Securities Law Prof Blog

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

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Wednesday, July 2, 2014

Aitken, Aspris, Foley & Harris on Algorithmic Trading

Michael J. Aitken, Angelo Aspris, Sean Foley, and Frederick H. deB. Harris have posted The Effects of Algorithmic Trading on Security Market Quality on SSRN with the following abstract:

We estimate in a systems framework the effect of algorithmic trading on security market quality, defined to include market manipulation at the close, information leakage prior to price-sensitive announcements, and effective spreads. Using cancellation proxies to identify AT, we show that greater AT can reduce market manipulation and information leakage as well as spreads. The data cover all securities on the London Stock Exchange and on NYSE-Euronext Paris four years before and after MiFID1. MiFID1 increased leakage and spreads with mixed effects on market manipulation. We address robustness to end-of-quarter reporting deadlines, analyze the over-identifying restrictions, and perform both Hausman and Stock-Yogo tests of the exogeneity and strength of our AT instruments.

July 2, 2014 | Permalink | Comments (0) | TrackBack (0)

Campbell on Small Business Capital Formation

Rutheford B. Campbell Jr. has posted The New Regulation of Small Business Capital Formation: The Impact - If Any - Of the Jobs Act on SSRN with the following abstract:

An efficient access to external capital by businesses is essential to a market economy. Small businesses, which amount to a vital component of our market economy, face not only structural and economic disadvantages but also legal obstacles in their search for essential, external capital.

The Titles II, III and IV of the Jobs Act were designed, at least apparently, to ameliorate inefficient legal rules governing small businesses’ access to external capital. While the act itself is not without challenges and significant misdirection, it offered the Commission an opportunity to construct regulatory regimes that materially enhance efficient, small business capital formation. The Commission, however, has failed to take full advantage of this opportunity.

Title II of the Jobs Act, as implemented by Commission regulations, changes Regulation D to permit a broad solicitation for investors in Rule 506 offerings. That change amounts to an efficient improvement that will provide some benefit to small businesses in search of external capital. A requirement for the exemption provided by the revised Rule 506, however, is that sales must be restricted to accredited investors only, and that by definition is a limited source of capital for small businesses.

Without significant changes to the Commission’s proposed rules implementing Title III (crowdfunding), the crowdfunding exemption will be less available for small business issuers than efficiency would require. The Commission’s proposed rules are plagued by excessive disclosure requirements for small offerings, integration complications, and unmanageable risks created by actions of intermediaries.

Without significant changes to the Commission’s proposed rules implementing Title IV (popularly called Regulation A-Plus), the exemption provided by Regulation A-Plus will be essentially unavailable for small businesses. This is due to excessive disclosure requirements for small offerings and, more importantly, the failure to provide an effective preemption of state authority over small Regulation A-Plus offerings.

The problems regarding the proposed crowdfunding regulations and the proposed Regulation A-Plus regulations are fixable, if the Commission has the will.


July 2, 2014 | Permalink | Comments (0) | TrackBack (0)

Merrill, Nadauld, Stulz & Sherlund on Mortgage Backed Securities

Craig B. Merrill, Taylor Nadauld, Rene M. Stulz, and Shane M. Sherlund have posted Were There Fire Sales in the RMBS Market? on SSRN with the following abstract:

Many observers have argued that the fall in RMBS prices during the crisis was partly caused by fire sales. We provide an explanation for why financial institutions may have engaged in fire sales using a unique dataset of RMBS transactions for insurance companies. We show that risk-sensitive capital requirements and mark-to-market accounting can jointly create incentives for capital-constrained financial institutions to engage in fire sales of stressed securities because the increased risk can make it too expensive to hold such securities. Further, we find that, in general, RMBS prices behaved as would be expected in the presence of fire sales.

July 2, 2014 | Permalink | Comments (0) | TrackBack (0)

Chu on Shareholder Litigation

Yongqiang Chu has posted Shareholder Litigation and the Cost of Bank Loans -- Evidence from a Natural Experiment on SSRN with the following abstract:

I study how the threat of shareholder litigation affects the cost of bank loans using a natural experiment based on a ruling by the Ninth Circuit Court of Appeals that makes class action shareholder litigation more difficult. I find that increasing the difficulty of securities class action suit decreases loan spreads, and the effect is stronger for firms closer to bankruptcy. The result is consistent with the argument that shareholder litigation can lead to wealth extraction from lenders in bankruptcy. I also find that the ruling increases loan spreads for firms with better credit quality and weaker corporate governance mechanisms, which is consistent with the argument that the threat of shareholder litigation can help discipline managers.

July 2, 2014 | Permalink | Comments (0) | TrackBack (0)

Koehler on the FCPA

Mike Koehler has posted Foreign Corrupt Practices Act Ripples on SSRN with the following abstract:

An obvious reason to comply with the Foreign Corrupt Practices Act (“FCPA”) is that non-compliance can expose a company to a criminal or civil FCPA enforcement action by the Department of Justice (“DOJ”) and/or the Securities and Exchange Commission (“SEC”). However, this Article highlights that settlement amounts in an actual FCPA enforcement action are often only a relatively minor component of the overall financial consequences that can result from FCPA scrutiny or enforcement in this new era.

By coining a new term of art - the “three buckets” of FCPA financial exposure - and through various case studies and examples, this Article demonstrates how FCPA scrutiny and enforcement can impact a company’s business operations and strategy in a variety of ways from: pre and post-enforcement action professional fees and expenses; to market capitalization; to cost of capital; to merger and acquisition activity; to impeding or distracting a company from achieving other business objectives; to private shareholder litigation; to offensive use of the FCPA by a competitor or adversary to achieve a business objective or to further advance a litigating position.

This Article thus shifts the FCPA conversation away from a purely legal issue to its more proper designation as a general business issue that needs to be on the radar screen of business managers operating in the global marketplace. By highlighting the many ripples of FCPA scrutiny and enforcement, it is hoped that more business managers can view the importance of FCPA compliance more holistically and not merely through the narrow lens of actual enforcement actions.


July 2, 2014 | Permalink | Comments (0) | TrackBack (0)

Jiang, Wang & Wang on the Ratings of MBS and ABS

John (Xuefeng) Jiang, Isabel Yanyan Wang, and Kailong (Philip) Wang have posted Former Rating Analysts and the Ratings of MBS and ABS: Evidence from LinkedIn on SSRN with the following abstract:

Using self-posted profiles on LinkedIn, we identify 391 rating analysts who previously work in the structured finance divisions of Moody’s, S&P or Fitch but later join issuers of mortgage-backed securities (MBS) and asset-backed securities (ABS) from 1997 to 2007. We find that MBS and ABS issued by firms that employ more former rating analysts suffer larger downgrades subsequently, implying that these former analysts help issuers inflate the initial ratings. Further analyses suggest former analysts influence ratings through their specialized knowledge in structured finance. We also find investors in AAA rated securities do not price the risk of rating inflation induced by former analysts.

July 2, 2014 | Permalink | Comments (0) | TrackBack (0)

Hu on Disclosure

Henry T. C. Hu has posted Disclosure Universes and Modes of Information: Banks, Innovation, and Divergent Regulatory Quests on SSRN with the following abstract:

In 2013, a new system for mandatory public disclosure came into effect, the first since the creation of the Securities and Exchange Commission (SEC) in 1934. Today, major banks and certain other entities must make disclosures mandated not only by the SEC, but also by a new system developed by the Federal Reserve Board and other U.S. bank regulators acting in the shadow of the Basel Committee on Banking Supervision and the Dodd-Frank Act. Already, this parallel system, which stemmed in large part from a belief that disclosures as to the complex risks flowing from modern financial innovation were manifestly inadequate, dwarfs the SEC system in sophistication as to the quantitative aspects of market risk and the impact of economic stress.

The overall morphology of mandatory public information has changed in elemental ways, spanning two parallel regulatory universes with divergent ends and means. The SEC system is directed at the interests of investors and market efficiency, while the bank regulator system is directed at the well-being of the entities themselves and the stability of the financial system. The regulatory means diverge as well, not only as to specific risk-related disclosures, but even as to overarching concepts like "materiality" and the availability of private enforcement.

This Article is the first academic work to consider the new morphology of public information. Refining the conceptual framework for "information" introduced in a prior (2012) work ("Too Complex to Depict?"), I set out three approaches to information. First, the longstanding approach to information is termed the "descriptive mode," one that relies on "intermediary depictions" of objective reality. An intermediary — such as a corporation issuing shares — stands between objective reality and the investor. The corporation observes and analyzes the objective reality, crafts a depiction of the pertinent aspects, and transmits its depiction to investors. With revolutionary advances in computer- and web-related technologies, investors need no longer rely exclusively on the descriptive mode and its intermediary depictions. The "transfer mode" allows "pure information" about the objective reality to be transmitted directly to investors. The "hybrid mode" draws on elements of both of the other modes, and investors rely on “moderately pure information.”

This Article also offers pathways for reform. In terms of modes, the most incremental step would be to improve the implementation of the descriptive mode, especially at the SEC. The key SEC disclosure requirements have been substantially frozen even as banking and financial innovation have undergone epochal changes. More fundamentally, regulators have invested almost entirely in the descriptive mode. Giving full consideration to all three modes — modal "informational neutrality" — would lead to a more diversified portfolio of informational strategies, one better suited to the informational challenges of financial innovation. The Article outlines examples of transfer and hybrid mode strategies and the need to address longstanding issues associated with confidential treatment requests and the Freedom of Information Act.

Reforms are also necessary at the level of the morphology. In the long run, the existence of parallel universes with divergent regulatory quests is unsustainable. The regulatory objectives of the two systems not only diverge, but sometimes conflict. A disclosure the SEC system deems essential for investor protection and market efficiency can be contrary to the bank well-being and financial system stability goals of the bank regulator system (and of the new Financial Stability Oversight Council). In the short run, boundary-setting and a modest form of "informational neutrality" across regulatory systems (including as to judicial review of rule-making) can promote coordination.

July 2, 2014 | Permalink | Comments (0) | TrackBack (0)

James McNamara Named as Deputy Chief Human Capital Officer in the SEC's Office of Human Resources

Details available here.

July 2, 2014 | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 1, 2014

Ferrarini & Saguato on Financial Market Infrastructures

Guido A. Ferrarini and Paolo Saguato have posted Regulating Financial Market Infrastructures on SSRN with the following abstract:

This paper focuses on the impact of financial market infrastructures (FMIs) and of their regulation on the post-crisis transformation of securities and derivatives markets. It examines, in particular, the role that trading and post-trading FMIs, and their new regulatory regime, are playing in the expansion of ‘public’ securities and derivatives markets, and the progressive shrinkage of ‘private’ markets (which broadly coincide with the ‘unregulated’ or ‘less regulated’ over-the-counter (OTC) markets).

The paper provides an overview of the policy approaches underlying the international crisis-era reforms to FMIs, and focuses on the dichotomy between the ‘systemic risk’ and ‘transaction costs’ approaches to financial markets and FMIs regulation. By reviewing the current move from ‘private’ markets to ‘public’ markets internationally, and with respect to the EU and US regimes, we analyze the role of trading infrastructures as liquidity providers, both in the securities markets and in the derivatives markets. And, shifting the focus to post-trading infrastructures – central clearing houses (CCPs), central securities depositories (CSDs), and trade repositories (TRs) – we address their role in supporting financial stability and market transparency. We conclude by identifying how regulators are now more deeply involved in FMIs’ governance and operation. We argue that such policy approach resulted in regulatory initiatives which move in the direction of increasing the systemic scope of FMIs, introducing elements of publicity in private markets, and calling for higher public supervision.

July 1, 2014 | Permalink | Comments (0) | TrackBack (0)

Barth, Biscarri, Kasznik & López-Espinosa on Available for Sale Securities

Mary E. Barth, Javier Gómez Biscarri, Ron Kasznik, and Germán López-Espinosa have posted Bank Earnings and Regulatory Capital Management Using Available for Sale Securities on SSRN with the following abstract:

We address banks’ use of available-for-sale (AFS) securities to manage earnings and regulatory capital. Although prior research investigates banks’ use of realized securities gains and losses to smooth earnings and regulatory capital, results are mixed. Creation of AFS securities and enhanced disclosures permit more powerful tests and new insights. We find banks realize gains and losses on AFS securities to smooth earnings and regulatory capital, and banks with more accumulated unrealized gains and losses do so to a greater extent. Banks with negative earnings realize losses to take a big bath, unless they have accumulated unrealized gains that offset the negative earnings. If so, they smooth earnings. Our inferences apply to non-listed and listed banks, which suggests the incentives do not derive solely from public capital market pressures. Our findings reveal the discretion afforded by historical cost-based accounting for AFS securities gains and losses enables banks to manage earnings and regulatory capital.

July 1, 2014 | Permalink | Comments (0) | TrackBack (0)

Ali, Ramsay & Saunders on Securities Lending

Paul Ali, Ian Ramsay, and Benjamin Saunders have posted The Legal Structure and Regulation of Securities Lending on SSRN with the following abstract:

This paper examines the legal structure of securities lending in Australia, and also Europe, the United Kingdom and United States. It provides an analysis of the widely used industry documents, the Australian Master Securities Lending Agreement and the Global Master Securities Lending Agreement (GMSLA). It outlines the regulation of securities lending and short selling, including restrictions on short selling and the applicable disclosure requirements. It discusses the collapse of Opes Prime and the key Federal Court decision which considered the legal effect of the AMSLA. It also outlines the regulatory responses to securities lending and short selling taken by IOSCO, in Europe, the United States and the United Kingdom during the global financial crisis.

July 1, 2014 | Permalink | Comments (0) | TrackBack (0)

Collins & Gallagher on Money Market Fund Portfolios

Sean Collins and Emily Gallagher have posted Assessing Credit Risk in Money Market Fund Portfolios on SSRN with the following abstract:

This paper measures credit risk in prime money market funds (MMFs), studies how such credit risk evolved in 2011-2012, and tests the efficacy of the Securities and Exchange Commission’s (SEC) January 2010 reforms, which were designed to improve the ability of MMFs to withstand severe market stresses. To accomplish this, we create a measure called “expected loss-to-maturity” or ELM. This is an estimate of the credit default swap premium (CDS) needed to insure the fund’s portfolio against credit losses. We also calculate by Monte Carlo the cost of insuring a fund against losses amounting to over 50 basis points. We find that ELM for prime MMFs was 15 basis points on an asset-weighted average basis over 2011-2012. Credit risk of prime MMFs rose from June to December 2011 before receding in 2012. Contrary to common perceptions, this did not primarily reflect funds’ credit exposure to eurozone banks because funds took measures to reduce this exposure. Instead, credit risk in prime MMFs rose because of the deteriorating credit outlook of banks in the Asia/Pacific region. Finally, we find evidence that the SEC’s 2010 liquidity and weighted average life (WAL) requirements reduced the credit risk of prime MMFs.

July 1, 2014 | Permalink | Comments (0) | TrackBack (0)

Levi, Segal & Segal on Financial Reporting

Shai Levi, Benjamin Segal, and Dan Segal have posted Does Corporate Governance Make Financial Reports Better, or Just Better for Equity Investors? on SSRN with the following abstract:

Financial reports should provide useful information to both shareholders and creditors, according to U.S. accounting principles. However, directors of corporations have fiduciary duties only toward equity holders, and those fiduciary duties normally do not extend to the interests of creditors. We examine whether this slant in corporate governance biases financial reports in favor of equity investors, and in particular leads to a downward bias in reported debt that can hurt creditors. We focus on firms’ decision to issue structured debt securities that are classified as equity in financial reports and can circumvent debt covenants. We find that when the local legal regime requires directors to consider creditors’ interests, firms are less likely to use such structured transactions, particularly if the board of directors of the firm is independent. Our results suggest that when corporate governance is designed to protect only equity holders, firms’ financial reports serve equity holders’ interests at the expense of other stakeholders.

July 1, 2014 | Permalink | Comments (0) | TrackBack (0)

Becht, Polo & Rossi on Shareholder Voting

Marco Becht, Andrea Polo, and Stefano Rossi have posted Does Mandatory Shareholder Voting Prevent Bad Acquisitions? on SSRN with the following abstract:

Corporate acquisitions can be ruinous for acquirer shareholders. Can shareholder voting prevent such corporate disasters? Previous empirical studies based on U.S. data are inconclusive because shareholder approval is discretionary. We study the U.K. setting where bids for relatively large targets are subject to mandatory shareholder approval. Our findings suggest that under the U.K. listing rules shareholder voting can deter bad acquisitions. We find that shareholders gain 8 cents per dollar at the announcement of a Class 1 deal or $13.6 billion over 1992-2010 in aggregate. In the United States acquirers lost $214 billion in matched deals during the same period. In the U.K. relatively smaller Class 2 transactions do not require a vote and shareholders lost $3 billion. Our results are robust to confounding effects and other controls. A Multidimensional Regression Discontinuity Design (MRDD) inspired test supports a causal interpretation of our findings. Class 1 deals just above the assignment threshold perform better than Class 2 deals just below. Our evidence suggests that mandatory voting makes boards more likely to refrain from overpaying or from proposing deals that are not in the interest of shareholders.

July 1, 2014 | Permalink | Comments (0) | TrackBack (0)

Augustin, Brenner & Subrahmanyam on Insider Trading

Patrick Augustin, Menachem Brenner, and Marti G. Subrahmanyam have posted Informed Options Trading Prior to M&A Announcements: Insider Trading? on SSRN with the following abstract:

We investigate informed trading activity in equity options prior to the announcement of corporate mergers and acquisitions (M&A). For the target companies, we document pervasive directional options activity, consistent with strategies that would yield abnormal returns to investors with private information. This is demonstrated by positive abnormal trading volumes, excess implied volatility and higher bid-ask spreads, prior to M&A announcements. These effects are stronger for out-of-the-money (OTM) call options and subsamples of cash offers for large target firms, which typically have higher abnormal announcement returns. The probability of option volume on a random day exceeding that of our strongly unusual trading (SUT) sample is trivial - about three in a trillion. We further document a decrease in the slope of the term structure of implied volatility and an average rise in percentage bid-ask spreads, prior to the announcements. For the acquirer, we provide evidence that there is also unusual activity in volatility strategies. A study of all Securities and Exchange Commission (SEC) litigations involving options trading ahead of M&A announcements shows that the characteristics of insider trading closely resemble the patterns of pervasive and unusual option trading volume. Historically, the SEC has been more likely to investigate cases where the acquirer is headquartered outside the US, the target is relatively large, and the target has experienced substantial positive abnormal returns after the announcement.

July 1, 2014 | Permalink | Comments (0) | TrackBack (0)

Monday, June 30, 2014

Commissioner Aguilar on Pension Fund Investments

On June 27, 2014 at the Latinos on Fast Track (LOFT) Investors Forum in Washington, D.C., Commissioner Luis A. Aguilar offered remarks on Evaluating Pension Fund Investments Through The Lens Of Good Corporate Governance.

June 30, 2014 | Permalink | Comments (0) | TrackBack (0)

Testimony on “Oversight of the SEC’s Division of Trading and Markets”

On June 26, 2014, Stephen Luparello, Director of the SEC's Division of Trading and Markets offered testimony before the United States House of Representatives Subcommittee on Capital Markets and Government Sponsored Enterprises, Committee on Financial Services.  The testimony mainly related to the Division's activities and responsibilities.

June 30, 2014 | Permalink | Comments (0) | TrackBack (0)

SEC Announces New Hires in the Office of Administrative Law Judges

The SEC has announced new hires in its Office of Administrative Law Judges.  The press release states:

The Securities and Exchange Commission today announced that two new judges and three new attorneys will join the Office of Administrative Law Judges this summer.

James E. Grimes joined the office as an Administrative Law Judge on June 30. The office also recently hired attorneys Darien S. Capron, William Weihao Miller, and Jessica Neiterman as law clerks. Another Administrative Law Judge is expected to join the office in August. These additions will nearly double the size of the office, which received more than 200 assignments to conduct public hearings and issued 34 Initial Decisions in fiscal 2013.

June 30, 2014 | Permalink | Comments (0) | TrackBack (0)

NASAA: Notice of Request for Comment Regarding a Proposed Model Rule for the Electronic Filing of Form D and Other Securities Registration or Notice Filing Documents

Details available here.

June 30, 2014 | Permalink | Comments (0) | TrackBack (0)

Sunday, June 29, 2014

Johnston on Electricity Markets

David Cay Johnston written an interesting piece, US Electricity Markets Are Anti-Consumer, which asserts that lack of transparency in electricity markets may violate federal securities law.  The piece asserts:

Accusations of market manipulation dog the electricity markets from coast to coast, raising questions about the integrity of these secretive entities and whether they can ensure sufficient generating capacity at all times.

Opportunities to drive electricity prices up through misconduct are rampant and sure to grow unless the current rules are reformed and veils of secrecy are pulled back.

The electricity markets, originally designed by Enron, are supposed to benefit consumers by attracting the necessary investment in power plants to meet the demand for juice at all times, especially during peak periods such as hot summer evenings.

June 29, 2014 | Permalink | Comments (0) | TrackBack (0)