Friday, January 31, 2014
Dirk A. Zetzsche has posted Going Dark Under German Law – Towards an Efficient Regime for Regular Delisting on SSRN with the following abstract:
Going-private transactions include all transactions which result in the withdrawal of a class of securities listed on a regulated stock exchange from listing on the regulated market. Going-private transactions may be the side-effect of a transaction with a different key objective. We refer to these transactions as cold delistings. For example, the transformation of an Aktiengesellschaft (plc equivalent) into a GmbH (ltd equivalent) leads to a cold delisting of shares because shares in a GmbH cannot be transferred easily and thus cannot be traded at regulated markets. Following the freeze out under ss. 327a et seq. Aktiengesetz (of the Aktiengesetz), all shares are transferred to a number of controlling shareholders meaning that a crucial listing requirement is no longer met, namely that shares be held by a wide range of shareholders. In contrast, this paper focuses on regular delistings (some refer to as “going dark”). We define a regular delisting as the withdrawal of a class of securities listed on a regulated market upon the issuer’s application and notice of intent to withdraw such securities from listing and/or registration, where the delisting is the primary objective of the transaction and its sole effect.
This paper analyses the current discussion about which requirements apply to a regular delisting in Germany. It is structured as follows: in part B we introduce the factual background to going-private transactions under German law. It is shown that going-private transactions are motivated by the failed expectations of management and controlling shareholders in stock market efficiency. Moreover, we argue that going-private transactions are related-party transactions. Part C provides an overview of the legal requirements for going-private transactions. While regular delistings pose the most pressing legal questions, the practical emphasis has been on cold delistings: up to October 2013 by far most going-private transactions were pursued by way of a freeze out. The German Bundesgerichtshof’s seminal Macroton judgement issued in late 2002 resulted in a state where regular delistings and cold delistings lead to almost the same costs for controlling shareholders. This explains the appeal of freeze outs compared to regular delistings. After the Bundesgerichtshof repealed its Macroton doctrine with its Frosta judgment in late 20132 – following a constitutional ruling in July 2012 – neither a shareholder resolution, nor a mandatory compensation is necessary for a going dark transaction under German company law. This judicature provides the background of an analysis of how an efficient delisting regime would look like which is given in Part D. While the analysis reveals significant deficiencies in the Macroton delisting requirements, it also criticizes the present state since the turnaround in late 2013 under which minority shareholders cannot invoke any company law-based protection. Considering ways to improve delisting efficiency, it is proposed that the prevailing compensation concept (i.e. the cash-out offer which is mandatory under German law) of the repealed Macroton judicature be replaced with a resolution concept under which minority shareholders resolve on the delisting; as an anti-corruption measure we also argue in favor of equal treatment for minority shareholders with regard to the benefits offered to them by the issuer and controlling shareholders.
Carl B. Wilkerson has posted The SEC's Continuing Quest for a Harmonized Standard of Care Governing Broker-Dealers and Investment Advisers on SSRN with the following abstract:
This document reviews the latest chapter in the long-running and continually evolving debate over the appropriate standard of care for broker-dealers and investments advisers under the federal securities laws. Following the SEC’s report to Congress under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) of its Study Regarding a Harmonized Standard of Care for Broker-Dealers and Investment Advisers in January 2012. The U.S. Securities and Exchange Commission (“SEC”) published a Request for Data and Information (RFDI) in March 2013 that elicits input on the costs and burdens of several hypothetical approaches to harmonizing the standards of care governing broker-dealers and investment advisers.
This material will highlight the SEC’s Request for Data and Information, summarize public input, and provide context within which to evaluate the FRDI in in view of the many stages of the regulatory examination of broker-dealer and investment adviser standards of care. Collectively, this information should provide a roadmap for evaluating the status of a harmonized standard of care for broker-dealers and investment advisers.
Many catalysts for change have contributed to this latest regulatory development on a standard of care, including regulatory solutions galvanized by profound economic turmoil, and competing industry and regulatory initiatives. The document reviews these agents for change that ultimately led to a congressionally mandated SEC study on a harmonized broker-dealer and investment adviser standard of care in the Dodd-Frank Act. The material also charts regulatory and industry positions, addresses various regulatory and legislative solutions that functioned as substantive preludes to the Dodd-Frank Act and provides a framework of statutory and regulatory background.
Hans Christiansen and Alissa Koldertsova have posted The Role of Stock Exchanges in Corporate Governance on SSRN with the following abstract:
Historically, the main contribution of exchanges to corporate governance has been listing and disclosure standards and monitoring compliance. Stock exchanges have established themselves as promoters of corporate governance recommendations for listed companies. Demutualisation and subsequent self-listing of exchanges have spurred a debate on the role of exchanges. Regulators have been concerned about conflicts of interest between exchanges' for-profit activities and their regulatory responsibilities. The conversion of exchanges to listed companies is thought to have intensified competition and raised questions around a potential "regulatory race" to the bottom.
Recently, the rise of ATS have had a profound impact on the stock exchange industry. Their existence has induced exchanges to cut fees and in some cases launch their own off-exchange platforms. The effect of ATS on corporate governance is not clear. Two practical concerns voiced so far are, first, that trading fragmentation may reduce the transparency of the markets for corporate control and have adverse consequences for price discovery. Second, exchanges are uneasy about the prospect of having to continue performing their traditional regulatory and other corporate governance enhancing functions amid a shrinking revenue base.
J. Robert Brown Jr. has published Selling Equity Through Crowdfunding: A Comment on SSRN with the following abstract:
The Securities and Exchange Commission has proposed rules that will implement the crowfunding exemption set forth in the JOBS Act. See SEC File No. S7-09-13. Once implemented, the exemption will allow non-reporting companies to use crowdfunding to raise equity. The SEC’s proposal, however, raises a number of issues, including: (A) concerns over reliance on the “collective wisdom of the crowd” as a substitute for traditional investor protections; (B) concerns over reliance on investor self-certification as a means of enforcing the investment limits for individual investors; (C) the inconsistency of the proposed method of calculating the offering limits applicable to issuers with the requirements of the JOBS Act; (D) concerns over the elimination of the integration doctrine; (E) the need to address and include persons in civil unions/civil partnerships within the definition of family member; and (F) the need to require the filing of Form Funding Portal in an interactive format. The attached paper analyzes all of these issues.
Guido A. Ferrarini and Paolo Saguato have posted Reforming Securities and Derivatives Trading in the EU: From EMIR to MIFIR on SSRN with the following abstract:
The financial crisis has generated a deep revision of the regulation of securities and derivatives markets. In this paper, we critically examine the extent to which current reforms, such as the European Market Infrastructure Regulation (EMIR) and the proposed Markets in Financial Instruments Directive (MiFID II) and Regulation (MIFIR), will expand ‘public’ securities and derivatives markets, while correspondingly reducing the scope of ‘private’ markets (which broadly coincide with the ‘unregulated’ over-the-counter markets). We also ask whether these reforms will on the whole reduce systemic risks and transaction costs of securities and derivatives trading in Europe. For these purposes, we formulate conjectures that are partly based on the experience of past reforms in the area equity trading.
Dain C. Donelson and Justin Hopkins have posted Disclosing Adverse Earnings News and Litigation: The Importance of Large Market Declines on SSRN with the following abstract:
This study examines the legal consequences of disclosing adverse news after hours or disclosing during large market declines. The probability of litigation rises to 0.28% (from 0.16%), and settlements increase 50% over the median (by $1.7 million) when disclosure occurs during a large market decline. Disclosures issued after hours are also more likely to trigger litigation (0.36% versus 0.17%), but this is because managers disclose more adverse news during this period. In supplemental tests, we find no evidence that the timing of firm disclosures affects dismissals, or that managers delay disclosures to avoid days with large market declines. The latter result could be attributable to managers not recognizing the legal consequences to disclosing adverse news on a day where the market declines significantly because legal standards suggest that broader market forces should have no bearing on the outcome of securities litigation.
Samuel S. Guzik has posted Regulation A+ Offerings - A New Era at the SEC on SSRN with the following abstract:
On December 18, 2013, the Commissioners of the U.S. Securities and Exchange Commission authorized the issuance of proposed rules intended to implement Title IV of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) — a provision widely labeled as “Regulation A Plus ” — and whose implementation was dependent upon SEC rulemaking. Title IV, entitled “Small Company Capital Formation”, was intended by Congress to expand the use of Regulation A — a little used exemption from a full blown SEC registration of securities which has been around for more than 20 years — by increasing the dollar ceiling from $5 million to $50 million. Both the scope and breadth of the SEC’s proposed rules, and the areas in which the SEC expressly seeks public comment, appear to represent an opening salvo by the SEC in what is certain to be a fierce, long overdue battle between the Commission and state regulators, the SEC determined to reduce the burden of state regulation on capital formation — a burden falling disproportionately on small business — and state regulators seeking to preserve their autonomy to review securities offerings at the state level.
This Paper analyzes what may very well be an historic turning point regarding the Commission's policies towards state regulation of federally registered offerings, by limiting or eliminating the power of state regulators to review registered offerings under Regulation A Plus, and the impact this may be expected to have on small business.
Mike Koehler has posted Why You Should Be Alarmed by the ADM FCPA Enforcement Action on SSRN with the following abstract:
Like all statutes, the Foreign Corrupt Practices Act has specific elements that must be met in order for there to be a violation. However, with increasing frequency in this new era of FCPA enforcement, it appears that the Department of Justice and the Securities and Exchange Commission have transformed FCPA enforcement into a free-for-all in which any conduct the enforcement agencies find objectionable is fair game to extract a multimillion-dollar settlement from a risk-averse corporation. A case in point is the recent $54 million FCPA enforcement action against Archer Daniels Midland Co. (ADM) and related entities.
After discussing the principal features of this enforcement action - namely that ADM and its shareholders were victims of a corrupt Ukraine government - this article highlights why anyone who values the rule of law should be alarmed by the ADM enforcement action.
The International Organization of Securities Commissions has published its final report on Recommendations Regarding the Protection of Client Assets. The report focuses on advising regulators in the supervision of intermediaries holding clients assets. The press release is available here.
The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending January 31, 2014).
Wednesday, January 29, 2014
On January 24, 2014 at the Forum for Corporate Directors in Orange County, California, Commissioner Daniel M. Gallagher develivered a speech on A Renewed Perspective on SEC Priorities. The speech mainly addressed the concerns relating to reforms focused the corporate disclosure system and the proxy advisory industry.
SEC Issues Risk Alert on Investment Advisers’ Due Diligence Processes for Selecting Alternative Investments
Monday, January 27, 2014
Stanislav Dolgopolov has posted High-Frequency Trading, Order Types, and the Evolution of the Securities Market Structure: One Whistleblower's Consequences for Securities Regulation on SSRN with the following abstract:
This Article analyzes — through the lens of securities regulation — the contributions of Haim Bodek, an advocate of reforming the securities market structure and a whistleblower who brought attention to several questionable practices of high-frequency traders and trading venues, including their use of complex and, arguably, nontransparent order types. More specifically, the Article addresses several key issues raised and discussed by Haim Bodek, such as the order type controversy and its implications for high-frequency traders, the status of self-regulatory organizations, trading obligations and privileges of market makers, and the duty of best execution, and aims to fit these issues into the evolving boundaries of civil liability under federal securities law and the reach of a private right of action.
The following law review articles relating to securities regulation are now available in paper format:
Samuel D. Brunson, Mutual Funds, Fairness, and the Income Gap, 65 Ala. L. Rev. 139 (2013).
Jared Chaykin, Note, U.S. v. Aguilar and the Foreign Corrupt Practices Act: Sending an S.O.S. to Congress, 44 U. Miami Inter-Am. L. Rev. 63 (2012).
Steven L. Schwarcz, Regulating Shadows: Financial Regulation and Responsibility Failure, 70 Wash. & Lee L. Rev. 1781 (2013).
On January 27, 2014 to the U.S. Chamber of Commerce in Washington, D.C., Commissioner Michael S. Piwowar gave a speech on Advancing and Defending the SEC’s Core Mission. Commissioner Piwowar stated "Regardless of the area, when making decisions, a Commissioner should be guided by the SEC’s core mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation." Although all of these goals seem appropriate for the SEC based on its Congressional mandates and Commissioner Piwowar's speech was informative and thoughtfully written, the Commissioner's statement seems to reflect three separate missions, and one must wonder how the SEC decides priorities when these three missions conflict.
The International Organization of Securities Commission is reporting that the Indonesian Financial Services Authority has become the 100th signatory to its multilateral memorandum of understanding on cooperation and enforcement. IOSCO describes the event as follows:
Securities regulators use the MMoU to share with each other essential investigative material, such as beneficial ownership information, and securities and derivatives transaction records, including bank and brokerage records. The MMoU sets out specific requirements for the exchange of information, ensuring that no domestic banking secrecy, blocking law or regulation prevents the provision of enforcement information among securities regulators.
Gaining the 100 signatories to the MMoU--out of a total of 125 eligible IOSCO members--marks a watershed for the organization. Established in 2002, the MMoU is the cornerstone of IOSCO’s efforts to eradicate potential safe havens for wrong doers. As long as jurisdictions remain outside the international enforcement regime of the MMoU, they create gaps in IOSCO’s global enforcement network.
The SEC Actions Blog has compiled This Week In Securities Litigation (The week ending January 24, 2014).
Wednesday, January 22, 2014
Steven M. Sheffrin has posted Restitution for Ponzi Scheme Victims: The Symbiotic Relationship of Tax and Securities Laws on SSRN with the following abstract:
This paper contrasts the restitution processes used by the Securities Investment Protection Corporation ("SIPC") and the Internal Revenue Service ("IRS") to provide restitution to the victims of Ponzi schemes. With its roots in bankruptcy law, the goal of SIPC is to provide reimbursement to victims of Ponzi schemes in an equitable manner, while the IRS is principally concerned with the impact of Ponzi schemes for taxable income. On the surface, the methods used by SIPC and the IRS appears potentially contradictory. Despite these contradictions, these methods are broadly consistent with one another and have a collaborative relationship. Nonetheless, implementation of these policies has proven to bedifficult for both the SIPC and the IRS, which is highlight of this paper. It also provides a welfare framework for evaluating the consequences of alternative restitution strategies.