Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, June 25, 2018

New Securities Law Articles in Print

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

John De Vito, Student Article, Discretion to Act: How the Federal Reserve’s Decisions Whether to Provide Emergency Loans During the Financial Crisis Were Discretionary and Why Dodd-Frank Falls Short of Preventing Future Bailouts, 10 J. Bus. Entrepreneurship & L. 295 (2017).

Daniel Isaacson, The Perfect Storm Is Brewing Once Again: What Scaling Back Dodd-Frank Will Mean for the Credit Default Swap, 10 J. Bus. Entrepreneurship & L. 249 (2017).

Brian T. Kloeblen, Comment, Splitting the Baby: The Death of Small Business, 48 Seton Hall L. Rev. 535 (2018).

Gabrielle Schwartz, Note, ‘Deriving’ an Understanding of the Extraterritorial Applicability of the Commodity Exchange Act, 91 St. John’s L. Rev. 769-791 (2017).

Clare Tilton, Note, Women and Whistleblowing: Exploring Gender Effects in Policy Design, 35 Colum. J. Gender & L. 338 (2018).

June 25, 2018 | Permalink | Comments (0)

Monday, June 18, 2018

Chaffee on Virtual Securities

I have posted Securities Regulation in Virtual Space on SSRN with the following abstract:

Video games, virtual worlds, virtual reality, and augmented reality are rapidly developing and evolving in exciting ways. As with any technology-related advancement, new legal issues are created as to how to apply and adapt the law. The question regarding the application of federal securities regulation to these virtual realms is an interesting one that has not been addressed.

If securities existing entirely within virtual space are securities for purposes of federal securities law, software developers, platform owners, and users become subject to the registration requirements and anti-fraud provisions of that body of law along with the rest of its provisions. Based upon a strict reading of the definition of a security found within the Securities Act and the Exchange Act, securities can exist entirely within virtual space because investment contracts, a type of security, can be created in such space. However, because the definition sections found in the Securities Act and Exchange Act both begin with the prefatory language “unless the context otherwise requires,” an analysis is required to determine whether these securities should be excluded from the application of federal securities law. Based upon the intended scope of federal securities regulation, various constitutional law principles, and concerns about hindering creativity and regulatory experimentation, the virtual context requires that securities existing entirely within virtual space be excluded from the scope of federal securities regulation.

Various concerns do exist regarding excluding such securities from the application of federal securities law including that that application of federal securities regulation is necessary for investor protection, to prevent an unworkable patchwork of state regulation, and to ensure that these rapidly developing and evolving virtual environments are properly regulated. Ultimately, however, the arguments for excluding such securities from the application of federal securities law outweigh the arguments for applying it.

June 18, 2018 | Permalink | Comments (0)

Fisch, Hamdani & Davidoff Solomon on Passive Investors

Jill E. Fisch, Assaf Hamdani, and Steven Davidoff Solomon have posted Passive Investors on SSRN with the following abstract:

The increasing percentage of the modern capital markets owned by passive investors – index funds and ETFs – has received extensive media and academic attention. This growing ownership concentration as well as the potential power of passive investors to affect both corporate governance and operational decision-making at their portfolio firms has led some commentators to call for passive investors to be subject to increased regulation and even disenfranchisement. These reactions fail to account for the institutional structure of passive investors and the market context in which they operate. Specifically, this literature assumes that passive investors compete primarily on cost and that, as a result, they lack incentives to engage meaningfully with their portfolio companies.

We respond to this failure by providing the first theoretical framework for passive investment and its implications for corporate governance. Our key insight is that although index funds are locked into their investments, their investors are not. Like all mutual fund shareholders, investors in index funds can exit at any time by selling their shares and receiving the net asset value of their ownership interest. This exit option causes mutual funds – active and passive – to compete for investors both on price and performance. While the conventional view focuses on the competition between passive funds tracking the same index, our analysis suggests that passive funds also compete against active funds. Passive fund sponsors therefore have an incentive to take measures to neutralize the comparative advantage enjoyed by active funds, that is, their ability to use their investment discretion to generate alpha. Because they cannot compete by exiting underperforming companies, passive investors must compete by using “voice” to prevent asset outflow.

We show that passive investors behave in accordance with this theory – their engagement with portfolio firms continues to grow, and they are devoting increasing resources to that engagement. Passive investors also exploit their comparative advantages – their size, breadth of portfolio and resulting economies of scale – to focus on improving corporate governance, efforts that reduce the underperformance and mispricing of portfolio companies. Passive investors thus seek to reduce the relative advantage that active funds gain through their ability to trade.

We conclude by exploring the overall implications of the rise of passive investment. Significantly, although existing critiques of passive investors are unfounded, the rise of passive investing has the potential to raise concerns about ownership concentration, conflicts of interest and corporate law’s traditional deference to shareholders.

June 18, 2018 | Permalink | Comments (0)

Trautman on Virtual Currencies

Lawrence J. Trautman has posted Bitcoin, Virtual Currencies, and the Struggle of Law and Regulation to Keep Pace on SSRN with the following abstract: 

At less than a decade old, Bitcoin and other virtual currencies have had a major societal impact, and proven to be a unique payment systems challenge for law enforcement, financial regulatory authorities worldwide, and the investment community. Rapid introduction and diffusion of technological changes throughout society, such as the blockchain that serves as Bitcoin’s crypto-foundation, continue to outpace the ability of law and regulation to keep pace. During 2017 alone, the market price of Bitcoin rose 1,735 percent, from about $970 to $14,292, causing an investor feeding frenzy. As of March 31, 2018, a total of 1,595 cryptocurrencies are reported, having an approximate market capitalization of $266.97 billion at that date. A brief history of the fast moving adoption of blockchain-based technology is provided, along with a look at the efforts of regulators to keep up with the staggering worldwide growth in the usage of virtual currencies.

In the United States, enforcement actions for violations of law involving virtual currencies are brought primarily by: The Commodities Futures Trading Commission (CFTC); The Securities and Exchange Commission (SEC) and The Department of The Treasury through the Financial Crimes Enforcement Network (FinCEN). This Article contributes to the literature and our understanding of the constant struggle of law and regulation to keep pace with rapid technological developments.

June 18, 2018 | Permalink | Comments (0)

New Securities Law Articles in Print

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

Sean Belcher, Note, Tracing the Invisible: Section 11's Tracing Requirement and Blockchain, 16 Colo. Tech. L.J. 145 (2017).

Merritt B. Fox, Lawrence R. Glosten & Gabriel V. Rauterberg, Stock Market Manipulation and Its Regulation, 35 Yale J. on Reg. 67 (2018).

Paul G. Mahoney, Deregulation and the Subprime Crisis, 104 Va. L. Rev. 235 (2018).

Gideon Mark, Confidential Witness Interviews in Securities Litigation, 96 N.C. L. Rev. 789 (2018).

Patrick McCarney, Note, False Start: Carving a Niche for Established Small Business Participation in Regulation Crowdfunding Rules Designed for Startups, 51 Ind. L. Rev. 277 (2018).

Jeongho Nam, Note, Model BIT: An Ideal Prototype Or a Tool for Efficient Breach?, 48 Geo. J. Int'l L. 1275 (2017).

June 18, 2018 | Permalink | Comments (0)

Wednesday, June 6, 2018

Lazaro on Fiduciary Standards

Christine Lazaro has posted Defining 'Fiduciary': Differences in Fiduciary Standards within the Securities Industry on SSRN with the following abstract:

Investment professionals are subject to varying standards of conduct when providing advice to clients. The standards range from providing advice which is suitable to acting consistently with a fiduciary standard.

The article provides a brief history of the applicable securities statutes governing investment advice. It discusses the differences in the enactment of the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Employee Retirement Income Security Act of 1974.

Next, the article discusses how each statute has impacted the standards applicable to brokers and investment advisers. Investment advisers are deemed fiduciaries. Brokers are held to the “suitability” standard, unless the broker is exercising discretion over client funds or there exist other special circumstances. In those cases, brokers are considered fiduciaries as well. Finally, both investment advisers and brokers may be considered fiduciaries when providing investment advice in connection with retirement assets.

June 6, 2018 | Permalink | Comments (0)

Loewenstein on Materiality

Mark Loewenstein has posted Thinking Fast and Slow About the Concept of Materiality on SSRN with the following abstract:

Determining whether, for securities law purposes, a misrepresentation or omission is material raises interesting questions. The Court of Appeals in SEC v. Texas Gulf Sulfur Co. provided some guidance on materiality and the U.S. Supreme Court has weighed in several times in the past 50 years. This article first discusses what Texas Gulf Sulfur contributed to the doctrine of materiality, then briefly considers other dimensions of the doctrine, and finally moves to its thesis: The doctrine of materiality should take into account important psychological insights and heuristics that may affect the way that a fact finder decides whether a misrepresentation or omission is material. In that regard, this article draws heavily on the work of a Nobel Prize winning psychologist, Daniel Kahneman, and his influential book, Thinking, Fast and Slow.

June 6, 2018 | Permalink | Comments (0)

Solomon on Shareholder Voting

Dov Solomon has posted The Importance of Inferior Voting Rights in Dual-Class Firms on SSRN with the following abstract:

Over the past several years, corporate law scholarship has carefully analyzed the effects of dual-class capital structures, which allocate superior voting rights to insiders and inferior voting rights to public shareholders. This Article adds to the literature by focusing on a unique and novel type of dual-class structure—one in which the public shares have no voting rights at all. It notes that this structure is fundamentally different because in the absence of even highly diluted voting rights in public hands, the firm does not have to meet certain types of disclosure rules and corporate governance standards. Nonvoting shareholders are deprived of these significant components of investor protection.

After carefully identifying the serious consequences of nonvoting common stock for investor protection, the Article suggests two ways to address them. First, the Securities and Exchange Commission should act to protect nonvoting shareholders by requiring the same level of disclosure when nonvoting stock is issued, as is required when voting stock is issued. Towards implementing this proposal, the Article distinguishes between the situation of no voting rights and the long-standing federal court decision asserting that the regulation of voting rights is beyond the delegated authority of the Commission. Second, stock exchange rules should impose requirements for listed firms aimed at protecting holders of nonvoting stock. These rules would grant nonvoting shareholders certain disclosure and governance rights they do not otherwise have under federal or state law. The Article’s proposals directly address the implications of nonvoting stock for disclosure and corporate governance, and therefore are preferable to the current incidental reaction of major index providers to dual-class capital structures.

June 6, 2018 | Permalink | Comments (0)

New Securities Law Articles in Print

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

Henrik Born, Note, Screening Out the Losers: How Delaware Corporations Can Implement Fee-Shifting to Deter Frivolous Strike Suits, 14 N.Y.U. J.L. & Bus. 351 (2017).

Martin Edwards, The Big Crowd and the Small Enterprise: Intracorporate Disputes in the Close-But-Crowdfunded Firm, 122 Penn St. L. Rev. 411 (2018).

Mira Ganor, Toehold Collaborations Beyond Insider Trading, 14 N.Y.U. J.L. & Bus. 187 (2017).

Yehonatan Givati, Of Snitches and Riches: Optimal IRS and SEC Whistleblower Rewards, 55 Harv. J. on Legis. 105 (2018).

Peter V. Marchetti, A Note to Congress: Amend Section 546(E) of the Bankruptcy Code to Harmonize the Policies of Fraudulent Conveyance Law and Protection of the Financial Markets, 26 Am. Bankr. Inst. L. Rev. 1 (2018).

Daniel J. Morrissey, Are Mutual Funds Robbing Retirement Savings?, 14 N.Y.U. J.L. & Bus. 143 (2017).

Samuel Nadler, Note, Federal Fiduciary Duties and Private Equity: The Search for Workable Standards, 2018 Colum. Bus. L. Rev. 254.

Darren Pouliot, Note, A Trinity of Interpretations: Finding the Current Status of the SEC's Significant Social Policy Exception, 2018 Colum. Bus. L. Rev. 287.

Kory Steen, Note, Vacating an Arbitration Award in Federal Court: The Jurisdictional Issues of the "Look Through" Approach and Arbitrators Violating Securities SRO Regulations, 94 U. Det. Mercy L. Rev. 459 (2017).

Anne M. Tucker & Holly van den Toorn, Will Swing Pricing Save Sedentary Shareholders?, 2018 Colum. Bus. L. Rev. 130.

Amy Deen Westbrook & David A. Westbrook, Unicorns, Guardians, and the Concentration of the U.S. Equity Markets, 96 Neb. L. Rev. 688 (2018).

Verity Winship & Jennifer K. Robbennolt, Admissions of Guilt in Civil Enforcement, 102 Minn. L. Rev. 1077 (2018).

Verity Winship & Jennifer K. Robbennolt, An Empirical Study of Admissions in SEC settlements, 60 Ariz. L. Rev. 1 (2018).

June 6, 2018 | Permalink | Comments (0)