Wednesday, May 6, 2015
John P. Anderson has posted What's the Harm in Issuer-Licensed Insider Trading? on SSRN with the following abstract:
There is growing support for the claim that issuer-licensed insider trading (when the insider’s firm approves the trade in advance and has disclosed that it permits such trading pursuant to published guidelines) is economically efficient, and morally harmless. But for the last 35 years many scholars and the U.S. Supreme Court have relied on “The Law of Conservation of Securities” to rebut claims that insider trading can be victimless. This law is purported to show that every act of insider trading, even those licensed by the issuer, causes an identifiable harm to someone. This essay argues that the Law of Conservation of Securities is not helpful to answering the moral question of whether insider trading is a victimless crime because it either proves too much or too little. It either proves that all profitable trades (or profitable trade omissions) in advance of firms’ material disclosures are morally impermissible (an absurdity), or it tells us nothing at all about the moral permissibility of such trades. Of course, once the Law of Conservation of Securities is neutralized, other moral criticisms of issuer-licensed insider trading that rely on this law also fail. Professor Leo Katz’s claim that morality does not permit one to consent to a system that openly allows issuer-licensed insider trading is offered as one example of an argument that fails once considered in light of a proper understanding of the Law of Conservation of Securities.
Monday, May 4, 2015
Henry T. C. Hu has posted Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency on SSRN with the following abstract:
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (e.g., “empty voting”), the control rights of debtholders (e.g., “empty crediting” and “hidden interests”/“hidden non-interests”), and of takeover practices (e.g., “hidden (morphable) ownership” to avoid Schedule 13D blockholder disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used — the “descriptive mode,” which relies on “intermediary depictions” of objective reality — is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges — a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC — also creates difficulties. This new parallel public disclosure system, developed by bank regulators in the shadow of Basel and the Dodd-Frank Act and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.
As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006-2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012-2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.
As to decoupling, the Article proceeds to analyze some key post-2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS Corp. opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The analytical framework's "empty voter with negative economic exposure" concept is addressed in a dual class share context. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts — and the pressing need for more action by the SEC. In addition, at the time the debt decoupling research was introduced, available evidence as to the significance of empty creditor, related hidden interest/hidden non-interest matters, and hybrid decoupling was limited. This Article helps address that gap.
As to information, the Article begins by outlining the calls for reform associated with the 2012-2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information — consisting of two parallel regulatory universes with divergent ends and means — is unsustainable in the long run and involve certain matters that need statutory resolution. In the interim, however, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken.
Saturday, May 2, 2015
The following law review articles relating to securities regulation are now available in paper format:
Christian At, Sylvain Beal & Pierre-Henri Morand, Freezeout, Compensation Rules, and Voting Equilibria, 41 Int'l Rev. L. & Econ. 91 (2015).
Ian Ayres & Quinn Curtis, Protecting Consumer Investors by Facilitating "Improved Performance" Competition, 2015 U. Ill. L. Rev. 1.
Clint. Hale, Comment, The Great and Powerful FAA: Why Schwab's Class Action Waiver Should Have Been Enforced Over FINRA's Rules, 42 Pepp. L. Rev. 109 (2014).
Nina Hart, Note, Moving at a Glacial Pace: What Can State Attorneys General Do about SEC Inattention to Nondisclosure of Financially Material Risks Arising from Climate Change?, 40 Colum. J. Envtl. L. 99 (2015).
Christine Hurt, Pricing Disintermediation: Crowdfunding and Online Auction IPOs, 2015 U. Ill. L. Rev. 217.
Zoe A. Jones, Note, Left Out in the Cold: Freezing Innocent Spouses' Assets in SEC Actions, 24 Cornell J.L. & Pub. Pol'y 381 (2014).
Friday, May 1, 2015
John P. Anderson has posted Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to Rational Reform on SSRN with the following abstract:
The SEC is poised to take action in the face of compelling evidence that corporate insiders are availing themselves of rule-sanctioned Trading Plans to beat the market. These Trading Plans allow insiders to trade while aware of material nonpublic information. Since the market advantage insiders have enjoyed from Plan trading can be traced to loopholes in the current regulatory scheme, increased enforcement of the existing rules cannot address the issue. But simply tweaking the existing rule structure to close these loopholes would not work either. This is because the SEC adopted the current rule as a part of a delicate compromise with the courts in the “use versus possession” debate over the proper test of scienter for insider trading liability. The current rule reflects the SEC’s preferred test (mere “awareness”), but it provides for Trading Plans as an affirmative defense in order to pass judicial scrutiny. Thus, any attempt to simply close the loopholes in Trading Plans while maintaining the awareness test would upset this delicate compromise. Only a comprehensive change to the current insider trading enforcement regime can address the issue.
The reform proposed here begins with the recognition that Plan trading is generally done with the firm’s awareness and consent. Such trading is therefore a form of Non-Promissory Insider Trading. Since there are strong arguments that there is no moral wrong or economic harm done by Non-Promissory Insider Trading, the regulatory regime should openly embrace it as a permissible form of compensation through firm-sanctioned Modified Trading Plans, so long as there is adequate disclosure. Though such liberalization would represent a radical departure from the current enforcement regime, it would be within the SEC’s rulemaking authority and would be consistent with Supreme Court precedent. Most importantly, it would dramatically improve the current enforcement regime in terms of justice, clarity, efficiency and coherence.
It is sometimes said there is nothing like a good crisis for effecting much needed change. The current media attention and public scrutiny over corporate insiders’ exploitation of rule-sanction Trading Plans may be just the crisis to spur the SEC to adopt a more rational and just approach to insider trading enforcement. The outline for such reform has been proposed here.
Eric D. Roiter has posted Disentangling Mutual Fund Governance from Corporate Governance on SSRN with the following abstract:
This Article addresses mutual fund governance, explaining how in recent years it has become entangled with the norms of corporate governance. There are two essential features of mutual funds, however, that differentiate them fundamentally from ordinary corporations. First, mutual funds are not only separate legal entities; they are also financial products (or services). Mutual fund investors are therefore both shareholders and customers. This stands, of course, in marked contrast to ordinary corporations, whose shareholders and customers are two distinct and separate groups. Second, mutual funds are fundamentally different owing to the right of redemption, a right of investors to withdraw their capital. The right of redemption is not only a financial right, it is also essential to the governance of mutual funds, imposing direct discipline upon a fund’s adviser. In contrast, redemption rights are antithetical to the organizing principles of ordinary corporations, whose economic viability in the markets depends upon the ability to lock in shareholders’ capital. This Article examines how recent mutual fund rulemaking by the SEC rests on mistaken comparisons to corporate governance, and makes recommendations as to how the SEC can improve its approach. In particular, this Article proposes that the SEC take steps to allow two new types of mutual funds that can compete in the marketplace alongside traditional mutual funds. One type is the unitary investment fund, which would retain fund boards solely to serve as monitors of fund advisers’ legal and fiduciary duties, while leaving judgments over the competitiveness of an adviser’s fees to the marketplace. The other is a “crowdfunded” mutual fund that would allow for investors themselves, rather than investment advisers, to initiate and organize funds.
Alon Brav and J.B. Heaton have posted Event Studies in Securities Litigation: Low Power, Confounding Effects, and Bias on SSRN with the following abstract:
Are event studies in securities litigation reliable? Basic’s fraud-on-the-market presumption sparked the wide use of event studies in securities litigation, and the Supreme Court’s 2014 decision in Halliburton will make event studies even more important, as litigants fight over the existence of a price impact before class certification. What is interesting about the use of the event studies in securities litigation, however, is that the methodology used in court differs from the methodology long-used in academic research. With few exceptions, securities litigation event studies are single-firm event studies, while almost all academic research event studies are multi-firm event studies. Multi-firm event studies are generally accepted in financial economics research, and peer-reviewed journals contain them by the hundreds. By contrast, single-firm event studies – the mainstay of modern securities fraud litigation – are almost nonexistent in peer-reviewed journals.
Importing a methodology that economists developed for use with multiple firms into a single-firm context creates three substantial difficulties. First, single-firm event studies suffer from a severe signal-to-noise problem in that they lack statistical power to detect price impacts unless the price impacts are quite large. Inattention to statistical power lowers the deterrent effect of the securities laws by giving a “free pass” to some economically meaningful price impacts and may encourage more small- and mid-scale fraud on markets than is socially optimal given the costs of litigation. Second, single-firm event studies do not average away confounding effects. While this problem is well known, some courts have unrealistic expectations of litigants’ ability to quantitatively decompose observed price impacts into those caused by alleged fraud and those unrelated to alleged fraud. Third, low statistical power and confounding effects combine to generate sizeable upward bias in detected price impacts and therefore in damages. To improve the accuracy of adjudication in securities litigation, we suggest that litigants report the statistical power of their event studies, that courts allow litigants flexibility to deal with the problem of confounding effects, and that courts and litigants consider the possibility of upward bias in the detection of price impacts and the estimation of damages.
Tom C. W. Lin has posted Reasonable Investor(s) on SSRN with the following abstract:
Much of financial regulation is built on a convenient fiction. In regulation, all investors are identically reasonable investors. In reality, they are distinctly diverse investors. This fundamental discord has resulted in a modern financial marketplace of mismatched regulations and misplaced expectations — a precarious marketplace that has frustrated investors, regulators, and policymakers.
This Article examines this fundamental discord in financial regulation and offers a better framework for thinking anew about investors and investor protection. This Article presents an original typology of heterogeneous investors that exposes the common regulatory fallacy of homogeneous investors. It explains that the simple paradigm of perfectly reasonable investors, while profoundly seductive, is an inadequate foundation for designing investor protection policies in a complex, contemporary marketplace. It demonstrates how this critical divergence has harmed investors and regulators in the modern, high-tech marketplace. To begin addressing such harms, this Article advocates for a novel algorithmic investor typology as an important step towards better reconciling financial regulation with financial reality. Specifically, it illustrates how core concepts of financial regulation like regulatory design, disclosure, and materiality can pragmatically improve as a result of the new typology. This Article ultimately argues that in order to better protect all investors, financial regulation must shift from an elegantly false, singular view of reasonable investors towards a more honest, pluralistic view of diverse investors — from protecting one type of reasonable investors to protecting all types of reasonable investors.
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending May 1, 2015).
SEC Announces Compliance Outreach Program Seminars for Investment Adviser and Investment Company Senior Officers
SEC Proposes Rules to Require Companies to Disclose the Relationship Between Executive Pay and a Company’s Financial Performance
Thursday, April 30, 2015
The following law review articles relating to securities regulation are now available in paper format:
Michael T. Cappucci, Prudential Regulation and the Knowledge Problem, 9 Va. L. & Bus. Rev. 1 (2014).
Stephen J. Choi, Jill E. Fisch & A.C. Pritchard, The Influence of Arbitrator Background and Representation on Arbitration Outcomes, 9 Va. L. & Bus. Rev. 43 (2014).
J. Scott Colesanti, Trotting Out the White Horse: How the S.E.C. Can Handle Bitcoin's Threat to American Investors, 65 Syracuse L. Rev. 1 (2014).
John C. Coates, Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications, 124 Yale L.J. 882 (2015).
Daniel J. Grimm, Traversing the Minefield: Joint Ventures and the Foreign Corrupt Practices Act, 9 Va. L. & Bus. Rev. 91 (2014).
Valerie M. Hughes, The Two Hundred Million Dollar Question: Were Letters of Credit as Good as Cash in the MF Global Liquidation?, 93 N.C. L. Rev. 276 (2014).
James J. Park, Bondholders and Securities Class Actions, 99 Minn. L. Rev. 585 (2014).
Hester Peirce & Robert Greene, Opening the Gate to Money Market Fund Reform, 34 Pace L. Rev. 1093 (2014).
Roberta Romano, Regulating in the Dark and a Postscript Assessment of the Iron Law of Financial Regulation, 43 Hofstra L. Rev. 25 (2014).
Jason E. Siegel, Note, Admit It! Corporate Admissions of Wrongdoing in SEC Settlements: Evaluating Collateral Estoppel Effects, 103 Geo. L.J. 433 (2015).
David A. Skeel, Jr., Behaviorism in Finance and Securities Law, 21 Sup. Ct. Econ. Rev. 77 (2014).
Yesha Yadav, Insider Trading in Derivatives Markets, 103 Geo. L.J. 381 (2015).
Friday, April 10, 2015
The following law review articles relating to securities regulation are now available in paper format:
Derek Fischer, Note, Dodd-Frank's Failure to Address CFTC Oversight of Self-Regulatory Organization Rulemaking, 115 Colum. L. Rev. 69 (2015).
Chad M. Jennings, Note, The American Depositary Revision: Restructuring ADRs for Emerging-Market Investments, 54 Va. J. Int'l L. 733 (2014).
Charles R. Korsmo & Minor Myers, The Structure of Stockholder Litigation: When Do the Merits Matter?, 75 Ohio St. L.J. 829 (2014).
Timothy E. Lynch, Coming Up Short: The United States' Second-Best Strategies for Corralling Purely Speculative Derivatives, 36 Cardozo L. Rev. 545 (2014).
Milan Markovic, Subprime Scriveners, 103 Ky. L.J. 1 (2014-2015).
Thomas W. Merrill & Margaret L. Merrill, Dodd-Frank Orderly Liquidation Authority: Too Big for the Constitution?, 163 U. Pa. L. Rev. 165 (2014).
Guy Noyes, Student Article, Kicking Start-Ups Out of Online Financial Markets: Why the FTC Should Regulate Websites to Supplement the SEC, 19 Intell. Prop. L. Bull. 29 (2014).
Steven L. Schwarcz, The Governance Structure of Shadow Banking: Rethinking Assumptions About Limited Liability, 90 Notre Dame L. Rev. 1 (2014).
Stuart E. Smith, Comment, The Securities and Exchange Commission's Proposed Regulations under the CROWDFUND Act Strike a Necessary Balance between the Burden of Disclosure Placed on Issuers of Securities and Meaningful Protection for Unsophisticated Investors, 44 U. Balt. L. Rev. 127 (2014).
Urska Velikonja, Team Production and Securities Laws, 38 Seattle U. L. Rev. 725 (2015).
Saturday, April 4, 2015
Bobby Ahdieh (Emory) forwarded me this announcement about a position in Emory's outstanding Center for Transactional Law and Practice:
Emory Law School seeks an Assistant Director of the Center for Transactional Law and Practice to teach in and share the administrative duties associated with running the largest program in the Law School. Each candidate should have a J.D. or comparable law degree and substantial experience as an attorney practicing or teaching transactional law. Significant contacts in the Atlanta legal community are a plus.
Initially, the Assistant Director will be responsible for leading the charge to further develop the Deal Skills curriculum. (In Deal Skills – one of Emory Law’s signature core transactional skills courses – students are introduced to the business and legal issues common to commercial transactions.) The Assistant Director will co-teach at least one section of Deal Skills each semester, supervise the current Deal Skills adjuncts, and recruit, train, and evaluate the performance of new adjunct professors teaching the other sections of Deal Skills.
As the faculty advisor for Emory Law’s Transactional Law Program Negotiation Team, the Assistant Director will identify appropriate competitions, select team members, recruit coaches, and supervise both the drafting and negotiation components of each competition. The Assistant Director will also serve as the host of the Southeast Regional LawMeets® Competition held at Emory every other year.
Additionally, the Assistant Director will be responsible for the creation of two to three new capstone courses for the transactional law program. (A capstone course is a small, hands-on seminar in a specific transactional law topic such as mergers and acquisitions or commercial real estate transactions.) The Assistant Director will identify specific educational needs, recruit adjunct faculty, assist with curriculum design, and monitor the adjuncts’ performance.
Besides the specific duties described above, the Assistant Director will assist the Executive Director with the administration of the transactional law program and the Transactional Law and Skills Certificate program. This will involve publicizing the program to prospective and current students, monitoring the curriculum to assure that students are able to satisfy the requirements of the Certificate, and counselling students regarding their coursework and careers. The Assistant Director can also expect to participate in strategic planning, marketing, fundraising, alumni outreach, and a wide variety of other leadership tasks.
Emory University is an equal opportunity employer, committed to diversifying its faculty and staff. Members of under-represented groups are encouraged to apply. For more information about the transactional law program and the Transactional Law and Skills Certificate Program, please visit our website at:
To apply, please mail or e-mail a cover letter and resumé to:
Emory University Law School
1301 Clifton Road, N.E.
Atlanta, GA 30322-2770
APPLICATION DEADLINE: April 30, 2015
Adam Adler, Student Article, High Frequency Regulation: A New Model for Market Monitoring, 39 Vt. L. Rev. 161 (2014).
Vladimir Atanasov, Bernard Black & Conrad S. Ciccotello, Unbundling and Measuring Tunneling, 2014 U. Ill. L. Rev. 1697.
Zachary J. Gubler, Reconsidering the Institutional Design of Federal Securities Regulation, 56 Wm. & Mary L. Rev. 409 (2014).
Peter J.Henning, A New Crime for Corporate Misconduct?, 84 Miss. L.J. 43 (2014).
Richard G. Himelrick, A Historical Introduction to Arizona's Securities Laws, 7 Ariz. Summit L. Rev. 679 (2014).
Kate Litvak, Defensive Management: Does the Sarbanes-Oxley Act Discourage Corporate Risk-Taking?, 2014 U. Ill. L. Rev. 1663.
Donna M. Nagy & Richard W. Painter, Plugging Leaks and Lowering Levees in the Federal Government: Practical Solutions for Securities Trading Based on Political Intelligence, 2014 U. Ill. L. Rev. 1521.
Friday, April 3, 2015
Boston University Law School
October 2-3, 2015
This annual workshop brings together scholars focused on corporate and securities litigation to present their works-in-progress. The papers may address any aspect of corporate and securities litigation or enforcement, including but not limited to securities class actions, fiduciary duty litigation, or comparative approaches to business litigation. We welcome scholars working in a variety of methodologies, including empirical analysis, law and economics or other fields, and traditional doctrinal analysis. Participants will generally be expected to have drafts completed by the fall, although work in a more formative stage may also be included. Each author will provide a brief introduction, but most of the time in each session will be devoted to collective discussion of the paper.
If you are interested in participating in the conference, which will be held at Boston University Law School on October 2-3, 2015, please send an abstract or draft of the paper you would like to present to email@example.com no later than May 29, 2015. Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified by June 30, 2015.
Any questions concerning the workshop should be directed to the organizers: Professor David Webber (firstname.lastname@example.org), Professor Jessica Erickson (email@example.com) and Professor Verity Winship (firstname.lastname@example.org).
This article, part of an annual series, provides a snapshot of Foreign Corrupt Practices Act and related developments from 2014 and will be of value to anyone who seeks an informed base of knowledge regarding the FCPA and related legal and policy issues.
Specifically, this article uses FCPA enforcement action data and other top FCPA or related developments to highlight noteworthy issues from 2014 such as: numerous enforcement statistics; the wide spectrum of FCPA enforcement actions; the gap between corporate and individual FCPA enforcement; the problematic surge in SEC administrative actions to resolve alleged instances of FCPA scrutiny; and judicial scrutiny of FCPA and related enforcement theories.
Professor Koehler provides links to the rest of his articles in this series here.
Cary Martin has posted Privileged Access to Financial Innovation on SSRN with the following abstract:
Access to private funds is limited to an elite class of investors -- wealthy individuals and large institutions. Individuals of more modest means -- “retail investors” -- face more limited investment choices; generally they can only invest in mutual funds. In spite of this inequitable division, the current regulatory climate will lead to an even further expansion of the private fund industry. This article argues that this loosening regulatory climate could lead to a talent drain amongst registered funds, could narrow the investment choices available to retail investors, and could deepen the already troubling income gap between wealthy and average earners. With respect to a possible talent drain, as it becomes easier for issuers to avoid the arduous registration requirements of the federal securities laws, many investment advisers will simply “go private” by instead offering hedge funds or other private investments. In assessing privileged access to strategies, since private funds are permitted to engage in more flexible trading strategies through the use of derivatives and other exotic instruments, elite investors have better opportunities for wealth maximization and diversification. A large body of empirical research has also found that private fund advisers often have privileged access to valuable information regarding upcoming investments. To the extent that this privileged access continues to grow, the options available to retail investors will continue to decline. From a broader perspective, this could magnify the financial challenges facing retail investors, some of which include dwindling retirement savings and declining property values, as well as deepen the already troubling income gap in this country. Alternative frameworks could entail; (1) loosening the capital restrictions that apply to mutual funds so that retail investors can access a greater degree of financial innovation, or (2) tightening the existing freedoms that apply to private funds, so as to level the playing field between retail and elite investors. However, the long-term and short-term effects to systemic risk, investor protection, and capital formation, would have to be thoroughly investigated before adopting any proposed solution along this spectrum. This would necessarily require enhanced coordination between the SEC and CFTC, and improved collaboration with related industries (e.g., economic, financial, banking, quantitative analysis, etc.).