Securities Law Prof Blog

Reuters: U.S. SEC Chair Grilled by Senate Panel Over Cyber Breach, Equifax

Michelle Price and Pete Schroeder of Reuters have authored an article, U.S. SEC Chair Grilled by Senate Panel Over Cyber Breach, Equifax, reporting on Chair Clayton's testimony today before the Senate Banking Committee.  Their story states in part:

The chairman of the U.S. Securities and Exchange Commission (SEC) told a congressional committee on Tuesday he did not believe his predecessor Mary Jo White knew of a 2016 cyber breach to the regulator’s corporate disclosure system, the exact timing of which could not be known “for sure.”

Jay Clayton, who was formally appointed to his role in May, also said listed companies should disclose more detailed information on cyber breaches “sooner,” and that the U.S. regulator was working on new guidelines to ensure this.

SEC Announces Enforcement Initiatives to Combat Cyber-Based Threats and Protect Retail Investors

The press release states in part:

The Securities and Exchange Commission today announced two new initiatives that will build on its Enforcement Division’s ongoing efforts to address cyber-based threats and protect retail investors. The creation of a Cyber Unit that will focus on targeting cyber-related misconduct and the establishment of a retail strategy task force that will implement initiatives that directly affect retail investors reflect SEC Chairman Jay Clayton’s priorities in these important areas.

New Securities Law Articles in Print

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

S. Burcu Avci & H. Nejat Seyhun, Why Don't General Counsels Stop Corporate Crime?,19 U. Pa. J. Bus. L. 751 (2017).

Lucian A. Bebchuk & Kobi Kastiel, The Untenable Case for Perpetual Dual-Class Stock, 103 Va. L. Rev. 585 (2017).

Stewart L. Brown, Mutual Funds and The Regulatory Capture of the SEC, 19 U. Pa. J. Bus. L. 701 (2017).

Herve Gouraige, Do Federal Courts Have Constitutional Authority to Adjudicate Criminal Insider-Trading Cases?, 69 Rutgers U. L. Rev. 47 (2016).

Virginia Harper Ho, "Comply or Explain" and the Future of Nonfinancial Reporting, 21 Lewis & Clark L. Rev. 317 (2017).

Darian M. Ibrahim, Crowdfunding Without the Crowd, 95 N.C. L. Rev. 1481 (2017).

Katherine A. Pancak & Thomas J. Miceli, Just Compensation for the Taking of Mortgage Loans, 13 J.L. Econ. & Pol'y 143 (2017).

Alexander D. Selig, A Practitioner's Guide to When Real Estate Becomes a Security, 9 Elon L. Rev. 391 (2017).

D. Gordon Smith, Insider Trading and Entrepreneurial Action, 95 N.C. L. Rev. 1507 (2017).

Celia R. Taylor, The Unsettled State of Compelled Corporate Disclosure Regulation After the Conflict Mineral Rule Cases, 21 Lewis & Clark L. Rev. 427 (2017).

Sharfman on Dual Class Shares

Bernard S. Sharfman has posted A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs on SSRN with the following abstract:

The shareholder empowerment movement (movement) has renewed its effort to eliminate, restrict or at the very least discourage the use of dual class share structures in initial public offerings (IPOs). This renewed effort was triggered by the recent Snap Inc. IPO that utilized non-voting stock. Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.

Unless there are significant sunset provisions, a dual class share structure allows insiders to maintain voting control over a company even when, over time, there is both an ebbing of superior leadership skills and a significant decline in the insiders’ ownership of the company’s common stock. Yet, investors are willing to take that risk even to the point of investing in dual class shares where the shares have no voting rights and barely any sunset provisions, such as in the recent Snap Inc. IPO. Why they are willing to do so is a result of the wealth maximizing efficiency that results from the private ordering of corporate governance arrangements and the understanding that agency costs are not the only costs of governance that need to be minimized.

In this essay, Zohar Goshen and Richard Squire’s newly proposed “principal-cost theory,” “each firm’s optimal governance structure minimizes the sum of principal costs, produced when investors exercise control, and agent costs, produced when managers exercise control,” is used to argue that the use of dual class shares in IPOs is a value enhancing result of private ordering, making the movement’s renewed advocacy unwarranted.

NASAA Issues Advisory on Binary Option Schemes

NASAA has issued an advisory regarding binary option schemes.  A notice provided on the NASAA site states:

The North American Securities Administrators Association (NASAA) is cautioning investors about schemes related to binary options amid the proliferation of online binary option platforms and a growing number of related investor complaints. The advisory provides information and resources to help investors better understand binary options, their risks and where to turn for help.

The advisory also discusses common investor complaints and offers common tactics and warning signs of schemes related to binary options, including: unsolicited investment offers; high-pressure sales tactics; personal information requests; and a lack of information about the offering firm or its management.

The full advisory is available here.

SEC Monitoring Impact of Hurricane Irma on Capital Markets, Continues to Monitor Impact of Hurricane Harvey

An SEC press release is available here.

New Securities Law Articles in Print

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

Eric C. Chaffee, The Supreme Court as Museum Curator: Securities Regulation and the Roberts Court, 67 Case W. Res. L. Rev. 847 (2017).

Zachary Naidich, Note, Regulation A-Plus's Identity Crisis: A One-Size-Fits-None Approach to Capital Formation, 82 Brook. L. Rev. 1005 (2017).

James Walsh, Comment, "Look Then to Be Well Edified, When the Fool Delivers the Madman": Insider-Trading Regulation After Salman v. United States, 67 Case W. Res. L. Rev. 979 (2017).

Karen E. Woody, No Smoke and No Fire: The Rise of Internal Controls Absent Anti-Bribery Violations in FCPA Enforcement, 38 Cardozo L. Rev. 1727 (2017).

Bridget Fitzpatrick Named SEC Chief Litigation Counsel

Details are available here.

Commissioner Piwowar on Exchange Traded Products

On September 8, 2017, Commissioner Michael S. Piwowar delivered a speech at the SEC-NYU Dialogue on Exchange-Traded Products. The text of the speech is available here.

Commissioner Stein on Exchange-Traded Products

On September 8, 2017, Commissioner Kara M. Stein delivered a speech at the SEC-NYU Dialogue on Exchange-Traded Products.  The text of the speech is available here. 

New Securities Law Articles in Print

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

Miriam H. Baer, Reconceptualizing the Whistleblower's Dilemma, 50 UC Davis L. Rev. 2215 (2017).

Anthony B. Benvegna, Note, A Guiding Light to a More Efficient Market: Why High-Frequency Trading Is Not a Flash in the Dark, 16 J. Int'l Bus. & L. 309 (2017).

Joshua A. Gold, Note, Equity Crowdfunding of Film--Now Playing at a Computer Near You, 95 Tex. L. Rev. 1367 (2017).

Alexander I. Platt, Unstacking the Deck: Administrative Summary Judgment and Political Control, 34 Yale J. on Reg. 439 (2017).

Jennifer Robichaux Carter, Comment, Hedge Funds Should Be Able to Challenge Patent Validity Using Inter Partes Review Despite Mixed Motives, 54 Hous. L. Rev. 1315 (2017).

Kenneth M. Rosen, Limits on Exporting Corporate Social Responsibility Through Domestic Regulation, 12 S.C. J. Int'l L. & Bus. 41 (2015).

Paolo Saguato, The Ownership of Clearinghouses: When "Skin in the Game" Is Not Enough, The Remutualization of Clearinghouses, 34 Yale J. on Reg. 601 (2017).

 

Iannarone on Robo-Advisers

Nicole G. Iannarone has posted Computer as Confidant: Digital Investment Advice and the Fiduciary Standard on SSRN with the following abstract: 

Digital investment advisers are the fastest growing segment of financial technology (fintech) and are disrupting traditional investment advisory delivery models. The computer-led investment advisory service model may be growing particularly quickly due to a confluence of social and political factors. Politicians and regulators have increasingly focused on the standards of care applicable to investment advice providers. Fewer Americans are ready for retirement and many lack access to affordable investment advice. At the same time, comfort with digital platforms have increased, with some preferring electronic interaction over human interaction. Claiming that they can democratize retirement service by providing advice meeting a fiduciary standard at a fraction of the traditional pricing model, robo-advisers hope to capitalize on these social movements and argue that they provide a solution: conflict-free advice to investors with portfolios of all sizes. Though they have voluntarily subjected themselves to the requirements of the Investment Advisers Act of 1940 (1940 Act), questions remain as to how robo-advisers will meet the fiduciary standard required by such registration. The essay recommends a two-pronged approach for the regulation of robo-advisers in the near term. First, existing regulatory tools such as examination, enforcement, and disclosure should be deployed to robustly explore the sufficiency and malleability of their existing parameters before crafting any new regulatory schemes. Second, the disclosure device should be studied to determine whether the intended beneficiary of the disclosure, retail consumers, comprehend the information being disclosed to them and whether changes to the format, delivery, and/or content of disclosures would better protect consumer investors.

Steinberg and Roberts on Control Person Liability

Marc I. Steinberg and Forrest C. Roberts have posted Laxity at the Gates: The SEC's Neglect to Enforce Control Person Liability on SSRN with the following abstract: 

In recent years the SEC has repeatedly stressed the importance of holding gatekeepers accountable in order to promote effective corporate governance. In spite of these assertions, the Commission has failed to use two powerful tools at its disposal to pursue gatekeepers. Section 20(a) of the Securities Exchange Act provides for liability against “control persons.” This Section imposes liability upon any person who controls another liable person to the same extent as such controlled person, unless she can establish that she acted in good faith and did not directly induce the violation. Sections 15(b)(4)(E) and 15(b)(6))A) of the Exchange Act give the Commission power to institute administrative proceedings against broker-dealers and associated persons for their failure to reasonably supervise another person who commits certain enumerated securities law violations. Although these enforcement mechanisms seem ripe for use, the Commission has refused to allege claims against control persons or based upon a failure to supervise in cases against big banks and large publicly regulated companies, such as those responsible for the financial crises and subsequent instances of large-scale misconduct. Instead, the SEC agrees to large monetary settlements with these companies without holding corporate miscreants liable.

The objective of this article is to propose an enforcement regime which holds executives, directors, and other fiduciaries responsible for misconduct occurring at their enterprises when such misconduct can be attributed to their lack of control or failure to supervise their employees. We will show that by using Sections 20(a) and 15(b)(6)(A), the Commission incentivizes those in charge to actively sniff out misconduct or face the sobering reality of being named in an SEC enforcement action. In order to accomplish this task, this article will: 1) discuss the legal authority giving the SEC power to use these provisions, and explain the provisions’ advantages over the SEC’s frequently used enforcement tools; 2) outline recent misconduct resulting in large monetary settlements with such financial institutions as JP Morgan, Goldman Sachs, Merrill Lynch, and Bank of America; 3) showcase the SEC’s refusal to implement these tools against big players; 4) set forth rationales as to why the Commission has cast these provisions aside, and 5) recommend an enforcement policy in this context that seeks to effectuate law compliance and enhanced corporate governance practices.

Ewens and Farre-Mensa on IPOS

Michael Ewens and Joan Farre-Mensa have posted The Evolution of the Private Equity Market and the Decline in IPOs on SSRN with the following abstract: 

Despite the large drop in the number of initial public offerings (IPOs) in the United States, privately-held startups backed by venture capital continue to achieve capital raising, revenue, and employment levels historically available only to their public peers. We show that startups’ ability to finance their late-stage growth while remaining private has been facilitated by a marked increase in the supply of private entrepreneurial capital, both from traditional and non-traditional startup investors. Two factors have contributed to this increase: Technological changes that have lowered investor search costs, and regulatory changes that have decreased the frictions faced by startups and their financiers when raising private capital, among them a major securities law passed in 1996 (NSMIA). Our evidence suggests that the lower IPO volume stems from their founders/managers choosing to remain private, rather than a market failure in the going-public process. Consistent with this interpretation, we show that exogenous increases in founder control increase the likelihood that a firm remains private late in its life.

 

Edwards on Robo-Advisers

Benjamin P. Edwards has posted The Rise of Automated Investment Advice: Can Robo-Advisers Rescue the Retail Market? on SSRN with the following abstract:

Different types of financial advisers serve the massive and widely dispersed retail investment market. In a market riddled with conflicts of interests, many advisers exploit retail customers by pitching suboptimal products, leading to lower investment returns and lower overall growth — but also to greater profits for the financial advisers collecting kickback-style commissions. New financial technology firms, commonly known as Robo-Advisers, may disrupt this market and these exploitative practices. Still, these potentially disruptive automated investment advice firms face significant regulatory risks.

Verstein on Insider Trading

Andrew Verstein has posted Insider Tainting: Strategic Tipping of Material Non-Public Information on SSRN with the following abstract:

Insider trading law is meant to be a shield, protecting the market and investors from connected traders, but it can also be a sword. Insofar as we penalize trading on the basis of material non-public information, it becomes possible to share information strategically in order to disable or constrain innocent investors. A hostile takeover can be averted, or a bidding war curtailed, because information recipients must then refrain from trading. This Article offers the first general account of “insider tainting,” an increasingly pervasive phenomenon of weaponizing insider trading law.

Ferrell & Morley on Institutional Institutional Intermediaries

Allen Ferrell and John Morley have posted New Special Study of the Securities Markets: Institutional Intermediaries on SSRN with the following abstract:

This essay, written for the Conference on the New Special Study of Securities Markets at Columbia Law School, identifies the key regulatory challenges posed by institutional intermediaries in America’s capital markets. We survey existing legal and economic research and suggest new areas for regulatory reform and scholarly inquiry. We cover registered investment companies (such as mutual funds), private investment funds (such as hedge funds and private equity funds), credit-rating agencies, and broker-dealers.