Securities Law Prof Blog

New in Print

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

Sean Keegan, Note, Logic or Public Policy:  Should "Confirmatory Statements" Be Actionable Under Rule 10b-5?, 31 J.L. & Com. 163 (2012-2013).

Michael Ohlrogge, How Statistical Sampling Can Solve the Conundrum of Compensation Disclosures under Dodd-Frank, 31 J.L. & Com. 109 (2012-2013).

James M. Pappenfus, Comment, Dodd-Frank and Basel III's Knowledge Problem, 36 Hous. J. Int'l L. 253 (2014).

NASAA Urges SEC to Revise Regulation A Proposal to Remove Potential Harm to Issuers and Investors

Details available here.

Chair White on Strengthening Enforcement

On March 24, 2014, Chair Mary Jo White delivered remarks via videoconference to the Annual Forum of the Australian Securities and Investments Commission regarding strengthening enforcement with an emphasis on international coorperation and a discussion of the SEC's recent undertakings in the area of enforcement.

SEC Extends Comment Period for Asset-Backed Securities Release

Details available here.

This Week in Securities Litigation

The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending March 28, 2014).

Canadian Securities Regulators Enter a Memorandum of Understanding with the U.S. Commodity Futures Trading Commission

The press release states in part:

The Ontario Securities Commission, together with the Autorité des marchés financiers, Alberta Securities Commission and British Columbia Securities Commission, recently entered into a Memorandum of Understanding with the United States Commodity Futures Trading Commission concerning regulatory cooperation related to the supervision and oversight of regulated entities that operate in both the United States and Canada (the "Supervisory MOU"). The Supervisory MOU provides a comprehensive framework for consultation, cooperation and information-sharing related to the day-to-day supervision and oversight of cross-border regulated entities and enhances the OSC's ability to supervise these entities.

 

Yadav on Market Efficiency

Yesha Yadav has posted Beyond Efficiency in Securities Regulation on SSRN with the following abstract:

This Article argues that the rise of algorithmic trading profoundly challenges the foundation on which much of today’s securities regulation framework rests: the understanding that securities’ prices objectively reflect available information in the market. The Efficient Capital Markets Hypothesis (ECMH) has long provided the theoretical touchstone undergirding central pillars of securities regulation. Mandatory disclosure, evidentiary presumptions in anti-fraud litigation and regulation driving the design of modern exchanges all look to the ECMH for theoretical validation. It is easy to understand why. Laws that make markets better at interpreting information can also improve their ability to allocate capital across the real economy.

Theory and regulation have failed to keep pace with markets where traders rely on pre-programmed algorithms to execute trades. This Article makes two claims. First, complex algorithms foster a separation between the trader and her ability to fully control the operation of the algorithm. Algorithms can execute many thousands of trades in milliseconds, crunching vast quantities of data and dynamically interacting with other traders in the process. This intelligence makes it difficult for a trader to fully predict how an algorithm might behave ex ante and near-impossible for her to track and control its activities in real-time. Secondly, though markets have traditionally relied on informed fundamental traders to decode complexity, these actors now possess reduced incentives to perform this function in algorithmic markets. Fundamental traders routinely see their gains diminished by faster, automated counterparts, able to front-run trades and to derive maximal benefit from the research of others. In arguing that algorithmic trading is transforming how markets process and interpret information, this Article shows that conventional assumptions in securities law doctrine and policy also break down. With these insights, this Article, offers a new framework to thoroughly reevaluate the centrality of efficiency economics in regulatory design.

Fox, Fox & Gilson on Economic Crisis and Share Price

Edward G. Fox , Merritt B. Fox and Ronald J. Gilson have posted Economic Crisis and Share Price Unpredictability: Reasons and Implications on SSRN with the following abstract:

During the recent financial crisis, there was a dramatic spike, across all industries, in the volatility of individual firm share prices after adjustment for movements in the market as a whole. In this Article, we demonstrate that a similar spike has occurred with each major downturn in the economy since the 1920s. The existence of this long history of crisis-induced spikes has not been previously recognized.

The Article evaluates a number of potential explanations for these recurrent spikes in firm-specific price volatility, a pattern that poses a puzzle in terms of existing financial theory. The most convincing explanations relate to reasons why information specifically concerning individual firms would become more important in difficult economic times.

This discovery of a long history of crisis-induced spikes in firm-specific price volatility has important implications for several areas of corporate and securities law. With regard to securities law, the Article concludes, for example, that because of these spikes, private damages actions are much less effective deterrents to corporate misstatements and insider trading in crisis times than in normal times. Consequently, substantial additional resources should be devoted to SEC enforcement actions during crisis times. The Article considers as well the most contentious corporate law issue of the last 30 years: the extent to which a target board of directors will be allowed to prevent shareholders from accepting a hostile takeover bid at a premium over the pre-bid share price. The Delaware Supreme Court’s approach to this question has been largely based on the difficult-to-define concept of “substantive coercion.” The Article concludes that these spikes could be a way of giving real meaning to the “substantive coercion” justification for board approval of defenses against hostile takeover attempts, but that the instances where this justification is appropriate will be rare.

De Angelis & Grinstein on CEO Compensation

David De Angelis and Yaniv Grinstein have posted Performance Terms in CEO Compensation Contracts on SSRN with the following abstract:

In December 2006, the Securities and Exchange Commission issued new rules that require enhanced disclosure on how firms tie CEO compensation to performance. We use this new available data to study the terms of performance-based awards in CEO compensation contracts in S&P 500 firms. We observe large variations in the choice of performance measures. Our evidence is consistent with predictions from optimal contracting theories: firms rely on performance measures that are more informative of CEO actions.

Hornuf & Schwienbacher on Crowdinvesting

Lars Hornuf and Armin Schwienbacher have posted Crowdinvesting – Angel Investing for the Masses? on SSRN with the following abstract:

This book chapter reviews crowdinvesting, which is sometimes referred to as equity crowdfunding. It specifically aims at answering the following question: Is crowdinvesting transforming the crowd into small business angels? In order to answer this question, we review the securities regulation in different jurisdictions and compare crowdinvesting practices in these countries with angel finance. Finally, we offer insights into different avenues for future research. One pertains to the question whether crowdinvesting will complement or substitute angel finance. While this issue cannot be answered unambiguously, we expect that in many cases, crowdinvesting may become a complementary source of funding to angel finance rather than a substitute. This is because crowdinvestors fill funding gaps at the lower end of the market or may at times co-invest with professional investors. In other cases, crowdinvestors may compete with business angels for the same investments since average funding volumes can be similar.

Min on Market Discipline

David Min has posted Understanding the Failures of Market Discipline on SSRN with the following abstract:

“Market discipline” — the notion that short-term creditors can efficiently rein in bank risk — has been a central pillar of banking regulation since the late 1980s, both in the United States and abroad. While market discipline did not prevent the buildup of bank risk that caused the recent financial crisis, the conventional wisdom has been that this failure was due to an insufficiency of market discipline, rather than any problems with the concept itself. As a result, policy makers have increased regulatory reliance on market discipline, making this a central part of their reform efforts. This Article challenges the prevailing wisdom and makes two significant contributions to the literature. First, I demonstrate that market discipline failed more severely and completely than has previously been acknowledged, as it did not even identify rising bank risk until after the financial crisis had already begun. Second, I explain the causes of this failure. Market discipline conflates two distinct types of bank-issued securities — investment securities and money instruments — and therefore errs in two critical ways. Market discipline relies too heavily upon investors in money instruments, who are relatively insensitive to risk and thus particularly poor monitors of banks. And market discipline ignores the effects of bank shareholders, who are highly risk-sensitive but may have incentives adverse to those of public policy. Despite these enormous flaws, market discipline continues to be a major point of emphasis among bank regulators and policy makers, increasing the risk that regulators may again be blindsided by another financial crisis.

SEC Announces the Agenda and Panelists for Its Cybersecurity Roundtable

The SEC has announced the agenda and panelists for its cybersecurity roundtable that will be held at its Washington, D.C. headquarters on March 26, 2014.  This event will be open to the public and webcast live on the SEC’s website.

SEC Staff Analysis of Data and Academic Literature Related to Money Market Fund Reform

Details available here.

Chair White on Protecting the Retail Investor

On March 21, 2014 at the Consumer Federation of America's 2014 Consumer Assembly, Chair Mary Jo White delivered a speech on protecting the retail investor.

Director Higgins on International Securities Regulation

On March 20, 2014 in London, England at the PLI's Thirteenth Annual Institute on Securities Regulation in Europe, Keith F. Higgins, Director of the SEC's Division of Corporation Finance delivered a keynote address on various issues related to international securities regulation.

Ontario Securities Commission Announces 2013 Enforcement Results

Details available here.

SEC Proposes Rules for Systemically Important and Security-Based Swap Clearing Agencies

Details available here.

NASAA Members Approve Streamlined Multi-State Coordinated Review Program

NASAA members have approved a streamlined multi-state coordinated review program to reduce compliance costs of companies attempting to raise capital under the JOBS Act.  The press release includes the following information:

Under the new program, Regulation A filings would be made in one place and distributed electronically to all states. Lead examiners would be appointed as the primary point of contact for a filer and each state will be given 10 business days for review. Lead examiners alone will interact with issuers to resolve any deficiencies.

The new program was initiated in response to Title IV of the JOBS Act, which raised to $50 million from $5 million the amount of money that can be raised through offerings exempt from registration under Regulation A. Congress directed the Securities and Exchange Commission (SEC) to adopt a rule implementing this JOBS Act provision. The SEC’s proposed rule, contrary to Congressional intent, seeks to transform Regulation A offerings into covered securities, which by law are not subject to state review. By doing so, the rule would eliminate state authority to review Regulation A offerings before they are sold to the public.

SEC and FINRA to Host Regional Compliance Outreach Programs for Broker-Dealers

Details available here.

NASAA to Host a Public Policy Conference

Details available here.