Securities Law Prof Blog

Guzik on Crowdfunding

Samuel S Guzik has posted SEC Crowdfunding Rulemaking Under the Jobs Act -- An Opportunity Lost? on SSRN with the following abstract:

On April 5, 2012, President Barack Obama signed into law the JOBS Act of 2012, intended to facilitate capital formation for small business, widely viewed as the principal engine of job creation in the United States. One of the JOBS Act’s more controversial provisions, Title III, created an exemption from registration of the offer and sale of "crowdfunded" securities under the Securities Act of 1933, allowing the sale of securities to an unlimited number of unaccredited investors without registration, on an Internet-based platform, through intermediaries which are either registered broker-dealers or SEC licensed "funding portals." Title III provided for a number of built-in investor protections, including limitations on the amount invested, limitation on the amount an issuer may raise in a 12 month period ($1 million), detailed financial and non-financial disclosure in connection with the offering, and ongoing annual issuer disclosure. Congress left much of the details of Title III in the hands of the SEC, to be fleshed out in the rulemaking process.

More than 18 months later, on October 23, 2013, in a 585 page release, the Commission approved the issuance of proposed Title III rules for public comment, with the comment period expiring in February 2014.

The following commentary addresses certain choices and challenges of the SEC in the ongoing Title III rulemaking process, evaluating a number of key areas where proposed rulemaking has in many instances exacerbated the inherent cost and complexity inherent in the Title III structure created by Congress, and suggesting alternative approaches in the rulemaking process as the SEC undertakes to finalize Title III rules.

Agarwalla, Jacob & Varma on the Indian Futures Market

Sobhesh Kumar Agarwalla, Joshy Jacob, and Jayanth Rama Varma have posted High Frequency Manipulation at Futures Expiry: The Case of Cash Settled Indian Single Stock Futures on SSRN with the following abstract:

Futures markets are known to be vulnerable to manipulation, and despite the presence of a variety of mechanisms to prevent such manipulation, instances of market manipulation have been found in some of the largest and most liquid futures markets worldwide. In 2013, the Securities and Exchange Board of India identified a case of alleged manipulation (in September 2012) of the settlement price of cash settled single stock futures based on high frequency circular trading. As is well known, it is easy for any well-endowed manipulator to manipulate the price; the real challenge for the manipulator is to make the manipulation profitable. The use of high frequency circular trading of the form alleged in the SEBI order makes many forms of manipulation profitable, and makes futures market manipulation a much bigger problem than previously thought.

As argued by Pirrong (2004), it is more practical to detect and punish manipulation than to try and prevent it. We develop an econometric technique that uses high frequency data and which can be integrated with the automated surveillance system to identify suspected cases of high frequency manipulation at futures expiry. We then use these techniques to identify a few suspected cases of manipulation. Needless to say, human judgement needs to be applied to decide which, if any, of these cases need to be taken up for investigation (and, after that, possible prosecution). This judgement is beyond the scope of our paper, and we refrain from making any judgement on whether any of the identified cases constitutes actual market manipulation.

Smith on Section 11

Daniel Hooper Smith has posted Subjective Falsity Under Section 11 of the Securities Act: Protecting Statements of Opinion on SSRN with the following abstract:

Subjective Falsity Under Section 11 of the Securities Act: Protecting Statements of Opinion discusses the Sixth Circuit’s strict liability decision in Indiana State District Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc. for statements of opinion contained in registration statements, and its express departure from both the Second and Ninth Circuits. Consistent with the Second, Third, and Ninth Circuits, this Article proposes that both objective and subjective falsity should be the requisite pleading standard for section 11 opinion statement cases. This Article reaches this conclusion by examining the history of the Securities Act and section 11, pleading requirements, decisions of other circuits, current legal scholarship, and recently-implemented statutes and regulations. Additionally, this Article examines the detrimental effects that a strict liability holding will have on highly-regulated industries such as healthcare and finance. This case is currently pending before the Supreme Court, sub nom. Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, distributed for conference of February 21, 2014.

New in Print

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

James Maruna, Note, The Circuits Confused the Market: Why the Third Circuit's Malack Decision Confirms the Need for a Uniform Approach to the Fraud-Created-the-Market Theory, 11 DePaul Bus. & Com. L.J. 545 (2013).

Hillel Nadler, Comment, I Didn't Do It: Third-Party Debtors and the Securities Law Violation Exception to Discharge, 80 U. Chi. L. Rev. 1921 (2013).

Van S. Wiltz, Will the JOBS Act Jump-Start the Video Game Industry? Crowdfunding Start-Up Capital, 16 Tul. J. Tech. & Intell. Prop. 141 (2013).

David Fredrickson Named Chief Counsel in the SEC's Division of Corporation Finance

The press release is available here.

Michael F. Maloney Named as the New Chief Accountant of the SEC’s Division of Enforcement

The press release is available here.

Rick Fleming Named as Head of SEC's Office of the Investor Advocate

The press release is available here.  The National American Securities Administrators Association also has issued a press release because of Fleming's previous role with that entity.

Paul A. Leder Named as Director of SEC’s Office Of International Affairs

Press release available here.

Call-For-Papers: The Business Lawyer

Diane Babal, the production manger for The Business Lawyer, sent me the following announcement:

The Editorial Board of The Business Lawyer is soliciting submission of articles and essays for Volumes 69 and 70. TBL is the flagship scholarly journal of the American Bar Association Section of Business Law. It reaches 40,000 readers on a quarterly basis. Authors must submit exclusively to the journal and submissions are peer-reviewed. We generally give authors a response in about two weeks. TBL provides a good forum to reframe scholarly articles published elsewhere for an audience of judges and practitioners. Past authors include Lucian Bebchuk, Barbara Black, Bernie Black, Starvros Gadinis, Joe Grundfest, Henry Hu, Roberta Karmel, Jonathan Lipson, Vice Chancellor Leo Strine, Guhan Subramanian, and former Chief Justice of the Delaware Supreme Court Justice Norman Veasey.

Articles should be submitted to Diane Babal, Production Manager, at [email protected] Questions about submissions can be addressed to Associate Editor-in-Chief, Professor Gregory Duhl, at [email protected]

Kovvali on Basic

Aneil Kovvali has posted Could the SEC Save Basic Through Rulemaking? on SSRN with the following abstract:

In Basic Inc. v. Levinson, the Supreme Court held that under certain circumstances, plaintiffs in securities fraud cases could use a rebuttable presumption to make the required showing that they had relied on the defendant's misrepresentations. Under Basic, a person transacting in a security traded on an efficient market is presumed to rely on the integrity of the market price, and thus is presumed to rely on any material misrepresentations that distort the market price. Basic facilitates class actions by replacing individualized inquiries into reliance with a common inquiry into the efficiency of the market and the materiality of the misstatement. As a result, it has become a central doctrine in America's securities law landscape. This Term, in Halliburton v. Erica P. John Fund, the Supreme Court is set to reexamine the validity of the Basic doctrine. With four Justices having recently announced that they were skeptical of the doctrine, it is clear that Basic is under serious threat.

The Securities and Exchange Commission ("SEC") is charged with the administration of the securities laws. This gives the SEC an interest in the outcome of Halliburton. Under various administrative deference doctrines, it also may give the SEC the ability to influence the outcome, or even to effectively undo an outcome that it dislikes. This Essay considers the SEC's capacity to defend Basic. It concludes that the SEC will not receive meaningful deference in the absence of rulemaking. Although several scholars have concluded that the SEC's rulemaking authority covers doctrines like Basic, the Essay identifies grounds for skepticism in the text of the statute. However, if the SEC can clear that hurdle, the Commission would have grounds for optimism that a rule codifying Basic would be respected by the courts.

Koldertsova on Middle East and North African Stock Exchanges

Alissa Koldertsova has posted Privatisation and Demutualisation of MENA Stock Exchanges on SSRN with the following abstract:

The interest in restructuring the ownership and legal form of Arab exchanges has grown in recent years, as witnessed by the ongoing discussions related to the privatisation of the Kuwait Stock Exchange and the demutualisation of the Moroccan Stock Exchange. Others, such as the Lebanese and Egyptian exchanges, are increasingly interested in exploring similar ownership transitions. The management of a number of exchanges considers that private ownership might afford them greater operational flexibility and ultimately, ability to be more competitive regionally and perhaps internationally.

This report explores the efforts of MENA stock exchanges to restructure their ownership through regional comparisons and country case studies. It also situates this process within global transformation of the stock exchange industry in the past two decades. In doing so, this report represents the first effort to analyse the ownership and governance practices of Arab stock exchanges with a view to discuss how the ownership transitions might be optimally structured and whether indeed they are desirable in the short or long term.

Hancock & Passmore on Mortgage-Backed Securities

Diana Hancock and S. Wayne Passmore have posted How the Federal Reserve's Large-Scale Asset Purchases (LSAPs) Influence Mortgage-Backed Securities (MBS) Yields and U.S. Mortgage Rates on SSRN with the following abstract:

We conduct an empirical analysis of the Federal Reserve's large-scale asset purchases (LSAPs) on MBS yields and mortgage rates. The Federal Reserve's accumulation of MBS and Treasury securities lowered MBS yields and mortgage rates by more than what would have been suggested by changes in market expectations alone, suggesting that portfolio rebalancing effects of LSAPs are an important consideration for monetary policy transmission. Our estimates also suggest that the Federal Reserve must hold a substantial market share of agency MBS or of Treasury securities to significantly lower MBS yields and in turn significantly lower mortgage rates.

Mocsary on Materiality under Section 10(b) and Rule 10b-5

George A. Mocsary has posted Statistically Insignificant Deaths: Disclosing Drug Harms to Investors (and Patients) Under SEC Rule 10b-5 on SSRN with the following abstract:

This Article, using statistical tools and theory in conjunction with more standard legal approaches, argues that pharmaceutical manufacturers should disclose all cases of illness or injury associated with their products because this data is material to patients and their doctors, and therefore to Securities and Exchange Commission Rule 10b-5’s “reasonable investor.” Patient and investor interests complement each other in this context, so each will benefit from disclosures that interest the other. Because individuals process more information than traditional statistical tests convey, they act reasonably in expanding their treatment and investment criteria beyond statistical data. Moreover, two sets of expert intermediaries — doctors and professional investors — will be involved. Their expertise will contribute to a more accurate assessment of the risks that adverse-event reports may suggest a drug presents, and of the significance of these risks to shareholders. The Supreme Court’s reasons for not requiring full disclosure are out of place in the context of adverse-event reporting given Rule 10b-5’s pro-disclosure mandate and the fact that even seemingly singular and unconnected facts can substantially move investors’ and patients’ opinions about a drug’s safety, and thus its maker’s viability. A full-disclosure rule would place the determination of which facts are important into the hands of parties with “skin in the game” rather than regulators or self-interested drug makers.

 

Sarfaty on Human Rights and Securities Regulation

Galit A. Sarfaty has posted Human Rights Meets Securities Regulation on SSRN with the following abstract:

Recent domestic legislation is blurring the line between securities regulation and human rights law. Securities law has traditionally regulated corporate disclosure on financial information, such as income statements and investment risks. By contrast, human rights law has traditionally operated in the international sphere and focused on state obligations.

That all changed in 2010 with the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which includes sections 1502 and 1504 on non-financial disclosure related to human rights and anti-corruption. In particular, section is the first regulation to create binding rules on due diligence with regard to a company’s supply chain. It imposes a new reporting requirement on publicly traded companies that manufacture products using certain conflict minerals. Companies must identify whether the sourcing of the minerals originated in the Democratic Republic of Congo (DRC) and bordering countries. If so, they must submit an independent private sector audit report on due diligence measures taken to determine whether those conflict minerals directly or indirectly financed or benefited armed groups in the covered countries.

The Dodd-Frank provisions are but one example of an emerging trend in international securities law. Over the past decade, an increasing number of governments and securities exchanges have passed mandatory regulations on corporate disclosure of social issues. In this Article, I take a step back from these recent developments to analyze a critical question: Is securities regulation the appropriate mechanism for achieving human rights compliance? By doing so, I seek to open a dialogue between two disparate streams of scholarship in private and public law and propose policy recommendations for effectively furthering the movement towards corporate accountability. While existing literature on sections 1502 and 1504 addresses the history of the legislation and critiques its efficacy, the main contribution of the Article is to analyze the normative implications of the broader strategy of using securities regulation to hold companies accountable for human rights abuses.

Heminway on Insider Trading

Joan MacLeod Heminway has posted Willful Blindness, Plausible Deniability and Tippee Liability: SAC, Steven Cohen, and the Court's Opinion in Dirks on SSRN with the following abstract:

Is the principal of a securities trading firm able to remain ignorant about the source of information used in trading on the principal's behalf and avoid liability for insider trading under U.S. law? This short essay explores that question using the SAC Capital Advisors, L.P. and Steven Cohen as an example case, reflecting on the law established by the Supreme Court in its opinion in Dirks v. SEC in light of both the Second Circuit opinion in SEC v. Obus and changes, occasioned by Regulation FD, in the nature of securities analysts’ work and the overall information entrepreneurialism of market intermediaries. Ultimately, issues identified in this context afford us the opportunity to take another look at U.S. insider trading law as a matter of policy.

IOSCO Issues a Report on Code of Conduct Fundamentals for Credit Rating Agencies

The International Organization of Securities Commissions has issued a report on Code of Conduct Fundamentals for Credit Rating Agencies.  The press release is available here.

Commissioner Stein on Capital Markets

On February 6, 2014, Commissioner Kara M. Stein delievered Remarks before Trader Forum 2014 Equity Trading Summit.

New in Print

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

Jason W. Burge & Lara K. Richards, Defining "Customer": A Survey of Who Can Demand FINRA Arbitration, 74 La. L. Rev. 173(2013).

Nicholas L. Georgakopoulos, The Ralston-Landreth-Gustafson Harmony: A Security!, 41 Cap. U. L. Rev. 553 (2013).

Christopher T. Hines, The Corporate Gatekeeper in Ethical Perspective, 78 Mo. L. Rev. 77 (2013).

Kelly S. Kibbie, The Currently Mandated Myopia of Rule 10b-5: Pay No Attention to that Manager Behind the Mutual Fund Curtain, 78 Mo. L. Rev. 171 (2013).

Chair White's Testimony on Financial Stability Oversight and Data Security

On February 6, 2014, Chair Mary Jo White delivered testimony before the United States Senate Committee on Banking, Housing, and Urban Affairs regarding Oversight of Financial Stability and Data Security.

Commissioner Gallagher on the PCAOB

On February 5, 2014 at an SEC Open Meeting in Washington D.C., Commissioner Daniel M. Gallagher delivered a Statement at an Open Meeting of the Commission to Consider the Public Company Accounting Oversight Board’s Proposed 2014 Budget and Accounting Support Fee.