Business Law Prof Blog

Materiality and the SEC's Rulemaking Authority

Over the summer, friend-of-the-BLPB Bernie Sharfman posted a draft paper to SSRN that was the subject of a short colloquy between us.  The paper, The Ascertainable Standards that Define the Boundaries of the SEC's Rulemaking Authority, asserts, among other things, that materiality is one of three "ascertainable policy standards that Congress has placed in the Acts to guide the SEC’s rulemaking discretion."  The reasoning? 

• "[T]here are multiple references to materiality in the Acts."
• The SEC's 1972 annual report avers that "[a] basic purpose of the Federal securities laws is to provide disclosure of material financial and other information on companies seeking to raise capital through the public offering of their securities, as well as companies whose securities are already publicly held."
• "As observed by Professor Ruth Jebe, it is fair to say that materiality 'constitutes the primary framing mechanism for financial reporting.'"

Bernie acknowledges that "there is no explicit statutory language in the Acts that forbids the SEC from promulgating rules requiring non-material disclosures."  I might add that nothing in either the Securities Act of 1933, as amended ("1933 Act"), or the Securities Exchange Act of 1934, as amended ("1934 Act"), explicitly limits the SEC's rulemaking authority to rules qualified by materiality.

Since the U.S. Congress knew to use materiality to qualify some disclosure, enforcement, and other responsibilities under the 1933 Act and the 1934 Act and not others, it easily could have provided an express constraint on the SEC's overall rulemaking authority in that regard.  Arguably, since Congress did not qualify all of the disclosure mandates in the 1933 Act or 1934 Act by materiality, SEC rulemaking that introduces a materiality qualification may be subject to unfavorable scrutiny.  (Congress could then take the view that, if it had meant to restrict the statutory disclosure or other mandates to only those items that are material, it would have said so.)  Yet, overall, Congress has delegated relatively broad authority to the SEC to engage in rule making that serves the investor protection, market integrity maintenance, and capital formation policies underlying the various provisions of the 1933 Act and the 1934 Act.

For example, Schedule A to the 1933 Act sets forth the initial disclosure mandates provided for by Congress for registration statements. See §7(a)(1) of the 1933 Act.  Congress then notes that the SEC "may by rules or regulations provide that any such information or document need not be included in respect of any class of issuers or securities if it finds that the requirement of such information or document is inapplicable to such class and that disclosure fully adequate for the protection of investors is otherwise required to be included within the registration statement."  Id. The disclosure requirements for registration statements are now executed primarily through registration forms adopted by the SEC under the 1933 Act.  In both Schedule A and in the forms of registration statement adopted by the SEC under the 1933 Act, disclosures were or are required that are not expressly qualified by materiality.  In fact, few of the mandatory disclosures in Schedule A are limited only to supplying material information.  The same is true for the initial disclosure mandates applicable to 1934 Act registration statements.  See § 12(b) of the 1934 Act.

There's more I could say, but I will leave it there for now.  As you might guess from the above, I am skeptical, at best, about the argument that materiality is a required constraint on SEC rule making.  I consider Congress's words and actions to be most important in this matter (absent any issues identified under the U.S Constitution).  Your thoughts on the asserted materiality constraint are welcomed.

Dalia Tsuk Mitchell on Delaware's Legacy

I've mentioned before in this space that Delaware's increasingly baroque rules for cleansing transactions - and thus winning business judgment rule protection - are starting to resemble the MBCA in their rigidity, and are drifting from the more equity-focused caselaw of the past, where cleansing procedures were less clear and cases often seemed to turn on the court's gut instinct about a transaction's fairness.

So I was delighted to see Dalia Tsuk Mitchell's new article, Proceduralism: Delaware's Legacy.  Her thesis is that when managerialism reigned as a corporate philosophy - viewing corporate elites as a kind of enlightened guardian of the public - Delaware justified deference to their decisionmaking on the grounds of their expertise.  Later, as managerialism fell out of favor, Delaware courts developed a new narrative to justify deference, namely, procedural fairness, that was not rooted in managers' expertise or elite status at all.  She contends that the new proceduralism, which focuses solely on firms' internal decisionmaking process, parallels a shareholder primacist view of the world, which abandons any notion that corporate managers have responsibilities to the communities in which they operate.  

Here is the abstract:

This article examines the Delaware courts’ 1980s shift from managerialism to a theory I label proceduralism. I argue that managerialism, which justified corporate law’s deference to directors in the preceding fifty years, was corporate law’s response to social, political, and cultural concerns outside corporations. At the turn of the twentieth century, corporations and their managers were empowered to fight socialism by protecting the interests of workers, while in the midcentury, corporations became the first line of defense against the threats of totalitarianism and later the Cold War. Corporate directors were viewed as heroes and their power justified as necessary for the survival of American democracy. By the 1980s, however, in response to numerous hostile acquisitions, decisions of the Delaware Supreme Court appeared to discard managerialism as the Court used the fairness standard to review, and even invalidate, directors’ actions. Yet, as this Article demonstrates, the Court did not abandon its deference to corporate directors. Rather, the Court substituted proceduralism for managerialism as a theory justifying managerial power. Grounded in the concept of fairness, specifically fair dealing, proceduralism is the idea that certain procedures—for example, authorization by disinterested directors or ratification by shareholders— ensure maximization of value, and that corporate law should focus on incentivizing corporate directors to follow these procedures by assuring them that, when they so do, their actions will not be subject to judicial review. Proceduralism was cemented into law in the decades following the hostile takeover boom, as the Delaware Chancery Court enmeshed fair dealing, or fair procedure, with the presumption of the business judgment rule, assuring directors that if they followed the procedural frameworks suggested by the Court, their actions will receive the protection of the business judgment rule whether such actions offered their shareholders a fair price or a price at all. By the twentieth century’s end, Delaware corporate law became fixated on internal processes rather than discretion and expertise; proceduralism became Delaware’s legacy.

PIABA Releases New Expungement Report

PIABA, the Public Investor Advocate Bar Association, and the PIABA Foundation released a new report on FINRA expungement earlier this week. The current report gives a good snapshot of where things stand at the end of an era with a new set of FINRA rules around expungement going into effect on October 16, 2023.  FINRA adopted some of these changes after comment letters I sent in on earlier proposals. On the whole, my record remains mixed with FINRA continuing to keep this process in arbitration.  James Tierney and I have a forthcoming paper on this contending that an administrative procedure would produce much better results than leaving this outsourced to the arbitration forum.  My core view is that the current structure simply fails to generate any real scrutiny, much less adversarial scrutiny, for most of these requests.

To address the scrutiny problem, we have some changes.  One of the biggest changes to the rules is a new process for notifying state regulators and allowing them to participate in hearings.  On the one hand, this is a good thing.  State regulators should be able to take steps to appropriately prevent the deletion of public records.  But on the other hand, this puts a new burden on the backs of thinly-staffed state securities regulators.  Without new appropriations and support, I don't immediately expect state regulators to be able to shoulder all of this workload.

The newest PIABA study finds that arbitrators have continued to recommended expungements at high rates in recent years, granting 90% of expungement requests.  FINRA has also faced a flood of requests in recent years with many brokers rushing to get expungement requests in before a rules change.  Investors also continued to largely sit on the sidelines with only 10% actually participating.  It's always struck me as odd that anyone would expect investors to meaningfully participate.  They personally know not to trust the broker they complained about and they get no personal benefit from participating in the expungement hearing.  Plus, the hearing will likely be unpleasant as the main point of it is to call the investor a liar and say that her complaint was false.

One of the most interesting findings in the new study concerns the distribution of expungement requests.  Over fifty percent of expungement requests come from five states:  California, Florida, New York, New Jersey, and Texas.  Although any state where a broker maintains registration may be able to intervene, the home state response in these jurisdictions will probably have a significant effect under the new regime. Brokers maintain on average registration in 16 different states.

Two Exciting Chair Opportunities at Brandeis (Louisville) Law!

Faculty Position (Harold Edward Harter Endowed Chair)

uofl.wd1.myworkdayjobs.com/en-US/UofLCareerSite/details/...

Position Description:

The University of Louisville's Brandeis School of Law invites applications for the Harold Edward Harter Endowed Chair of Commercial Law, to commence July 1, 2024. The holder of the Harter Chair should have a well-established record of outstanding scholarship as well as teaching expertise in one or more areas of Commercial Law, consistent with the expectations of a tenured, full professor. The University of Louisville is a vibrant, intellectual community while Louisville is a thriving, major metropolitan city with a great legal market.

The Brandeis School of Law is committed to excellence in preparing lawyers for productive careers. The school boasts an excellent faculty with a deep commitment to teaching and academic support, and a low student-faculty ratio. Our smaller class sizes foster close interaction between students and faculty, nurture a culture of collegial learning, and provide opportunities for individualized attention. In addition to teaching excellence, our faculty is deeply committed to producing excellent scholarships and to community engagement. Our faculty boasts many engaged scholars.

The School of Law strives to promote collegiality and professionalism, and its culture is based on civility and respect for all students, faculty, and staff. The school also seeks to admit and support a diverse law school population and provides opportunities to share and discuss differing opinions.

Applicants for this position should have distinguished academic credentials, a record of scholarship, and a strong commitment to scholarship, teaching, service, professional ethics, and collegiality. The School of Law values the diversity of its faculty and encourages applications from persons who will contribute to that diversity.

Documents Requested: Letter of interest – CV – Teaching Philosophy – Teaching Evaluations

The Committee will begin reviewing applications immediately and continue to review until hiring needs are met.

Equal Employment Opportunity

The University of Louisville is an equal opportunity, affirmative action employer, and is committed to providing employment opportunities to all qualified applicants without regard to race, sex, age, color, national origin, ethnicity, creed, religion, disability, genetic information, sexual orientation, gender, gender identity and expression, marital status, pregnancy, or veteran status. If you are unable to use our online application process due to an impairment or disability, please contact the Employment team at [email protected] or 502.852.6258.

 

Faculty Position (Grosscurth Chair)

uofl.wd1.myworkdayjobs.com/en-US/UofLCareerSite/details/...

The University of Louisville's Brandeis School of Law invites applications for the Grosscurth Chair in Intellectual Property to commence July 1, 2024. The holder of the Grosscurth Chair should have a well-established record of outstanding scholarship as well as teaching expertise in one or more areas of Intellectual Property, consistent with the expectations of a tenured, full professor. The University of Louisville is a vibrant, intellectual community with significant opportunities to develop interdisciplinary programs while Louisville is a thriving, major metropolitan city with a need for more attorneys with IP experience.

The Louis D. Brandeis School of Law: The Brandeis School of Law is committed to excellence in preparing lawyers for productive careers. The school boasts an excellent faculty with a deep commitment to teaching and academic support, and a low student-faculty ratio. Our smaller class sizes foster close interaction between students and faculty, nurture a culture of collegial learning, and provide opportunities for individualized attention. In addition to teaching excellence, our faculty is deeply committed to producing excellent scholarships and to community engagement. Our faculty boasts many engaged scholars.

The School of Law strives to promote collegiality and professionalism, and its culture is based on civility and respect for all students, faculty, and staff. The school also seeks to admit and support a diverse law school population and provides opportunities to share and discuss differing opinions.

Applicants: Applicants for this position should have distinguished academic credentials, a record of scholarship, and a strong commitment to scholarship, teaching, service, professional ethics, and collegiality. The School of Law values the diversity of its faculty and encourages applications from persons who will contribute to that diversity.

Documents Requested: Letter of interest – CV – Teaching Philosophy – Teaching Evaluations

The Committee will begin reviewing applications immediately and continue to review until hiring needs are met.

Equal Employment Opportunity

The University of Louisville is an equal opportunity, affirmative action employer, and is committed to providing employment opportunities to all qualified applicants without regard to race, sex, age, color, national origin, ethnicity, creed, religion, disability, genetic information, sexual orientation, gender, gender identity and expression, marital status, pregnancy, or veteran status. If you are unable to use our online application process due to an impairment or disability, please contact the Employment team at [email protected] or 502.852.6258.

UConn Law Seeking Faculty

ASSOCIATE PROFESSOR OF LAW / PROFESSOR OF LAW

The University of Connecticut School of Law invites applications from entry-level and lateral candidates for two full-time, tenure-track, or tenured-at-hire faculty positions commencing in the fall of 2024. Although we will consider candidates with a range of curricular and scholarly expertise, subject areas of particular interest include criminal procedure, environmental and energy law, and taxation; we also have needs in civil procedure, constitutional law, cybersecurity, land use, professional responsibility, property, securities regulation, and trusts and estates. A successful candidate will have a record of professional accomplishments commensurate with an appointment at the rank of (1) Associate Professor (for entry-level candidates) or (2) Professor (for lateral candidates) with an opportunity for tenure-at-hire.

The UConn School of Law is especially interested in candidates who will add to the diversity of our faculty and community. We welcome applications from underrepresented groups and other candidates with experiences, backgrounds, and viewpoints that will enrich the diversity of our institution. UConn Law School is the top-ranked public law school in the Northeast, offering a professional education and scholarly environment of the highest quality. The School is committed to building and supporting a vibrant, multicultural, and diverse community of students, faculty, and staff. Its beautiful Gothic Revival campus is located in the West End of Hartford, a few miles from the state capitol and courts, as well as the headquarters of leading insurance companies and other major corporations. The School has both day and evening divisions and offers the JD (Juris Doctor) degree, LLM (Master of Laws) degrees, and the SJD (Doctor of Laws) degree, as well as several dual degree programs. The UConn Law faculty includes leading scholars, experienced practitioners, and internationally known experts in a wide range of fields. The Law School hosts four student journals, over forty student organizations, extensive clinical and public service for the surrounding communities, and one of the largest law libraries in the world.

Founded in 1881, UConn is a Land Grant and Sea Grant institution and member of the Space Grant Consortium. It is the state’s flagship institution of higher education and includes a main campus in Storrs, CT, four regional campuses throughout the state, and 13 Schools and Colleges, including a Law School in Hartford, and Medical and Dental Schools at the UConn Health campus in Farmington. The University has approximately 10,000 faculty and staff and 32,000 students, including nearly 24,000 undergraduates and over 8,000 graduate and professional students. UConn is a Carnegie Foundation R1 (highest research activity) institution, among the top 25 public universities in the nation. Through research, teaching, service, and outreach, UConn embraces diversity and cultivates leadership, integrity, and engaged citizenship in its students, faculty, staff, and alumni. UConn promotes the health and well-being of citizens by enhancing the social, economic, cultural, and natural environments of the state and beyond. The University serves as a beacon of academic and research excellence as well as a center for innovation and social service to communities. UConn is a leader in many scholarly, research, and innovation areas. Today, the path forward includes exciting opportunities and notable challenges. Record numbers of undergraduate applications and support for student success have enabled the University to become extraordinarily selective.

MINIMUM QUALIFICATIONS

• A JD degree or equivalent terminal degree in a related field.
• Demonstrated expertise and ability to teach effectively in one or more of the following areas: civil procedure, constitutional law, criminal procedure, cybersecurity, environmental and energy law, land use, professional responsibility, property, securities regulation, and taxation.
• A demonstrated capacity for scholarly excellence.
• A demonstrated commitment to advancing diversity, equity, inclusion, and belonging in the workplace, legal academy, and/or profession.

PREFERRED QUALIFICATIONS

Entry-Level

• Demonstrated expertise and ability to teach in either criminal procedure, environmental and energy law, or federal income taxation.
• Published or accepted work that demonstrates scholarly aptitude and long-term promise.
• Active participation in relevant scholarly and/or professional communities.
• Law school teaching experience.

Lateral

• Demonstrated expertise and ability to teach in either criminal procedure, environmental and energy law, or federal income taxation.
• A strong national reputation in the candidate’s field of expertise.
• A record of outstanding achievement in scholarship, teaching, and service.
• Prominence in relevant scholarly and/or professional communities.

APPOINTMENT TERMS

This is a full-time appointment for a tenure-track or tenured-at-hire position. Lateral applicants must meet University requirements for appointment at the rank of Full Professor, with tenure. Salary and rank will be highly competitive and commensurate with background, qualifications, and experience. Benefits include health insurance, retirement annuities, and research support. Candidates should expect to work at the Law School located in Hartford, Connecticut.

TERMS AND CONDITIONS OF EMPLOYMENT

Employment of the successful candidate is contingent upon the successful completion of a pre-employment criminal background check.

TO APPLY

Please apply online to Academic Jobs Online https://academicjobsonline.org/ajo/jobs/25446 and submit the following application materials:

• A letter of interest,
• Curriculum vitae,
• Scholarship statement,
• Teaching statement,
• Commitment to diversity statement,
• Sample journal articles or books,
• Names and contact information for three (3) letters of reference.

Any questions about application materials may be directed to the appointments committee chair, Minor Myers, at [email protected].

At the University of Connecticut, our commitment to excellence encompasses a commitment to building a culturally diverse community.

This position will be filled subject to budgetary approval.

All employees are subject to adherence to the State Code of Ethics, which may be found at http://www.ct.gov/ethics/site/default.asp.

All members of the University of Connecticut are expected to exhibit appreciation of, and contribute to, an inclusive, respectful, and diverse environment for the University community.

The University of Connecticut aspires to create a community built on collaboration and belonging and has actively sought to create an inclusive culture within the workforce. The success of the University is dependent on the willingness of our diverse employee and student populations to share their rich perspectives and backgrounds in a respectful manner. This makes it essential for each member of our community to feel secure and welcomed and to thoroughly understand and believe that their ideas are respected by all. We strongly respect each individual employee’s unique experiences and perspectives and encourage all members of the community to do the same. All applicants will receive consideration for employment without regard to race, color, religion, gender, gender identity or expression, sexual orientation, national origin, genetics, disability, age, or veteran status.

The University of Connecticut is an AA/EEO Employer.

How Do Law Partners Fare When Their Firms Fail?

Andrew Granato has posted his draft paper After the “Partner Run”: the Dewey & LeBoeuf Diaspora on SSRN.  You can find it here.  The abstract reads as follows:

“Partner runs” are a phenomenon distinctive to the American legal profession, a result of legal professional responsibility rules, partnership governance, and bankruptcy law that occasionally causes individual law firms to spiral into liquidation following unexceptional setbacks. It is unclear whether this idiosyncratic feature of law firm collapse can pose a threat to the industrial organization of the legal profession. Can lawyers easily recover and recreate the benefits of law firm scale by re-merging into other law firms with ease, or does a partner run mark a scarlet letter that poisons lawyers’ careers, and the legal profession as a whole, permanently?

I provide the first rigorous examination of this issue using the case study of the 2012 downfall of Dewey & LeBoeuf, the largest law firm bankruptcy ever. I hand-construct a dataset using public information in directories, news reports, and LinkedIn of the career outcomes of every lawyer who worked at Dewey’s U.S. offices in 2012 and a control group of similarly situated lawyers at law firms identified to me by former Dewey leadership as Dewey’s benchmark competition (1,575 lawyers total). Immediately after the firm crumpled, about 80% of Dewey’s partners remained in Biglaw as partners or forms of counsel, while about half of Dewey’s associates remained Biglaw associates. Ex-Dewey associates who were cluster-hired with their practice area out of Dewey as the firm collapsed are more likely to be (1) men and (2) Biglaw partners in 2022. I find suggestive and inconclusive evidence that ex-Dewey partners, a decade on, are marginally less likely to be partners at top law firms than alumni of control firms, and find that the overall distribution of 2022 employment, especially for ex-Dewey associates, is quite similar between alumni of Dewey and its rivals. I therefore find little evidence for stigma against (non-core management) Dewey lawyers or damage from dissolution of firm-specific relational capital in the labor market in the long run.

My findings suggest that the long-run cost of partner runs to the legal profession at an institutional level, at least in times when the overall legal job market is somewhat liquid, is modest at most. The policy implication of this finding is that policymakers and state bar associations should be cautious in modifying the rules that inadvertently generate partner runs, like the requirement of exclusive lawyer ownership of law firms, if such changes would also generate costs. These law firm glass houses, it seems, can regenerate elsewhere.

I first became acquainted with this work at the 2023 National Business Law Scholars Conference this past summer.  As a former Biglaw (a/k/a BigLaw and Big Law--maybe we can settle on one of these terms sometime?) lawyer, I find Andrew's inquiry interesting and the findings somewhat unsurprising (although I admit to being relieved that the impacts on partners were, in fact, modest).  Having known folks in firms that dissolved, I believe it's good to know that a law firm can fail and the partners can survive (and maybe even thrive).

Who gets to appeal a securities dismissal?

So here’s a bizarre little PSLRA procedural case out of the Ninth Circuit.  Mark Habelt, a shareholder of iRhythm, filed a securities action on behalf of himself and a class of other investors, alleging the company committed fraud.  As is not uncommon in these cases, other class members moved to be appointed lead.  Habelt himself did not so move, and eventually, the Public Employees’ Retirement System of Mississippi was appointed lead, and its counsel – a different firm than Habelt’s – was appointed lead counsel.

Again, as is common, PERSM filed an amended complaint that continued to name Habelt in the caption, but did not include him as a named plaintiff in the substantive allegations.  Eventually, the case was dismissed on the pleadings, and PERSM did not appeal.

Habelt, however, did.  And the Ninth Circuit, 2-1, held that he did not have standing to do so.  The court reasoned:

“[a] person or entity can be named in the caption of a complaint without necessarily becoming a party to the action.”… Beyond an individual’s mere inclusion in the caption, the more important indication of whether she is a party to the case are the “allegations in the body of the complaint.” It is upon this ground that Habelt’s argument falters. While it is true that Habelt filed the initial complaint in this matter, that complaint has now been extinguished. …Nor does Habelt’s status as a putative class member give him standing to appeal. Although “an unnamed member of a certified class may be considered a party for the [particular] purpos[e] of appealing an adverse judgment,” the “definition of the term ‘party’” does not cover an unnamed class member “before the class is certified.”

The implication was that the only way Habelt could have become a party and advanced his appeal was if he had first moved to intervene at the district court level.

So, my thoughts.

First, at least in the securities space, this is an unusual situation because I, at least, was always under the impression that most dismissals on the pleadings are appealed – from the attorneys’ perspective, the incremental costs are negligible.  So I wonder why the lead plaintiff chose not to do so here. I have not studied the underlying case at all so I have no idea if this is correct, but an obvious reason not to do so would be fear of generating unfavorable precedent – lead counsel (and some lead plaintiffs) are repeat players in this space and might reasonably care about that.

Second, but Habelt did want to appeal!  Obviously, whatever PERSM’s counsel’s calculus, Habelt and/or his attorneys had a different calculus.  But he wanted to appeal on behalf of the class, and procedurally, that’s just … weird.  What would happen if he won?  Does the case get remanded for PERSM – which abandoned it – to continue litigating?  Is Habelt lead now?  Is the LP contest reopened?

All of this just highlights a real problem: lead plaintiff and lead counsel represent the class, but they do so even before a true Rule 23 process.  And they can really bind the class nonetheless, because even if Habelt had intervened, there’s a real possibility he could not have appealed on the class’s behalf without reopening lead plaintiff selection, see In re Merck Sec. Litig., 432 F.3d 261 (3d Cir. 2005).  And in many cases, a district court judgment may be issued before a potential intervenor even knows it’s necessary to intervene to preserve an appeal right.

Plus – as the Habelt dissent noted – the chances that Habelt could just file a new action – after all, he wasn’t formally a party to the original one, according to the Ninth Circuit – are slim to none.  Statutes of repose are not tolled during the pendency of a class action, see California Public Employees’ Retirement System v. ANZ Securities, 582 U.S. 497 (2017), and the limitations period is not tolled for successive class cases, see China Agritech v. Resh, 138 S. Ct. 1800 (2018), and since securities class actions take forever to resolve (months can pass before a lead plaintiff is appointed, years before the motion to dismiss briefing is complete and an opinion issued), that functionally gives a terrific amount of power to whoever is appointed lead to in fact bind the class, unless class members want to be preemptive enough to intervene on spec.

In any event, I’m not sure what the solution is (other than unwinding ANZ and China Agritech), and though the situation is rare, the Ninth Circuit’s grounds for dismissal strike me as elevating form over substance – a trap for the unwary, if you will.  Habelt filed a complaint, it was never dismissed, his name was on the case – of course he reasonably assumed he was still a party.  To hold otherwise only invites future jockeying.  Will all class members who filed complaints insist on having their names be included in subsequent pleadings?  File preemptory motions to intervene?  I can’t see what benefit there would be to encouraging such a system.  But again, if the LP process would circumvent Habelt’s right to represent the class on appeal anyway, a la Merck, then, I suppose, no harm no foul.

SEALS 2024 - More Business Programming

Last week, I posted about a discussion group I am organizing on teaching numeracy for the Southeastern Association of Law Schools (SEALS) 2024 annual meeting.  (Thanks to those who responded!)  I also am working with folks who are organizing another session.  More on that in another post!  And some of you or others you know also may be proposing panels or discussion groups.  But the Business Law Workshop at the conference can always use another program, imv.

With that thought in mind, I am reaching out to suggest that you organize a business program for the SEALS 2024 annual meeting.  The SEALS submission webpage includes instructions and information about the submission process and a hypertext link to the the submission site.  The submission site is open for 2024 program proposals now and is easy to navigate.  I am happy to help by answering any questions you may have (or by getting answers for you).

The only tricky parts are determining the type of session you want to organize and complying with the requirements for that type of session.  The two most common types of programs are panels and discussion groups, as follows:

PANELS

Panels are the traditional presentations at most conferences. The time allotted is about an hour-and-a-half, and between 4 and 6 panelists do presentations around a central theme or subject. You should leave time for questions or discussion with the audience at the end of the presentations.

Here are the rules that govern Panels:

• • Panels must include at least four speakers.
  • Panels must include both a title for the program, as well as a description of the program.
  • If your proposal would fit into a workshop in a particular area (e.g., constitutional law, criminal procedure, business law, teaching), please indicate that fact in your proposal.
  • Before you list someone as a speaker, please confirm that person is willing and able to participate.
  • The one-panel-per-person rule applies. No attendee may serve on more than one panel. This rule governs all kinds of panels and includes moderators and panelists. There are a
    couple of situations in which this rule will not apply: the Call for Papers presentations, Discussion Groups, mentors for new scholars, and programming in the other special workshops with attendance limited to special registrants (e.g., the workshops for new law teachers and prospective law teachers).
  • Only one person per school can be on a panel unless the two people are co-authors. They are treated as one person for purposes of time.
  • At least half the panelists (including the moderator) must be from institutional and affiliate member schools,

DISCUSSION GROUPS

Discussion Groups require ten discussants, with the designation of one of them as the moderator of the discussion. Groups may include a few additional discussants. Discussion Groups are scheduled in either two-hour or three-hour blocks. The discussants often have concise written papers on a central theme, abstracts, or have prepared some thoughts around several questions connected to that theme. The discussants circulate their papers or thoughts in writing before the conference, spend 3-5 minutes summarizing their points, and then discuss the theme in more depth along with all attendees in the room. Wide audience participation and discussion are the focus of this kind of programming.

To propose a Discussion Group, you will need at least ten discussants.

• • Discussion Group proposals must include a title, as well as a description of the Discussion Group.
  • Before you list someone as a speaker, please confirm that person is willing and able to participate.
  • If your proposal would fit into a workshop in a particular area (e.g., constitutional law, criminal procedure, business law, teaching), please indicate that fact in your proposal.
  • The one-panel-per-person rule does not apply.
  • The one-person-per-school rule does not apply.
  • Discussion Group organizers must issue a call for participants.
  • At least one-fourth of the discussants must be from institutional and affiliate member schools.

So, think about who you might want to join up with to vet current research or talk about teaching methods, techniques, or tools!  Then, propose a program.  The date of the conference (July 21-27, 2024) is optimally situated to position business law faculty for the new school year.  As a result, it is a great conference for rededicating oneself to one's law scholarship and teaching.

Shnitser on CITs

Natalya Shnitser posted a really fascinating paper that taught me about collective investment trusts (CITs), which, I have to admit, wasn’t something I knew anything about.

As I understand it, they function very much like a mutual fund, but they’re managed by banks instead of investment companies.  As such, they are exempt from much of the securities regulation that protects mutual fund investors – very little transparency or liquidity – but they’re increasingly showing up on 401k menus, to the point where, according to Shnitser, they now represent 30% of defined contribution plan assets.

The rationale for this exemption from securities regulation is that, once upon a time, when defined benefit plans dominated the workplace, it was assumed employers/pension plans would be able to bargain on equal terms, but that’s not true today, when individual workers simply select CITs from among other investment choices.

One area I’m particularly interested in is their role in corporate governance.  Because these are retirement plan assets, CITs are ERISA fiduciaries, and that means, among other things, that they must vote their shares to benefit the plan, just like a pension fund would.  But because they don’t have to publicly report their votes, there’s no real mechanism of enforcement.  That said, the big mutual fund companies – BlackRock, Vanguard, Fidelity, State Street – have apparently gotten into this space, figuring, if banks are going to be able to offer CITs that compete with mutual funds but with fewer regulatory burdens, mainstream asset managers may as well claim a piece of that business, too.  Which would suggest that CIT shares are being voted the same way fund families vote – BlackRock, I assume, doesn’t have a separate voting policy for CITs versus index funds.  But since the big mutual fund companies are now experimenting with versions of pass through voting, will that mean CIT investors are left out in the cold?

Anyway, here’s the abstract:

The retirement security of millions of American workers is increasingly tied to an investment vehicle that most have never even heard of, and whose dramatic rise has received almost no regulatory scrutiny in recent decades. With nearly $7 trillion dollars in assets, “collective investment trusts” (CITs) are rapidly replacing mutual funds on the investment menus of employer-sponsored retirement plans. Individuals who once had staked their retirement nest eggs on the returns from mutual funds have had more and more of their savings transferred into bank sponsored CITs, which now hold nearly 30% of all assets in defined contribution plans, up from just 13% a decade ago. Yet despite such dramatic growth and economic significance, CITs which look and act a lot like mutual funds but are sponsored by banks and subject to oversight by the Comptroller of the Currency—have been largely overlooked, with almost no critical analysis of CITs as investment funds, as institutional investors, and as increasingly important participants in an interconnected financial system.

This Article tells the story of a century-old bank product seizing on regulatory gaps and exploding in popularity among retirement plans seeking cheaper investment options for individual participants. The dramatic growth of CITs raises new and critical questions about the tradeoffs associated with CITs: in particular, the benefits of lower fees versus the individual and systemic risks that may stem from lower transparency, fragmented regulatory oversight, fewer restrictions on permitted investments, and centralized control in the hands of bank trustees. In identifying these tradeoffs, this Article builds the foundation for future scholarship to improve the understanding of the behemoth investment vehicle whose growth and impact have gone largely unexamined over the last four decades.

What Business Lawyers Needs to Ask their Clients About Generative AI Usage

Last week I had the pleasure of joining my fellow bloggers at the UT Connecting the Threads Conference on the legal issues related to generative AI (GAI) that lawyers need to understand for their clients and their own law practice. Here are some of the questions I posed to the audience and some recommendations for clients. I'll write about ethical issues for lawyers in a separate post. In the meantime, if you're using OpenAI or any other GAI, I strongly recommend that you read the terms of use. You may be surprised by certain clauses, including the indemnification provisions. 

I started by asking the audience members to consider what legal areas are most affected by GAI? Although there are many, I'll focus on data privacy and employment law in this post.

Data Privacy and Cybersecurity

Are the AI tools and technologies you use compliant with relevant data protection and privacy regulations, such as GDPR and CCPA? Are they leaving you open to a cyberattack?

This topic also came up today at a conference at NCCU when I served as a panelist on cybersecurity preparedness for lawyers.

Why is this important?

ChatGPT was banned in Italy for a time over concerns about violations of the GDPR. The Polish government is investigating OpenAI over privacy issues. And there are at least two class action lawsuits in California naming Microsoft and OpenAI. Just yesterday, a US government agency halted the use of GAI due to data security risks. 

It’s also much easier for bad actors to commit cybercrime because of the amount of personal data they can  scrape and analyze and because deepfake technology allows impersonation of images and voices in a matter of seconds. The NSA and FBI have warned people to be worried about misinformation and cyberthreats due to the technology. On a positive note, some are using GAI to fight cybercrime.

Surveillance and facial recognition technology can violate privacy and human rights. Governments have used surveillance technology to tamp down on and round up dissidents, protestors, and human rights defenders for years. Now better AI tools makes that easier. And if you haven't heard some of the cautions about Clearview AI and the misidentification of citizens, you should read this article. A new book claims that this company could "end privacy as we know it."

What should (you and) your clients do?

• Ensure algorithms minimize collection and processing of personal data and build in confidentiality safeguards to comply with privacy laws
• Revise privacy and terms of use policies on websites to account for GAI
• Build in transparency for individuals to control how data is collected and used
• Turn on privacy settings in all AI tools and don’t allow your data to be used for training the large language models
• Turn off chat history in settings on all devices
• Prevent browser add-ons
• Check outside counsel guidelines for AI restrictions (or draft them for your clients)
• Work with your IT provider or web authority to make sure your and your clients’ data is not being scraped for training
• Use synthetic data sets instead of actual personally identifiable information
• Ensure that you have a Generative AI Security Policy
• Check vendor contracts for AI usage
• Enhance cybersecurity training
• Conduct a table top exercise and make sure that you have an incident response plan in place
• Check cyberinsurance policies for AI clauses/exclusions

What about the employment law implications?

According to a Society for Human Resources Management Member Survey about AI usage:

• 79% use AI for recruiting and hiring

• 41% use AI for learning and development

• 38% use AI for performance management

• 18% use AI for productivity monitoring

• 8% use Ai for succession planning

• 4% use AI or promotional decisions

GAI algorithms can also have significant bias for skin color. The National Institute of Standards and Technology (NIST) released research showing that "not just dark African-American faces, but also Asian faces were up to 100 times more likely to be failed by these systems than the faces of white individuals.”

Then there’s the question of whether recruiters and hiring managers should use AI to read emotions during an an interview. The EU says absolutely not. 

The Equal Employment Opportunity Commission has taken notice. In a panel discussion, Commissioner Keith Sonderling explained, “carefully designed and properly used, AI has potential to enhance diversity and inclusion, accessibility in the workplace by mitigating the risk of unlawful discrimination. Poorly designed and carelessly implemented, AI can discriminate on a scale and magnitude greater than any individual HR professional.” The EEOC also recently settled the first of its kind AI bias case for $365,000.

What to do 

• Use AI screening tools to disregard name, sec, age, national origin, etc.
• Use bots for interviews to eliminate bias because of accents
• Check local laws such as New York City's automated decision tools guidance for employers
• Be careful about training large language models on current workforce data because that can perpetuate existing bias
• Review the EEOC Resource on AI

Questions to Ask Your Clients:

• How are you integrating human rights considerations into your company's strategy and decision-making processes, particularly concerning the deployment and use of new technologies?

• Can you describe how your company's corporate governance structure accounts for human rights and ethical considerations, particularly with regards to the use and impact of emerging technologies?

• How does your company approach balancing the need for innovation and competitive advantage with the potential societal and human rights impact of technologies like facial recognition and surveillance?

• As data becomes more valuable, how is your company ensuring ethical data collection and usage practices?

• Are these practices in line with both domestic and international human rights and privacy standards?

• How is your organization addressing the potential for algorithmic bias in your technology, which can perpetuate and exacerbate systemic inequalities?

• What steps are you taking to ensure digital accessibility and inclusivity, thereby avoiding the risk of creating or enhancing digital divides?

• How is your company taking into account the potential environmental impacts of your technology, including e-waste and energy consumption, and what steps are being taken to mitigate these risks while promoting sustainable development?

• Are you at risk of a false advertising or unfair/deceptive trade practices act claim from the FTC or other regulatory body due to your use of AI?

Whether or not you're an AI expert or use GAI in your practice now, it's time to raise these issues with your clients. Future posts will address other legal issues and the ethical implications of using AI in legal practice. 

Another Case Challenging FINRA's Constitutionality

Another case challenging FINRA's constitutionality has generated a District Court opinion upholding FINRA's constitutionality.  Judge Reyes found that, Alpine "does not suggest that courts must enjoin every challenged FINRA enforcement action pending the Alpine merits decision."

Kim differs from Alpine in some significant ways.  The plaintiff does not face expulsion, just an ordinary fine and disciplinary proceeding.  Kim faces a possible $30,000 fine and a requirement to disgorge $16,000 in profits.  This, unsurprisingly, complicates his attempt to secure an injunction against the enforcement action because it doesn't seem as though he will face any irreparable harm--just "an enforcement hearing, months away, and most likely, monetary fines."

The case also differs in that amici got involved at an early stage this time.  The opinion thanks "CBOE Global Markets, Inc.; CME Group Inc.; National Futures Association; and the Securities Exchanges."  

Most courts will not be familiar with SROs.  Given that, it makes sense for a range of amici to come in on these cases to help give context to courts.

Ultimately, how this issue will turn out for Kim depends on the pending Alpine appeal.

Open Lecturer Position in Legal Studies - University of Georgia Terry College of Business

Dear BLPB Readers:

"The Department of Insurance, Legal Studies and Real Estate in the Terry College of Business at The University of Georgia invites applications for a full-time non-tenure-track faculty position in Legal Studies at the lecturer level. The expected start date is May 2024 but can be as early as January 2024. The position is renewable based on performance and promotion to Senior Lecturer is possible after six years of service. Participation in service activities appropriate to the rank is expected.  Salary is competitive and commensurate with qualifications."

The complete job posting is here.

SEALS 2024 - Teaching Numeracy Discussion Session

The Southeastern Association of Law Schools (SEALS) is soliciting proposals for its 2024 annual meeting (to be held at the Harbor Beach Resort & Spa in Fort Lauderdale, Florida from July 21-July 27, 2024).  After last year's meeting, folks suggested to me it could be time again to have a teaching panel at SEALS in 2024.  Specifically, the suggestion was made that a group be put together to talk about teaching numeracy to business-inclined students.  I am happy to organize it.

Please let me know if you want to join in on this discussion group.  I am looking for at least nine folks to join me.  Email me or leave a comment here if you would like to join in.

Here we go again

On September 29, the Supreme Court granted cert in Macquarie Infrastructure Corp. v. Moab Partners, to decide:

whether the Second Circuit erred in holding—in conflict with the Third, Ninth, and Eleventh Circuits—that a failure to make a disclosure required under Item 303 can support a private claim under Section 10(b), even in the absence of an otherwise-misleading statement. 

(The question, I think, mischaracterizes the Third Circuit; you’ll get a sense of why below, the parties will argue the rest.  But leaving that point aside - )

I have no idea how the case will unfold, of course, but I tend to assume that despite the narrow framing, the real question is whether silence in the face of a regulatory duty to disclose constitutes a misleading omission.  I.e., it does not matter what the particular required disclosure is, or what the cause of action is; the question is whether, if you remain silent when a regulation requires you to speak, that is the equivalent of an affirmatively misleading statement.  The Second Circuit has repeatedly held yes, it is, usually in the context of 10b claims over Item 303 omissions.  Other circuits - well, to be honest, have been muddled.

This matters for any rule that prohibits false statements, or omissions that would render remaining statements misleading, but does not, by its terms, impose liability for omissions to state required information.

So, for example, compare Section 11 of the Securities Act of 1933:

In case any part of the registration statement, when such part became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading ... [purchasers can sue]

With Section 12 of the Securities Act, which prohibits the use of a prospectus that contains:

an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading

See?  Section 11 prohibits false statements, misleading statements, and straight omissions.  Section 12, by contrast, does not, by its terms, impose liability for failing to disclose required information (which is another reason why, by the way, that the Supreme Court got it wrong in Gustafson v. Alloyd Co., 513 U.S. 561 (1995), but that’s an argument for another time).  So, you could ask - if a prospectus fails to include required information, is there Section 12 liability?

Rule 10b-5 has similar wording to Section 12, as does Rule 14a-9 (proxy solicitations may not contain a “statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication”).  Nonetheless, in Jaroslawicz v. M&T Bank Corp., 962 F.3d 701 (3d Cir. 2020), the Third Circuit held that 14a-9 liability may be triggered by failing to disclose information required under Item 105 in the proxy statement.

So, to be very clear, the issue is whether under Section 12, or Rule 10b-5, or Rule 14a-9, failing to disclose required information is the equivalent of making a false statement.  If so, under this theory, the plaintiff would still have to separately prove the other elements of the relevant cause of action, such as materiality and, if relevant, scienter; silence, in the face of a regulatory obligation, would only satisfy the single element of falsity.  Or, as the Supreme Court put it in Basic, Inc. v. Levinson, 485 U.S. 224 (1988), “Silence, absent a duty to disclose, is not misleading.”

The Supreme Court previously granted cert to decide this issue in Leidos Inc. v. Indiana Public Retirement System, but the parties settled, and the case was dismissed.  That time around, the United States actually weighed in on the plaintiffs’ side, which makes me wonder.

Could the SEC make all, or most, of this go away just by changing the signature block on the forms – the 10-Ks, the 10-Qs, the Schedule 14As, etc – to specifically say the forms are complete, as well as accurate?  You could do that for the SOX certifications, as well – which also don’t, currently, contain language representing that the form is complete.  At that point, there may be fights over whether the signatories must harbor scienter or whether someone else in the organization could, but it would at least narrow relevant scenarios.

And speaking of omissions liability –

One area where an amendment to the form would not be sufficient is where no form is filed at all, namely, where the plaintiffs allege the defendant should have filed a 13D or 13G disclosing a stake, and did not do so.  Again, the claim is that silence in the face of a regulatory duty to disclose - here, the duty to file a 13D to disclose a 5% stake - is the equivalent of a false statement for 10b-5 purposes. 

And this, of course, is playing out right now in a putative class action against Elon Musk, for failure to disclose his Twitter stake in a timely fashion (that case also involves affirmative false statements, in that Musk not only delayed disclosing his stake at all, but additionally filed a “passive” 13G form when he already knew he was not going to be passive).  I blogged about Musk’s potential liability here, before the complaint was filed, and this week, SDNY denied Musk’s motion to dismiss.  So it seems Musk has some interest in the outcome of Macquarie Infrastructure v. Moab Partners.

But there’s more!  The SEC is the one who usually enforces the 13D/13G filing requirements, and we all assumed the SEC’s interest in this was dead, but  - wrong!  Apparently, Musk agreed to sit for a depo, didn’t show, and now is refusing any depo – which caused the SEC to file a motion to compel in the Northern District of California.  So … stay tuned!

Event on Private Market Regulaton

You may be interested in an event taking place on October 11 at the Center for American Progress in Washington, DC, which will focus on the regulation of private markets and feature SEC Commissioner Caroline Crenshaw, as well as business law professors Renee Jones (BC) and George Georgiev (Emory).

The registration link (in-person or virtual) is as follows: https://www.americanprogress.org/events/accessing-public-capital-without-public-disclosure/

Event description:

Accessing Public Capital Without Public Disclosure

Oct. 11, 2023

12:30 PM - 12:35 PM

Introductory remarks provided by CAP Senior Vice President for Inclusive Growth Emily Gee.

12:35 PM - 1:05 PM

Keynote remarks provided by Caroline A. Crenshaw, Commissioner of the U.S. Securities and Exchange Commission.

1:05 PM - 1:45 PM

A panel discussion with experts on the topic moderated by CAP Senior Director for Financial Regulation Alexandra Thornton, featuring Renee Jones (Boston College Law School) and George Georgiev (Emory University School of Law)

Today, more capital is raised annually in private markets than in the public markets. Hundreds of multibillion-dollar companies can raise all the capital they need from an unlimited number of unaffiliated investors, while selling products and services to tens of thousands of customers and employing thousands of people. Many are unicorns—companies that started in private markets and never left.

But companies that offer their shares for sale in private markets generally are not required to provide investors and the public with the type of information that public companies must provide when offering their shares for sale, such as reliable information about their operations, financials, business prospects, or governance, much less the financial risks they may face from climate disasters, workforce lawsuits, human rights violations, and more.

The astounding growth of private markets affects us all. Large opaque companies create risks not just for their investors and customers, but also for their workers and for the economy overall. Addressing these risks will help protect retirement savings from fraud and waste and ensure that our economy works for everyone.

Please join the Center for American Progress to discuss the origin and potential risks of opaque private markets and what can be done to avoid a future crisis.

Open Tenure-track Faculty Position - Minnesota State University Mankato

Dear BLPB Readers:

"Minnesota State University Mankato is hiring a full-time tenure track Assistant Professor of Business Law position starting Fall 2024. Here is a link to the job posting -https://minnesotastate.peopleadmin.com/postings/2485.

The Business Law program offers a stand-alone certificate and teaches a robust curriculum to undergraduate and MBA students. Classes regularly offered include Legal Environment of Business; Contracts, Sales and Professional Responsibility; Employment and Labor Law; Technology and Intellectual Property Law; Negotiation and Conflict Resolution, International Legal Environment of Business; and Environmental Law.

Applications will start to be reviewed after December 1 and continue until the position is filled. MSU-Mankato is an equal opportunity employer and is a member of the Minnesota State System. Contact Wade Davis if you have any questions: [email protected]."

Financial Restructuring Roundtable: Call for Papers

The Third Annual Financial Restructuring Roundtable will be held in person on April 4, 2024 in New York City. Spearheaded by Samir Parikh, Robert Rasmussen, and Michael Simkovic, this invitation-only event brings together practitioners, jurists, scholars, and finance industry professionals to discuss important financial restructuring and business law issues.

The Roundtable invites the submission of papers. Selected participants will receive a $2,000 stipend and have the opportunity to workshop their papers in an intimate, collegial setting.

We seek papers exploring diverse topics and will be interested in interdisciplinary perspectives. Papers will be selected through a blind review process. Junior scholars (with one to ten years in academia) are invited to submit a 3 – 5 page overview of a proposed paper. Submissions may be an introduction, excerpt from a longer paper, or extended abstract. The submission should be anonymized, and – aside from general citations to the author’s previous articles – all references to the author should be removed.

Please submit proposals by October 30, 2023. Invitations will be issued via email by December 1, 2023. Working drafts of papers should be available for circulation to participants by March 1, 2024.

Proposals – as well as questions and concerns – should be directed to Samir Parikh at [email protected].

Connecting the Threads VII: This Coming Friday!

I am pleased to report that Connecting the Threads is back for another year--our seventh!  As readers will recall, this annual symposium features the work of your Business Law Prof Blog editors (sometimes with coauthors), with commentary from Tennessee Law faculty members and students.  Every year, my colleagues and I offer up a variety of presentation topics covering developing theory, policy, doctrine, pedagogy, and practice trends in various areas of business law.

This year’s panels include:

“Algorithms to Advocacy: How Emerging Technologies Impact Legal Practice and Ethics”
Marcia Narine Weldon

“The Road and Corporate Purpose”
William P. Murray and J. Haskell Murray

“Is the SEC Proposing a ‘Loaded Questions’ Climate Disclosure Regime?”
John P. Anderson

“Business Lawyer Leadership: Valuing Relationships”
Joan Heminway

“Metals Derivatives Markets and the Energy Transition”
Colleen Baker and James Coleman

If you are in the Knoxville area, please come join us on Friday for the day.  The program runs from 8:30 am (registration) to 3:00 pm.  Registration for CLE credit can be accessed here.

DEIB and Business Law Program this Week

 

RWU Law looks forward to the next installment of the Integrating Doctrine & Diversity Speaker Series:

HOW DOES DIVERSITY, EQUITY, INCLUSION AND BELONGING PEDAGOGY FIT IN BUSINESS ISSUES AND FINANCIAL AFFAIRS CLASSES? LEADING WITH DEIB IN WILLS, TRUSTS, ESTATES, INSURANCE, CONTRACTS, AND TAXATION LAW CLASSES

Wednesday, October 4 | 2:00 – 3:00 PM EST

Zoom Webinar Registration here.

Details about the Featured Speakers & Program here.