Friday, June 13, 2014
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending June 13, 2014).
Tuesday, June 10, 2014
Mike Koehler of the FCPA Professor Blog has authored a new book, The Foreign Corrupt Practices Act in a New Era. In Koehler's words, "The book dissects the FCPA’s new era and readers from the boardroom, to the courtroom, to the classroom will benefit from the nine chapters of the book which place the FCPA’s new era in context and provide a practical and provocative analysis of the FCPA, its enforcement, and related topics." Although I haven't reviewed a copy yet, based on Koehler's depth and breadth and experience with the FCPA, I highly recommend this book. More details are available here.
Monday, June 9, 2014
On June 5, 2014 in Washington, D.C., Commissioner Daniel M. Gallagher delivered Remarks at SEC Historical Society 2014 Annual Meeting: On the 80th Anniversary of the SEC.
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending June 6, 2014).
The International Organization of Securities Commissions published a report on Good Practices on Reducing Reliance on CRAs in asset management. The press release is available here.
The following law review articles relating to securities regulation are now available in paper format:
Steven J. Brams & Joshua R. Mitts, Law and Mechanism Design: Procedures to Induce Honest Bargaining, 68 N.Y.U. Ann. Surv. Am. L. 729 (2013).
Christine Spinella Davis et al., Recent Developments in Business Litigation, 49 Tort Trial & Ins. Prac. L.J. 89 (2013).
Marlene Martin, Comment, Can Shareholders "Bring the Sun" to Climate Change Disclosure?--Reflections on Shareholders' Power to Fix environmental Problems Through Proposals on Climate Change, 14 Wyoming L. Rev. 289 (2014).
Robert J. Rhee, On duopoly and Compensation Games in the Credit Rating Industry, 108 Nw. U. L. Rev. 85 (2013).
Tuesday, June 3, 2014
Michael D. Guttentag has posted A New Light on Public Company Political Spending Disclosure on SSRN with the following abstract:
Mandatory disclosure is a central feature of securities regulation in the United States, yet there is little agreement regarding precisely how the Securities and Exchange Commission (“SEC”) should determine what public companies are required to disclose. The current debate about whether the SEC should require the disclosure of political spending by public companies is but one example of this lack of consensus.
In this Article I first answer the more general question of how to evaluate any proposed public company mandatory disclosure requirement. I then apply this new evaluation method to the specific question of whether public companies should be required to disclose political spending. This analysis shows, based, in part, on previously unpublished empirical findings, that the evidence does not support requiring public companies to disclose political spending.
Johannes W. Fedderke and Marco Ventoruzzo have posted Do Conservative Justices Favor Wall Street? Ideology and the Supreme Court's Securities Regulation Decisions on SSRN with the following abstract:
The appointment of Supreme Court justices is a politically-charged process and the "ideology" (or "judicial philosophy") of the nominees is perceived as playing a potentially relevant role in their future decision-making. It is fairly easy to intuit that ideology somehow enters the analysis with respect to politically divisive issues such as abortion and procreative rights, sexual conduct, freedom of speech, separation of church and state, gun control, procedural protections for the accused in criminal cases, governmental powers. Many studies have tackled the question of the relevance of the ideology of the justices or appellate judges on these issues, often finding a correlation between policy preferences and decisions.
This Paper fills a gap in the existing literature examining the correlation between ideology and judicial decision-making in the highly technical area of securities regulation. To put it more provocatively, we address the question if "conservative justices" are more "pro Wall Street", and "liberal justices" more "pro investors." Since the enactment of the securities laws in the 1930s, the Supreme Court has decided a significant number of cases in this field. Even if the regulation of financial markets might seem less politically-charged than some of the issues mentioned above, we argue that there is meaningful room for political ideology and policy preferences in deciding these cases.
The Paper is organized as follows. First we offer a brief overview of the different systems used for the selection of the judiciary, focusing in particular on the appointment of Supreme Court Justices, but considering also other systems. We underline the relevance of political considerations in the selection process, which could influence the ideology of selected judges and justices. We also discuss more analytically the space that judicial interpretation can have in the area of securities regulation, and we summarize the existing literature on the correlation between the ideology of judges and justices and their positions on the bench, including measures of the elusive concept of "ideology".
The core of our study, and its most important contribution, is in the second part. A first section is dedicated to the methodological approach followed in collecting and coding the data used, explaining issues such as the selection of the cases considered for the empirical analysis, and the coding of the decisions and of the position of the justices on the political spectrum. Several interesting and complex issues, and some judgment-calls, are discussed in this part. For example, different authors have taken diverging positions on whether an active market for control and hostile takeovers are beneficial to investors, or whether rigorous insider trading prohibitions are desirable for fostering efficient markets. We take the position that both takeovers and insider trading protect investors, and we coded the cases we examined accordingly.
Finally, we present the major empirical results. Our data confirm that, even using different definitions and measures of "ideology", conservative justices are more "pro Wall Street" and "free markets", and liberal justices are more "pro investors" and "regulated markets", more concerned about market failures, and more in favor of private plaintiffs or government intervention. We also use the data collected to explore other questions. For example, we consider if and how the "pro-market" attitude of the Court correlates with the evolution of some general economic variables (i.e., if in times of economic growth and bullish markets justices tend to be more "free-marketers"). We also examine when justices are more consistent in their decisions in this area, when the Court was more divided, and which Courts of Appeals are more often overruled by the Supreme Court.
Two caveats are important. First, we do not associate any negative implication with the fact that "ideology" plays a role in deciding "hard cases." Obviously this does not in any way imply that the justices distort the law in order to achieve pre-determined policy goals, but simply that, when the law is ambiguous, different and legitimate interpretative approaches and policy considerations might lead to different outcomes. Second, while the data indicate a meaningful correlation, the correlation does not entirely explain the decision-making of the justices, therefore confirming the independence and prestige of the Supreme Court and its members.
Monday, June 2, 2014
On May 28, 2014 in Chicago, Illinois, Kevin M. Stout, the SEC's Senior Associate Chief Accountant, delivered a Presentation to the PCAOB Forum on Auditing Smaller Broker-Dealers.
Sunday, June 1, 2014
The following law review articles relating to securities regulation are now available in paper format:
Caitlin A. Bubar, Note, Improving Statutory Deadlines in Agency Action: Learning from the SEC's Missed Deadlines under the JOBS Act, 92 Tex. L. Rev. 995 (2014).
Ryan M. Carpenter, Note, Providing Equal Investment Opportunity Via Securities Exchange Act Section 13(f), 46 Conn. L. Rev. 763 (2013).
Cecilia A. Glass, Note, Sword or Shield? Setting Limits on SLUSA's Ever-Growing Reach, 63 Duke L.J. 1337 (2014).
John Morley, The Separation of Funds and Managers: A Theory of Investment Fund Structure and Regulation, 123 Yale L.J. 1228 (2014).
Symposium: Revolution in the Regulation of Financial Advice: The U.S., The U.K. and Australia, Introduction by Francis J. Facciolo; articles by Ryan K. Bakhtiari, Katrina Boice, Jeffrey S. Majors, Mercer Bullard, Christine Lazaro, Andrew Melnick, Paul R. Walsh, David W. Johns, Anita K. Krug, David G. Tittsworth, Richard Batten, Gail Pearson, Arthur B. Laby and Gerard McMeel. 87 St. John's L. Rev. 297-627 (2013).
Thursday, May 29, 2014
On May 29, 2014 in Washington, D.C., Commissioner Daniel M. Gallagher offered Remarks at Municipal Securities Rulemaking Board’s 1st Annual Municipal Securities Regulator Summit.
Darien Shanske has posted The Feds are Already Here: The Federal Role in Municipal Debt Finance on SSRN with the following abstract:
Should the federal government be involved in the regulation of municipal debt finance? The answer is arguably not. But this theoretical dispute is not the focus of this Article because, in fact, the federal government already regulates municipal debt finance extensively, generally much more extensively than the states regulate their municipalities’ use of debt. The primary source of federal regulation is the securities laws. Less well-known is that federal tax law also serves as an important constraint. This Article surveys and critically evaluates these federal laws, and comes to three tentative conclusions. First, the current federal oversight “system,” unplanned and ad hoc as it is, has been effective. Second, in part because the current system has never been thought of as a comprehensive system, there are low-hanging fruit in terms of making the system work better. To the extent the federal government does not put these reforms in place, states should. Third, even an optimally operating federal overlay does not absolve the states from more careful regulation of the financial affairs of their localities, particularly as to the use of debt. Above all, what the federal government does not — and ought not — do is provide localities with the expertise to use debt optimally; this is another area where the states should focus their reform efforts.
Shimin Chen and Donghui Wu have posted Does Audit Reporting Matter in Pricing Securities? Evidence from an Emerging Market on SSRN with the following abstract:
Prior research on whether the market responds to auditors’ opinions provides mixed results. We revisit this issue in China. The stock market of China is dominated by individual investors, who are less sophisticated in assimilating value-relevant information such as modified audit opinions (MAOs). Also, audit modifications due to the violations of GAAP or disclosure rules (GAAP/DISC MAOs), which are subtler than going concern opinions (GCOs) in their value implications and thus more likely to be mispriced, are permissible in China. Chinese stock market thus gives mispricing its best chance of being detected. We find that MAOs predict firms’ future financial performance, and the market reaction during the short window around the disclosure of MAOs is also consistent with such predictive power of MAOs. Importantly, MAO disclosure is not followed by negative long-term stock returns, suggesting that stock price adjustments to MAOs are speedy and unbiased. These findings hold for both GCOs and GAAP/DISC MAOs. Together, our findings support the informativeness of audit opinions and cast doubt on the argument that investors inefficiently use this important information in pricing securities because of information processing bias.
Edward X. Li, Charles E. Wasley, and Jerold L. Zimmerman have posted The Disclose or Abstain Incentive to Issue Management Guidance on SSRN with the following abstract:
Prior research generally argues that managers issue management earnings forecasts (MFs) to secure capital market benefits (i.e., reduce information asymmetry between managers and investors to lower a firm’s cost of capital), to reduce the firm’s litigation costs, or to allow managers to trade opportunistically in their firm’s stock. We discuss and test whether some MFs are issued because managers have an affirmative duty under Rule 10b-5 of the Securities Acts to disclose all material information or to abstain from trading in their firm’s securities. Four sets of tests support our conjecture that managers issue some MFs to comply with their duty under Rule 10b-5. Since prior MF studies have typically ignored the alternative explanation that managers issue some MFs to comply with disclose or abstain obligations the inferences drawn from such studies about managerial incentives to issue MFs likely overstate the economic significance of the variables used to capture capital market or opportunistic incentives for MF disclosure.
Andrew Odlyzko has posted Economically Irrational Pricing of 19th Century British Government Bonds on SSRN with the following abstract:
British government bonds formed the deepest, most liquid, and most transparent financial market of the 19th century. This paper shows that those bonds had long periods, extending over decades, of anomalous behavior, in which Consols, the largest and best known of these instruments, were noticeably overpriced relative to equivalent gilts which offered the same interest rate and the same guarantee of payment. The British government did take advantage of this market inefficiency, but apparently to a lesser extent than it could have.
This finding and similar ones for other comparable pairs of British gilts appear to provide the most extreme counterexamples documented so far to the Efficient Markets Hypothesis and to the Law of One Price. They also offer a promising test case for exploring the effects of mass psychology on economic behavior. It appears that several communities held divergent views on the values of securities that standard theory provides unambiguous answers for.
The Supplement for this paper are available at the following URL: http://ssrn.com/abstract=2435437
Hester Peirce has posted Securities Lending and the Untold Story in the Collapse of AIG on SSRN with the following abstract:
American International Group, Inc. (AIG), a large insurance company, received a massive bailout during the financial crisis in response to difficulties centered on the company’s multifaceted exposure to residential mortgage-backed securities. The company is back on its feet, albeit in more streamlined form and with a new overseer — the Federal Reserve. This paper focuses on a piece of the AIG story that is rarely told — the role of the company’s securities-lending program in imperiling the company and some of its insurance subsidiaries. The paper argues that regulatory responses to AIG have been inapt. AIG did not need another regulator, but better risk management. The markets would have conveyed that message clearly had regulators not intervened to ensure AIG’s survival. This paper adds the missing piece to the AIG story in an effort to challenge the notion that more regulatory oversight for companies like AIG will prevent future crises.