Elon L. Rev. 391 (2017).

D. Gordon Smith, Insider Trading and Entrepreneurial Action, 95 N.C. L. Rev. 1507 (2017).

Celia R. Taylor, The Unsettled State of Compelled Corporate Disclosure Regulation After the Conflict Mineral Rule Cases, 21 Lewis & Clark L. Rev. 427 (2017).

September 25, 2017 | Permalink | Comments (0)

Monday, September 18, 2017

Sharfman on Dual Class Shares

Bernard S. Sharfman has posted A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs on SSRN with the following abstract:

The shareholder empowerment movement (movement) has renewed its effort to eliminate, restrict or at the very least discourage the use of dual class share structures in initial public offerings (IPOs). This renewed effort was triggered by the recent Snap Inc. IPO that utilized non-voting stock. Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.

Unless there are significant sunset provisions, a dual class share structure allows insiders to maintain voting control over a company even when, over time, there is both an ebbing of superior leadership skills and a significant decline in the insiders’ ownership of the company’s common stock. Yet, investors are willing to take that risk even to the point of investing in dual class shares where the shares have no voting rights and barely any sunset provisions, such as in the recent Snap Inc. IPO. Why they are willing to do so is a result of the wealth maximizing efficiency that results from the private ordering of corporate governance arrangements and the understanding that agency costs are not the only costs of governance that need to be minimized.

In this essay, Zohar Goshen and Richard Squire’s newly proposed “principal-cost theory,” “each firm’s optimal governance structure minimizes the sum of principal costs, produced when investors exercise control, and agent costs, produced when managers exercise control,” is used to argue that the use of dual class shares in IPOs is a value enhancing result of private ordering, making the movement’s renewed advocacy unwarranted.

September 18, 2017 | Permalink | Comments (0)

Thursday, September 14, 2017

NASAA Issues Advisory on Binary Option Schemes

NASAA has issued an advisory regarding binary option schemes.  A notice provided on the NASAA site states:

The North American Securities Administrators Association (NASAA) is cautioning investors about schemes related to binary options amid the proliferation of online binary option platforms and a growing number of related investor complaints. The advisory provides information and resources to help investors better understand binary options, their risks and where to turn for help.

The advisory also discusses common investor complaints and offers common tactics and warning signs of schemes related to binary options, including: unsolicited investment offers; high-pressure sales tactics; personal information requests; and a lack of information about the offering firm or its management.

The full advisory is available here.

September 14, 2017 | Permalink | Comments (0)

SEC Monitoring Impact of Hurricane Irma on Capital Markets, Continues to Monitor Impact of Hurricane Harvey

An SEC press release is available here.

September 14, 2017 | Permalink | Comments (0)

New Securities Law Articles in Print

The following law review articles relating to securities regulation are now available in paper format:

Eric C. Chaffee, The Supreme Court as Museum Curator: Securities Regulation and the Roberts Court, 67 Case W. Res. L. Rev. 847 (2017).

Zachary Naidich, Note, Regulation A-Plus's Identity Crisis: A One-Size-Fits-None Approach to Capital Formation, 82 Brook. L. Rev. 1005 (2017).

James Walsh, Comment, "Look Then to Be Well Edified, When the Fool Delivers the Madman": Insider-Trading Regulation After Salman v. United States, 67 Case W. Res. L. Rev. 979 (2017).

Karen E. Woody, No Smoke and No Fire: The Rise of Internal Controls Absent Anti-Bribery Violations in FCPA Enforcement, 38 Cardozo L. Rev. 1727 (2017).

September 14, 2017 | Permalink | Comments (0)

Saturday, September 9, 2017

Bridget Fitzpatrick Named SEC Chief Litigation Counsel

Details are available here.

September 9, 2017 | Permalink | Comments (0)

Commissioner Piwowar on Exchange Traded Products

On September 8, 2017, Commissioner Michael S. Piwowar delivered a speech at the SEC-NYU Dialogue on Exchange-Traded Products. The text of the speech is available here.

September 9, 2017 | Permalink | Comments (0)

Commissioner Stein on Exchange-Traded Products

On September 8, 2017, Commissioner Kara M. Stein delivered a speech at the SEC-NYU Dialogue on Exchange-Traded Products.  The text of the speech is available here

September 9, 2017 | Permalink | Comments (0)

New Securities Law Articles in Print

The following law review articles relating to securities regulation are now available in paper format:

Miriam H. Baer, Reconceptualizing the Whistleblower's Dilemma, 50 UC Davis L. Rev. 2215 (2017).

Anthony B. Benvegna, Note, A Guiding Light to a More Efficient Market: Why High-Frequency Trading Is Not a Flash in the Dark, 16 J. Int'l Bus. & L. 309 (2017).

Joshua A. Gold, Note, Equity Crowdfunding of Film--Now Playing at a Computer Near You, 95 Tex. L. Rev. 1367 (2017).

Alexander I. Platt, Unstacking the Deck: Administrative Summary Judgment and Political Control, 34 Yale J. on Reg. 439 (2017).

Jennifer Robichaux Carter, Comment, Hedge Funds Should Be Able to Challenge Patent Validity Using Inter Partes Review Despite Mixed Motives, 54 Hous. L. Rev. 1315 (2017).

Kenneth M. Rosen, Limits on Exporting Corporate Social Responsibility Through Domestic Regulation, 12 S.C. J. Int'l L. & Bus. 41 (2015).

Paolo Saguato, The Ownership of Clearinghouses: When "Skin in the Game" Is Not Enough, The Remutualization of Clearinghouses, 34 Yale J. on Reg. 601 (2017).


September 9, 2017 | Permalink | Comments (0)

Iannarone on Robo-Advisers

Nicole G. Iannarone has posted Computer as Confidant: Digital Investment Advice and the Fiduciary Standard on SSRN with the following abstract: 

Digital investment advisers are the fastest growing segment of financial technology (fintech) and are disrupting traditional investment advisory delivery models. The computer-led investment advisory service model may be growing particularly quickly due to a confluence of social and political factors. Politicians and regulators have increasingly focused on the standards of care applicable to investment advice providers. Fewer Americans are ready for retirement and many lack access to affordable investment advice. At the same time, comfort with digital platforms have increased, with some preferring electronic interaction over human interaction. Claiming that they can democratize retirement service by providing advice meeting a fiduciary standard at a fraction of the traditional pricing model, robo-advisers hope to capitalize on these social movements and argue that they provide a solution: conflict-free advice to investors with portfolios of all sizes. Though they have voluntarily subjected themselves to the requirements of the Investment Advisers Act of 1940 (1940 Act), questions remain as to how robo-advisers will meet the fiduciary standard required by such registration. The essay recommends a two-pronged approach for the regulation of robo-advisers in the near term. First, existing regulatory tools such as examination, enforcement, and disclosure should be deployed to robustly explore the sufficiency and malleability of their existing parameters before crafting any new regulatory schemes. Second, the disclosure device should be studied to determine whether the intended beneficiary of the disclosure, retail consumers, comprehend the information being disclosed to them and whether changes to the format, delivery, and/or content of disclosures would better protect consumer investors.

September 9, 2017 | Permalink | Comments (0)