Tuesday, October 4, 2016
Lawrence R. Glosten, Suresh Nallareddy, and Yuan Zou have posted ETF Trading and Informational Efficiency of Underlying Securities on SSRN with the following abstract:
This paper investigates the effect of exchange-traded funds’ (ETF) trading activity on the informational efficiency of their underlying securities. We find that ETF trading increases informational efficiency for stocks with weak information environments and for stocks with imperfectly competitive equity markets. The increase in informational efficiency results from the timely incorporation of systematic earnings information. In contrast, we find no such effect for stocks with stronger information environments and stocks with perfectly competitive equity markets. ETF trading increases return co-movement, and this increase is partly attributable to the timely incorporation of systematic earnings information. Using S&P 500 index additions and deletions as an additional setting and Russell 1000/2000 index reconstitution as an identification, we corroborate our main findings.
Jeff Schwartz has posted Venture Exchange Regulation: Listing Standards, Market Microstructure, and Investor Protection on SSRN with the following abstract:
This chapter from the forthcoming Handbook on Law and Entrepreneurship (Gordon Smith & Christine Hurt eds.) sets out a template for the regulation of venture exchanges — securities markets specifically designed for trading smaller and younger firms.
I argue for listing standards that eliminate the smallest and youngest firms, and those where the listing exchange perceives a heightened risk of fraud. I also suggest that market microstructure rules should mandate fully transparent call-auction trading and limit trading to the listing exchange. Finally, I argue that the most efficient and effective way to protect investors is to deemphasize ex ante regulation, in particular, mandated disclosures, much of which retail investors would likely ignore, and instead emphasize ex post regulation, in particular, SEC enforcement of the rules against securities fraud, market manipulation, and insider trading.
NASAA's Request for Public Comments on a Proposed Statement of Policy Regarding the Use of Electronic Offering Documents and Electronic Signatures
The announcement states:
The Corporation Finance Section of the North American Securities Administrators Association (NASAA) is requesting public comment on a proposed Statement of Policy Regarding Use of Electronic Offering Documents and Electronic Signatures. This proposal is a second request for public comment following the feedback received from the Electronic Initiatives proposal released for public comment in May of 2016. Comments are due by November 2, 2016.
Monday, October 3, 2016
SEC Announces Agenda for October 5 Meeting of the Advisory Committee on Small and Emerging Companies
SEC, FINRA and MSRB to Hold Compliance Outreach Program for Municipal Advisors on 11/10 as a Webcast
Stanford Law Review Online Symposium on Salman v. United States and the Future of Insider Trading Law
The Stanford Law Review has posted a series of essays on Salman v. United States and the future of insider trading law. The description of the online sysmposium is as follows:
On October 5, the Supreme Court will hear oral argument in an insider trading case—Salman v. United States—for the first time in nearly two decades. The Court’s decision in Salman is expected to resolve a major circuit split between the Second and Ninth Circuits as to when tipping and trading on stock tips constitute violations of the antifraud provisions of the federal securities laws. This online Symposium features the insights of five prominent securities law scholars (Jill E. Fisch, Donald C. Langevoort, Jonathan R. Macey, and A.C. Pritchard, with an introductory piece by Donna M. Nagy) into how Salman might shape the landscape of insider trading jurisprudence in the years to come.
The following law review articles relating to securities regulation are now available in paper format:
Dain C. Donelson, Justin J. Hopkins & Christopher G. Yust, The Role of Directors' and Officers' Insurance in Securities Fraud Class Action Settlements, 58 J.L. & Econ. 747 (2015).
Ryan J. Patrone, Note, Linking Past and Present: Assessing the Stability of Post-Title VII Derivatives Markets, 12 N.Y.U. J.L. & Bus. 459 (2016).
Urska Velikonja, Reporting Agency Performance: Behind the SEC's enforcement Statistics, 101 Cornell L. Rev. 901 (2016).
Kevin Y. Wang, Note, Valuable Nepotism?: The FCPA and Hiring Risks in China, 49 Colum. J.L. & Soc. Probs. 459 (2016).
Thursday, September 29, 2016
SEC Release No. 34-78962 has been issued and states in part the following:
The Securities and Exchange Commission (“Commission”) proposes to amend Rule 15c6-1(a) under the Securities Exchange Act of 1934 (“Exchange Act”) to shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (“T+3”) to two business days after the trade date (“T+2”). The proposed amendment is designed to reduce a number of risks, including credit risk, market risk, and liquidity risk and, as a result, reduce systemic risk for U.S. market participants.
SEC Release No. 34-78963 has been issued and states in part the following:
The Securities and Exchange Commission (“SEC” or “Commission”) proposes to amend the definition of “covered clearing agency” under Rule 17Ad-22 to mean a registered clearing agency that provides the services of a central counterparty (“CCP”), central securities depository (“CSD”), or a securities settlement system (“SSS”). The Commission also proposes a definition of “securities settlement system” and proposes to amend the definitions of “central securities depository services” to facilitate the proposed amendment to “covered clearing agency.” In addition, the Commission proposes to amend the definition of “sensitivity analysis” under Rule 17Ad-22 to expand the scope of covered clearing agencies subject to requirements thereunder. These amendments are proposed pursuant to Section 17A of the Securities Exchange Act of 1934 (“Exchange Act”) and the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act”), enacted in Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”).
Tuesday, September 27, 2016
Anne M. Anderson and Paul Brockman have posted Form 13F (Mis)Filings on SSRN with the following abstract:
We examine the reliability of Form 13F filings and document the widespread presence of significant reporting errors. Even among a select group of high-profile bank holding companies, we find that filing firms frequently (1) report their holdings of securities that do not appear on the SEC’s Official List, (2) report inaccurate market prices for securities that do appear on the SEC’s Official List, and (3) file amended 13F reports that can be less accurate than the original filings. Overall, our evidence shows that the widespread reliance on 13F filings for institutional ownership figures is unwarranted.
Jonathan M. Karpoff, Allison Koester, D. Scott Lee, and Gerald S. Martin have posted Proxies and Databases in Financial Misconduct Research on SSRN with the following abstract:
An extensive accounting and finance literature examines the causes and effects of financial misreporting or misconduct based on samples drawn from four popular databases that identify restatements, securities class action lawsuits, and Securities and Exchange Commission (SEC) Accounting and Auditing Enforcement Releases (AAERs). We show, however, that the results from empirical tests can depend on which database is accessed. To examine the causes of such discrepancies, we compare the information in each database to a detailed sample of 1,243 case histories in which the SEC brought enforcement action for financial misrepresentation. These comparisons allow us to identify, measure, and estimate the economic importance of four characteristics of each database that affect inferences from empirical tests. First, these databases contain information on only the event that is used to proxy for misconduct (e.g., restatements), so they omit other relevant announcements that affect a researcher’s interpretation and use of the events. Second, the initial public revelation of financial misconduct occurs, on average, months before the initial coverage in these databases, leading to discrepancies in event study measures and pre/post comparison tests. Third, most of the events captured by these databases are unrelated to financial fraud, and efforts to cull out non-fraud events yield heterogeneous results. Fourth, the databases omit large numbers of events they were designed to capture. We show the extent to which each database is subject to these concerns and offer suggestions for researchers seeking to use these databases.
Lin William Cong and Douglas Xu have posted Rise of Factor Investing: Asset Prices, Informational Efficiency, and Security Design on SSRN with the following abstract:
We model financial innovations such as Exchange-Traded Funds (ETFs), smart beta products, and many index-based vehicles as composite securities that facilitate trading large baskets of assets and encourage factor investing. Consistent with recent empirical findings, we show composite securities lead to larger trading costs and synchronicity for illiquid assets, and lower asset-specific but higher factor information in prices, while increasing their return volatility and co-movements. Regardless of their informedness and liquidity needs, factor investors prefer the same composite security designs that entail liquid and representative assets. We also discuss how transparency of composite security trading, distinction between composite bundles and derivatives, and endogenous information acquisition affect pricing and security design.
Monday, September 26, 2016
The following law review articles relating to securities regulation are now available in paper format:
Brian Elzweig, Valerie Chambers & Jud Stryker, After Goeller v. United States, Can the Theft Loss Treatment Now Be Applied to Investments When Corporate Deception Is Present? 38 Campbell L. Rev. 1 (2016).
Stavros Gadinis & student Colby Mangels, Collaborative Gatekeepers, 73 Wash. & Lee L. Rev. 797 (2016).
Thomas M. Madden, Significance and the Materiality of Tautology, 10 J. Bus. & Tech. L. 217 (2015).
Thomas McGuire et al., Resolving Reverse-Payment Settlements with the Smoking Gun of Stock Price Movements, 101 Iowa L. Rev. 1581 (2016).
Seth C. Oranburg, Bridgefunding: Crowdfunding and the Market for Entrepreneurial Finance, 25 Cornell J.L. & Pub. Pol'y 397 (2015).
Lu Xu, Recent development, In re Advanced Battery Technologies, Inc.: How Independent Auditors of Chinese Reverse Merger Companies Avoid Liability in Securities Fraud Litigation, 24 Tul. J. Int'l & Comp. L. 427 (2016).
The Harvard Law School Program on Corporate Governance is currently seeking applicants for two positions:
The Harvard Law School Program on Corporate Governance invites applications for the position of Executive Director. Together with the Faculty Director and others, the Executive Director of the Program works on building, developing, and managing the full range of activities of the Program. Under the Faculty Director’s oversight, the Executive Director manages the wide range of the Program’s operations; collaborates with major corporations, law firms, investors, advisers, and other organizations; participates in developing and directing conferences and other events for the Program; and manages the administration and personnel of the program, including fellows, research assistants, and staff. The Executive Director also collaborates with constituent groups and other professionals; participates in fundraising activities; interacts with donors and visitors; and takes on other management roles within the Program as needed. The Executive Director is involved in overseeing the Program’s website and other media outreach efforts, as well as the Program’s blog, the Harvard Law School Forum on Corporate Governance and Financial Regulation.
Applications will be considered on a rolling basis. Candidates should have a J.D. or another graduate degree in law, policy, or social science, and 3+ years of experience in a relevant field of law or policy. This is a full-time term appointment. Start date is flexible. Additional information on the Executive Director position, as well as detailed instructions on how to apply, is available through ASPIRE.
The Harvard Law School Program on Corporate Governance invites applications for Post-Graduate Academic Fellows. Candidates should be interested in spending two or three years at Harvard Law School in preparation for a career in academia or policy research, and should have a J.D., LL.M. or S.J.D. from a U.S. law school (or expect to have completed most of the requirements for such a degree by the time they commence their fellowship). During the term of their appointment, Post-Graduate Academic Fellows work on research and corporate governance activities of the Program, depending on their interests and Program needs. Fellows may also work on their own research and publishing, and some former Fellows of the Program now teach in leading law schools in the U.S. and abroad.
Applications are considered on a rolling basis. Interested candidates should submit a CV, list of references, law school grades, and a writing sample and cover letter to the coordinator of the Program, Ms. Jordan Figueroa, at email@example.com. The cover letter should describe the candidate’s experience, reasons for seeking the position, career plans, and the kinds of Program projects and activities in which they would like to be involved. The position includes Harvard University benefits and a competitive fellowship salary. Start date is flexible.
Sunday, September 25, 2016
Donna M. Nagy has posted Beyond Dirks: Gratuitous Tipping and Insider Trading on SSRN with the following abstract:
Does a corporate insider who gratuitously shares material nonpublic information with a friend or relative — with no expectation of receiving anything in return — commit securities fraud? The Supreme Court is poised to answer that question in Salman v. United States, after steering clear of insider trading law for nearly two decades. It has been even longer still since the Court last addressed securities fraud liability relating to stock trading tips; it articulated a “personal benefit” test for joint tipper-tippee liability in 1983 in Dirks v. SEC, a decision reinforcing the “classical” theory of insider trading. In 2015, a circuit split arose as to whether gratuitous tipping constitutes a violation of the antifraud provisions in the federal securities laws, and the Court has granted certiorari in Salman to resolve that issue. This article disagrees with the Second Circuit’s finding that gratuitous tips do not result in a personal benefit and supports the Ninth Circuit’s conclusion that such tips are illegal. But in arguing that gratuitous tips satisfy the personal benefit test, this article draws from a potent combination of four post-Dirks developments in corporate and securities law: 1) the Court’s endorsement of the “misappropriation” theory in United States v. O’Hagan; 2) federal securities legislation in 1984, 1988, and 2012 that evidences Congress's support for an expansive antifraud proscription against insider trading and tipping; 3) the SEC’s decision to effectively ban the practice of selective disclosure through its adoption of Regulation FD; and 4) state court decisions that construe fiduciary disloyalty to include not only self-dealing but also other conscious actions taken by agents in bad faith. These developments should prompt the Court not only to affirm the Ninth Circuit’s decision but also to look beyond Dirks to consolidate the Court’s prior complementary theories of insider trading liability — the classical and misappropriation theories — into a new unified framework that would regard insider trading as a “fraud on contemporaneous traders.”
Arjya B. Majumdar and Umakanth Varottil have posted Regulating Equity Crowdfunding in India: Walking a Tightrope on SSRN with the following abstract:
Start-up companies face difficulties in raising finances, and the situation has intensified since the global financial crisis in 2008. As a result, crowdfunding has made its appearance as an attractive alternative capital-raising mechanism by harnessing technology (primarily the Internet) to access funding from the “crowd.”
In this chapter, we explore the core question of how should one regulate equity crowdfunding in a manner that enhances its appeal to engender the development of small and new-age businesses through accessible funding opportunities and at the same time protect investors against undue risks, such as fraud, which arise from the activity. We analyse the regulatory conundrum on equity crowdfunding by examining the legal regime for crowdfunding in India.
The rules relating to fundraising by companies in India have been considerably tightened under the Companies Act, 2013 that limits crowdfunding activity. However, the Securities and Exchange Board of India (SEBI) has issued a consultation paper that proposes a framework for ushering in crowdfunding in India. We find that the unduly onerous conditions imposed by SEBI have the effect of deterring rather than promoting the growth of crowdfunding. The existing (and proposed) legal framework in India have erred on the side of caution and sought to emphasise more on investor protection than to engender the market for crowdfunding.
Joanna Diane Caytas has posted Developing Blockchain Real-Time Clearing and Settlement in the EU, U.S., and Globally on SSRN with the following abstract:
Clearing and settlement of international securities transactions for indirectly held securities presents major challenges as the immense potential of blockchain technology creates the possibility of a tamper-proof consolidated audit trail, of almost infinitesimal transaction cost, and increased transactional velocity. While true real-time clearing and settlement will remain utopia for the foreseeable future, disruptive fintech innovations are being tested by major financial institutions around the globe as realization takes hold that critical mass is not a limiting criterion in a cloud-based blockchain world. But while technology develops virtually at the speed of IT-based innovation, banks realize the threat of losing control of payment systems and the notion of negative float is dwindling toward zero, exposing banks to additional risks and challenges to liquidity and collateral management in order to be able to make technologically possible instant payments. At the same time, the regulatory framework both in the U.S and the EU lags alarmingly behind the pace of technology as sudden institutional and supervisory concerns about Bitcoin and other cryptocurrencies have showed. While blockchain technology is not only capable of revolutionizing payments, clearing, and settlement, but indeed any form of transaction processing or verifiable vote, it raises issues of data protection, BigData processing, but also of identifying systemic payment risks. While both U.S. and EU regulators have shown valuable and highly appropriate restraint so as not to throttle innovation, regulation and oversight remain conditions precedent to broad-based use and safe application.