Securities Law Prof Blog

Coffee on Entrepreneurial Litigation

John C. Coffee Jr. has posted The Globalization of Entrepreneurial Litigation: Law, Culture, and Incentives on SSRN with the following abstract:

Entrepreneurial litigation is litigation in which the plaintiff’s attorney functions as a risk-taking entrepreneur, financing, organizing, managing, and settling the litigation on behalf of numerous clients (who generally hold “negative value” claims), but with only modest oversight from the clients. Although well established in the United States (and to a lesser extent in Australia, Canada, and Israel), it has long been resisted in Europe, the U.K., and elsewhere, where local rules both preclude the opt-out class action, contingent fees, and jury trials in civil cases, and mandate a “loser pays” rule with respect to legal fees. Yet, despite these obstacles, entrepreneurial litigation appears now to be coming to both Europe and Japan, with large settlements having recently been struck in securities litigation (most notably $1.4 billion this year in the Fortis litigation). Perhaps surprisingly, the driving force leading this transition has been American plaintiff law firms, who do not litigate the action, but do organize it, using third party funding and litigation insurance as functional substitutes for the contingent fee and the American Rule on fee shifting.

Some have explained this phenomenon as a response to the U.S. Supreme Court’s decision in Morrison v. National Australia Bank Ltd., which barred U.S. courts from exercising extraterritorial jurisdiction over the federal securities laws, and thereby arguably encouraged other jurisdictions to compete for the cases that formerly were litigated in the U.S. Although the Morrison decision was a catalyst, this article rejects the claim that foreign jurisdictions are engaged in any competition for securities litigation, finding instead that defense counsel have found that they can sweep absent class members into a low cost settlement class action under The Netherland’s WCAM statute by discriminating between “active” and “non-active” class members.

This article examines these developments and the issues they pose for Europe and Japan. Ultimately, despite early successes, the long-term question becomes: How successful can legal entrepreneurs be when operating in a different and skeptical legal culture?

Baghai & Becker on Credit Ratings

Ramin Baghai and Bo Becker have posted Reputation and Competition in the Credit Ratings Market - Evidence from Commercial Mortgage-Backed Securities on SSRN with the following abstract:

We examine a quasi-experimental setting where a rating agency (S&P) is completely shut out of a large segment of the commercial mortgage-backed securities market for more than one year, following a procedural mistake. We exploit the fact that many tranches of CMBS deals have multiple ratings. Subsequent to the drop in its business volume (but not before), S&P assigned higher ratings than other raters, in particular for large deals and for deals from important issuers. The results suggest that issuing optimistic ratings is a strategy that can be used by a rating agency with a weak reputation to gain market share in a market with strong competition.

SEC to Hold Annual Government-Business Forum on Small Business Capital Formation on November 17

Details available here.

SEC Proposes Amendments to Require Use of Universal Proxy Cards that Would Include All Board Nominees

Details available here.

SEC Adopts Final Rules to Facilitate Intrastate and Regional Securities Offerings

Details available here.

Ibrahim on Crowdfunding

Darian M. Ibrahim has posted Crowdfunding Without the Crowd on SSRN with the following abstract:

The final crowdfunding rules took three years for the SEC to pass, but crowdfunding — or offering securities over the Internet — is now a reality. Will crowdfunding be a wasteland of startups who cannot find other funding, only to be floated until failure by rubes who are easily parted with their money? This Essay argues that crowdfunding has a much better chance of success if we abandon the idea that it does (and should) employ “crowd-based wisdom” at all. Instead, crowdfunding needs intermediation by experts just like the successful forms of entrepreneurial finance (e.g., angel investing and venture capital) that have preceded it.

The final SEC rules move us in the right direction. At the heart of the crowdfunding experience lies the “funding portal,” or the website that will actually list the startup as an investment opportunity. As originally promulgated, funding portals were to be almost completely passive entities who could not subjectively “curate” (or screen) the startups that wished to list on the site. The final SEC rules permit some funding portal curation, which will allow funding portals to list better quality startups.

As I will argue, however, this permitted curation does not go far enough, given a funding portal’s justified concern over becoming a broker-dealer. Thus, I suggest ways in which expert investors participating in crowdfunding offerings can and should use message boards and investment clubs to further guide unsophisticated investors toward better investment choices. At the same time, I acknowledge potential liability concerns for experts who do so. Together, on balance, careful curation by funding portals and expert investors will give crowdfunding a better chance of success.

Adrian, Fleming & Vogt on Market Liquidity

Tobias Adrian, Michael J. Fleming, and Erik Vogt have posted Market Liquidity after the Financial Crisis on SSRN with the following abstract:

This paper examines market liquidity in the post-crisis era, in light of concerns that regulatory changes might have reduced banks’ ability and willingness to make markets. We begin with a discussion of the broader trading environment, including a discussion of regulations and their potential effect on dealer balance sheets and market making, but also considering plausible alternative drivers of market liquidity. Using both high- and low-frequency data on U.S. Treasury securities and corporate bonds, we then investigate empirically whether liquidity has in fact deteriorated, and we review market behavior around three key post-crisis events. Overall, our findings, and those of recent papers we survey, do not suggest a significant decline in bond market liquidity. We conclude with ideas for future research, including the evaluation of additional data, methodological improvements, and closer analyses of liquidity risk and the interplay between market liquidity and funding liquidity.

de Fontenay, Meyer & Gulati on Stock Exchanges

Elisabeth de Fontenay, Josefin Meyer and G. Mitu Gulati have posted The Sovereign-Debt Listing Puzzle on SSRN with the following abstract:

The claim that stock exchanges perform certification and monitoring roles in securities offerings is pervasive in the legal and financial literatures. This article tests the validity of this “bonding hypothesis” in the sovereign-bond market — one of the oldest and largest securities markets in the world. Using data on sovereign-bond listings for the entire post-World War II period, we provide the first comprehensive report on sovereigns’ historical listing patterns. We then test whether a sovereign bond issue’s listing jurisdiction affects its yield at issuance, as the bonding hypothesis would predict. We find little evidence of bonding in today’s sovereign-debt market. Instead, we hypothesize that sovereign-bond listings are primarily a form of regulatory arbitrage. Because certain investors may be restricted to investing abroad only in listed securities, sovereigns are incentivized to list their bonds, but to seek out the least restrictive exchange that qualifies.

Deputy Director and Deputy Chief Economist Bauguess on Big Data

On October 21, 2016 at the Midwest Region Meeting of the American Accounting Association in Chicago, Illinois, Scott W. Bauguess, Deputy Director and Deputy Chief Economist of the SEC's Division of Economic and Risk Analysis delivered a speech entitled Has Big Data Made Us Lazy?, as part of the event.

New in Print

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

Sang Yop Kang, 'Generous Thieves': The Puzzle of Controlling Shareholder Arrangements in Bad-Law Jurisdictions, 21 Stan. J.L. Bus. & Fin. 57 (2015).

Joseph Quincy Patterson, Note, Many Key Issues Still Left Unaddressed in the Securities and Exchange Commission's Attempt to Modernize Its Rules of Practice, 91 Notre Dame L. Rev. 1675 (2016).

Susanna Kim Ripken, Paternalism and Securities Regulation, 21 Stan. J.L. Bus. & Fin. 1 (2015).

Michael Vignone, Note, Inside Equity-Based Crowdfunding: Online Financing Alternatives for Small Businesses, 91 Chi.-Kent L. Rev. 803 (2016).

Informing Investors of Climate Risk: The Impact of Securities Laws in the Environmental Context, Tom Mounteer, moderator; Leah A. Dundon, Kevin A. Ewing, Elizabeth Lewis, panelists. 46 Envtl. L. Rep. News & Analysis 10455-10465 (2016).

Chair White on Prioritizing Regulatory Enhancements for the U.S. Treasury Market

On October 24, 2016 at the The Evolving Structure of the U.S. Treasury Market Second Annual Conference in New York, New York, Chair Mary Jo White delivered a keynote address on Prioritizing Regulatory Enhancements for the U.S. Treasury Market.

Commissioner Piwowar on Economic Analysis

On October 21 at the 2016 Conference on Auditing and Capital Markets in Washington, D.C., Commissioner Michael S. Piwowar offered remarks on the importance of economic analysis in regulatory processes.

John W. Berry Named Associate Regional Director for Enforcement in Los Angeles Office

Details available here.

Palmiter on Mutual Funds

Alan R. Palmiter has posted The Mutual Fund Investor on SSRN with the following abstract:

This chapter for an upcoming handbook on mutual funds (by Edward Elgar Publishing) offers an overview of the mutual fund market and the investors who inhabit it. On the supply side, mutual funds hold $16 trillion in financial assets and have become the largest component of our private retirement system. On the demand side, mutual fund ownership has become widespread, with 90 million fund-owning households composed mostly of middle-class, educated, and older investors.

The portrait of mutual fund investors, painted by a large and consistent body of academic and government studies over the past few decades, is disturbing. Fund investors are mostly ignorant of fund characteristics, inattentive to risks (and opportunities) of different asset classes, and often insensitive to fund fees. Instead, fund investors tend to chase past returns and attempt to time the market. As a result, the average returns for fund investors (both in stock and bond funds) have significantly trailed benchmark market returns – according to some studies, by several percentage points.

The role of financial intermediaries in the mutual fund market is also disconcerting. Often, financial advisers give fund investors conflicted advice, leading them to choose high-cost, under-performing funds on which the advisers garner commissions. Although some employers are shifting employees to low-cost, risk-appropriate balanced funds, many 401(k) plans remain less than optimal. Moreover, fund companies tout higher-cost actively managed funds, despite growing evidence that most, if not all, fund managers are unable to beat the market – particularly after fees.

There are, however, glimmers of hope. Recently, many fund investors have moved to lower-cost index funds – reflecting a new sensitivity both to the importance of low costs and to the empty promise of active fund management. Target date funds have also established a beachhead in the 401(k) market. The recent clarion calls of the financial press reinforces these trends, as a growing drumbeat of stories emphasizes the importance of fund fees, the counter-productivity of trying to beat or time the market, and the emptiness of chasing past fund performance.

Director Wyatt on the Office of Compliance Inspections and Examinations

On Oct. 17, 2016 at the National Society of Compliance Professionals 2016 National Conference in Washington, D.C., Marc Wyatt, Director of the SEC's Office of Compliance Inspections and Examinations delivered a keynote address entitled Inside the National Exam Program in 2016 that detailed the current state of the OCIE.

 

New in Print

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

Christina Batog, Note, Blockchain: A Proposal to Reform High Frequency Trading Regulation, 33 Cardozo Arts & Ent. L.J. 739 (2015).

Laura Bower Braunsberg, Asking the Right Question: The Mixed Consideration Denominator Problem, 40 Del. J. Corp. L. 989 (2016).

Jan De Bruyne, How the Threat of Holding Credit Rating Agencies Liable Might Increase the Accuracy of Their Ratings, 52 Willamette L. Rev. 173 (2015).

Levon Garslian, Towards a Universal Model Regulatory Framework for Derivatives: Post-Crisis Conclusions from the United States and the European Union, 37 U. Pa. J. Int'l L. 941 (2016).

Sarah R. Sandy & Erin J. Tilton, Community Development Districts as Creditors: The Role of Separation of Powers in Protecting the District's Fiscal Sovereignty, 45 Stetson L. Rev. 377 (2016).

Linn White, Title III of the JOBS Act: Congress Invites Investor Abuse and Leaves the SEC Holding the Bag, 52 Willamette L. Rev. 227 (2015).

Bromberg, Gilligan & Ramsay on Market Manipulation Sanctions

Lev Bromberg, George Gilligan, and Ian Ramsay have posted Enforcement of Financial Market Manipulation Laws: An International Comparison of Sanctions on SSRN with the following abstract:

Market manipulation has been a significant focus of regulators, the media and others in many countries, with widespread allegations of market manipulation, not just relating to securities, but in relation to interest rates, foreign exchange and commodities. This working paper presents the results of a detailed comparative empirical study of sanctions imposed for trade-based market manipulation in Australia, Canada (Ontario), Hong Kong, Singapore and the United Kingdom (UK). The comparative study is based on a dataset of around 250 sanctions imposed on individuals and companies found or alleged to have contravened market manipulation provisions across the jurisdictions. The study compares the type, magnitude and frequency of sanctions (custodial sentences, banning orders and various pecuniary sanctions) imposed by statutory bodies and the courts for market manipulation in the selected jurisdictions in the ten year period from 1 January 2006 to 31 December 2015. The study also examines pecuniary sanctions imposed relative to illegal profits obtained by the defendants. Key findings include substantial differences between the jurisdictions in the use of sanctions, with much higher use of custodial sentences in Hong Kong, Singapore and Australia, much higher use of banning orders in Ontario and the UK imposing the highest median pecuniary sanctions.

Christensen, Hail & Leuz on Securities Regulation in the European Union

Hans Bonde Christensen, Luzi Hail, and Christian Leuz have posted Capital-Market Effects of Securities Regulation: Prior Conditions, Implementation, and Enforcement on SSRN with the following abstract:

We examine the capital-market effects of changes in securities regulation in the European Union (EU) aimed at reducing market abuse and increasing transparency. To estimate causal effects for the population of EU firms, we exploit that for plausibly exogenous reasons, like national legislative procedures, EU countries adopted these directives at different times. We find significant increases in market liquidity, but the effects are stronger in countries with stricter implementation and traditionally more stringent securities regulation. The findings suggest that countries with initially weaker regulation do not catch up with stronger countries, and that countries diverge more upon harmonizing regulation.

Senator Elizabeth Warren Urges President Obama to Replace Chair Mary Jo White

Details available here.

SEC Adopts Rules to Modernize Information Reported by Funds, Require Liquidity Risk Management Programs, and Permit Swing Pricing

Details available here