Friday, October 2, 2020

Sex, Lies, and M&A- Part II

No. You didn't miss Part 1. I wrote about Weinstein clauses last July. Last Wednesday, I spoke with a reporter who had read that blog post.  Acquirors use these #MeToo/Weinstein clauses to require target companies to represent that there have been no allegations of, or settlement related to, sexual misconduct or harassment. I look at these clauses through the lens of a management-side employment lawyer/compliance officer/transactional drafting professor. It’s almost impossible to write these in a way that’s precise enough to provide the assurances that the acquiror wants or needs.

Specifically, the reporter wanted to know whether it was unusual that Chevron had added this clause into its merger documents with Noble Energy. As per the Prospectus:

Since January 1, 2018, to the knowledge of the Company, (i), no allegations of sexual harassment or other sexual misconduct have been made against any employee of the Company with the title of director, vice president or above through the Company’s anonymous employee hotline or any formal human resources communication channels at the Company, and (ii) there are no actions, suits, investigations or proceedings pending or, to the Company’s knowledge, threatened related to any allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above. Since January 1, 2018, to the knowledge of the Company, neither the Company nor any of its Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above.

Whether I agree with these clauses or not, I can see why Chevron wanted one. After all, Noble’s former general counsel left the company in 2017 to “pursue personal interests” after accusations that he had secretly recorded a female employee with a video camera under his desk. To its credit, Noble took swift action, although it did give the GC nine million dollars, which to be fair included $8.3 million in deferred compensation. Noble did not, however, exercise its clawback rights. Under these circumstances, if I represented Chevron, I would have asked for the same thing. Noble’s anonymous complaint mechanisms went to the GC’s office. I’m sure Chevron did its own social due diligence but you can never be too careful. Why would Noble agree? I have to assume that the company’s outside lawyers interviewed as many Noble employees as possible and provided a clean bill of health. Compared with others I’ve seen, the Chevron Weinstein clause is better than most.

Interestingly, although several hundred executives have left their positions due to allegations of sexual misconduct or harassment since 2017, only a small minority of companies use these Weinstein clauses. Here are a few:

  1. Merger between Cotiviti and Verscend Technologies:

Except in each case, as has not had and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, to the Knowledge of the Company, (i) no allegations of sexual harassment have been made against (A) any officer or director of the Acquired Companies or (B) any employee of the Acquired Companies who, directly or indirectly, supervises at least eight (8) other employees of the Acquired Companies, and (ii) the Acquired Companies have not entered into any settlement agreement related to allegations of sexual harassment or sexual misconduct by an employee, contractor, director, officer or other Representative.

  1. Merger between Genuine Parts Company, Rhino SpinCo, Inc., Essendant Inc., and Elephant Merger Sub Corp.:

To the knowledge of GPC, in the last five (5) years, no allegations of sexual harassment have been made against any current SpinCo Business Employee who is (i) an executive officer or (ii) at the level of Senior Vice President or above.

  1. AGREEMENT AND PLAN OF MERGER BY AND AMONG WORDSTREAM, INC., GANNETT CO., INC., ORCA MERGER SUB, INC. AND SHAREHOLDER REPRESENTATIVE SERVICES LLC:

(i) The Company is not party to a settlement agreement with a current or former officer, employee or independent contractor of the Company or its Affiliates that involves allegations relating to sexual harassment or misconduct. To the Knowledge of the Company, in the last eight (8) years, no allegations of sexual harassment or misconduct have been made against any current or former officer or employee of the Company or its Affiliates.

  1. AGREEMENT AND PLAN OF MERGER By and Among RLJ ENTERTAINMENT, INC., AMC NETWORKS INC., DIGITAL ENTERTAINMENT HOLDINGS LLC and RIVER MERGER SUB INC.:

(c) To the Company’s Knowledge, in the last ten (10) years, (i) no allegations of sexual harassment have been made against any officer of the Company or any of its Subsidiaries, and (ii) the Company and its Subsidiaries have not entered into any settlement agreements related to allegations of sexual harassment or misconduct by an officer of the Company or any of its Subsidiaries.

Here are just a few questions:

  1. What's the definition of "sexual misconduct"? Are the companies using a legal definition? Under which law? None of the samples define the term.
  2. What happens of the company handbook or policies do not define "sexual misconduct"?
  3. How do the parties define "sexual harassment"? Are they using Title VII, state law, case law, their diversity training decks,  the employee handbook? None of the samples define the term.
  4. What about the definition of "allegation"? Is this an allegation through formal or informal channels (as employment lawyers would consider it)? Chevron gets high marks here.
  5. Have the target companies used the best knowledge qualifiers to protect themselves?
  6. How will the target company investigate whether the executives and officers have had “allegations”? Should the company lawyers do an investigation of every executive covered by the representation to make sure the company has the requisite “knowledge”? If the deal documents don't define "knowledge," should we impute knowledge?
  7. What about those in the succession plan who may not be in the officer or executives ranks?

Will we see more of these in the future? I don’t know. But I sure hope that General Motors has some protection in place after the most recent allegations against Nikola’s founder and former chairman, who faces sexual assault allegations from his teenage years. Despite allegations of fraud and sexual misconduct, GM appears to be moving forward with the deal, taking advantage of Nikola’s decreased valuation after the revelation of the scandals.

I’ll watch out for these #MeToo clauses in the future. In the meantime, I’ll ask my transactional drafting students to take a crack at reworking them. If you assign these clauses to your students, feel free to send me the work product at mweldon@law.miami.edu.

Take care and stay safe.

October 2, 2020 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Lawyering, M&A, Management, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)

Wednesday, September 23, 2020

What Do People Really Think of Insider Trading? Part IV

This is the fourth installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on the public’s views concerning the ethics of insider trading in different factual scenarios.

The survey presented each respondent with five basic insider-trading scenarios. In each scenario, the inside information pertained to the acquisition of a small company by a larger company. Respondents were placed in the shoes of (1) the CEO of the small firm being acquired by the larger firm; (2) a janitorial employee of the small firm; (3) an outside accountant hired to audit the small firm; (4) the friend of a middle manager of the small firm who learns the inside information at a holiday party; and (5) a stranger who overhears the material nonpublic information in an elevator. The survey instrument randomly directed respondents down multiple question paths for each of these scenarios. I will summarize just some of the results for the CEO scenario in this post, but see here for the complete results.

When asked whether it would be ethical for the CEO of the smaller company to trade in her own company’s shares based on material nonpublic information of the imminent acquisition, 37% said yes. That number increased to 50%, however, when respondents were asked if it would be ethical for the CEO to trade in the larger, acquiring company based on the same information. The 13-point difference may be explained by the fact that the CEO's trading in her own company implicates both the classical and misappropriation prohibitions for insider trading under our current enforcement regime, while trading in the other firm's shares would only implicate the misappropriation theory. Under the classical theory, the harm of insider trading is said to stem from a breach by the insider of a duty to disclose to her company's current or prospective shareholders on the other side of the trade (so this theory would not apply to the trade in the other, large company's shares). Under the misappropriation theory, the harm of insider trading is located in a breach of duty to the source of the information (so in both scenarios the source is the same). The difference in responses therefore suggests there are some respondents whose intuitions align with either the classical theory or the misappropriation theory, but not both.  If all respondents found the classical and misappropriation theories equally compelling, we would not expect a difference.

After providing their initial answers to these scenario-based questions, respondents were then presented with a short piece of propaganda about insider trading. They were offered a statement suggesting either that insider trading has positive, negative, or neutral consequences for markets. The propaganda had a surprising impact. For instance, respondents were much more willing (by a margin of 9%) to condone the CEO’s trading in his own company’s shares (46%) after having been presented with the short propaganda piece. These results suggest that the public’s ethical views concerning even the most straightforward insider-trading scenarios under our current enforcement regime are neither clear nor firm.

(Modified on 9/24/20 at 11:30 am CST)

September 23, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Tuesday, September 15, 2020

What Do People Really Think of Insider Trading? Part III

This is the third installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on the public’s views concerning the morality of insider trading.

The survey asked participants (1) whether they would trade on inside information if it came into their possession; (2) whether they believe that insider trading is morally wrong; and (3) whether they believe that insider trading should be illegal. The following table offers a demographic breakdown of the results.

 

Would you trade based on inside info?

Is insider trading morally wrong?

Should insider trading be illegal?

 

Yes

No

Yes

No

Yes

No

Overall

44.9%

55.1%

62.8%

35.5%

66.7%

33.3%

Gender

Female

45.9%

54.1%

59.4%

39.3%

62.5%

37.5%

Male

43.6%

56.4%

66.7%

31.2%

71.5%

28.5%

Race

Asian

56.1%

43.9%

56.1%

42.4%

62.1%

37.9%

Black

59.0%

41.0%

43.3%

55.1%

45.5%

54.5%

Latinx

61.5%

38.6%

45.8%

51.8%

48.2%

51.8%

Native Am.

66.7%

33.3%

58.3%

41.7%

58.3%

41.7%

White

39.7%

60.2%

68.6%

29.7%

72.6%

27.4%

Other

40.9%

59.1%

59.1%

40.9%

72.7%

27.3%

Trading Status

Invest

51.3%

48.7%

66.5%

31.6%

71.3%

28.7%

Abstain

40.3%

59.7%

59.3%

39.3%

62.4%

37.6%

As expected, a majority of respondents (63%) view insider trading as immoral and 66% think it should be illegal. These numbers are relatively close—at the margin of error for the poll. But the story is more complex when considered in light of responses concerning trading preferences. 18% of respondents said insider trading is immoral but also said they would trade on it—reflecting some cognitive dissonance or a lack of moral clarity. 10% said insider trading is not immoral but also said they would not trade on it--call them cautious abstainers.

We attempted to use these figures to get a clearer sense of respondents’ “true” moral attitudes regarding insider trading. If we take the number who said it is immoral and subtract out those who’s moral clarity is weak, we get 44.2% who have a clear sense that insider trading is wrong. If we take those who would not trade on inside information and subtract those who abstain only out of caution (e.g., fear of prosecution), we get 44.6% who abstain on moral grounds. It is interesting that these two numbers are so close, and this consistency tracks across most demographic subgroups. The numbers suggest that there is a core group of respondents (~44%) who have moral clarity that insider trading is wrong, and who would not trade on inside information for that reason.

The data therefore offers some evidence that the “true” percentage of respondents who believe that insider trading is immoral is probably less than 62%, and could be as low as 44%. See here for a more complete discussion of these and other findings from our survey.

The next installment of this post will share survey responses to a number of scenario-based questions.

September 15, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Tuesday, September 8, 2020

What Do People Really Think of Insider Trading? Part II

This is the second installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on some of our results pertaining to the effect of insider trading on the public’s confidence in the integrity of our capital markets.

It turns out that most Americans believe that insider trading is pervasive. The following table breaks down respondents’ answers to the question, “How common do you think insider trading is?”

 

Very Common

Common

Rare

Very Rare

Overall

25.4%

55.0%

15.0%

4.6%

Gender

Female

24.0%

57.0%

14.4%

4.5%

Male

26.8%

52.7%

15.9%

4.6%

Race

Asian

25.8%

51.5%

18.2%

4.5%

Black

41.6%

38.8%

15.2%

4.5%

Latinx

25.3%

55.4%

14.5%

4.8%

Native Am.

25.0%

58.3%

0.0%

16.7%

White

22.3%

58.3%

15.1%

4.3%

Other

22.7%

54.6%

13.6%

9.1%

Trading Status

Invest

30.5%

52.1%

14.4%

3.0%

Abstain

21.5%

56.9%

15.9%

5.7%

           

Approximately 80% of Americans believe insider trading is common or very common. If insider trading’s perceived pervasiveness undermines market confidence, we would expect that those who actually invest in the stock market would be less likely to believe that insider trading is common or very common. But, in fact, the opposite is true: investors are actually slightly more likely (82.6%) to believe insider trading is pervasive than those who abstain from investing in the stock market (78.4%).

Respondents were also asked the following open-ended question with an opportunity to fill in a response: “If you had done your research and found a company that you liked and wanted to invest in, is there anything that might keep you from buying stock in that company?” Notably, despite knowing that the study was about insider trading, only 0.4% indicated that insider trading in the company would deter them from investing in that company. This suggests that, if awareness of insider trading does undermine market confidence, it is not among the public’s principal concerns.

The study did, however, find some support for the market-confidence theory. For example, consider the responses to the following questions that specifically address the market confidence issue:

 

 “If you thought that a small number of people were trading on inside information concerning a company you have been researching, would it make you more likely to buy stock in that company, less likely, or make no difference?”

 

Less

Likely

No Difference

More Likely

Δ Less Likely vs. Market

Overall

48.2%

34.3%

17.5%

+4.9%

“If you knew insider trading was common in the stock market, would you be more likely to invest, less likely, or would it make no difference?”

 

Less

Likely

No Difference

More Likely

Δ Less Likely vs. Company

Overall

43.3%

40.6%

14.9%

-4.9%

While fewer than half of the survey’s participants said that they would be less likely to trade in a given stock (48.2%) or the market generally (43.3%) if they knew insider trading was taking place, these are not trivial numbers. Assuming that some of these respondents who would be less likely to trade do actually abstain from trading for that reason, this offers support for the market confidence justification for the regulation of insider trading. For a full demographic breakdown of the answers to these questions, as well as a table summarizing respondents’ explanations for their responses, see here.

The next installment of this post will explore public perceptions of the morality of insider trading, whether it should be illegal, and what penalties should be imposed.

September 8, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Saturday, September 5, 2020

Where Were The Gatekeepers Pt 1- Big Pharma and Operation Warp Speed

I think that the GCs at Big Pharma have hacked into my Zoom account. First, some background. Earlier this week, I asked my students in UM’s Lawyering in a Pandemic course to imagine that they were the compliance officers or GCs at the drug companies involved in Operation Warp Speed, the public-private partnership formed to find a vaccine for COVID-19 in months, rather than years. I asked the students what they would do if they thought that the scientists were cutting corners to meet the government’s deadlines. Some indicated that they would report it internally and then externally, if necessary.

I hated to burst their bubbles, but I explained that the current administration hasn’t been too welcoming to whistleblowers. I had served on a non-partisan, multi-stakeholder Department of Labor Whistleblower Protection Advisory Committee when President Trump came into office, which was disbanded shortly thereafter. For over a year after that, I received calls from concerned scientists asking where they could lodge complaints. With that background, I wanted my students to think about how company executives could reasonably would report on cutting corners to the government that was requiring the “warp speed” results in the first place. We didn’t even get into the potential ethical issues related to lawyers as whistleblowers.

Well the good news is that Pfizer, Moderna, Johnson & Johnson, GlaxoSmithKline, and Sanofi  announced on Friday that they have signed a pledge to make sure that they won’t jeopardize public safety by ignoring protocols. Apparently, the FDA may be planning its own statement to reassure the public. I look forward to seeing the statements when they’re released, but these companies have been working on these drugs for months. Better late than never, but why issue this statement now? Perhaps the lawyers and compliance officers – the gatekeepers – were doing their jobs and protecting the shareholders and the stakeholders. Maybe the scientists stood their ground. We will never know how or why the companies made this decision, but I’m glad they did. The companies hadn’t announced this safety pledge yet when I had my class and at the time, almost none of the students said they would get the vaccine. Maybe the pledge will change their minds.

Although the drug companies seem to be doing the right thing, I have other questions about Kodak. During the same class, I had asked my students to imagine that they were the GC, compliance officer, or board member at Kodak. Of course, some of my students probably didn’t even know what Kodak is because they take pictures with their phones. They don’t remember Kodak for film and cameras and absolutely no one knows Kodak as a pharmaceutical company. Perhaps that’s why everyone was stunned when Kodak announced a $765 million federal loan to start producing drug ingredients, especially because it’s so far outside the scope of its business. After all, the company makes chemicals for film development and manufacturing but not for life saving drugs. Kodak has struggled over the past few years because it missed the boat on digital cameras and has significant debt, filing for bankruptcy in 2012. It even dabbled in cryptocurrency for a few months in 2018. Not the first choice to help develop a vaccine.

To be charitable, Kodak did own a pharmaceutical company for a few years in the 80’s. But its most recent 10-K states that “Kodak is a global technology company focused on print and advanced materials and chemicals. Kodak provides industry-leading hardware, software, consumables and services primarily to customers in commercial print, packaging, publishing, manufacturing and entertainment.” 

The Kodak deal became even more newsworthy because the company issued 1.75 million in stock and options to the CEO and other grants to company insiders and board members before the public announcement of the federal loan. The CEO had only had the job for a year. I haven’t seen any news reports of insiders complaining or refusing the grants. In fact, the day after the announcement of the loan, a Kodak board member made a $116 million dollar donation to charity he founded. Understandably, the news of the deal caused Kodak’s shares to soar. Insiders profited, and the SEC started asking questions after looking at records of the stock trades.

Alas, the deal is on hold as the SEC investigates. The White House’s own trade advisor has said that this may be “one of the dumbest decisions by executives in corporate history.” I’m not sure about that, but there actually may be nothing to see here. Some believe that there was a snafu with the timing of the announcement and that the nuances of Reg FD may get Kodak off the hook .I wonder though, what the gatekeepers were doing? Did the GC, compliance officer, or any board member ask the obvious questions? “Why are we doing something so far outside of our core competency?” They didn’t even get the digital camera thing right and that is Kodak’s core competency. Did anyone ask “should we really be issuing options and grants right before the announcement? Isn’t this loan material, nonpublic information and shouldn’t we wait to trade?”

I’ll keep watching the Kodak saga and will report back. In coming posts, I’ll write about other compliance and corporate governance mishaps. In the meantime, stay safe and please wear your masks.


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September 5, 2020 in Compensation, Compliance, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Management, Marcia Narine Weldon, Securities Regulation, Shareholders, Technology | Permalink | Comments (0)

Tuesday, September 1, 2020

What Do People Really Think of Insider Trading? Part I

This is the first installment of a multi-part guest blog presenting some results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment situates the survey amidst the ongoing debate over the goals of the U.S. insider-trading enforcement regime, and current efforts to reform it. Subsequent installments will share some of the survey results and their implications.

U.S. insider-trading law has been mired in controversy for most of its sixty-year history. Many scholars have argued that restrictions on insider trading should never have been adopted because it is victimless and improves market performance. Others claim that insider trading is unfair, imposes a tax on market participation, and undermines the public’s confidence in our capital markets. Some such critics advocate for broader theories of liability along with stiffer penalties.

Arguments on both sides of this controversy regularly appeal to claims that turn crucially on the public’s actual attitudes concerning insider trading. For example, the recently-published Report of the Bharara Task Force on Insider Trading opens with the declaration that “[m]ost agree that there is something fundamentally unfair about [insider trading].” And in United States v. O’Hagan, Justice Ginsburg averred that “investors would hesitate to venture their capital in a market where [insider trading] is unchecked by law.” Such empirical claims (and their contraries) are rarely backed by data. They therefore amount to little more than speculation. With stiff civil fines and up to 20 years of imprisonment at stake, however, these laws should be based on more than guesswork.

My co-authors and I hope to shed new light on this decades-old debate. Our findings come at a crucial time. Congress may be poised to implement a statutory overhaul of our sixty-year old insider trading regime, with the recent passage of the Insider Trading Prohibition Act in the House with a near-unanimous 410-13 vote. We hope that the survey data will inform these efforts and facilitate intelligent reform.

The survey was administered to a census-representative group (across age, gender, race, and other categories) of 1,313 respondents in April 2019, providing a survey-level margin of error of ±3 percent.

The questions addressed a broad swath of topics covering respondents’ attitudes concerning, inter alia, the pervasiveness of insider trading; how knowledge of widespread insider trading would affect market confidence; whether insider trading is morally wrong, should be illegal, or should be punished; and whether they would personally trade on inside information if they had the opportunity. Some of the results are surprising, and reflect a great deal of ambivalence. For example, what does it mean that nearly a fifth of respondents would engage in insider trading even though they believe it is immoral?

The survey also asked a number of scenario-based questions to test respondents’ intuitions concerning insider trading in a variety of contexts from the boardroom to the cocktail party. Finally, the survey looked to test the firmness of respondents’ views by subjecting them to “propaganda” for and against insider trading, and measuring the extent to which such influence changed their views. The results show a significant change in views after exposure to propaganda, suggesting the public’s views on insider trading are not firmly held.

The next installments to this post will detail some of the survey’s results and point to further empirical research that my co-authors and I plan to undertake.

September 1, 2020 in Securities Regulation, White Collar Crime | Permalink | Comments (0)

Monday, July 13, 2020

U.S. Securities Crowdfunding: A Way to Economic Inclusion for Low-Income Entrepreneurs in the Wake of COVID-19?

Earlier today, I submitted a book chapter with the same title as this blog post.  The chapter, written for an international management resource on Digital Entrepreneurship and the Sharing Economy, represents part of a project on crowdfunding and poverty that I have been researching and thinking through for a bit over two years now.  My chapter abstract follows:

The COVID-19 pandemic has exacerbated and created economic hardship all over the world.  The United States is no exception.  Among other things, the economic effects of the COVID-19 crisis deepen pre-existing concerns about financing U.S. businesses formed and promoted by entrepreneurs of modest means.

In May 2016, a U.S. federal registration exemption for crowdfunded securities offerings came into existence (under the CROWDFUND Act) as a means of helping start-ups and small businesses obtain funding.  In theory, this regime was an attempt to fill gaps in U.S. securities law that handicapped entrepreneurs and their promoters from obtaining equity, debt, and other financing through the sale of financial investment instruments over the Internet.  The use of the Internet for business finance is particularly important to U.S. entrepreneurs who may not have access to funding because of their own limited financial and economic positions. 

As the pandemic continues and the fifth year of effectiveness of the CROWDFUND Act progresses, observations can be made about the role securities crowdfunding has played and may play in sustaining and improving prospects for those limited means entrepreneurs.  A preliminary examination indicates that, under current legal rules, securities crowdfunding is a promising, yet less-than-optimal, financing vehicle for these entrepreneurs.  Nevertheless, there are ways in which U.S. securities crowdfunding may be used or modified to play a more positive role in promoting economic inclusion through capital raising for the innovative ventures of financially disadvantaged entrepreneurs and promoters.

I value the opportunity to contribute to this book with scholars from a number of research disciplines and countries.  I have been looking for ways to concretize some of my ideas from this project in a series of shorter publications, and this project seems like a good fit.  Nevertheless, I admit that I have been finding it challenging to segment out and organize my ideas about how securities crowdfunding may better serve entrepreneurs and investors, especially in the current economic downturn.  As always, your ideas are welcomed.

July 13, 2020 in Books, Corporate Finance, Crowdfunding, Entrepreneurship, International Business, Research/Scholarhip, Securities Regulation | Permalink | Comments (0)

Monday, June 1, 2020

2021 AALS Annual Meeting - Section on Securities Regulation Calls for Papers

The AALS Section on Securities Regulation distributed two calls for papers earlier today.
Both are included below.

+++++

AALS Call for Papers:
What Can Securities Regulation Contribute to
Environmental Law, and Vice Versa?

The AALS Sections on Environmental Law and Securities Regulation are delighted to present a joint session at the 2021 AALS Annual Meeting, titled “What Can Securities Regulation Contribute to Environmental Law, and Vice Versa?” We are awaiting final scheduling information from AALS, but we anticipate receiving a three-hour joint program slot. We are planning an innovative format that will include short (5-7 minute) paper presentations in plenary session, followed by collaboration in “table discussion” groups.

The political vicissitudes of environmental policy in recent years have led to increased focus on the potential of private mechanisms to achieve environmental results that had traditionally been sought by government action. At the same time, investors and market regulators have become increasingly aware of the need for corporations to grapple with environmental risks, particularly with respect to global climate disruption.

This joint session will bring together leading scholars from the fields of environmental and securities law to discuss the reciprocal influences that environmental and securities law exert on each other, including a discussion of the following questions: How do the goals of securities regulation intersect with environmental policy? Are the securities laws an effective means of advancing environmental policy? What are the regulatory implications, both for securities regulation and environmental law, of this intersection? What are innovative investors and companies doing in response to the risks of climate change?

We invite papers that explore these questions from a diversity of perspectives, both theoretical and applied. The authors of the selected papers will present short, TED-style talks at the 2021 Annual Meeting and engage in dialogue with each other and attendees about the ideas presented.

By August 15, 2020, please send your submission to Professor Steve Gold at stgold@law.rutgers.edu and Professor Wendy Couture at wgcouture@uidaho.edu. We welcome submissions at any stage of development, although preference may be given to more fully developed papers over abstracts and paper proposals. The authors of the selected papers will be notified by September 15, 2020. 

The Call for Paper presenters will be responsible for paying their registration fee and travel expenses.  Please note that AALS anticipates that the Annual Meeting will proceed in person as planned in San Francisco, (https://am.aals.org/), and the theme is The Power of Words.

AALS Call for Papers:
Emerging Voices in Securities Regulation

The AALS Section on Securities Regulation is delighted to bring together junior and senior securities regulation scholars for the purpose of providing junior scholars feedback on their scholarship and helping them prepare their work for submission for publication. Junior scholars’ presentations of their drafts will be followed by comments from senior scholars and further audience discussion.

If you would like to present your draft as a junior scholar, by August 15, 2020, please send your draft to Professor Wendy Couture at wgcouture@uidaho.edu. We welcome submissions at any stage of development, although preference may be given to more fully developed papers over abstracts and paper proposals. The authors of the selected papers will be notified by September 15, 2020. 

If you would like to volunteer to provide feedback as a more senior scholar, please let Professor Couture know, at wgcouture@uidaho.edu, by August 15, 2020. Thank you in advance for your generosity.

The Call for Paper presenters will be responsible for paying their registration fee and travel expenses.  Please note that AALS anticipates that the Annual Meeting will proceed in person as planned in San Francisco, (https://am.aals.org/), and the theme is The Power of Words.

June 1, 2020 in Call for Papers, Conferences, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Thursday, April 16, 2020

Shifting Investment Advice Standards

As the weeks pass, we move steadily closer and closer to the June 30th implementation date for Regulation Best Interest.  As I've written elsewhere, the new SEC rule does little actually help investors.  The new rule package may also do real harm by collapsing distinctions between brokerage firms and independent registered investment advisers.  In the headline quote for a new white paper from the Institute for the Fiduciary Standard, Professor Tamar Frankel explains how the new package erodes established fiduciary principles

Rostad and Fogarty tell the story that these standards deserve attention because they abandon decades of established principles. They then offer selected remedies to help investors manage in this new era. The Securities and Exchange Commission’s Regulation Best Interest ignores the brokers’ advisory sales-talk and waters-down significantly brokers’ fiduciary duties. In fact little remains. Hopefully, this rule will fail to achieve its purpose or is fixed before it brings true disasters on the securities markets. Otherwise, investors and the securities markets may pay the price.

As the SEC has altered investor protections, states have begun to put their own protections in place.  Nevada stands alone with the first state fiduciary statute.   New Jersey and Massachusetts also have proposed regulations.

Yet these regulations will not arrive before Regulation Best Interest goes into effect. At present, New Jersey has delayed its rule process. New Jersey's initial proposal broke with the SEC on an important point.  It doesn't rely on disclosure to completely sanitize conflicts.  Rather, the New Jersey proposal included a provision that "there is no presumption that disclosing a conflict of interest in and of itself will satisfy the duty of loyalty."  

At present, I wouldn't expect the SEC to delay implementation of Regulation Best Interest. The brokerage industry isn't likely to seriously push for any delay because it would be like a child asking to delay Christmas.  As Regulation Best Interest goes into effect, brokerages get the ability to market themselves as acting in their customers' best interests while still operating with the same conflicts.  Be on the lookout for new advertising campaigns featuring "best interest" language.  Few, if any, customers will actually read the fine print.

But financial adviser ads will continue to roll.  With almost all other businesses shuttered and advertising prices plummeting, expect to see more ads from groups like the CFP board on television.   After Regulation Best Interest goes into effect, they will all tell you that they'll act in your best interest.  Sorting out what they actually will do once they have your money will be more of a challenge.

 

April 16, 2020 in Securities Regulation | Permalink | Comments (0)

Thursday, April 9, 2020

New Paper: Congressional Securities Trading

Iowa's Greg Shill has a new paper out on Congressional Securities Trading.  As a former congressional staffer, he brings a special appreciation to the issue.

Congressional securities trading has attracted a good bit of attention after controversial trades by Senators Burr and Loeffler.  The scrutiny has even drawn more attention to another surprisingly well-timed trade by Senator Burr.

In his essay, Shill takes up the issue from a policy perspective, looking at how we ought to regulate Congressional Securities Trading.  He draws from ordinary securities regulation and suggest pulling over the trading plan approach and short-swing profit prohibition we use for corporate executives.  This approach should help manage ordinary securities transactions by members of Congress and their staff.  He also advocates for limiting Congressional investing to U.S. index funds and treasuries.  This would reduce the incentive to favor one market participant over another.

The proposed reforms would be a substantial improvement over the status quo.  We should not have legislators with significant financial incentives to favor one company over another when making law and setting policy.  We should also not subsidize public service by tolerating Congressional trading on Congressional information.

Of course, we'll still face some implementation challenges.  When and how would we require newly-elected and currently-serving officials to liquidate existing portfolios?  What kinds of exceptions would we make for private-company investments where no ready, liquid market exists?  These implementation challenges strike me as mild compared to the benefits.

And Congressional adoption of the proposal would certainly yield substantial benefits.  Although difficult to quantify, two broad benefits seem clear. First, adopting the proposal would generally increase confidence in government's integrity.  As we're seeing with the pandemic, public trust in public officials can shift how society responds in times of collective crisis.  

Allowing federal officials to trade securities generates real harm, confusion, and suspicion.  Consider the hubbub over Trump's indirect ownership of a tiny stake in drug-maker Sanofi.  Some have seized on the small, indirect interest to contend that he now hypes a particular drug for personal gain.  A public-trust-focused regime limiting all elected officials to only broad index funds and U.S. Treasuries would likely cut down on the fear that officials recommend particular things to the public because of their economic interests.  To be clear, it strikes me as extremely unlikely that the President now hypes the drug because of his minuscule ownership stake.  The much likelier explanation is simply disordered magical thinking.

Many politicians have been targeted by similar attacks. This particular type of ill-informed charge has also been leveled at Senator Elizabeth Warren.  One deeply misleading headline claimed she "invested in private prisons" before going on to explain that she owned a Vanguard index fund.  It would be better to remove this line of attack entirely by sharply limiting the ways public officials invest.

Limiting Congressional ownership would also advance another vital national interest by increasing confidence in American securities markets.  Our ability to attract capital and move it from investors to the real economy depends on confidence in the system.  If investors fear that Congressional insiders have a leg up, they may not be as likely to participate in our markets.

As Congress considers how to regulate on these issues in the future, it should pay close attention to Shill's recommendations.

April 9, 2020 in Financial Markets, Securities Regulation, White Collar Crime | Permalink | Comments (1)

Friday, March 27, 2020

Pandemic Puppy & Reg BI Changes to Suitability Standards

Although this is a little off-brand for the BLPB, I thought readers might appreciate a puppy break.  This is Lucky, the newest addition to the family.

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She's excellent at giving me so much to worry about that I stop thinking about the pandemic!  But that does not mean that stuff stops happening!

Notably, FINRA has a rule proposal out to alter its exiting suitability standard in light of the SEC's new Regulation Best Interest. FINRA summarized the proposal as doing two things:

  1. amend the FINRA and CAB suitability rules to state that the rules do not apply to recommendations subject to Regulation Best Interest (“Reg BI”), and to remove the element of control from the quantitative suitability obligation; and
  2. conform the rules governing non-cash compensation to Reg BI’s limitations on sales contests, sales quotas, bonuses and non-cash compensation.

Because Reg BI so closely resembles the FINRA Suitability Rule, firms may not have to do too much to comply with the text of the rule.  This leaves me wondering about guidance.  FINRA has many notices to members and other explanations available to give context to the suitability rule.  With regulation moving from the self-regulator to the regulator, will the guidance move as well and will it have the same force?  This may be unknowable because so many customer issues get resolved in arbitrations without explained decisions.

What will happen in the future when FINRA has to manage compliance or enforcement for activity covered by Reg BI?  In the past, FINRA could simply determine what its own rules meant.  Now, new issues may need to be addressed by the SEC instead.  FINRA may still simply opt to apply Rule 2110 for conduct it would have deemed over the line under the suitability standard.  Essentially, it's a catch-all for requiring all members to "observe high standards of commercial honor and just and equitable principles of trade."  

Regulation Best Interest is now set to go into effect this July.  Whether the date will get bumped back remains uncertain.  Financial Planning has reported that the SEC is now mulling whether to extend the deadline.  My bet is that the SEC will probably extend the deadline event though there probably isn't much of a need to because it didn't seem as though Reg BI actually required any major changes to most firms' business practices.

March 27, 2020 in Compliance, Securities Regulation | Permalink | Comments (0)

Monday, March 9, 2020

Curiosity and Skepticism Make Me Want To Read This Article . . . .

Friend of the BLPB and fellow crowdfunding researcher Andrew Schwartz recently posted this article on SSRN: Mandatory Disclosure in Primary Markets, 2019 Utah L. Rev. 1069.  I was provoked by the abstract, which reads as follows:

Mandatory disclosure—the idea that companies must be legally required to disclose certain, specified information to public investors—is the first principle of modern securities law. Despite the high costs it imposes, mandatory disclosure has been well defended by legal scholars on two theoretical grounds: ‘Agency costs’ and ‘information underproduction.’ While these two concepts are a good fit for secondary markets (where investors trade securities with one another), this Article shows that they are largely irrelevant in the context of primary markets (where companies offer securities directly to investors). The surprising result is that primary offerings—such as an IPO—may not require mandatory disclosure at all. This profound insight calls into question the fundamental premises of the Securities Act of 1933 and similar laws governing primary offerings around the world. Reform of these rules could lead to a new age of simplified, low-cost primary offerings to the public, something that is already happening in New Zealand through its equity crowdfunding market.

As someone who believes that federal law should provide an exemption for small crowdfunded offerings (although current rule-making proposals instead look to ratchet up the aggregate offering prices for the federal crowdfunding exemption) with lighter mandatory disclosure obligations than those provided for under Title III of the Jumpstart Our Business Startups Act and Regulation Crowdfunding, I found myself very curious about Andrew's paper.  So, I skimmed it (since I do not have time to read it in full at the moment).  I am glad to see that the article raises a distinction worth more exploration in the mandatory disclosure space--that between primary and secondary offerings.  But I admit to some skepticism about the overall thesis as to the lack of value of mandatory disclosure in primary offerings.  I hope a thorough review of the paper will provide important information and analyses.  

As the abstract and a recent post on the article on The CLS Blue Sky Blog indicate, the paper highlights for attention two of the theoretical values of mandatory disclosure for examination: its positive effects on agency costs and on information underproduction.  Given those ostensible focuses, here are a few things I will be looking for as I read:

  • An articulation of the different types of agency costs associated with initial public offerings (IPOs) and other primary offerings (as evidenced in the literature) and their relationship to mandatory disclosure obligations, as well as observations on the effects of mandatory and voluntary disclosure on those agency costs;
  • A rationale for why other theories supporting mandatory disclosure regulation are seemingly marginalized or omitted in the paper, including (1) standardization to facilitate investor comparisons and contrasts (which it seems is mentioned in a few footnotes) and (2) efficient capital market theory applications in the IPO disclosure context (including, perhaps, those impacting observed underpricing/overpricing market effects); and
  • An explanation of the role, if any, of investor sophistication and information access (which, together with mandatory disclosure, have framed analyses of the value of mandatory disclosure since the Court's Ralston Purina decision more than 65 years ago) in the article's analyses and overall thesis.

By quick inspection, it appears that the agency costs addressed are restricted to those borne of a manager-shareholder relationship that relies on a somewhat legalistic, rather than economic, concept of agency that would arise only after investors in the market purchase shares of corporate stock in an offering and become shareholders.  I wonder about the role of managers and others as promoters of the offering . . . .  Standardization is at least mentioned in a few places.  And as to the third bullet point, it looks like the answer the paper proffers is that institutional investors will drive significant voluntary disclosure to be made to all in a manner that gets information to the market efficiently.  If that is the argument, I look forward to seeing the evidence.  

So, I am curious, but I remain skeptical.  I am reserving judgment until I read the article in its entirety!  Regardless, this work has my attention, for sure.  Let me know if you have read it and, if so, what your reactions are.  Andrew also may want to comment.

Independent of the mandatory disclosure arguments, I know that I will enjoy reading about New Zealand's crowdfunding experience.  I do find comparative regulatory work like this very enlightening.  I appreciate Andrew adding that to the mix, too.

March 9, 2020 in Corporate Finance, Crowdfunding, Joan Heminway, Securities Regulation | Permalink | Comments (2)

Wednesday, January 15, 2020

Sharfman on Exemptions from the Proxy Rules for Proxy Voting Advice

The following comes to us from Bernard S. Sharfman. It is a copy of the comment letter (without footnotes) that he recently sent to the SEC in support of the Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice.  (The comment letter with footnotes can be found here.)  An introductory excerpt is followed, after the break, by the full letter. Please excuse any formatting errors generated by my poor copy-and-paste skills.

Part I of this letter will describe the collective action problem that is at the heart of shareholder voting. Part II will discuss the problems that this collective action causes for the voting recommendations of proxy advisors, including the creation of a resource constrained business environment. Part III discusses how proxy advisors deal with such a business environment. Part IV will discuss how the market for voting recommendations is an example of a market failure, requiring the SEC to pursue regulatory action to mitigate the harm caused by two significant negative externalities. Part V will discuss how the collective action problem of shareholder voting and the market failure impacts corporate governance. Part VI will discuss the value of the proposed amendments.

Continue reading

January 15, 2020 in Corporate Governance, Current Affairs, Securities Regulation, Stefan J. Padfield | Permalink | Comments (2)

Tuesday, December 24, 2019

Did A Child Die to Make Your Smartphone, Tablet, Laptop, or Car?

Happy holidays! Billions of people around the world are celebrating Christmas or Hanukah right now. Perhaps you’re even reading this post on a brand new Apple Ipad, a Microsoft Surface, or a Dell Computer. Maybe you found this post via a Google search. If you use a product manufactured by any of those companies or drive a Tesla, then this post is for you. Last week, a nonprofit organization filed the first lawsuit against the world’s biggest tech companies alleging that they are complicit in child trafficking and deaths in the cobalt mines of the Democratic Republic of Congo. Dodd-Frank §1502 and the upcoming EU Conflict Minerals Regulation, which goes into effect in 2021, both require companies to disclose the efforts they have made to track and trace "conflict minerals" -- tin, tungsten, tantalum, and gold from the DRC and surrounding countries. DRC is one of the poorest nations in the world per capita but has an estimated $25 trillion in mineral reserves (including 65% of the world's cobalt). Armed militia use rape and violence as a weapon of war in part so that they control the mineral wealth. The EU and US regulators believe that consumers might make different purchasing decisions if they  knew whether companies source their minerals ethically. The EU legislation, notably, does not limit the geography to the DRC, but instead focuses on conflict zones around the world.

If you’ve read my posts before, then you know that I have written repeatedly about the DRC and conflict minerals. After visiting DRC for a research trip in 2011, I wrote a law review article and co-filed an amicus brief during the §1502 litigation arguing that the law would not help people on the ground. I have also blogged here about legislation to end the rulehere about the EU's version of the rule, and here about the differences between the EU and US rule. Because of the law and pressure from activists and socially-responsible investors, companies, including the defendants, have filed disclosures, joined voluntary task forces to clean up supply chains, and responded to shareholder proposals regarding conflict minerals for years. I will have more on those initiatives in my next post. Interestingly, cobalt, the subject of the new litigation, is not a “conflict mineral” under either the U.S. or E.U. regulation, although, based on the rationale behind enacting Dodd-Frank §1502, perhaps it should have been.  Nonetheless, in all of my research, I never came across any legislative history or materials discussing why cobalt was excluded.

The litigation makes some startling claims, but having been to the DRC, I’m not surprised. I’ve seen children who should have been in school, but could not afford to attend, digging for minerals with shovels and panning for gold in rivers. Although I was not allowed in the mines during my visit because of a massacre in the village the night before, I could still see child laborers on the side of the road mining. If you think mining is dangerous here in the U.S., imagine what it’s like in a poor country with a corrupt government dependent on income from multinationals.

The seventy-nine page class action Complaint was filed filed in federal court in the District of Columbia on behalf of thirteen children claiming: (1) a violation of the Trafficking Victims Protection Reauthorization Act of 2008; (2) unjust enrichment; (3) negligent supervision; and (4) intentional infliction of emotional distress. I’ve listed some excerpts from the Complaint below (hyperlinks added):

Defendants Apple, Alphabet, Dell, Microsoft, and Tesla are knowingly benefiting from and providing substantial support to this “artisanal” mining system in the DRC. Defendants know and have known for a significant period of time the reality that DRC’s cobalt mining sector is dependent upon children, with males performing the most hazardous work in the primitive cobalt mines, including tunnel digging. These boys are working under stone age conditions for paltry wages and at immense personal risk to provide cobalt that is essential to the so-called “high tech” sector, dominated by Defendants and other companies. For the avoidance of doubt, every smartphone, tablet, laptop, electric vehicle, or other device containing a lithium-ion rechargeable battery requires cobalt in order to recharge. Put simply, the hundreds of billions of dollars generated by the Defendants each year would not be possible without cobalt mined in the DRC….

Plaintiffs herein are representative of the child cobalt miners, some as young as six years of age, who work in exceedingly harsh, hazardous, and toxic conditions that are on the extreme end of “the worst forms of child labor” prohibited by ILO Convention No. 182. Some of the child miners are also trafficked. Plaintiffs and the other child miners producing cobalt for Defendants Apple, Alphabet, Dell, Microsoft, and Tesla typically earn 2-3 U.S. dollars per day and, remarkably, in many cases even less than that, as they perform backbreaking and hazardous work that will likely kill or maim them. Based on indisputable research, cobalt mined in the DRC is listed on the U.S. Department of Labor’s International Labor Affairs Bureau’s List of Goods Produced with Forced and Child Labor.

When I mentioned above that I wasn’t surprised about the allegations, I mean that I wasn’t surprised that the injuries and deaths occur based on what I saw during my visit to DRC. I am surprised that companies that must perform due diligence in their supply chains for conflict minerals don’t perform the same kind of due diligence in the cobalt mines. But maybe I shouldn't be surprised at all, given how many companies have stated that they cannot be sure of the origins of their minerals. In my next post, I will discuss what the companies say they are doing, what they are actually doing, and how the market has reacted to the litigation. What I do know for sure is that the Apple store at the mall nearest to me was so crowded that people could not get in. The mall also has a Tesla showroom and people were gearing up for test drives. Does that mean that consumers are not aware of the allegations? Or does that mean that they don’t care?  I’ll discuss that in the next post as well.

Wishing you all a happy and healthy holiday season.

December 24, 2019 in Compliance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, Litigation, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)

Monday, November 18, 2019

Insider Trading Stories at UT Law

TJLP(InsiderTradingStories2019)

I was thrilled to be with so many wonderful colleagues and students (pictured above) at the Tennessee Journal of Law and Policy's symposium at UT Law last Friday.  The symposium, "Insider Trading: Stories from the Attorneys," featured presentations about famous and not-so-famous insider trading cases.  Presenters included Michael Guttentag (Loyola, Los Angeles), me, Jeremy Kidd (Mercer), Ellen Podgor (Stetson), John Anderson (Mississippi College), Eric Chaffee (Toledo), Kevin Douglas (Scalia), and Donna Nagy (Maurer).  The papers presented highlight a variety of salient issues (including observations about the impact of gender and sexual orientation in specific cases or types of cases) involving or touching insider trading regulation.  They are being published in 2020 by the Tennessee Journal of Law & Policy.

The idea for the symposium came from a Southeastern Association of Law Schools (SEALS) discussion session convened last summer by John and me.  I described it in this post.  Let me or John know if you are working in the insider trading area and would like to join us for our 2020 SEALS discussion group, "Insider Trading: Is It All about the Money?"  The SEALS conference is scheduled to be held July 30 - August 5, 2020.  The discussion is always lively!

November 18, 2019 in Conferences, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Monday, November 4, 2019

Micromanagement through Shareholder Proposals

I approached with some curiosity the Securities and Exchange Commission's recent shareholder proposal guidance in Staff Legal Bulletin No. 14J ("SLB 14J").  My interest in this topic stems from my past life as a full-time lawyer in private practice.  During that time, I both wrote shareholder proposals and wrote no-action letters to the Securities and Exchange Commission ("SEC") to keep shareholder proposals out of corporate proxy statements.

In SLB 14J, the SEC clarifies its application of the "ordinary business" exception to the inclusion of a shareholder proposal under Rule 14a-8.  Specifically, "[t]he Commission has stated that the policy underlying the 'ordinary business' exception rests on two central considerations. The first relates to the proposal’s subject matter; the second relates to the degree to which the proposal 'micromanages' the company."  I want to share the SEC's guidance with you on the latter.

The idea of shareholders micromanaging most public firms is almost laughable.  Yet, certain shareholder proposals do get somewhat specific in their direction of the firm and its resources.

In considering arguments for exclusion based on micromanagement, . . . we look to whether the proposal seeks intricate detail or imposes a specific strategy, method, action, outcome or timeline for addressing an issue, thereby supplanting the judgment of management and the board. [A] proposal, regardless of its precatory nature, that prescribes specific timeframes or methods for implementing complex policies, consistent with the Commission’s guidance, may run afoul of micromanagement. In our view, the precatory nature of a proposal does not bear on the degree to which a proposal micromanages. . . .

This makes some sense to me, yet this guidance may not be as easy to apply as the SEC may think.  Here is the SEC's example of an excludable proposal:

For example, this past season we agreed that a proposal seeking annual reporting on “short-, medium- and long-term greenhouse gas targets aligned with the greenhouse gas reduction goals established by the Paris Climate Agreement to keep the increase in global average temperature to well below 2 degrees Celsius and to pursue efforts to limit the increase to 1.5 degrees Celsius” was excludable on the basis of micromanagement. In our view, the proposal micromanaged the company by prescribing the method for addressing reduction of greenhouse gas emissions. We viewed the proposal as effectively requiring the adoption of time-bound targets (short, medium and long) that the company would measure itself against and changes in operations to meet those goals, thereby imposing a specific method for implementing a complex policy.

I am note sure how I feel about the characterization of this proposal as excludable.  Is the described proposal about reporting or about "prescribing the method for addressing the reduction of addressing reduction of greenhouse gas emissions"?  Well, maybe a little of each . . . .  What do you think?

During my time in active, full-time law practice, the format and content of Rule 14a-8 changed a number of times.  It appears that the SEC may be poised to make another change--one more fundamental than enhanced guidance.  According to one recent report, the SEC may announce as early as tomorrow "changes . . . to make it harder for shareholders to file proposals, and harder for proposals to be eligible for re-filing in subsequent years."  Stay tuned for that possible announcement.

[Note: All footnote references in the quotations used in this post have been omitted.]

November 4, 2019 in Corporate Governance, Corporations, Joan Heminway, Securities Regulation, Shareholders | Permalink | Comments (2)

Saturday, September 7, 2019

Beyond Bitcoin: Leveraging Blockchain to Benefit Business and Society

Have you ever wanted to learn the basics about blockchain? Do you think it's all hype and a passing fad? Whatever your view, take a look at my new article, Beyond Bitcoin: Leveraging Blockchain to Benefit Business and Society, co-authored with Rachel Epstein, counsel at Hedera Hashgraph.  I became interested in blockchain a year ago because I immediately saw potential use cases in supply chain, compliance, and corporate governance. I met Rachel at a Humanitarian Blockchain Summit and although I had already started the article, her practical experience in the field added balance, perspective, and nuance. 

The abstract is below:

Although many people equate blockchain with bitcoin, cryptocurrency, and smart contracts, the technology also has the potential to transform the way companies look at governance and enterprise risk management, and to assist governments and businesses in mitigating human rights impacts. This Article will discuss how state and non-state actors use the technology outside of the realm of cryptocurrency. Part I will provide an overview of blockchain technology. Part II will briefly describe how public and private actors use blockchain today to track food, address land grabs, protect refugee identity rights, combat bribery and corruption, eliminate voter fraud, and facilitate financial transactions for those without access to banks. Part III will discuss key corporate governance, compliance, and social responsibility initiatives that currently utilize blockchain or are exploring the possibilities for shareholder communications, internal audit, and cyber security. Part IV will delve into the business and human rights landscape and examine how blockchain can facilitate compliance. Specifically, we will focus on one of the more promising uses of distributed ledger technology -- eliminating barriers to transparency in the human rights arena thereby satisfying various mandatory disclosure regimes and shareholder requests. Part V will pose questions that board members should ask when considering adopting the technology and will recommend that governments, rating agencies, sustainable stock exchanges, and institutional investors provide incentives for companies to invest in the technology, when appropriate. Given the increasing widespread use of the technology by both state and non-state actors and the potential disruptive capabilities, we conclude that firms that do not explore blockchain’s impact risk obsolescence or increased regulation.

Things change so quickly in this space. Some of the information in the article is already outdated and some of the initiatives have expanded. To keep up, you may want to subscribe to newsletters such as Hunton, Andrews, Kurth's Blockchain Legal Resource. For more general information on blockchain, see my post from last year, where I list some of the videos that I watched to become literate on the topic. For additional resources, see here and here

If you are interested specifically in government use cases, consider joining the Government Blockchain Association. On September 14th and 15th,  the GBA is holding its Fall 2019 Symposium, “The Future of Money, Governance and the Law,” in Arlington, Virginia. Speakers will include a chief economist from the World Bank and banking, political, legal, regulatory, defense, intelligence, and law enforcement professionals from around the world.  This event is sponsored by the George Mason University Schar School of Policy and Government, Criminal Investigations and Network Analysis (CINA) Center, and the Government Blockchain Association (GBA). Organizers expect over 300 government, industry and academic leaders on the Arlington Campus of George Mason University, either in person or virtually. To find out more about the event go to: http://bit.ly/FoMGL-914.

Blockchain is complex and it's easy to get overwhelmed. It's not the answer to everything, but I will continue my focus on the compliance, governance, and human rights implications, particularly for Dodd-Frank and EU conflict minerals due diligence and disclosure. As lawyers, judges, and law students, we need to educate ourselves so that we can provide solid advice to legislators and business people who can easily make things worse by, for example, drafting laws that do not make sense and developing smart contracts with so many loopholes that they cause jurisdictional and enforcement nightmares.

Notwithstanding the controversy surrounding blockchain, I'm particularly proud of this article and would not have been able to do it without my co-author, Rachel, my fantastic research assistants Jordan Suarez, Natalia Jaramillo, and Lauren Miller from the University of Miami School of Law, and the student editors at the Tennessee Journal of Business Law. If you have questions or please post them below or reach out to me at mweldon@law.miami.edu. 

 

 

September 7, 2019 in Compliance, Conferences, Contracts, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, Law Reviews, Lawyering, Legislation, Marcia Narine Weldon, Securities Regulation, Shareholders, Technology | Permalink | Comments (0)

Tuesday, August 13, 2019

AALS Section on Securities Regulation - Call for Papers

Call for Papers
AALS Section on Securities Regulation—2020 AALS Annual Meeting
Emerging Voices in Securities Regulation
Works-in-Progress Program
January 2-5, 2020
Washington, DC

The AALS Securities Regulation section invites proposals for its "Emerging Voices in Securities Regulation” works-in-progress workshop at the 2020 AALS Annual Meeting.  The workshop will bring together junior and senior securities regulation scholars for the purpose of giving junior scholars feedback on their scholarship and helping them prepare their work for the spring law review submission cycle.  A junior scholar is any untenured full-time faculty member as of January 2, 2020. 

FORMAT:  The program will involve multiple simultaneous roundtables, with one junior scholar, one or two senior scholars, and interested observers at each table.  Junior scholars’ presentations of their drafts will be followed by oral comments from senior scholars and further discussion, as time permits. 

SUBMISSION PROCEDURE:  Junior scholars who are interested in participating in the program should send an abstract (or longer summary) or draft-in-progress to Professor Eric C. Chaffee, Chair of the AALS Securities Regulation Section, at Eric.Chaffee@utoledo.edu, on or before September 16, 2019.  The cover email should state the junior scholar’s institution, tenure status, number of years in his or her current position, and any previous positions in academia.  The subject line of the email should read: “Submission—Sec Reg WIP Program.”

Junior scholars whose papers are selected for the program will need to submit their presentation drafts to Professor Chaffee by December 13, 2019, in order that the assigned commenters will have sufficient time to read the drafts prior to the Annual Meeting.

ELIGIBILITY:  Junior scholars at AALS member law schools are eligible to submit proposals.  Pursuant to AALS rules, faculty at fee-paid law schools, foreign faculty, adjunct and visiting faculty (without a full-time position at an AALS member law school), graduate students, fellows, and non-law school faculty are not eligible to submit.  Please note that all presenters at the program are responsible for paying their own annual meeting registration fees and travel expenses.

August 13, 2019 in Call for Papers, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Monday, May 13, 2019

Qualified Opportunity Funds - Securities Law Advisory

Today, I have been attending and presenting at the Midwest Symposium on Social Entrepreneurship in Kansas City, Missouri.  This is the Seventh Annual installment of this event, which engages entrepreneurs, lawyers, government actors, and others in education, networking, and discussions around various issues (which differ from year to year) relating to social enterprise structure, governance, finance, and operations.  I love attending this symposium.  The people are socially and intellectually stimulating.  I appreciate Tony Luppino inviting me to participate.

There is much I could write about the programs today.  However, I will focus in one one small thing for now: Opportunity Zones and more particularly the funds that invest in them.  A quick description of Opportunity Zones and a cautionary message on related investment funds follow.

The U.S. Internal Revenue Service has defined Opportunity Zones as follows in a Q&A posted on its website:

An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. Localities qualify as Opportunity Zones if they have been nominated for that designation by the state and that nomination has been certified by the Secretary of the U.S. Treasury via his delegation of authority to the Internal Revenue Service.

The main point is to encourage investment in businesses or real estate in distressed areas of the United States through federal tax incentives.

Unsurprisingly, investment funds have been established to make these tax-advantaged financings.  From that state of affairs stems my public service announcement.  As I listened to folks talking about this form of funding real estate and businesses, the securities lawyer in me became uncomfortable.  The presenters appeared to be ignoring the seemingly obvious conclusion that the process of seeking investors to participate in these investment funds is a securities offering that must be registered under federal or state securities laws, unless an exemption is available.  So, I raised that point from the audience . . . .

Sure enough, if one looks or resources on the Internet, one learns that promoters of these funds seem to have reached the same legal conclusion about the potential application of securities offering registration/exemptions.  (See, e.g., here and here.)  Federal registration exemptions in or under the Securities Act of 1933, as amended, that might work in this context include those for private placements (Section 4(a)(2) or Rule 506(b)) and intrastate offerings (Section 3(a)(11) and Rules 147 and 147A).

Bottom line word to the wise?  Find an exemption for the offer or sale of investment interests in a Qualified Opportunity Fund or register the offering with the Securities and Exchange Commission and any applicable state securities commission.  Otherwise, proceed at your regulatory peril . . . .

 

May 13, 2019 in Joan Heminway, Securities Regulation | Permalink | Comments (0)

Monday, April 22, 2019

The Internet & Business Disclosures: Observations

Co-blogger Ann Lipton has posted a number of times on Elon Musk's Twitter disclosures and their potential legal significance.  I chimed in once.  Unless I am mistaken, her most recent post (citing to our prior posts) on this subject is here.  Based on these posts, we both seem to understand that the Twitter Era has spawned some interesting disclosure-related legal questions.

I had these posts in the back of my mind when I got an email invitation yesterday from IPO Docs, a firm that sells "Regulation D Private Placement Memorandum Templates" to check into the firm's services.  I have never been a fan of online templates or form documents as drafting precedent, especially for investment disclosure documents.  In general, one-size-fits-all disclosure lawyering is just too far from my practice background (which involved reverse-engineering the work of my Skadden colleagues and others).  But I do tell students they should be familiar with these kinds of form/exemplar resources and that, after determining the quality and suitability of a resource for their purposes, they may want to use form documents as a cross-check for contents or phrasing.

These two examples of Internet-related disclosures (online commentary and disclosure forms) are two pieces of a larger disclosure regulation puzzle.  The puzzle?  How best to address challenges to disclosure regulation posed by our increased use of and reliance on the Internet.  Believe me; I am a fan of the Internet.  But having been engaged with disclosure regulation pre-Internet and post-Internet, I do see challenges.

Social media and blog posts or commentary, for example, raise issues about the nature of the speech and the identity of the speaker.  Are tweets made by firm managers disclosures of firm information or are they private statements?  Who is the person behind a social media or weblog account commenting on business affairs?  (I note that Ann's September 29, 2018 post on the Musk affair reports, based on information in the SEC's complaint, that analysts "privately contacted Tesla’s head of investor relations for more information and were assured that the tweet was legit."  And many may remember the dust-up--almost twelve years ago--around John Mackey's "anonymous" online posts.)

To the extent that we come to accept, from a disclosure compliance standpoint, business disclosures that are made through fractured online posts and commentary, we lose the benefits of standardization--including easy comparability--that comes from the traditional periodic and transaction-based disclosure regimes built into the Securities Act of 1933 and Securities Exchange Act of 1934.  While I understand the virtues of allowing for more customized business disclosures in certain circumstances (e.g., for Form S-8 registration statements, where a summary plan description geared to benefit-holders fulfills key prospectus disclosure requirements), should we be encouraging or mandating that investors of all kinds comb the Internet to find scraps of information to enable them to get comparable data?  (Of course, many investors do perform Internet searches, regardless.  But mandatory disclosure documents are the core elements of compliance, and they allow for relatively direct comparisons.)

What about disclosure challenges relating to Internet-available offering documents?  I admit that I have less concern here if these documents are purchased and used by a competent lawyer.  But I fear that will not be the dominant scenario.

In my view, a significant peril with disclosure templates is that people using them as drafting models may not be competent or skilled in their use.  Specifically, form end-users may not understand (or even consult) the legal rules relating to disclosures required to be made by a firm seeking capital under applicable federal and state securities law registration exemption(s).  The interpretation and interaction of some of these rules--and the preservation of arguments and remedies if an exemption is later found to be unavailable--can be complex.  It is too easy to use template text without questioning it.

Moreover, Internet forms may lull businesses into thinking they have met all attendant legal requirements relating to a financing transaction for which a form document has been purchased.  In a private placement, the existence of an accurate and complete disclosure document is but one of many legal compliance issues.  Private placements exempt under Regulation D have a number of moving parts, disclosure being only one.

I feel very "old school" in writing this post.  What are your views on these and other issues relevant to business disclosures made on or facilitated by the Internet?  As a person who has been known to describe herself as a "disclosure lawyer," I would appreciate any ideas you may have.  And tell me where I am wrong in the observations I make here.

April 22, 2019 in Ann Lipton, Joan Heminway, Securities Regulation | Permalink | Comments (2)