Securities Law Prof Blog

Peck on the JOBS Act and Job Creation

Ian K. Peck has posted Where are the Jobs in the Jobs Act? An Examination of the Uneasy Connection between Securities Disclosure and Job Creation on SSRN with the following abstract:

The JOBS Act, passed in April 2012, is designed to produce American jobs through removing various regulatory barriers for small companies to access investor capital. As the regulations continue to be implemented, commentators have dissected the various ways in which the JOBS Act attempts to achieve this goal. One of the methods involves making the IPO process initially less burdensome, through scaling back financial and corporate governance disclosures. Crowdfunding, which will eventually permit companies to raise investor capital through an online “funding portal”, has garnered both deep criticism from regulators and praise from small business owners. Yet little attention has been paid to the notion that the very reason for disclosure reform is job creation. This matters because job creation has not historically played a direct role in the reform of securities disclosure statutes and regulations. This Article analyzes what role, if any, job creation should occupy in the reform of securities disclosure laws. After establishing the normative baseline for disclosure theory and reform, this Article highlights various unintended consequences of using job creation as a justification for reform and proposes a framework for understanding job creation-based disclosure reforms going forward.

Bird, Borochin & Knopf on Securities Class Actions

Robert C. Bird, Paul Borochin, and John D. Knopf have posted The Value of the Chief Legal Officer to the Firm on SSRN with the following abstract:

We examine the value of the CLO to the firm in varying internal environments. Using the shock of a securities class action lawsuit, we measure the value of the CLO through changes in firm value through the metrics of relative total and incentive compensation of the CLO and other C-suite members. We find that BHARs increase by 1% when the CLO is one of the top five highest compensated executives, and increase by nearly 4% when the CLO is similarly high-paid and a securities class action lawsuit has been filed.

We consider two possible hypotheses to explain why the CLO increases firm value: legal expertise and internal monitoring. We test these alternative hypotheses by examining how CLO compensation is affected by inside versus outside board control, the presence of CEO with a law degree, firm opacity, Tobin’s Q, and executive turnover. We conclude that it is the monitoring function of the CLO, rather than her legal expertise, that is the source of the CLO’s greatest contribution to the firm.

Polezhaeva on Russian Securities Regulation

Natalia Polezhaeva has posted Self-Regulatory Organizations of Professional Securities Market Participants: Membership Features on SSRN with the following abstract:

Based on the analysis of Russian legislation and self-regulatory organizations of professional securities market participants documents the article describes the main membership conditions of such organizations and defines membership features.

Ahdieh on Securities Regulation and Cost-Benefit Analyses

Robert B. Ahdieh has posted Reanalyzing Cost-Benefit Analysis: Toward a Framework of Function(s) and Form(s) on SSRN with the following abstract:

The analysis herein arises from the collision course between the sweeping reforms mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and a single sentence of the U.S. Code, adopted nearly fifteen years earlier and largely forgotten ever since. Few were likely thinking of Section 106 of the National Securities Market Improvement Act when the Dodd-Frank Act was enacted on July 21, 2010. As applied by the D.C. Circuit less than a year later in Business Roundtable v. SEC, however, that provision’s peculiar requirement of cost-benefit analysis could prove the new legislation’s undoing.

To help navigate this potential impasse, the Article that follows suggests the need to more carefully analyze the function and form of the cost-benefit analysis mandate in Section 106 and develops a generally applicable framework for doing so. Discussions of cost-benefit analysis have traditionally approached it as a fairly singular phenomenon — with broad aspirations of “efficiency” as its purpose and with its application in environmental and risk regulation understood to capture its form. In reality, cost-benefit analysis is both more ad hoc — and more systematically varied — than this account suggests.

The framework proposed herein thus makes an important contribution to our understanding of the complexities and varieties of cost-benefit analysis generally. In the particular case of Section 106, meanwhile, it counsels a distinct function and particular characteristics of form that will better direct its application — both to the myriad regulations mandated by the Dodd-Frank Act and beyond. Properly understood, Section 106 is designed to encourage SEC attention to substantive considerations that might otherwise be neglected, given the Commission’s traditional focus on investor protection. As to form, Section 106 constitutes a true mandate and one properly subject to judicial review. Contrary to the analysis in Business Roundtable, however, that mandate is procedural rather than substantive in nature. By comparison with formal cost-benefit analysis, it is less rigidly quantitative. It does, however, demand careful attention to the distributional impacts of relevant rulemaking. To such particularized ends and in such tailored form, ultimately, cost-benefit analysis has the potential to generate significant insight — both under Section 106 and for financial regulation as a whole.

New in Print

The following law review articles relating to securities regulation are now available in paper format:

Hilary J. Allen, A New Philosophy for Financial Stability Regulation, 45 Loy. U. Chi. L.J. 173 (2013).

Carl S. Bjerre, Investment Securities, 68 Bus. Law. 1243 (2013).

James Doring, Comment, Not Much to "Like" about the Facebook IPO: How Regulation FD Can Help Fix the Waning Confidence of the Reasonable Investor, 15 Duq. Bus. L.J. 45 (2013).

Jenny Liu, Note, Reframing Commodity Pools in the Wake of Dodd-Frank and the Volcker Rule, 99 Cornell L. Rev. 201 (2013).

Task Force on Securities Law Opinions, ABA Business Law Section, Legal Opinions in SEC Filings (2013 Update), 68 Bus. Law. 1149 (2013).

Brugler and Linton on the London Stock Exchange

James Brugler and Oliver B. Linton have posted Circuit Breakers on the London Stock Exchange: Do They Improve Subsequent Market Quality? on SSRN with the following abstract:

This paper uses proprietary data to evaluate the efficacy of single-stock circuit breakers on the London Stock Exchange during July and August 2011. We exploit exogenous variation in the length of the uncrossing periods that follow a trading suspension to estimate the effect of auction length on market quality, measured by volume of trades, frequency of trading and the change in realised variance of returns. We also estimate the effect of a trading suspension in one FTSE-100 stock on the volume of trades, trading frequency and the change in realised variance of returns for other FTSE-100 stocks in the same industrial sector. While we find that auction length has a significant detrimental effect on market quality for the suspended security, we also show that trading suspensions help to ameliorate the spread of market microstructure noise and price inefficiency across securities. In both cases we find asymmetric effects in rising and falling markets with suspensions only having a significant impact in the latter case. Although trading suspensions may not improve the trading process within a particular security, they do play an important role preventing the spread of poor market quality across securities and therefore can be effective tools for promoting market-wide stability.

Liao on Canadian Securities Regulation and Corporate Governance

Carol Liao has posted A Canadian Model of Corporate Governance: Where Do Shareholders Really Stand? on SSRN with the following abstract:

This feature article in the Director Journal summarizes the findings from the report, "A Canadian Model of Corporate Governance: Insights from Canada's Leading Legal Practitioners," produced for the Canadian Foundation for Governance Research and the Institute of Corporate Directors (also available on SSRN).

In the report, interviews were conducted with 32 leading senior legal practitioners across Canada to opine on the fundamental principles that are driving the development of Canadian corporate governance. The report found that Canadian common law has made the process of considering stakeholders in the "best interests of the corporation" more overt, well beyond what is assumed in Anglo-American corporate legal scholarship. Layered onto this corporate legal base, the securities commissions are now playing a major role in shaping Canadian corporate governance practices, and their influence has pushed Canada toward a more shareholder-centric model of governance. Securities regulators have increased shareholders’ rights well beyond what has ever been contemplated under Canadian corporate law. It remains to be seen from the pending determinations by the Canadian Securities Administrators on the regulation of poison pills as to whether the regulators will be tempering their positions toward shareholder primacy in the future.

Roundtable on Proxy Voting Canada

On January 29, 2014, the Ontario Securities Commission is hosting a roundtable on proxy voting in Canada.  The details are available here.

This Week in Securities Litigation

The SEC Actions Blog has compiled This Week In Securities Litigation (The week ending January 17, 2014).

Bauguess, Cooney & Hanley on IPOs

Scott W. Bauguess, John Cooney Jr., and Kathleen Weiss Hanley have posted Investor Demand for Information in Newly Issued Securities on SSRN with the following abstract:

The existence of informed investors is a necessary condition for informationally efficient prices. Numerous studies examine the role of information suppliers in the price discovery process (e.g., underwriters, analysts, auditors, venture capitalists). From the investor’s perspective, researchers typically rely on proxies for informativeness (e.g., institutional versus retail investors, trade size) due to a lack of observable data. Our study directly measures investor demand for information and its impact on security prices using search traffic associated with corporate filings on the EDGAR system of the Securities and Exchange Commission (SEC). Our analysis focuses on the registration period for IPOs when the lead underwriter solicits information from purchasing investors to establish the firm’s market value. Information asymmetries between investors and the issuing firm are likely to be high during this period, increasing the value of information acquisition. Consistent with the important role of informed investors in the price discovery process, we find that EDGAR search traffic significantly increases for peer firms on IPO filing dates. We also find that investor demand for information is positively related to the probability of IPO success, and can predict both price revisions and initial returns. Overall, our results indicate that information acquisition is reflected in the pricing of newly issued securities.

Capelle-Blancard & Havrylchyk on French Securities Regulation

Gunther Capelle-Blancard and Olena Havrylchyk have posted The Impact of the French Securities Transaction Tax on Market Liquidity and Volatility on SSRN with the following abstract:

In this paper, we assess the impact of the securities transaction tax (STT) introduced in France in 2012 on market liquidity and volatility. To identify causality, we rely on the unique design of this tax that is imposed only on large French firms, all listed on Euronext. This provides two reliable control groups (smaller French firms and foreign firms also listed on Euronext) and allows using difference-in-difference methodology to isolate the impact of the tax from other economic changes occurring simultaneously. We find that the STT has reduced trading volume, but we find no effect on theoretically based measures of liquidity, such as price impact, and no significant effect on volatility. The results are robust if we rely on different control groups (German stocks included in DAX and MDAX), analyze dynamic effects or construct a control group by propensity score matching.

Gallagher on Capital Requirements

On January 15, 2014, Commissioner Daniel M. Gallagher gave a speak entitled The Philosophies of Capital Requirements in Washington DC.  The speech explored the various theories behind capital requirements for both banks and for non-bank financial institutions.

 

SEC Announces New Date for Compliance with Final Municipal Advisor Registration Rules

As recently announced by the SEC, the new date for compliance with the final municipal advisor regulation rules is July 1, 2014.  Details are available here.

Billings and Lewis on IPOs

Mary Brooke Billings and Melissa Fay Lewis have posted Investors’ Use of Litigation to Settle the Score in the IPO Setting on SSRN with the following abstract:

Prior research suggests that the fear of litigation precludes most managers from manipulating earnings in the initial public offering (“IPO”) setting. Yet, managers’ restraint is perhaps unwarranted: research has not yet linked instances of aggressive pre-IPO reporting to increased litigation risk. This paper investigates when aggressive IPO reporting triggers legal consequences. Examining 2,037 IPOs, we find that pre-IPO abnormal accruals are not solely opportunistic and, even when ex post evidence indicates the presence of opportunism, litigation is more likely to occur when investors have relied on the suspect earnings during the pricing process. Why might investors rely on some firms’ abnormal accruals when valuing the IPO and yet disregard the abnormal accruals of other firms? Our analyses suggest that IPO investors incorporate abnormal accrual information into IPO prices in situations where accruals are more likely to reflect information and other sources of information to help investors make pricing decisions are lacking or are less reliable. In these situations, we find that abnormal accruals do positively correlate with future performance, validating investors’ use of this information when pricing these offerings. Yet, when ex post performance reveals that the pre-IPO abnormal accruals were in fact inflated, we find that litigation emerges to allow harmed shareholders to recover losses incurred dating back to the pricing process — importantly, investors are only harmed if they used those abnormal accruals in pricing the IPO. Taken collectively, our evidence indicates that litigation does indeed surface in the IPO setting — but only when investors need it to settle the score.

Barnett on Mortgage Backed Securities

Harold C. Barnett has posted Risk and Mortgage Backed Securities in a Time of Transition on SSRN with the following abstract:

The residential mortgage backed securities (MBS) market expanded and collapsed as securitizers packaged increasingly toxic loans into private label MBS. Underwriting of the ability to repay was replaced with new affordability products and expectation of continuously rising home prices. The risk of default was misrepresented by securitizers and credit rating agencies. As a result of the financial crisis of 2007-2008, 90 percent of loan originations are now insured or guaranteed by taxpayers. Public and private investors are seeking compensation through litigation. The Dodd-Frank Act has produced a rigorous ability to repay qualifying standard as well as liability for non-compliance. A lender “skin in the game” or borrower down payment requirement might also be forthcoming. The new rules could substantially reduce the risk of default while excluding many borrowers and first-time homeowners from the mortgage market. An inclusive private label MBS market has not yet emerged.

Chiodo on Canadian Securities Class Actions

Suzie Chiodo has posted Victory for Access to Justice as Supreme Court of Canada Upholds Certification Decision in 'Market Timing' Class Action on SSRN with the following abstracts:

In a major victory for mutual fund investors, the Supreme Court of Canada has upheld a decision to certify the “market timing” class action (AIC Limited v Fischer). The decision means that securities class actions can proceed even where fines have been imposed or settlements reached in parallel regulatory proceedings by the Ontario Securities Commission (OSC). The decision has significant and positive ramifications for access to justice and has been described as “the most important class action decision this year”.

Rapp on the Private Right of Action Under Section 10(b) and Rule 10b-5

Robert N. Rapp has posted Plausible Cause: Exploring the Limits of Loss Causation in Pleading and Proving Market Fraud Claims Under Securities Exchange Act Section 10(b) and SEC Rule 10b-5 on SSRN with the following abstract:

Loss causation is a critical element in both pleading and proving private market fraud actions asserting violations of Securities Exchange Act §10(b) and SEC Rule 10b-5. In the wake of the U.S. Supreme Court’s decision in Dura Pharmaceuticals, Inc. v. Broudo, in which the Court made clear that plaintiff investors asserting “fraud-on-the-market” claims must demonstrate that alleged market losses are actually linked to an actionable information failure constituting a violation of these provisions, lower courts have wrestled with the sufficiency of pleading loss causation on motions to dismiss, and as a matter of presenting evidence on motions for summary judgment, and more recently at trial. “Corrective disclosures,” “manifestation of a concealed risk,” “disclosure events” on a market deception timeline, along with “confounding factors” and “disaggregation” of investor losses have all become paramount considerations in framing actual, recoverable investor losses. In this article, the prominence of loss causation as a determinative element in pleading and proving market fraud claims is explored with a view to establishing limits as a matter of law and common sense in an open market setting.

New in Print

The following law review articles relating to securities regulation are now available in paper format:

Brianna L. Gates, Note, The SEC on a Forum Shopping Apree:  SEC Enforcement Power and Control Person Liability after Dodd-Frank, 99 Iowa L. Rev. 393 (2013).

Anthony Sallah, Note, Scheme Liability:  Conduct Beyond the Misrepresentations, Deceptive Acts, and a Possible Janus Intervention, 45 U. Tol. L. Rev. 181 (2013).

Interpretive Guidance on Municipal Advisor Registration Rules

Details available here.

Myron Marlin, Director of Communications, to Leave SEC

Details available here.