Securities Law Prof Blog

SEC Issues Staff Report on Accredited Investor Definition

The SEC has issued a staff report on the definition of an accredited investor.  The press release is available here.  Comments on the report can be made here.

NASAA Announces Top Investor Threats

NASAA has published its annual list of top investor threats.  This year's list includes:

1. Unregistered products/unlicensed salesmen: The offer of securities by an individual without a valid securities license should be a red alert for investors. Con artists also try to bypass stringent state registration requirements to pitch unregistered investments with a promise of “limited or no risk” and high returns.

2. Promissory Notes: In an environment of low interest rates, the promise of high-interest-bearing promissory notes may be tempting to investors, especially seniors and others living on a fixed income. Promissory notes generally are used by companies to raise capital. Legitimate promissory notes are marketed almost exclusively to sophisticated or corporate investors with the resources to research thoroughly the companies issuing the notes and to determine whether the issuers have the capacity to pay the promised interest and principal. Most promissory notes must be registered as securities with the SEC and the states in which they are sold. Average investors should be cautious about offers of promissory notes with a duration of nine months or less, which in some circumstances do not require registration. Short-term notes that appear to be exempt from securities registration have been the source of most – but not all – of the fraudulent activity involving promissory notes identified by regulators.

3. Oil/Gas Investments: Many oil and gas investment opportunities, while involving varying degrees of risks to the investor, are legitimate in their marketing and responsible in their operations. However, as in many other investment opportunities, it is not unusual for unscrupulous promoters to attempt to take advantage of investors by engaging in fraudulent practices. Fraudulent oil and gas deals frequently are structured with the limited partnership (or other legal entity) in one state, the operation and physical presence of the field in a second state, and the offerings made to prospective investors in states other than the initial two states. As a result, there is less chance of an investor dropping by a well site or a nonexistent company headquarters. Such a structure also makes it difficult for authorities and victims to identify and expose the fraud.

4. Real Estate-related Investments: Troublesome real estate-related investments identified by securities regulators included non-traded real estate investment trusts (REITs), timeshare resales, and brokered mortgage notes. These types of products often carry higher risk. For example, non-traded REITs are sold directly to investors and are not traded on exchanges (as are conventional REITs). Non-traded REITS can be risky and have limited liquidity, which may make them unsuitable for certain investors.

5. Ponzi Schemes: The premise is simple: pay early investors with money raised from later investors. The only people certain to make money are the promoters who set the Ponzi in motion.

IOSCO Publishes Statement and Survey Report on Regulation of Crowdfunding

IOSCO has published a statement and a survey report on Crowdfunding.  The press release is available here.

The statement begins:

Post the 2008 financial crisis, traditional credit providers have become increasingly constrained in their ability to make loans available for worthy investment projects, particularly with respect to small and medium enterprises. Policy makers and regulators have sought ways to encourage investment in small firms and start-ups. One of these ways has been through the use of crowdfunding, which seeks to leverage technology, inter alia, to provide an alternative channel for capital raising. However, when developing or investing in crowdfunding, IOSCO believes it is important for regulators and policy makers to balance the need for supporting economic growth and recovery with that of protecting investors.

New in Print

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

Rajeev R. Bhattacharya & Stephen J. O'Brien, Arbitrage Risk and Market Efficiency--Applications to Securities Class Actions, 55 Santa Clara L. Rev. 643 (2015).

Ryan Jones, Comment, The Fight Over Home Court: An Analysis of the SEC's Increased Use of Administrative Proceedings, 68 SMU L. Rev. 507 (2015).

Michael A. Perino, A Scandalous Perversion of Trust: Modern Lessons from the Early History of Congressional Insider Trading, 67 Rutgers U. L. Rev. 335 (2015).

Sam Thypin-Bermeo, Comment, The S.E.C. and the Damsel in Distress: A Contextual Analysis of the Duty of Best Execution, 27 Yale J.L. & Feminism 169 (2015).

Cremers & Curtis on Mutual Funds

Martijn Cremers and Quinn Curtis have posted Do Mutual Fund Investors Get What They Pay For? The Legal Consequences of Closet Index Funds on SSRN with the following abstract:

Actively managed mutual funds sell the potential to beat the market by picking stocks that are expected to outperform passive benchmarks like the S&P 500. Funds that are marketed as active vary substantially in the degree to which their portfolio holdings actually differ from the holdings of passive index funds. A purportedly active fund with a portfolio that substantially overlaps with the market is known as a closet index fund. Since closet index funds charge considerably higher fees than true index funds but provide a substantially similar portfolio, they tend to be poor investment choices. This article presents empirical evidence on closet index funds, showing that more than 10% of U.S. mutual fund assets are currently invested in closet index funds and that high cost closet index funds substantially underperform their benchmarks. We argue that persistent closet indexing implicates a number of legal issues, including possible liability for fund advisors under the Securities Act and the Investment Company Act. We conclude by discussing potential adjustments to mutual fund disclosures that could help investors identify closet index funds.

Koehler on the FCPA

Mike Koehler has posted The Uncomfortable Truths and Double Standards of Bribery Enforcement on SSRN with the following abstract:

In recent years, Foreign Corrupt Practices Act (FCPA) enforcement has become a top priority for the U.S. government, and government enforcement officials have stated that "we in the United States are in a unique position to spread the gospel of anti-corruption" and that FCPA enforcement ensures not only that the United States "is on the right side of history, but also that it has a hand in advancing that history."

However, the FCPA is not the only statute in the federal criminal code concerning bribery. Rather, the FCPA was modeled in large part after the U.S. domestic bribery statute, and when speaking of its FCPA enforcement program, the government has recognized that it "could not be effective abroad if we did not lead by example here at home." Indeed, the policy reasons motivating Congress to enact the FCPA — that corporate payments were subverting the democratic process, undermining the integrity and stability of government, and eroding public confidence in basic institutions — apply with equal force to domestic bribery.

Against this backdrop, this Article explores through various case studies and examples whether the United State’s crusade against bribery suffers from uncomfortable truths and double standards. Through these case studies and examples, readers can decide for themselves whether the U.S. government "practices what it preaches" when it comes to the enforcement of bribery laws and whether the United States is indeed "in a unique position to spread the gospel of anti-corruption."

Grundfest on SEC Administrative Proceedings

Joseph Grundfest has posted Fair or Foul? SEC Administrative Proceedings and Prospects for Reform Through Removal Legislation on SSRN with the following abstract:

The Securities and Exchange Commission has announced its intention to increase its reliance on administrative proceedings and to reduce the frequency with which it litigates in federal court. The Commission has also clearly signaled its intent to call for Chevron deference to its rulings in administrative proceedings. These developments have triggered a firestorm of controversy. Critics challenge the fairness of the agency's administrative process. They also warn of the adverse implications of excessive reliance on the agency's interpretations of the federal securities laws to the exclusion of interpretations by the federal courts.

This article addresses the possibility of removal legislation as a potential response to the Commission's initiative. It emphasizes a form of removal designed not to eliminate the administrative process, but to protect respondent rights in a manner that provides the Commission with a powerful incentive to reform its internal procedures. The proposal is also sensitive to the potential burdens that would be imposed on already crowed federal dockets. The proposed legislation would identify a category of cases that would not be removable because they raise matters that are well suited to administrative adjudication and need not clutter the federal courts' dockets. Late filing claims and allegations of violations of the Commission's net capital rules might fall in this category. A second category of cases would give rise to removal as of right because they likely implicate matters that would benefit from resolution in proceedings subject to the full panoply of rights available in federal court. Insider trading cases and allegations of bribery in violation of the Foreign Corrupt Practices Act might fall in this second category. Respondents in all other cases would have the right to petition a federal district court for an order of removal in a process modeled on Federal Rule of Procedure 23(f). In considering this petition for discretionary removal, the court could consider a range of factors including the adequacy of the Commission's procedures given the complexity of the allegations and the implications of the prosecution for respondents' businesses and careers. The discretionary nature of the review is designed to incentivize the Commission to reform its internal processes in an effort to prevent the grant of the discretionary petition in a larger percentage of proceedings.

Varottil on Securities Regulation in India

Umakanth Varottil has posted The Nature of the Market for Corporate Control in India on SSRN with the following abstract:

Given its deep and liquid stock markets, India presents a favourable environment for public takeovers. In order to develop and regulate takeover activity, India’s securities regulator the Securities and Exchange Board of India (SEBI) has enacted specific regulations. While at a broad level these regulations appear to attribute their origins to the United Kingdom (UK) and other countries that have adopted the UK model or its variants, I argue in this paper that takeover regulation in India bears fundamental differences and unique characteristics that have necessitated special treatment.

Due to the prevalence of concentrated shareholdings in Indian companies, the incidence of hostile takeovers has been negligible. While SEBI’s takeover regulations do not confer much power to the target’s board to set up takeover defences, the nature of concentration of shareholdings and other factors offer sufficient protection to incumbent shareholders and managements against corporate raiders. Hence, substantial attention in India is focused on the mandatory bid rule (MBR), which operates to grant equality of treatment to minority shareholders by conferring them an exit option in case of a change in control. India’s takeover regulations are arguably stringent in implementing the MBR. This impedes value-enhancing takeovers unless they are effected with the concurrence of the controlling shareholders, who could potentially block them.

Added to this, India’s takeover regulations confer benefits on incumbents that would impede a market for corporate control in the conventional sense. For example, promoters can take advantage of creeping acquisition limits, and also certain exemptions from the MBR when they enhance their positions in the company. Hence, while the takeover regulation overtly appears designed to engender a market for corporate control, its operation coupled with the corporate structure and culture in India attenuate the possibility of takeovers.

Relying upon the political economy of takeover regulation, and more specifically the interest group theory, my goal in this paper is to demonstrate the influence of promoters in shaping India’s takeover regulation. I seek to do so both analytically and empirically. While the Indian markets have witnessed a constant stream of takeovers, they are almost entirely organized changes of control in a friendly manner that trigger the MBR. Voluntary, unsolicited offers that are common in the more developed markets are miniscule in number in India.

National Business Law Scholars Conference Call for Papers

The National Business Law Scholars Conference (NBLSC) will be held on Thursday and Friday, June 23-24, 2016, at The University of Chicago Law School. 

This is the seventh annual meeting of the NBLSC, a conference that annually draws legal scholars from across the United States and around the world.  We welcome all scholarly submissions relating to business law.  Junior scholars and those considering entering the legal academy are especially encouraged to participate. 

To submit a presentation, email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu with an abstract or paper by February 19, 2016.  Please title the email “NBLSC Submission – {Your Name}.”  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.”  Please specify in your email whether you are willing to serve as a moderator.  We will respond to submissions with notifications of acceptance shortly after the deadline.  We anticipate the conference schedule will be circulated in May. 

Keynote Speakers:

Professor Steven L. Schwarcz, Stanley A. Star Professor of Law & Business, Duke Law School

Chief Judge Diane P. Wood, The United States Court of Appeals for the Seventh Circuit

Conference Organizers:

Tony Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia School of Law)
Jeff Schwartz (The University of Utah, S.J. Quinney College of Law)

Koehler on the FCPA

Mike Koehler has posted The Uncomfortable Truths and Double Standards of Bribery Enforcement on SSRN with the following abstract:

In recent years, Foreign Corrupt Practices Act (FCPA) enforcement has become a top priority for the U.S. government, and government enforcement officials have stated that "we in the United States are in a unique position to spread the gospel of anti-corruption" and that FCPA enforcement ensures not only that the United States "is on the right side of history, but also that it has a hand in advancing that history."

However, the FCPA is not the only statute in the federal criminal code concerning bribery. Rather, the FCPA was modeled in large part after the U.S. domestic bribery statute, and when speaking of its FCPA enforcement program, the government has recognized that it "could not be effective abroad if we did not lead by example here at home." Indeed, the policy reasons motivating Congress to enact the FCPA — that corporate payments were subverting the democratic process, undermining the integrity and stability of government, and eroding public confidence in basic institutions — apply with equal force to domestic bribery.

Against this backdrop, this Article explores through various case studies and examples whether the United State’s crusade against bribery suffers from uncomfortable truths and double standards. Through these case studies and examples, readers can decide for themselves whether the U.S. government "practices what it preaches" when it comes to the enforcement of bribery laws and whether the United States is indeed "in a unique position to spread the gospel of anti-corruption."

Dolgopolov on High-Frequency Trading

Stanislav Dolgopolov has posted Regulating Merchants of Liquidity: Market Making from Crowded Floors to High-Frequency Trading on SSRN with the following abstract:

This Article develops a framework for analyzing the very existence of regulation of market makers and singles out such key factors as externalities in the market for liquidity, vulnerability of these market participants to certain trading strategies, and their own opportunism. This framework is explored through the evolution of the market making segment of the securities industry from crowded floors to high-frequency trading, and the regulatory outlook is analyzed from the standpoint of the current market structure crisis.