Securities Law Prof Blog

Commissioner Gallagher on Municipal Securities Regulation

On May 29, 2014 in Washington, D.C., Commissioner Daniel M. Gallagher offered Remarks at Municipal Securities Rulemaking Board’s 1st Annual Municipal Securities Regulator Summit.

Shanske on Municipal Debt Finance

Darien Shanske has posted The Feds are Already Here: The Federal Role in Municipal Debt Finance on SSRN with the following abstract:

Should the federal government be involved in the regulation of municipal debt finance? The answer is arguably not. But this theoretical dispute is not the focus of this Article because, in fact, the federal government already regulates municipal debt finance extensively, generally much more extensively than the states regulate their municipalities’ use of debt. The primary source of federal regulation is the securities laws. Less well-known is that federal tax law also serves as an important constraint. This Article surveys and critically evaluates these federal laws, and comes to three tentative conclusions. First, the current federal oversight “system,” unplanned and ad hoc as it is, has been effective. Second, in part because the current system has never been thought of as a comprehensive system, there are low-hanging fruit in terms of making the system work better. To the extent the federal government does not put these reforms in place, states should. Third, even an optimally operating federal overlay does not absolve the states from more careful regulation of the financial affairs of their localities, particularly as to the use of debt. Above all, what the federal government does not — and ought not — do is provide localities with the expertise to use debt optimally; this is another area where the states should focus their reform efforts.

Chen & Wu on Securities Pricing

Shimin Chen and Donghui Wu have posted Does Audit Reporting Matter in Pricing Securities? Evidence from an Emerging Market on SSRN with the following abstract:

Prior research on whether the market responds to auditors’ opinions provides mixed results. We revisit this issue in China. The stock market of China is dominated by individual investors, who are less sophisticated in assimilating value-relevant information such as modified audit opinions (MAOs). Also, audit modifications due to the violations of GAAP or disclosure rules (GAAP/DISC MAOs), which are subtler than going concern opinions (GCOs) in their value implications and thus more likely to be mispriced, are permissible in China. Chinese stock market thus gives mispricing its best chance of being detected. We find that MAOs predict firms’ future financial performance, and the market reaction during the short window around the disclosure of MAOs is also consistent with such predictive power of MAOs. Importantly, MAO disclosure is not followed by negative long-term stock returns, suggesting that stock price adjustments to MAOs are speedy and unbiased. These findings hold for both GCOs and GAAP/DISC MAOs. Together, our findings support the informativeness of audit opinions and cast doubt on the argument that investors inefficiently use this important information in pricing securities because of information processing bias.

Li, Wasley & Zimmerman on Insider Trading

Edward X. Li, Charles E. Wasley, and Jerold L. Zimmerman have posted The Disclose or Abstain Incentive to Issue Management Guidance on SSRN with the following abstract:

Prior research generally argues that managers issue management earnings forecasts (MFs) to secure capital market benefits (i.e., reduce information asymmetry between managers and investors to lower a firm’s cost of capital), to reduce the firm’s litigation costs, or to allow managers to trade opportunistically in their firm’s stock. We discuss and test whether some MFs are issued because managers have an affirmative duty under Rule 10b-5 of the Securities Acts to disclose all material information or to abstain from trading in their firm’s securities. Four sets of tests support our conjecture that managers issue some MFs to comply with their duty under Rule 10b-5. Since prior MF studies have typically ignored the alternative explanation that managers issue some MFs to comply with disclose or abstain obligations the inferences drawn from such studies about managerial incentives to issue MFs likely overstate the economic significance of the variables used to capture capital market or opportunistic incentives for MF disclosure.

Odlyzko on 19th Century British Government Bonds

Andrew Odlyzko has posted Economically Irrational Pricing of 19th Century British Government Bonds on SSRN with the following abstract:

British government bonds formed the deepest, most liquid, and most transparent financial market of the 19th century. This paper shows that those bonds had long periods, extending over decades, of anomalous behavior, in which Consols, the largest and best known of these instruments, were noticeably overpriced relative to equivalent gilts which offered the same interest rate and the same guarantee of payment. The British government did take advantage of this market inefficiency, but apparently to a lesser extent than it could have.

This finding and similar ones for other comparable pairs of British gilts appear to provide the most extreme counterexamples documented so far to the Efficient Markets Hypothesis and to the Law of One Price. They also offer a promising test case for exploring the effects of mass psychology on economic behavior. It appears that several communities held divergent views on the values of securities that standard theory provides unambiguous answers for.

The Supplement for this paper are available at the following URL: http://ssrn.com/abstract=2435437

Peirce on AIG

Hester Peirce has posted Securities Lending and the Untold Story in the Collapse of AIG on SSRN with the following abstract:

American International Group, Inc. (AIG), a large insurance company, received a massive bailout during the financial crisis in response to difficulties centered on the company’s multifaceted exposure to residential mortgage-backed securities. The company is back on its feet, albeit in more streamlined form and with a new overseer — the Federal Reserve. This paper focuses on a piece of the AIG story that is rarely told — the role of the company’s securities-lending program in imperiling the company and some of its insurance subsidiaries. The paper argues that regulatory responses to AIG have been inapt. AIG did not need another regulator, but better risk management. The markets would have conveyed that message clearly had regulators not intervened to ensure AIG’s survival. This paper adds the missing piece to the AIG story in an effort to challenge the notion that more regulatory oversight for companies like AIG will prevent future crises.

Heminway on Crowdfunding

Joan MacLeod Heminway has posted Investor and Market Protection in the Crowdfunding Era: Disclosing to and for the 'Crowd' on SSRN with the following abstract:

This article focuses on disclosure regulation in a specific context: securities crowdfunding (also known as crowdfund investing or investment crowdfunding). The intended primary audience for disclosures made in the crowdfund investing setting is the “crowd,” an ill-defined group of potential and actual investors in securities offered and sold through crowdfunding. Securities crowdfunding, for purposes of this article, refers to an offering of securities made over the Internet to a broad-based, unstructured group of investors who are not qualified by geography, financial wherewithal, access to information, investment experience or acumen, or any other criterion.

To assess disclosure to and for the crowd, this short symposium piece proceeds in three principal parts before concluding. First, the article briefly describes securities crowdfunding and the related disclosure and regulatory environments. Next, the article summarizes basic principles from scholarly literature on the nature of investment crowds. This literature outlines two principal ways in which the behavioral psychology of crowds interacts with securities markets. On the one hand, crowds can be “mad” — irrational, foolish, and even stupid. On the other hand, crowds can be “wise” — rational, sensible, and intelligent. After outlining these two strains in the literature on the behavioral attributes of crowds, the article assesses the possible implications of that body of literature for the regulation of disclosure in the securities-crowdfunding setting. The work concludes by asserting that, when considering and designing disclosure to and for the securities-crowdfunding crowd, the insights from this behavioral literature should be taken into account.

New in Print

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

Lucian A. Bebchuk et al.,  Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy, 39 J. Corp. L. 1 (2013).

Lucy Chang, Note, The Truth-on-the-Market Defense and its Relevance in SEC Enforcement Actions, 76 Law & Contemp. Probs. 341 (2013).

 Reagan R. Demas, Biting the Hands that Feed:  Corporate Charity and the U.S. Foreign Corrupt Practices Act, 29 Am. U. Int'l L. Rev. 335 (2014).

Jeffrey R. Favitta, Note, The Exception that Ate the Rule:  Why QRM Should Not Equal QM, 18 N.C. Bank. Inst. 363 (2014).

Kevin W. Humphries, Note, Not Your Older Brother's Bonds:  The Use and Regulation of Social-Impact Bonds in the United States, 76 Law & Contemp. Probs. 433 (2013).

S. Austin King, Note, Proffering the Right Evidence:  Proving Loss Causation and Damages under SEC Rule 10b-5,  18 N.C. Bank. Inst. 431 (2014).

Michelle Lichtor, Note, How "Suitable" Is the Language of Suitability in the Modern Era?, 39 J. Corp. L. 201 (2013).

Tom C.W. Lin, The New Financial Industry, 65 Ala. L. Rev. 567 (2014).

Junsun Park, Enforcement of Securities Law in the Global Marketplace:  Cross-Border Cooperation in the Prosecution of Transnational Hedge Fund Fraud, 39 Brook. J. Int'l L. 231 (2014).

Steven L. Schwarcz, Securitization, Structured Finance, and Covered Bonds, 39 J. Corp. L. 129 (2013).

Mark V. Vlasic & Peter Atlee, Myanmar and the Dodd-Frank Whistleblower "Bounty":  The U.S. Foreign Corrupt Practices Act and Curbing Grand Corruption through Innovative Action, 29 Am. U. Int'l L. Rev. 441 (2014).

Berle V: Capital Markets, the Corporation, and the Asian Century: Governance, Accountability, and the Future of Corporate Law,The Fifth Annual Symposium of the Adolf A. Berle, Jr. Center on Corporations, Law & Society, Articles by Ross P. Buckley, Douglas W. Arner, Michael Panton, Colin Scott, Justin O'Brien, Frank Partnoy, Rachel E. Barkow, Olivia Dixon, Jeremy R. Cooper, Greg Golding, Adam D. Dixon, George Gilligan, Megan Bowman, Teemu Ruskola, Nicholas Calcina Howson, Takaya Seki, Thomas Clarke, Kent Greenfield and Roberta S. Karmel, 37 Seattle U. L. Rev. 307-811 (2014).

This Week in Securities Litigation

The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending May 23, 2014).

Director Ceresney on the Division of Enforcement

On May 20, 2014 in Washington, D.C., Andrew Ceresney, Director of the SEC's Division of Enforcement, delivered a Keynote Address at Compliance Week 2014.  His remarks chiefly related to the role of the Division of Enforcement.

Chair White on Securities Regulation and Accounting

On May 20, 2014 in Washington, D.C., Chair Mary Jo White offered Remarks at the Financial Accounting Foundation Trustees Dinner.  Chair White concluded her remarks by noting the following:

Because accounting standards adopted by the FASB are the core of the financial reporting required by the federal securities laws, a strong relationship between the SEC and FASB is vital.  Continuing development of robust and effective accounting standards that are enforceable and result in good financial reporting is our common bedrock.  Investors benefit tremendously from our collaborative relationship, and I look forward to continuing and enhancing that relationship in the future.

Chair White on Enforcement

On May 19, 2014 at the NYC Bar Association’s Third Annual White Collar Crime Institute in New York, NY, Chair Mary Jo White delivered remarks on Three Key Pressure Points in the Current Enforcement Environment.  Chair White's remarks addressed "(1) the pressure of multiple regulators in the same or overlapping investigations; (2) the decision to charge individuals, entities, or both; and (3) the range of remedies and ultimate resolutions" as they impact the current enforcement environment.

Commissioner Stein on Compliance

On May 19, 2014 in Washington, D.C., Commissioner Kara M. Stein delivered a Keynote Address at Compliance Week 2014.  In summation, Commissioner Stein offered the following two thoughts:

First, compliance is a bedrock of good markets.  Second, we need your help to make compliance as strong as possible.  The American public and our financial markets are counting on us.   

Commissioner Piwowar on Regulation of Financial Markets

On May 16, 2014 in Washington, D.C., Commissioner Michael S. Piwowar delivered Remarks to the First Annual Conference on the Regulation of Financial Markets.  Notably, Commissioner Piwowar stated the following:

Academic research is critically important to the SEC’s mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.  Other financial regulators have long benefitted from holding academic research conferences on issues of importance to their agencies and it is high time for the Commission to do likewise.  

New in Print

The following law review article relating to securities regulation is now available in paper format:

Jill E. Fisch, and Tess Wilkinson-Ryan, Why Do Retail Investors Make Costly Mistakes? An Experiment on Mutual Fund Choice, 162 U. Pa. L. Rev. 605 (2014).

NASAA’s Streamlined Multi-State Coordinated Review Program Now Accepting Applications for Regulation A Offerings

Details available here.

SEC Names Gina Talamona as Communications Director

Details available here.

Chair White's Testimony before the Subcommittee on Financial Services and General Government Committee on Appropriations

The testimony is available here.

Chief Accountant Paul Beswick to Leave SEC

Details available here.

This Week in Securities Litigation

The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending May 16, 2014).