Securities Law Prof Blog

New in Print

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

Frances S. Fendler & Heath Abshure, Private Civil Liability under the Arkansas Securities Act, 38 U. Ark. Little Rock L. Rev. 125 (2016).

Yesha Yadav, The Failure of Liability in Modern Markets, 102 Va. L. Rev. 1031 (2016).

Root on Compliance Incentives

Veronica Root has posted Coordinating Compliance Incentives on SSRN with the following abstract:

In today’s regulatory environment, a corporation engaged in wrongdoing can be sure of one thing: regulators will point to an ineffective compliance program as a key cause of institutional misconduct. The explosion in the importance of compliance is unsurprising given the emphasis that governmental actors—from the Department of Justice, to the Securities and Exchange Commission, to even the Commerce Department—place on the need for institutions to adopt “effective compliance programs.” The governmental actors that demand effective compliance programs, however, have narrow scopes of authority. DOJ Fraud handles violations of the Foreign Corrupt Practices Act, while the SEC adjudicates claims of misconduct under the securities laws, and the Federal Trade Commission deals with concerns regarding anticompetitive behavior. This segmentation of enforcement authority has created an information and coordination problem amongst regulators, resulting in an enforcement regime where institutional misconduct is adjudicated in a piecemeal fashion. Enforcement actions focus on compliance with a particular set of laws instead of on whether the corporate wrongdoing is a result of a systematic compliance failure that requires a comprehensive, firm-wide, compliance overhaul. As a result, the government’s goal of incentivizing companies to implement “effective ethics and compliance programs” appears at odds with its current enforcement approach.

Yet governmental actors currently have the tools necessary to provide strong inducements for corporations to, when needed, engage in restructuring of their compliance programs. This Article argues that efforts to improve corporate compliance would benefit from regulatory mechanisms that

(i) recognize when an institution is engaged in recidivist behavior across diverse regulatory areas and

(ii) aggressively sanction institutions that are repeat offenders. If governmental actors adopt a new enforcement strategy aimed at “Coordinating Compliance Incentives,” they can more easily detect when an institution is suffering from a systemic compliance failure, which may deter firms from engaging in recidivist behavior. If corporations are held responsible for being repeat offenders across diverse regulatory areas, it may encourage them to implement more robust reforms to their compliance programs and, ultimately, lead to improved ethical conduct and more effective compliance programs within public companies.

Bullard on Investment Advisers

Mercer Bullard has posted Mandatory Third Party Compliance Examinations for Investment Advisers: An SEC Waterloo? on SSRN with the following abstract:

The Securities and Exchange Commission (SEC or Commission) appears to be on the verge of requiring investment advisers to undergo third party examinations. One justification for the rulemaking is that the Commission lacks sufficient resources to examine advisers frequently enough. Another is to create indirectly a self-regulatory organization (SRO) for investments advisers. Both may leave a rulemaking particularly vulnerable to challenge as arbitrary and capricious under the Administrative Procedures Act. This Article considers three novel grounds on which a rulemaking may be successfully challenged. Congress has repeatedly rejected SEC requests to provide additional funding for examinations or to create an adviser SRO. This Article speculates that the rulemaking could be successfully challenged on the grounds that it usurps Congress’s power of the purse by imposing an unauthorized tax on investment advisers, and/or Congress’s authority to authorize the creation of an adviser SRO. On firmer ground, the Article discusses the risk that Section 206(4) of the Investment Advisers Act of 1940, under which a third party examination rule would likely be adopted, does not authorize such broad rulemaking. Such a challenge could not only defeat the rulemaking, but also undermine the viability of other rules adopted under Section 206(4). This Article also considers some of the numerous examples of third party examiners that could provide useful models for a third party examination rule for advisers. It surveys seven types of third party examiners in order to provide a framework for thinking about how a third party compliance rule might be designed: nationally recognized statistical rating organizations, proxy firm advisors, the CFA Institute, public company auditors, compliance consultants, chief compliance officers, and surprise and internal controls auditors. Each examiner serves a distinctly different third party examination role and their regulation is equally varied, if not always consistent.

Pang, Yang & Zhao on Mortgage Backed Securities

Tao Pang, Yipeng Yang and Dai Zhao have posted Convergence Studies on Monte Carlo Methods for Pricing Mortgage-Backed Securities on SSRN with the following abstract:

Monte Carlo methods are widely-used simulation tools for market practitioners from trading to risk management. When pricing complex instruments, like mortgage-backed securities (MBS), strong path-dependency and high dimensionality make the Monte Carlo method the most suitable, if not the only, numerical method. In practice, while simulation processes in option-adjusted valuation can be relatively easy to implement, it is a well-known challenge that the convergence and the desired accuracy can only be achieved at the cost of lengthy computational times. In this paper, we study the convergence of Monte Carlo methods in calculating the option-adjusted spread (OAS), effective duration (DUR) and effective convexity (CNVX) of MBS instruments. We further define two new concepts, absolute convergence and relative convergence, and show that while the convergence of OAS requires thousands of simulation paths (absolute convergence), only hundreds of paths may be needed to obtain the desired accuracy for effective duration and effective convexity (relative convergence). These results suggest that practitioners can reduce the computational time substantially without sacrificing simulation accuracy.

New in Print

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

Stanislav Dolgopolov, Regulating Merchants of Liquidity: Market Making from Crowded Floors to High-Frequency Trading, 18 U. Pa. J. Bus. L. 651 (2016).

Jill Gross, The Historical Basis of Securities Arbitration as an Investor Protection Mechanism, 2016 J. Disp. Resol. 171.

Jerry Markham, Regulating the Moneychangers, 18 U. Pa. J. Bus. L. 789 (2016).

Christopher H. Pierce-Wright, Comment, State Equity Crowdfunding and Investor Protection, 91 Wash. L. Rev. 847 (2016).

New Directions for Corporate and Securities Litigation, Tribute by Joel Seligman; articles by James D. Cox, Colleen Honigsberg, Robert J. Jackson, Jr., Yu-Ting Forester Wong, Michael J. Kaufman, John M. Wunderlich, William K. Sjostrom, Jr., Urska Velikonja, Jill E. Fisch, Hillary A. Sale, Robert B. Thompson, Allen Ferrell, Andrew Roper, Alon Brav, and J.B. Heaton. 93 Wash. U. L. Rev. 247-614 (2015).

Cazier, Merkley & Treu on Corporate Disclosures

Richard A. Cazier, Kenneth J. Merkley, and John Spencer Treu have posted When are Firms Sued for Making Optimistic Disclosures? on SSRN with the following abstract:

Recent research finds a positive association between disclosure tone and future securities lawsuits and concludes that optimistic qualitative statements subject firms to litigation risk. We examine whether this association varies between forward and non-forward-looking statements due to asymmetric legal protections related to these two types of disclosures. We find that only the tone of non-forward-looking statements is associated with subsequent shareholder lawsuits. Our results suggest that firms are not sued for optimistic statements regarding future events, consistent with the safe harbor provisions effectively mitigating litigation risk for qualitative forward-looking disclosures. Furthermore, we find evidence suggesting that the link between non-forward-looking disclosure tone and future litigation is attributable primarily to a failure of firms to adequately disclose bad news rather than by firms’ excessive positive statements or “hype”. Future research should consider managers’ divergent reporting incentives for forward versus non-forward-looking statements when correlating measures of disclosure tone with other outcomes or determinants.

Leung & Kang on ADRs

Tim Leung and Jamie Juhee Kang have posted Asynchronous ADRs: Overnight vs Intraday Returns and Trading Strategies on SSRN with the following abstract:

American Depositary Receipts (ADRs) are exchange-traded certificates that represent shares of non-U.S. company securities. They are major financial instruments for investing in foreign companies. Focusing on Asian ADRs in the context of asynchronous markets, we present methodologies and results of empirical analysis of their returns. In particular, we dissect their returns into intraday and overnight components with respect to the U.S. market hours. The return difference between the S&P500 index, traded through the SPDR S&P500 ETF (SPY), and each ADR is found to be a mean-reverting time series, and is fitted to an Ornstein-Uhlenbeck process via maximum-likelihood estimation (MLE). Our empirical observations also lead us to develop and backtest pairs trading strategies to exploit the mean-reverting ADR-SPY spreads. We find consistent positive payouts when long position in ADR and short position in SPY are simultaneously executed at selected entry and exit levels.

Brown on Mutual Funds

Stewart L. Brown has posted Mutual Funds and the Regulatory Capture of the SEC on SSRN with the following abstract:

Regulatory agencies are created to act in the public interest but often end up acting in the interests of those regulated. This is known as regulatory capture. The mutual fund industry is the custodian of massive levels of wealth of the investing public and is regulated by the Securities Exchange Commission (“the SEC”). Mutual fund assets are currently in the neighborhood of $16 trillion and these assets generate revenues in excess of $100 billion per year for the firms that manage mutual funds. The investment management industry is incentivized to influence the regulators by whatever means available to maximize profits for their owners. This paper documents how the investment management industry has captured the SEC in certain key policy areas. As a result, the industry is able to siphon off billions of dollars per year in excessive and often hidden fees. The SEC has within its power to unilaterally blunt some of the worse abuses if it was willing to act in the public interest.

New in Print

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

Thomas S. Green, Comment, An Analysis of the Advantages of Non-Market Based Approaches for Determining Chapter 11 Cramdown Rates: A Legal and Financial Perspective, 46 Seton Hall L. Rev. 1151 (2016).

Hester Peirce, Derivatives Clearinghouses: Clearing the Way to Failure, 64 Clev. St. L. Rev. 589 (2016).

Moses M. Tincher, Casenote, Timber! The SEC Falls Hard as the Georgia District Court in Timbervest Finds the Appointment of the SEC ALJs "Likely Unconstitutional", 67 Mercer L. Rev. 459 (2016).

Commissioner Stein on Big Data

On October 28th at the Big Data in Finance Conference at the University of Michigan, Commissioner Kara M. Stein delivered a keynote address on A Vision for Data at the SEC.

SEC Staff Provides Additional Economic Analysis on Proposed Derivatives Rule

Details available here.

SEC Names Marc A. Panucci as Deputy Chief Accountant

Details available here.

SEC Announces Agenda & Panelists for Nov. 14 Fintech Forum

Details available here.