Securities Law Prof Blog

Haan on NAM v. SEC

Sarah Haan has an interesting post on Balkination about D.C. Circuit's rehearing of NAM v. SEC, the 2014 case in which the court threw out part of the SEC’s Conflict Minerals Rule on First Amendment grounds.  The post addresses the issue in the case:  Can the D.C. Circuit apply a commercial speech test to a securities disclosure rule?

Koehler on the FCPA and SEC Forum Selection

Mike Koehler has an interesting post on the Foreign Corrupt Practices Act on the FCPA Professor Blog.  The post discusses how the SEC determines whether as a civil action in federal court or an SEC administrative proceeding.  It's well worth a read.

New in Print

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

Carlos Berdejo, Revisiting the Voting Prohibition in Bond Workouts, 89 Tul. L. Rev. 541 (2015).

Hunter DeKoninck, Note, Breaking the Curse: A Multilayered Regulatory Approach, 22 Ind. J. Global Legal Stud. 121 (2015).

Susan B. Heyman, Rethinking Regulation Fair Disclosure and Corporate Free Speech, 36 Cardozo L. Rev. 1099 (2015).

Jonathan Lindenfeld, Note, The CFTC's Substituted Compliance Approach: An Attempt to Bring about Global Harmony and Stability in the Derivatives Market, 14 J. Int'l Bus. & L. 125 (2015).

Nicole Mirjanich, Comment, Digital Money: Bitcoin's Financial and Tax Future Despite Regulatory Uncertainty, 64 DePaul L. Rev. 213 (2014).

Neal Perlman, Note, Section 21(a) Reports: Formalizing a Functional Release Valve at the Securities and Exchange Commission, 69 N.Y.U. Ann. Surv. Am. L. 887 (2014).

Gregory Scopino, The (Questionable) Legality of High-Speed "Pinging" and "Front Running" in the Futures Markets, 47 Conn. L. Rev. 607 (2015).

Elan W. Silver, Comment, Reaching the Right Investors: Comparing Investor Solicitation in the Private-Placement Regimes of the United States and the European Union, 89 Tul. L. Rev. 719 (2015).

Robert H. Steinhoff, Comment, The Next British Invasion Is Securities Crowdfunding: How Issuing Non-Registered Securities Through the Crowd Can Succeed in the United States, 86 U. Colo. L. Rev. 661 (2015).

Natalie A. Turchi, Note, Restructuring a Sovereign Bond Pari Passu Work-Around: Can Holdout Creditors Ever Have Equal Treatment, 83 Fordham L. Rev. 2171 (2015).

Anderson on Insider Trading

John P. Anderson has posted Solving the Paradox of Insider Trading Compliance on SSRN with the following abstract:

Regulators demand the impossible when they require issuers to design and implement an effective insider trading compliance program because insider trading is a crime that neither Congress nor the SEC has defined with any specificity. This problem of uncertainty is then compounded by the threat of heavy civil and criminal sanctions for violations. Placed between this rock and hard place, issuers tend to adopt over-broad insider trading compliance programs that come at a heavy price in terms of corporate culture, cost of compensation, share liquidity, and cost of capital. The irony is that, since all of these costs are ultimately passed along to the shareholders, insider trading enforcement under the current regime has precisely the opposite of its intended effect. This is the paradox of insider trading compliance for issuers, just one more symptom of a dysfunctional insider trading enforcement regime that is in need of a dramatic overhaul.

There are a number of conceivable paths to resolving this paradox. The most obvious solution would be for the SEC to issue a rule or for Congress to promulgate a statute defining insider trading with greater specificity. But while simply fixing definitions to the elements of insider trading under the current regime would improve matters, this Article calls for a more radical solution. It is suggested that the current enforcement regime be liberalized to permit insider trading where the issuer approves the trade in advance and has disclosed that it permits such trading pursuant to regulatory guidelines. It is argued that such reform would lead to a more rational, efficient, and just insider trading enforcement regime. Moreover, by aligning the interests of issuers, shareholders, and regulators, it would also offer the most effective solution to the paradox of insider trading compliance.

Koehler on the FCPA

Mike Koehler has posted Ten Seldom Discussed Foreign Corrupt Practices Act Facts that You Need to Know on SSRN with the following abstract:

Much is written about the Foreign Corrupt Practices Act. However, amid the clutter of enforcement agency rhetoric and resolution documents not subjected to any meaningful judicial scrutiny as well as the mountains of FCPA Inc. marketing material touting the next compliance risk, there are certain FCPA facts that are seldom discussed.

Yet such facts, covering the entire span of the FCPA — from the statute’s enactment, to its statutory provisions, to FCPA enforcement, to FCPA reform, to the FCPA industry itself — occasionally bear repeating.

This article does that by highlighting ten seldom discussed FCPA facts that you need to know.

New in Print

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

Aaron S. Davidowitz, Note, Abandoning the 'Mosaic Theory': Why the 'Mosaic Theory' of Securities Analysis Constitutes Illegal Insider Trading and What to Do about It, 46 Wash. U. J.L. & Pol'y 281 (2014).

Alicia J. Davis, Market Efficiency and the Problem of Retail Flight, 20 Stan. J.L. Bus. & Fin. 36 (2014).

Francis J. Facciolo, Do I Have a Bridge for You: Fiduciary Duties and Investment Advice, 17 U. Pa. J. Bus. L. 101 (2014).

Nan S. Ellis & Steven B. Dow, Attaching Criminal Liability to Credit Rating Agencies: Use of the Corporate Ethos Theory of Criminal Liability, 17 U. Pa. J. Bus. L. 167 (2014)

Cody R. Friesz, Note, Crowdfunding & Investor Education: Empowering Investors to Mitigate Risk & Prevent Fraud, 48 Suffolk U.L. Rev. 131 (2015).

Priyah Kaul, Note, Admit or Deny: A Call for Reform of the SEC's "Neither-Admit-Nor-Deny" Policy, 48 U. Mich. J.L. Reform 535 (2015).

Michael P. Marek & Robert A. Wilson, A Future for Reserve-Based Lending in Emerging Markets? Limitations of the Traditional Model, 10 Tex. J. Oil Gas & Energy L. 149 (2014).

Nathan R. Schuur, Note, Fraud Is Already Illegal: Section 621 of the Dodd-Frank Act in the Context of the Securities Laws, 48 U. Mich. J.L. Reform 565 (2015).

Will White, Note, Oil, Corruption, and the Department of Justice: FCPA Enforcement and the Energy Industry, 10 Tex. J. Oil Gas & Energy L. 181 (2014).

2014 Symposium, Never the Twain: Emerging U.S.-Chinese Business Law Relations. Articles by Franklin Allen, Jun "QJ" Qian, Jerome A. Cohen, Li Guo, Nicholas Calcina Howson, Vikramaditya S. Khanna, Jiangyu Wang and Angela Huyue Zhang, 47 Cornell Int'l L.J. 499-707 (2014).

Chair White's Testimony on the Fiscal Year 2016 Budget Request of the U.S. Securities and Exchange Commission

Details available here.

SEC Announces Outreach Programs to Help Firms Comply With Regulation Systems Compliance and Integrity

Details available here.

IOSCO Publishes Results of Survey on Anti-Fraud Messaging Employed by Regulators

Details are available here.

Anderson on Insider Trading

John P. Anderson has posted What's the Harm in Issuer-Licensed Insider Trading? on SSRN with the following abstract:

There is growing support for the claim that issuer-licensed insider trading (when the insider’s firm approves the trade in advance and has disclosed that it permits such trading pursuant to published guidelines) is economically efficient, and morally harmless. But for the last 35 years many scholars and the U.S. Supreme Court have relied on “The Law of Conservation of Securities” to rebut claims that insider trading can be victimless. This law is purported to show that every act of insider trading, even those licensed by the issuer, causes an identifiable harm to someone. This essay argues that the Law of Conservation of Securities is not helpful to answering the moral question of whether insider trading is a victimless crime because it either proves too much or too little. It either proves that all profitable trades (or profitable trade omissions) in advance of firms’ material disclosures are morally impermissible (an absurdity), or it tells us nothing at all about the moral permissibility of such trades. Of course, once the Law of Conservation of Securities is neutralized, other moral criticisms of issuer-licensed insider trading that rely on this law also fail. Professor Leo Katz’s claim that morality does not permit one to consent to a system that openly allows issuer-licensed insider trading is offered as one example of an argument that fails once considered in light of a proper understanding of the Law of Conservation of Securities.

Hu on Financial Innovation

Henry T. C. Hu has posted Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency on SSRN with the following abstract:

Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (e.g., “empty voting”), the control rights of debtholders (e.g., “empty crediting” and “hidden interests”/“hidden non-interests”), and of takeover practices (e.g., “hidden (morphable) ownership” to avoid Schedule 13D blockholder disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used — the “descriptive mode,” which relies on “intermediary depictions” of objective reality — is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges — a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC — also creates difficulties. This new parallel public disclosure system, developed by bank regulators in the shadow of Basel and the Dodd-Frank Act and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.

As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006-2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012-2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.

As to decoupling, the Article proceeds to analyze some key post-2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS Corp. opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The analytical framework's "empty voter with negative economic exposure" concept is addressed in a dual class share context. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts — and the pressing need for more action by the SEC. In addition, at the time the debt decoupling research was introduced, available evidence as to the significance of empty creditor, related hidden interest/hidden non-interest matters, and hybrid decoupling was limited. This Article helps address that gap.

As to information, the Article begins by outlining the calls for reform associated with the 2012-2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information — consisting of two parallel regulatory universes with divergent ends and means — is unsustainable in the long run and involve certain matters that need statutory resolution. In the interim, however, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken.

 

New in Print

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

Christian At, Sylvain Beal & Pierre-Henri Morand, Freezeout, Compensation Rules, and Voting Equilibria, 41 Int'l Rev. L. & Econ. 91 (2015).

Ian Ayres & Quinn Curtis, Protecting Consumer Investors by Facilitating "Improved Performance" Competition, 2015 U. Ill. L. Rev. 1.

Clint. Hale, Comment, The Great and Powerful FAA: Why Schwab's Class Action Waiver Should Have Been Enforced Over FINRA's Rules, 42 Pepp. L. Rev. 109 (2014).

Nina Hart, Note, Moving at a Glacial Pace: What Can State Attorneys General Do about SEC Inattention to Nondisclosure of Financially Material Risks Arising from Climate Change?, 40 Colum. J. Envtl. L. 99 (2015).

Christine Hurt, Pricing Disintermediation: Crowdfunding and Online Auction IPOs, 2015 U. Ill. L. Rev. 217.

Zoe A. Jones, Note, Left Out in the Cold: Freezing Innocent Spouses' Assets in SEC Actions, 24 Cornell J.L. & Pub. Pol'y 381 (2014).

National Business Law Scholars Conference: Reopened Call for Papers

Details are available here.

Anderson on Insider Trading

John P. Anderson has posted Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to Rational Reform on SSRN with the following abstract:

The SEC is poised to take action in the face of compelling evidence that corporate insiders are availing themselves of rule-sanctioned Trading Plans to beat the market. These Trading Plans allow insiders to trade while aware of material nonpublic information. Since the market advantage insiders have enjoyed from Plan trading can be traced to loopholes in the current regulatory scheme, increased enforcement of the existing rules cannot address the issue. But simply tweaking the existing rule structure to close these loopholes would not work either. This is because the SEC adopted the current rule as a part of a delicate compromise with the courts in the “use versus possession” debate over the proper test of scienter for insider trading liability. The current rule reflects the SEC’s preferred test (mere “awareness”), but it provides for Trading Plans as an affirmative defense in order to pass judicial scrutiny. Thus, any attempt to simply close the loopholes in Trading Plans while maintaining the awareness test would upset this delicate compromise. Only a comprehensive change to the current insider trading enforcement regime can address the issue.

The reform proposed here begins with the recognition that Plan trading is generally done with the firm’s awareness and consent. Such trading is therefore a form of Non-Promissory Insider Trading. Since there are strong arguments that there is no moral wrong or economic harm done by Non-Promissory Insider Trading, the regulatory regime should openly embrace it as a permissible form of compensation through firm-sanctioned Modified Trading Plans, so long as there is adequate disclosure. Though such liberalization would represent a radical departure from the current enforcement regime, it would be within the SEC’s rulemaking authority and would be consistent with Supreme Court precedent. Most importantly, it would dramatically improve the current enforcement regime in terms of justice, clarity, efficiency and coherence.

It is sometimes said there is nothing like a good crisis for effecting much needed change. The current media attention and public scrutiny over corporate insiders’ exploitation of rule-sanction Trading Plans may be just the crisis to spur the SEC to adopt a more rational and just approach to insider trading enforcement. The outline for such reform has been proposed here.

Roiter on Mutual Fund Governance

Eric D. Roiter has posted Disentangling Mutual Fund Governance from Corporate Governance on SSRN with the following abstract:

This Article addresses mutual fund governance, explaining how in recent years it has become entangled with the norms of corporate governance. There are two essential features of mutual funds, however, that differentiate them fundamentally from ordinary corporations. First, mutual funds are not only separate legal entities; they are also financial products (or services). Mutual fund investors are therefore both shareholders and customers. This stands, of course, in marked contrast to ordinary corporations, whose shareholders and customers are two distinct and separate groups. Second, mutual funds are fundamentally different owing to the right of redemption, a right of investors to withdraw their capital. The right of redemption is not only a financial right, it is also essential to the governance of mutual funds, imposing direct discipline upon a fund’s adviser. In contrast, redemption rights are antithetical to the organizing principles of ordinary corporations, whose economic viability in the markets depends upon the ability to lock in shareholders’ capital. This Article examines how recent mutual fund rulemaking by the SEC rests on mistaken comparisons to corporate governance, and makes recommendations as to how the SEC can improve its approach. In particular, this Article proposes that the SEC take steps to allow two new types of mutual funds that can compete in the marketplace alongside traditional mutual funds. One type is the unitary investment fund, which would retain fund boards solely to serve as monitors of fund advisers’ legal and fiduciary duties, while leaving judgments over the competitiveness of an adviser’s fees to the marketplace. The other is a “crowdfunded” mutual fund that would allow for investors themselves, rather than investment advisers, to initiate and organize funds.

Brav & Heaton on Event Studies in Securities Litigation

Alon Brav and J.B. Heaton have posted Event Studies in Securities Litigation: Low Power, Confounding Effects, and Bias on SSRN with the following abstract:

Are event studies in securities litigation reliable? Basic’s fraud-on-the-market presumption sparked the wide use of event studies in securities litigation, and the Supreme Court’s 2014 decision in Halliburton will make event studies even more important, as litigants fight over the existence of a price impact before class certification. What is interesting about the use of the event studies in securities litigation, however, is that the methodology used in court differs from the methodology long-used in academic research. With few exceptions, securities litigation event studies are single-firm event studies, while almost all academic research event studies are multi-firm event studies. Multi-firm event studies are generally accepted in financial economics research, and peer-reviewed journals contain them by the hundreds. By contrast, single-firm event studies – the mainstay of modern securities fraud litigation – are almost nonexistent in peer-reviewed journals.

Importing a methodology that economists developed for use with multiple firms into a single-firm context creates three substantial difficulties. First, single-firm event studies suffer from a severe signal-to-noise problem in that they lack statistical power to detect price impacts unless the price impacts are quite large. Inattention to statistical power lowers the deterrent effect of the securities laws by giving a “free pass” to some economically meaningful price impacts and may encourage more small- and mid-scale fraud on markets than is socially optimal given the costs of litigation. Second, single-firm event studies do not average away confounding effects. While this problem is well known, some courts have unrealistic expectations of litigants’ ability to quantitatively decompose observed price impacts into those caused by alleged fraud and those unrelated to alleged fraud. Third, low statistical power and confounding effects combine to generate sizeable upward bias in detected price impacts and therefore in damages. To improve the accuracy of adjudication in securities litigation, we suggest that litigants report the statistical power of their event studies, that courts allow litigants flexibility to deal with the problem of confounding effects, and that courts and litigants consider the possibility of upward bias in the detection of price impacts and the estimation of damages.

Lin on Investor Protection

Tom C. W. Lin has posted Reasonable Investor(s) on SSRN with the following abstract:

Much of financial regulation is built on a convenient fiction. In regulation, all investors are identically reasonable investors. In reality, they are distinctly diverse investors. This fundamental discord has resulted in a modern financial marketplace of mismatched regulations and misplaced expectations — a precarious marketplace that has frustrated investors, regulators, and policymakers.

This Article examines this fundamental discord in financial regulation and offers a better framework for thinking anew about investors and investor protection. This Article presents an original typology of heterogeneous investors that exposes the common regulatory fallacy of homogeneous investors. It explains that the simple paradigm of perfectly reasonable investors, while profoundly seductive, is an inadequate foundation for designing investor protection policies in a complex, contemporary marketplace. It demonstrates how this critical divergence has harmed investors and regulators in the modern, high-tech marketplace. To begin addressing such harms, this Article advocates for a novel algorithmic investor typology as an important step towards better reconciling financial regulation with financial reality. Specifically, it illustrates how core concepts of financial regulation like regulatory design, disclosure, and materiality can pragmatically improve as a result of the new typology. This Article ultimately argues that in order to better protect all investors, financial regulation must shift from an elegantly false, singular view of reasonable investors towards a more honest, pluralistic view of diverse investors — from protecting one type of reasonable investors to protecting all types of reasonable investors.

This Week in Securities Litigation

The SEC Actions Blog has compiled This Week In Securities Litigation (Week ending May 1, 2015).

SEC Announces Compliance Outreach Program Seminars for Investment Adviser and Investment Company Senior Officers

Details are available here.

SEC Proposes Rules to Require Companies to Disclose the Relationship Between Executive Pay and a Company’s Financial Performance

Details are available here.