Securities Law Prof Blog

Shelby on Hedge Funds

Cary Martin Shelby has posted Are Hedge Funds Still Private? Exploring Publicness in the Face of Incoherency on SSRN with the following abstract:

Academics have frequently noted that the term “public” is one of the most under theorized concepts under our federal securities laws. It has never been sufficiently defined by Congress, and issuers must instead rely on various indicators of publicness gleaned from an extensive patchwork of rules and exemptions. A prevalent indicator of publicness includes the status of investors, where investment companies that broadly offer investments to the general public, such as mutual funds and money-market funds, are required to register under a complex web of federal legislation. Relatedly, private investment companies such as hedge funds and private equity funds, which restrict offerings to elite investors, are typically considered private and are thus exempt from federal regulation. Other historical indicators include advertising, size of pool, and number of investors/clients. However, these historical indicators of publicness did not capture the increasing effect that private funds were having on the general public, such as systemic risk, retailization, and participation in the shadow banking industry. Congress responded by expanding indicators of publicness through the Dodd-Frank Act of 2010, which created new registration requirements for private funds irrespective of the status of such underlying investors.

 

Nevertheless, this article argues that Congress has improperly focused on ancillary laws, such as the Investment Advisers Act of 1940 and the Commodity Exchange Act of 1936, to integrate evolving notions of publicness in the regulation of investment companies. Congress should instead focus on the Investment Company Act of 1940 (“1940 Act”), which is the primary legislation tailored to the industry. In focusing on these ancillary laws, Congress has effectively expanded and complicated the patchwork of regulation that applies to these entities, which has further complicated the examination of publicness from a theoretical, regulatory, and practical perspective. This improper focus has also resulted in under-inclusive and over-inclusive indicators of publicness under the 1940 Act, further compromising investor protection in these burgeoning markets. An alternative framework should include the following tasks: (1) integrate emerging indicators of publicness under the 1940 Act; (2) conduct a wholesale review of the 1940 Act; and (3) monitor other strategies that could invoke public concerns such as hedge fund activism, third-party litigation funding, and investment in distressed economies such as Detroit, Puerto Rico, and Greece. This article builds on the current literature on this topic which has largely focused on the incoherency of publicness in the context of the Securities Act of 1933 and the Securities Exchange Act of 1934. This article is the first to assess whether emerging notions of publicness have been properly incorporated under the 1940 Act.

Cary Martin Shelby

Yadav on Insider Trading

Yesha Yadav has posted Insider Trading and Market Structure on SSRN with the following abstract:

This Article argues that the emergence of algorithmic trading raises a new challenge for the law and policy of insider trading. It shows that securities markets comprise a cohort of algorithmic “structural insiders” that – by virtue of speed and physical proximity to exchanges – systematically gain first access to information and play an outsize role in price formation. This Article makes three contributions. First, it introduces and develops the concept of structural insider trading. Securities markets increasingly rely on automated traders utilizing algorithms – or pre-programmed electronic instructions – for trading. Policy allows traders to enjoy important structural advantages: (i) to physically locate on or next to an exchange, shortening the time it takes for information to travel to and from the marketplace; and (ii) to receive feeds of richly detailed data directly to these co-located trading operations. With algorithms sophisticated enough to respond instantly and independently to new information, co-located automated traders can receive and trade on not-fully-public information ahead of other investors. Secondly, this Article shows that structural insider trading exhibits harms that are substantially similar to those regulated under conventional theories of corporate insider trading. Structural insiders place other investors at a persistent informational disadvantage. Through their first sight of market-moving data, structural insiders can capture the best trades and erode the profits of informed traders, reducing their incentives to participate in the marketplace. Despite the similarity in harms, however, this Article shows that doctrine does not apply to restrict structural insider trading. Rather, structural insiders thrive in full view and with regulatory permission. Thirdly, the Article explores the implications of structural insider trading for the theory and doctrine of insider trading. It shows them to be increasingly incoherent in their application. In protecting investors against one set of insiders but not another, law and policy appear under profound strain in the face of innovative markets.

Zaring on SEC Enforcement

David T. Zaring has posted Enforcement Discretion at the SEC on SSRN with the following abstract:

The Dodd-Frank Wall Street Reform Act allowed the Securities & Exchange Commission to bring almost any claim that it can file in federal court to its own Administrative Law Judges. The agency has since taken up this power against a panoply of alleged insider traders and other perpetrators of securities fraud. Many targets of SEC ALJ enforcement actions have sued on equal protection, due process, and separation of powers grounds, seeking to require the agency to sue them in court, if at all.

This article evaluates the SEC’s new ALJ policy both qualitatively and quantitatively, offering an in-depth perspective on how formal adjudication – the term for the sort of adjudication over which ALJs preside – works today. It argues that the suits challenging the SEC’s ALJ routing are without merit; agencies have almost absolute discretion as to who and how they prosecute, and administrative proceedings, which have a long history, do not threaten the Constitution. The controversy illuminates instead dueling traditions in the increasingly intertwined doctrines of corporate and administrative law; the corporate bar expects its judges to do equity, agencies, and their adjudicators, are more inclined to privilege procedural regularity.

Velikonja on SEC Enforcement

Urska Velikonja has posted Reporting Agency Performance: Behind the SEC's Enforcement Statistics on SSRN with the following abstract:

Every October, after the end of its fiscal year, the Securities and Exchange Commission releases its annual enforcement report, detailing its activity for the year. The report boasts record enforcement activity, often showing significant increases over the prior fiscal year in the number of enforcement actions brought and monetary penalties ordered. The numbers suggest that the SEC is ever tougher on securities violators. The SEC includes these statistics in its budget requests; the figures are repeated in congressional testimony, scholarship, policy proposals, and the business press.

Yet the SEC’s metrics are deeply flawed. The Article reviews fifteen years of enforcement actions and demonstrates that the widely-circulated statistics are invalid because they do not measure what they purport to measure, and unreliable because they can be manipulated all too easily. The SEC double and triple counts many of its cases and overstates the fines it orders. This Article constructs better measures. These measures reveal that the SEC’s statistics mask the fact that core enforcement has remained steady since 2002, and obscure a shift in enforcement towards easier-to-prosecute strict-liability violations.

The SEC is not alone in using misleading statistics to report its performance. Multiple reporting statutes authorize Congress to cut agencies’ budgets for failing to meet performance targets. In response, agencies report flawed metrics to protect their ability to continue enforcing the law. The Article suggests that Congress should not threaten to reduce an agency’s budget because of year-to-year fluctuations in enforcement. In addition, to make reported numbers more reliable, non-financial performance measures should not be developed by the agency. Instead, the selection and development of performance indicators should be standardized across agencies, much like financial reporting has already been standardized. Doing so would depoliticize reporting, as well as enable comparisons among agencies, both domestically and internationally.

New in Print

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

Robert P. Bartlett, III, Do Institutional Investors Value the Rule 10b-5 Private Right of Action? Evidence from Investors' Trading Behavior Following Morrison v. National Australia Bank Ltd., 44 J. Legal Stud. 183 (2015).

Allan Gustin, Comment, Investors Beware: How California Municipalities Get Away with Defrauding Investors after Nuveen Municipal High Income Opportunity Fund v. City of Alameda, 48 Loy. L.A. L. Rev. 277 (2014).

The Administrative Law of Financial Regulation, Foreword by James D. Cox & Steven L. Schwarcz; articles by John C. Coates IV, James D. Cox, Kathryn Judge, Steven L. Schwarcz, Gillian E. Metzger and David Zaring; responses by Ryan Bubb, Robert J. Jackson, Jr., Michael S. Barr and Thomas W. Merrill. 78 Law & Contemp. Probs. 1-204 (2015).

New in Print

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

Kevin Kearney, Note, Proxy.gov: A Proposal to Modernize Shareholder Lists and Simplify Shareholder Communications, 37 Hastings Comm. & Ent. L.J. 391 (2015).

Tabetha Martinez, Note, Amending Rule 10b-5: SAC Capital and the Willfully Blind Financial Executive, 37 T. Jefferson L. Rev. 447 (2015).

David M. Reeb, Yuzhao Zhang & Wanli Zhao, Insider Trading in Supervised Industries, 57 J.L. & Econ. 529 (2014).

Strader on Insider Trading

Kelly Strader has posted (Re)Conceptualizing Insider Trading: United States v. Newman and the Intent to Defraud on SSRN with the following abstract:

Insider trading law is a mens rea morass. The confusion concerning the mental element of this crime risks both the deprivation of fair notice to potential defendants and the abuse of prosecutorial discretion. In the wake of aggressive and high-profile insider trading prosecutions, these concerns are particularly salient. The Second Circuit’s decision in United States v. Newman takes an important first step in articulating the mens rea component of insider trading. Taking Newman as a starting point, this article seeks to re-conceptualize and systematize insider trading law. When articulating the mens rea of insider trading, courts should focus on the underlying concept of insider trading law: the harm caused by the breach of trust attendant to the theft of inside information. When a court clearly focuses on the core purpose of insider trading law, the second level of reform is possible. That is, we can assess the culpability of alleged inside traders by the harm that they intended to cause and assign levels of mens rea accordingly. Applying common law fraud principles, and using Model Penal Code terminology and methodology, this article identifies the elements of insider trading and attaches appropriate levels of mens rea to each element. The article concludes with a set of jury instructions that reflect these underlying principles.

New in Print

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

Onnig H. Dombalagian, Substance and Semblance in Investor Protection, 40 J. Corp. L. 599 (2015).

Michael D. Guttentag, On Requiring Public Companies to Disclose Political Spending, 2014 Colum. Bus. L. Rev. 593.

Vincent R. Johnson, International Financial Law: The Case Against Close-Out Netting, 33 B.U. Int'l L.J. 395 (2015).

Susan Lorde Martin, Compliance Officers: More Jobs, More Responsibility, More Liability, 29 Notre Dame J.L. Ethics & Pub. Pol'y 169 (2015).

Geeyoung Min, The SEC and the Courts' Cooperative Policing of Related Party Transactions, 2014 Colum. Bus. L. Rev. 663.

Matthew G. Newmann, Note, Neither Admit nor Deny: Recent changes to the Securities and Exchange Commission's Longstanding Settlement Policy, 40 J. Corp. L. 793 (2015).

Matthew A. Pei, Note, Intrastate Crowdfunding, 2014 Colum. Bus. L. Rev. 854.

Quigley, Helen. Note, Kicking the Can Down the Road: Dodd-Frank's Attempted Reform on Broker-Dealers, 59 N.Y.L. Sch. L. Rev. 561 (2014/15).

Robert N. Rapp, Plausible Cause: Exploring the Limits of Loss Causation in Pleading and Proving Market Fraud Claims under Securities Exchange Act Section 10(b) and SEC Rule 10b-5, 41 Ohio N.U. L. Rev. 389 (2015).

Margaret V. Sachs, Superstar Judges as Entrepreneurs: The Untold Story of Fraud-on-the-Market, 48 UC Davis L. Rev. 1207 (2015).

Vollmer on SEC Enforcement

Andrew N. Vollmer has posted Four Ways To Improve SEC Enforcement on SSRN with the following abstract:

The enforcement program at the Securities and Exchange Commission has been the subject of severe criticism in recent years. The occasional reforms that have been adopted have not begun to root out the deeper, structural defects with the investigation and charging process at the SEC. Reforms going to the essence of the process and the way the Division of Enforcement operates are needed.

The three fundamental problems with SEC enforcement are that the Commission and the Division of Enforcement (1) advance legal theories that are outside settled boundaries, (2) misunderstand or mischaracterize the factual record, and (3) fail to accord fair and impartial treatment to persons being investigated. The result is an unacceptably high number of cases that lack merit, meaning either that the extensive evidence collected by the SEC does not support the alleged violation or that the case relies on a legal theory that is not likely to be accepted by a court.

The SEC can do better and be more effective. It can extend more fairness and consideration to those being investigated without any damage to tough enforcement. The paper describes four ways to improve SEC enforcement:

• use established and accepted legal theories and do not base claims on new, untested liability theories,

• create an objective and balanced investigative record that considers both potential wrongdoing and innocent explanations,

• apply rigorous, neutral standards before opening investigations and initiating cases. A formal investigation should be based on credible evidence justifying a reasonable suspicion of a possible violation and on an evaluation of enforcement priorities. The Commissioners should not authorize a proceeding unless they believe a reasonable person would conclude that the SEC is more likely than not to prevail on the facts and the law and believe that a proceeding would serve broad and legitimate enforcement goals, and

• substantially shorten investigations. Each member of the staff should make an effort to limit the number of documents requested and the number of individuals called for testimony.

A fifth possible reform, discussed in an earlier article, is that the SEC should significantly narrow investigative subpoenas.

Hornuf & Schwienbacher on German Crowdinvesting

Lars Hornuf and Armin Schwienbacher have posted Funding Dynamics in Crowdinvesting on SSRN with the following abstract:

We use hand-collected data from four German crowdinvesting portals to analyze what determines individual investment decisions in crowdinvesting. In contrast with the crowdfunding campaigns on Kickstarter where the typical pattern of project support is U-shaped, we find crowdinvesting dynamics to be rather L-shaped under a first-come, first-serve mechanism and U-shaped under an auction mechanism. The evidence shows that investors base their decisions on information provided by the entrepreneur in form of updates during the campaign and by the investment behavior and comments of other crowd investors. Moreover, we find evidence for a collective attention effect and herding behavior.

Katz, Bommarito, Soellinger & Chen on Securities Litigation

Daniel Martin Katz, Michael James Bommarito II, Tyler Soellinger, and James Ming Chen have posted Law on the Market? Evaluating the Securities Market Impact of Supreme Court Decisions on SSRN with the following abstract:

Do judicial decisions affect the securities markets in discernible and perhaps predictable ways? In other words, is there “law on the market” (LOTM)? This is a question that has been raised by commentators, but answered by very few in a systematic and financially rigorous manner. Using intraday data and a multiday event window, this large scale event study seeks to determine the existence, frequency and magnitude of equity market impacts flowing from Supreme Court decisions.

We demonstrate that, while certainly not present in every case, "law on the market" events are fairly common. Across all cases decided by the Supreme Court of the United States between the 1999-2013 terms, we identify 79 cases where the share price of one or more publicly traded company moved in direct response to a Supreme Court decision. In the aggregate, over fifteen years, Supreme Court decisions were responsible for more than 140 billion dollars in absolute changes in wealth. Our analysis not only contributes to our understanding of the political economy of judicial decision making, but also links to the broader set of research exploring the performance in financial markets using event study methods.

We conclude by exploring the informational efficiency of law as a market by highlighting the speed at which information from Supreme Court decisions is assimilated by the market. Relatively speaking, LOTM events have historically exhibited slow rates of information incorporation for affected securities. This implies a market ripe for arbitrage where an event-based trading strategy could be successful.

New in Print

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

Tristan R. Brown, Note, Nobody Goes to Jail: The Economics of Criminal Law, Securities Fraud, and the 2008 Recession, 41 New Eng. J. on Crim. & Civ. Confinement 343 (2015).

Kerry L. Burke, II, Note, Fear Based Motivation: Dodd-Frank's New Sentencing Guidelines for Insider Trading Lead to an Extension of Tippee Liability, 41 New Eng. J. on Crim. & Civ. Confinement 395 (2015).

Cadesby B. Cooper, Note, Rule 10b-5 at the Intersection of Greenwash and Green Investment: The Problem of Economic Loss, 42 B.C. Envtl. Aff. L. Rev. 405 (2015).

Michael Evans, Note, Adding a Due Diligence Defense to Section 13(b) and Rule 13b2-2 of the Securities Exchange Act of 1934, 72 Wash. & Lee L. Rev. 901 (2015).

Alexander D. Flaschsbart, Note, Municipal Bonds in Bankruptcy Section 902(2) and the Proper Scope of "Special Revenues" in Chapter 9, 72 Wash. & Lee L. Rev. 955 (2015).

Merritt B. Fox, Halliburton II: It All Depends on What Defendants Need to Show to Establish No Impact on Price, 70 Bus. Law. 437 (2015).

Sandeep Gopalan & Katrina Hogan, Ethical Transnational Corporate Activity at Home and Abroad: A Proposal for Reforming Continuous Disclosure Obligations in Australia and the United States, 46 Colum. Hum. Rts. L. Rev. 1 (2015).

Anita K. Krug, Investing and Pretending, 100 Iowa L. Rev. 1559 (2015).

Steven W. Lippman, Comment, A Corporation's Securities Litigation Gambit: Fee-Shifting Provisions that Defend Against Fraud-on-the-Market, 49 U. Rich. L. Rev. 1321 (2015). 

Jeffrey Manns, The Reciprocal Oversight Problem, 100 Iowa L. Rev. 1619 (2015).

Janna Mouret, Comment, Shelter from the Retaliation Storm, 52 Hous. L. Rev. 1529 (2015).

Steven L. Schwarcz, Derivatives and Collateral: Balancing Remedies and Systemic Risk, 2015 U. Ill. L. Rev. 699.

Lily D. Vo, Comment, Substituted Compliance: An Alternative to National Treatment for Cross-Border Transactions and International Financial Entities, 13 Geo. J.L. & Pub. Pol'y 85 (2015).

Fourth Annual Institute for Investor Protection Conference: The New Landscape of Securities Fraud Class Actions, Foreword by Shelley Dunck; remarks by Thomas Goldstein, Judge Shira A. Scheindlin and Jeffrey Paul Mahoney; articles by David Tabak, Marc I. Gross, Leigh Handelman Smollar, Wendy Gerwick Couture and Charles W. Murdock. 46 Loy. U. Chi. L.J. 447-582 (2015).

Institute for Law and Economic Policy Symposium: Business Litigation and Regulatory Agency Review in the Era of the Roberts Court, Articles by John C. Coates IV, Donald C. Langevoort, Geoffrey Miller, Ann M. Lipton, Yoon-Ho Alex Lee, Donna M. Nagy, Brian T. Fitzpatrick, David H. Webber, Deborah A. DeMott and Mark Lebovitch, 57 Ariz. L. Rev. 1-309 (2015).