Securities Law Prof Blog

This Week in Securities Litigation

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

SEC Adopts Asset-Backed Securities Reform Rules

The SEC has adopted asset-backed securities reform rules.  The press release in part states the following:

The Securities and Exchange Commission today adopted revisions to rules governing the disclosure, reporting, and offering process for asset-backed securities (ABS) to enhance transparency, better protect investors, and facilitate capital formation in the securitization market.

The new rules, among other things, require loan-level disclosure for certain assets, such as residential and commercial mortgages and automobile loans. The rules also provide more time for investors to review and consider a securitization offering, revise the eligibility criteria for using an expedited offering process known as “shelf offerings,” and make important revisions to reporting requirements.

SEC Announces Pilot Plan to Assess Stock Market Tick Size Impact for Smaller Companies

The SEC has announced a pilot plan to assess stock market tick size impact for smaller companies.  The press release in part states the following:

The Securities and Exchange Commission today announced that the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) filed a proposal to establish a national market system plan to implement a targeted 12-month pilot program that will widen minimum quoting and trading increments (tick sizes) for certain stocks with smaller capitalization.  The Commission plans to use the pilot program to assess whether such changes would enhance market quality for smaller capitalization stocks for the benefit of investors and issuers.

SEC Names James Schnurr As Chief Accountant

Details available here.

Exploring Koehler's Scholarship on the FCPA

Mike Koehler of the FCPA Professor Blog has posted a useful and interesting reading list of his scholarship on the Foreign Corrupt Practices Act.  Although this is obvious, he is one of the leading experts on corruption and his scholarship is well worth reading.

Chief Information Officer Thomas Bayer to Leave SEC

Details available here.

SEC Announces Municipal Advisor Exam Initiative

Details available here.

Chu on Credit Ratings

Chenghuan Sean Chu has posted Empirical Analysis of Credit Ratings Inflation as a Game of Incomplete Information on SSRN with the following abstract:

This paper models competition among credit rating agencies as an auction. Equilibrium ratings give a distorted representation of agencies' true assessment of quality, because the agencies choose their ratings strategically. I quantify the distortion in ratings for individual commercial mortgage-backed securities, and find the extent of distortion to be an important predictor of the securities' ex post performance. I also find that the distortion magnitudes decreased after the recent financial crisis. Through counterfactual simulations, I determine the marginal impact of additional rating agencies on distortions, and I identify the impact of proposed disclosure requirements.

 

Rapp on the Office of Market Intelligence

Geoffrey Christopher Rapp  has posted Intelligence Design: An Analysis of the SEC's New Office of Market Intelligence and its Goal of Using Big Data to Improve Securities Enforcement on SSRN with the following abstract:

This contribution to the University of Cincinnati's spring 2013 symposium on “Addressing the Challenges of Protecting the Public: Enforcement Practices and Policies in the Post-Financial Crisis Era,” discusses the SEC's creation of a new Office of Market Intelligence in January, 2010. OMI was created in the aftermath of the Madoff scandal and charged with using advanced techniques to detect securities fraud and to process tips and complaints, including those arising from the Dodd-Frank whistleblower bounty reward program. While it may be too soon to judge the success of the new Office, useful comparisons to other federal intelligence activities (such as in the national security context) and to the business tool of "Market Intelligence" can be drawn.

NASAA Annual Conference to Focus on Meeting Tomorrow’s Challenges Today

Details available here.

This Week in Securities Litigation

The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending August 15, 2014).

New in Print

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

Jesse M. Fried, Insider Trading Via the Corporation, 162 U. Pa. L. Rev. 801 (2014).

Christian Johnson, Regulatory Arbitrage, Extraterritorial Jurisdiction, and Dodd-Frank:  The Implications of US Global OTC Derivative Regulation, 14 Nev. L.J. 542 (2014).

Neel Rane, Comment, Twenty Years of Shareholder Proposals after Cracker Barrel:  An Effective Tool for Implementing LGBT Employment Protections, 162 U. Pa. L. Rev. 929 (2014).

John Jr. Robinson, Note, Water Securities:  Rights to Use, Used as Collateral, 2013 Utah L. Rev. 1725.

Asking the Audience for Help: Crowdfunding as a Means of Control, Benette Zively, Moderator; David Marlett, Steven Bradford, Jolie Goodnight, Panelists, 15 Tex. Rev. Ent. & Sports L. 87-121 (2013).

Pollard & Perry on Dodd Frank

Randle B. Pollard and Tod Perry have posted 'Grade Incomplete': Examining the Securities and Exchange Commission’s Attempt to Implement Credit Rating and Certain Corporate Governance Reforms of Dodd-Frank on SSRN with the following abstract:

Following the financial crisis of 2007-2009, Congress passed the Dodd-Frank Act with stated goals, among others, of creating a sound economic foundation and protecting consumers. The Dodd-Frank Act creates several new agencies and restructures the financial regulatory system, yet controversies remain on the promulgation of new rules and the overall effectiveness in accomplishing the stated goals of the Act.

This Article briefly discusses the status of rulemaking by newly created agencies and the restructured financial regulatory system mandated by the Dodd-Frank Act three years after its passage. Next, we focus on certain aspects of the SEC and its charge from Dodd-Frank to implement new agencies and regulations. Specifically, we examine the SEC efforts to establish the Office of Credit Ratings and its regulations and the SEC’s efforts related to additional executive compensation disclosure regulations required by Dodd-Frank.

Kaal on Private Funds and Dodd Frank

Wulf A. Kaal has posted The Systemic Risk of Private Funds after the Dodd-Frank Act on SSRN with the following abstract:

The Financial Stability Oversight Council (FSOC) was created under the Dodd-Frank Act with the primary mandate of guarding against systemic risk and correcting perceived regulatory weaknesses that may have contributed to the financial crisis of 2008-09. The SEC collects data pertaining to private fund advisers in order to facilitate the FSOC’s assessment of non-bank financial institutions’ potential systemic risks. Evidence that the SEC’s data collection encounters accuracy and consistency problems might hamper the FSOC’s ability to evaluate the systemic risk of private funds. The author shows that while the SEC’s data plays a crucial role in all stages of FSOC’s systemic risk assessment of private funds, the FSOC relies most heavily on some of the most problematic disclosure items collected by the SEC.

Ashcraft, Gooriah & Kermani on Mortgage Backed Securities

Adam B. Ashcraft, Kunal Gooriah, and Amir Kermani have posted Does Skin‐in‐the‐Game Affect Security Performance? Evidence from the Conduit CMBS Market on SSRN with the following abstract:

Does reducing the skin‐in‐the‐game of informed agents matter for the performance of securitized assets? In the conduit commercial mortgage backed securities (CMBS) market, an informed investor purchases the bottom five percent of the capital structure, known as the B‐piece, conducting independent screening of loans from which all other investors benefit. However, during the recent credit boom, a secondary market for B‐pieces developed, permitting these investors to significantly reduce their skin‐in‐the‐game. In this paper, we document, that after controlling for all information available at issue, the percentage of the B‐piece that is sold by these investors has a significant adverse impact on the probability that more senior tranches ultimately default. The result is robust to the use of an instrumental variables strategy which relies on the greater ability of larger B‐piece buyers to sell these positions given the need for large pools of collateral. Moreover we show the risk associated with this agency problem was not priced.

Fleckner on Regulating Trading Practices

Andreas M. Fleckner has posted Regulating Trading Practices on SSRN with the following abstract:

High-frequency trading, dark pools, front-running, phantom orders, short selling — the way securities are traded ranks high among today’s regulatory challenges. Thanks to a steady stream of news reports, investor complaints and public investigations, calls for the government to intervene and impose order have become commonplace, both in financial and academic circles. The regulation of trading practices, one of the oldest roots of securities law and still a regulatory mystery to many people, is suddenly the talk of the town. From a historical and comparative perspective, however, many of the recent developments look less dramatic than some observers believe. This is the quintessence of the present chapter. It explains how today’s regulatory regime evolved, identifies the key rationale for governments to intervene, and analyzes the rules, regulators and techniques of the world’s leading jurisdictions. The chapter’s central argument is that governments should focus on the price formation process and ensure that it is purely market-driven. Local regulators and self-regulatory organizations will take care of the rest.

Coates on Securities Litigation and the Roberts Court

John C. Coates, IV has Securities Litigation in the Roberts Court: An Early Assessment posted on SSRN with the following abstract:

This article provides an early assessment – both quantitative and qualitative – of the Roberts Court’s securities law decisions. Such cases represent an increased share of Supreme Court’s docket, compared to prior Courts, but only because its overall docket has shrunk, while it has continued to take an average of one to two securities law cases per year. The Roberts Court has maintained the same overall split in “expansive” or “restrictive” outcomes as the post-Powell Rehnquist Court, with reduced polarization: more than half were unanimous and only three included five-vote majorities. An attitudinal model does no better than a coin flip in predicting outcomes. What are new is a heightened role for procedure and a resistance to bright-line rules, with procedural decisions more restrictive and rejections of bright-line rules more expansive. The turn to procedure matches the background and interests of the Chief Justice, a former appellate litigator leading a broader “procedural revolution” on the Court, beyond the limited reach of securities law. The analysis is applied to predict outcomes for cases to be argued in the October 2014 term, and is used to sketch the types of cases likely to attract the attention of the Court in the future.

Blocher & Whaley on Passive Investing

Jesse Blocher and Robert E. Whaley have posted Passive Investing on SSRN with the following abstract:

Financial economists have long touted the benefits of passive investing, but see it as a lower cost subset of active investing. Instead, we show that passive fund managers have a fundamentally different business model than active fund managers, similar to a media/advertising model where the product (entertainment/news) is given away and the audience is monetized to generate revenue. Specifically, we show that Exchange Traded Funds (ETFs) derive most of their profits from securities lending, while charging a minimal expense ratio. Findings for passive index mutual funds are similar, but attenuated. ETF managers respond to these incentives by slanting their holdings toward more profitable to lend stocks. Investors see a small benefit, as securities lending revenue is associated with somewhat lower deviation from the underlying index.

New in Print

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

Elizabeth R. Gorman, Note, When the Poor Have Nothing Left to Eat:  The United States' Obligation to Regulate American Investment in the African Land Grab, 75 Ohio St. L.J. 199 (2014).

David Groshoff, Kickstarter My Heart:  Extraordinary Popular Delusions and the Madness of Crowdfunding Constraints and Bitcoin Bubbles, 5 Wm. & Mary Bus. L. Rev. 489 (2014).

Daniel E. Herz-Roiphe, Comment, Innocent Abroad? Morrison, Vilar, and the Extraterritorial Application of the Exchange Act, 123 Yale L.J. 1875 (2014).

The Foreign Corrupt Practices Act:  A Panel at the 2012 National Lawyers Convention, Hon. William H. Pryor Jr., Moderator; Lanny A. Breuer, Mark F. Mendelsohn, Michael B. Mukasey and George T. Terwilliger III, Panelists, 51 Am. Crim. L. Rev. 433 (2014).

This Week in Securities Litigation

The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending August 8, 2014).