Securities Law Prof Blog

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

Monday, October 29, 2018

New Securities Law Articles in Print

The following law review article relating to securities regulation is now available in paper format:

Seth C. Oranburg, Hyperfunding: Regulating Financial Innovations, 89 U. Colo. L. Rev. 1033 (2018).

Zachary J. Robins & Timothy M. Joyce, How to Crowdfund and Not Fall Flat on Your Face: Best Practices for Investment Crowdfunding Offerings and the Data to Prove It, 43 Mitchell Hamline L. Rev. 1059 (2017).


October 29, 2018 | Permalink | Comments (0)

Sunday, October 21, 2018

New Securities Law Articles in Print

The following law review article relating to securities regulation is now available in paper format:

S. Burcu Avci, Cindy A. Schipani & H. Nejat Seyhun, Eliminating Conflicts of Interests in Banks: The Significance of the Volcker Rule, 35 Yale J. on Reg. 343 (2018).

Jonathan D. Glater, Insiders, Outsiders, & Fair Access: Identifying Culpable Insider Trading, 83 Brook. L. Rev. 1393 (2018).

Kevin S. Haeberle & M. Todd Henderson, Making a Market for Corporate Disclosure, 35 Yale J. on Reg. 383 (2018).

Scott Hirst, Universal Proxies, 35 Yale J. on Reg. 437 (2018).

Daniel B. Listwa & Charles Seidell, Note, Penalties in Equity: Disgorgement After Kokesh v. SEC, 35 Yale J. on Reg. 667 (2018).

Susan Lorde Martin, The Appointments Clause and the SEC's Administrative Law Judges: Protecting the Separation of Powers, Political Accountability, and Investors, 12 Va. L. & Bus. Rev. 287 (2018)

Jeremy R. McClane, Regulating Substance Through Form: Lessons from the SEC's Plain English Initiative, 55 Harv. J. on Legis. 265 (2018).

Neal Newman, Regulation A+: New and Improved After the JOBS Act or a Failed Revival?, 12 Va. L. & Bus. Rev. 243 (2018).

D. Butler Sparks, Comment, Omens of Overregulation: Why the SEC Should Abandon Its Course Toward Broker-Dealer Regulation of Private Equity Fund Managers, 12 Va. L. & Bus. Rev. 349 (2018).

Ryan D. Zick & Jeff Tchakarov, Adjudicating Securities Law Violations in the Age of Limited Bankruptcy Court Jurisdiction, 26 Am. Bankr. Inst. L. Rev. 293 (2018).

October 21, 2018 | Permalink | Comments (0)

Thursday, October 4, 2018

New Securities Law Articles in Print

 The following law review article relating to securities regulation is now available in paper format:

Hilary J. Allen, The SEC as Financial Stability Regulator, 43 J. Corp. L. 715 (2018).

Merritt B. Fox, Lawrence R. Glosten & Gabriel V. Rauterberg, Informed Trading and Its Regulation, 43 J. Corp. L. 817 (2018).

October 4, 2018 | Permalink | Comments (0)

Friday, September 14, 2018

Turk & Woody on Securities Law, Judge Kavanaugh & the Supreme Court

Matthew C. Turk and Karen E. Woody have posted Judge Kavanaugh, Lorenzo v. SEC, & the Post-Kennedy Supreme Court on SSRN with the following abstract: 

This Article analyzes an upcoming Supreme Court case, Lorenzo v. SEC (Lorenzo), and explains why it provides a unique window into the Court’s future now that Justice Kennedy has departed and presumably will be replaced by Brett Kavanaugh. When the Court issues its decision on Lorenzo in 2019, it will be ruling on a lower court opinion from the D.C. Circuit in which Judge Kavanaugh wrote separately in an extensive dissent. That dissent is quite remarkable. It contains a scathing assessment of securities fraud enforcement and adjudication at the SEC, the majority opinion’s interpretation of deceptive financial conduct under Rule 10b-5, and the SEC’s overall role in the development of federal securities law doctrine. In the dissent, Judge Kavanaugh further identifies how the legal deficiencies specific to Lorenzo also motivate his broader skepticism towards the Constitutional legitimacy of the administrative and regulatory state as a whole, a view that represents his signature contribution as a federal judge. Thus, in Lorenzo, the defining judicial philosophy of an incoming Supreme Court Justice is on full display.

As this article further argues, the deeper import of Lorenzo is not what it reveals about the views of Judge Kavanaugh. Rather, it is in the reception those views will meet from the other eight Justices on the Court. In addressing the argument set forth in Lorenzo’s dissent, the current members of the Court will be confronting the positions of a peer and future colleague. By necessity, they will also signal their openness to being persuaded by Judge Kavanaugh on issues where speaks with greatest authority and can be expected to act as forceful advocate for his vision of the law at the Court. In short, Lorenzo will serve as a bellwether for Judge Kavanaugh’s influence as judicial entrepreneur on behalf of his trademark theory of the Constitutional separation of powers in administrative law. Given the current juncture at which the Court finds itself, the stakes could not be higher. Accordingly, this article concludes its analysis by turning to where the stakes are highest of all—the role that Judge Kavanaugh may play in the demise of the Chevron doctrine and the collapse of judicial deference toward the administrative state.

September 14, 2018 | Permalink | Comments (0)

New Securities Law Articles in Print

The following law review article relating to securities regulation is now available in paper format:

J. Robert Brown Jr., Shareholder Proposals and the Limits of Encrypted Interpretations, 63 Vill. L. Rev. 35 (2018).

Caelainn Carney, Note, Robo-Advisers and the Suitability Requirement: How They Fit in the Regulatory Framework, 2018 Colum. Bus. L. Rev. 586.

Lesley Chen, Comment, The SEC's Forgotten Power of Exemption: How the SEC Can Receive Deference in Favor of Internal Whistleblowers Even When the Text Is Clear, 67 Emory L.J. 1043 (2018).

Antonio M. DiNizo Jr., Comment, Battle of the Bayou: Placing a Receiver in the Right Position During a Bankruptcy Proceeding, 30 St. Thomas L. Rev. 290 (2018).

Marek Dubovec & Adalberto Elias, The Challenges of the Mexican Intermediated Securities Holding System and Opportunities for Modernization, 19 Or. Rev. Int'l L. 93 (2018).

Brandon Faske, Comment, Turning Billions Into (Green) Trillions: Tracking the Growth and Development of the Green Bond Market in China, France, India, and the United States, 31 Tul. Envtl. L.J. 293 (2018).

Ross Levine, Chen Lin & Lai Wei, Insider Trading and Innovation, 60 J.L. & Econ. 749 (2017).

Jonathan S. Masur & Eric A. Posner, Cost-Benefit Analysis and the Judicial Role, 85 U. Chi. L. Rev. 935 (2018).

Matthew Evans Miehl, Note, The Cost of Appraisal Rights: How to Restore Certainty in Delaware Mergers, 52 Ga. L. Rev. 651 (2018).

Matthew L. Mustokoff & Margaret E. Mazzeo, Loss Causation on Trial in Rule 10b-5 Litigation a Decade after Dura, 70 Rutgers U. L. Rev. 175 (2017).

Ori Oren, Note, ICO's, DAO's, and the SEC: A Partnership Solution, 2018 Colum. Bus. L. Rev. 617.

Bernard S. Sharfman, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs, 63 Vill. L. Rev. 1 (2018).

Jeff Thomas, Equity Crowdfunding Portals Should Join and Enhance the Crowd by Providing Venture Formation Resources, 42 Nova L. Rev. 375 (2018).

September 14, 2018 | Permalink | Comments (0)

Saturday, September 1, 2018

Sharfman on the Agency Costs of Agency Capitalism

Bernard Sharfman has an interesting post over at the Delaware Corporate and Commercial Litigation Blog discussing the agency costs generated by the dominance of institutional investors as shareholders of record of the voting stock of publicly traded companies.  In part, he writes:

Agency costs are generated when an institutional investor acts based on its own preferences, not the preferences of those who provide it with the funds to purchase securities. That is, there is a divergence between the objective of shareholder wealth maximization, the default objective of those 100 million plus retail investors in the United States who invest in mutual funds either directly or through retirement accounts, or are the beneficiaries of public pension funds, and the preferences of institutional investors who manage those funds.  The result is that these agency costs may significantly harm the efficiency of corporate governance and lead to lower returns for investors. . . .

Former Chancellor William T. Allen was prescient when he stated in the famous 1988 Delaware Chancery Court case of Blasius Industries, Inc. v. Atlas Corp., that “[i]t may be that we are now witnessing the emergence of new institutional voices and arrangements that will make the stockholder vote a less predictable affair than it has been.” However, it is doubtful that he was including in this “less predictable affair” language the additional uncertainty and, most importantly, the inefficiency created by the agency costs of agency capitalism. It is now up to corporate law to respond.

The post is worth a read.

September 1, 2018 | Permalink | Comments (0)

New Securities Law Articles in Print

The following law review article relating to securities regulation is now available in paper format:

Yifat Aran, Note, Beyond Covenants Not to Compete: Equilibrium in High-Tech Startup Labor Markets, 70 Stan. L. Rev. 1235 (2018).

Ronald H. Filler & Jerry W. Markham, Whistleblowers--A Case Study in the Regulatory Cycle for Financial Services, 12 Brook. J. Corp. Fin. & Com. L. 311 (2018).

Brent Hammack, Student Article, A Comparative Analysis of U.S. & U.K. Regulations Pertaining to Domestic Corporate Takeovers, and the Resulting Differences in Hostile Takeover Activities Between the Two Markets, 25 Willamette J. Int'l L. & Disp. Resol. 121 (2018).

Echo Kaixi Wang, Note, Financing Green: Reforming Green Bond Regulation in the United States, 12 Brook. J. Corp. Fin. & Com. L. 467 (2018).

September 1, 2018 | Permalink | Comments (0)

Tuesday, August 21, 2018

New Securities Law Articles in Print

The following law review article relating to securities regulation is now available in paper format:

Stanislav Dolgopolov, Securities Fraud Embedded in the Market Structure Crisis: High-Frequency Traders as Primary Violators, 9 Wm. & Mary Bus. L. Rev. 551 (2018).

Zachary S. Gilreath, Comment, The Culprit of the Great Recession: A Detailed Explanation of Mortgage-Backed Securities, Their Impact on The 2008 Financial Crisis, and the Legal Aftermath, 13 J. Bus. & Tech. L. 319 (2018).

Mike Koehler, The FCPA's Record-Breaking Year, 50 Conn. L. Rev. 91 (2018).

Gideon Mark, The Yates Memorandum, 51 UC Davis L. Rev. 1589 (2018).

Paul Mason, et al., Does Shareholder Voting Matter? Evidence from the Takeover Market, 53 Wake Forest L. Rev. 157 (2018).

Laila Metjahic, Note, Deconstructing the DAO: The Need for Legal Recognition and the Application of Securities Laws to Decentralized Organizations, 39 Cardozo L. Rev. 1533 (2018).

David Miller, Note, Perfect Hedge: Adding Precision to the Proposed SEC Rule on Investment Company Use of Derivatives with a Hedging Exception, 59 B.C. L. Rev. 1471 (2018).

Tiffany L. Minks, Comment, Ethereum and the SEC: Why Most Distributed Autonomous Organizations Are Subject to the Registration Requirements of the Securities Act of 1933 and a Proposal for a New Regulation, 5 Tex. A&M L. Rev 405 (2018).

Michael Leonidas Nester, Note, Reconciling the Volker Rule with the Dodd-Frank Act's Objectives: How to Best Combat Systemic Risk, 86 Fordham L. Rev. 3059 (2018).

Andrew A. Schwartz, The Gatekeepers of Crowdfunding, 75 Wash. & Lee L. Rev. 885 (2018).

Jonathon C. Stanley, Note, A Legal Frankenstein's Monster: The Complete Bar Order in Securities Fraud Class Action Lawsuits, 75 Wash. & Lee L. Rev. 1215 (2018).

Matthew C. Turk & Karen E. Woody, The Leidos Mix-Up and The Misunderstood Duty to Disclose in Securities Law, 75 Wash. & Lee L. Rev. 957 (2018).

Amy Deen Westbrook, Cash For Your Conscience: Do Whistleblower Incentives Improve Enforcement of The Foreign Corrupt Practices Act?, 75 Wash. & Lee L. Rev. 1097 (2018).

Alice Xiang, Comment, Unlocking the Potential of Art Investment Vehicles, 127 Yale L.J. 1698 (2018).

Insider Trading, Articles by John P. Anderson, Stephen M. Bainbridge, Franklin A. Gevurtz, Zachary J. Gubler, Joan MacLeod Heminway, Peter J. Henning, Roberta S. Karmel & Yesha Yadav, 56 Wash. U. J.L. & Pol'y 1-152 (2018).

Institute for Investor Protection Conference: Corporate Ethics and Compliance in the Era of Re-Deregulation, Introduction by Michael J. Kaufman; keynote by Steven A. Ramirez; essays by Seth Green, Cherly L. Wade, Arthur Acevedo, Celia R. Taylor & Melinda S. Molina; remarks by Hon. Shira A. Scheindlin, 49 Loy. U. Chi. L.J. 569-683 (2018).


August 21, 2018 | Permalink | Comments (0)

Friday, July 27, 2018

Diamond & Kuan on High Frequency Trading

Stephen F. Diamond & Jennifer W. Kuan have posted Are the Stock Markets 'Rigged'? An Empirical Analysis of Regulatory Change on SSRN with the following abstract:

Volatile events in the stock market such as the 2010 Flash Crash have sparked concern that financial markets are "rigged" in favor of trading firms that use high frequency trading ("HFT") systems. We analyze a regulatory change implemented by the SEC in 2007 by examining its effect on a key market metric, the bid-ask spread, an investor cost, and find that the regulatory shift, indeed, disadvantages investors. We link the implementation of this change to a shift in the volume of trades from a low-cost venue to a high-cost venue. We argue that this outcome is predicted by the incentives of the venues, non-profit stock exchanges owned by different types of members. The less-volatile, lower-cost New York Stock Exchange was owned by underwriters and included a specialist system that is less vulnerable to HFT tactics that can disadvantage investors.

July 27, 2018 | Permalink | Comments (0)

New Securities Law Articles in Print

The following law review article relating to securities regulation is now available in paper format:

Scott D. Hughes, Cryptocurrency Regulations and Enforcement in the U.S., 45 W. St. L. Rev. 1 (2017).

Dorothy S. Lund, The Case Against Passive Shareholding Voting, 43 J. Corp. L. 493 (2018).

Jeremy Kidd, Quacks or Bootleggers: Who's Really Regulating Hedge Funds?, 75 Wash. & Lee L. Rev. 367 (2018).

Hester Peirce, Rethinking the National Market System, 43 J. Corp. L. 649 (2018).

Gladriel Shobe, Private Benefits in Public Offerings: Tax Receivable Agreements in IPOs, 71 Vand. L. Rev. 889 (2018).

Anne M. Tucker, The Long and the Short: Portfolio Ratios & Mutual Fund Investment Time Horizons, 43 J. Corp. L. 581 (2018).

July 27, 2018 | Permalink | Comments (0)

Sunday, July 22, 2018

New Securities Law Articles in Print

The following law review article relating to securities regulation is now available in paper format:

Alexander Hall, Comment, Whistling Different Tunes: A Comprehensive Look at the Future of Whistleblowers under Dodd-Frank, 86 UMKC L. Rev. 681 (2018).

Tamilla Nurizada, Note, A Global Body and a Global Problem: The Curious Case of the G-20 and Securities Regulation, 50 Cornell Int'l L.J. 643 (2017).

A.C. Pritchard, Book review, Insider Trading Law and the Ambiguous Quest for Edge, 116 Mich. L. Rev. 945 (2018).

July 22, 2018 | Permalink | Comments (0)

Tuesday, July 17, 2018

New Securities Law Articles in Print

The following law review article relating to securities regulation is now available in paper format:

Ryan Bubb & Marcel Kahan, Regulating Motivation: A New Perspective on the Volcker Rule, 96 Tex. L. Rev. 1019 (2018).

Jacqueline K. Chang, Note, Kokesh v. SEC: The Demise of Disgorgement, 22 N.C. Bank. Inst. 309 (2018).

Matthew Fagan, Note, Third-Party Institutional Proxy Advisors: Conflicts of Interest and Roads to Reform, 51 U. Mich. J.L. Reform 621 (2018).

Anthony Michael Sabino, Reflections Upon the Jurisprudence of Justice Antonin Scalia: Selections from Securities Law, Arbitration, and Administrative Law, 46 Hofstra L. Rev. 445 (2017).

Joanne Wu, Note, Investors' Trash, Taxpayers' Treasure: The Banco Popular Wipeout and Contingent Convertible Bonds, 22 N.C. Bank. Inst. 405 (2018).

July 17, 2018 | Permalink | Comments (0)

Thursday, July 5, 2018

Sharfman on Dual Class Share Voting Versus “Empty Voting” of Mutual Fund Advisors

Bernard S. Sharfman has a nice post on Dual Class Share Voting Versus the “Empty Voting” of Mutual Fund Advisors over at the The Conference Board Governance Blog.  In part, he writes:

From time to time I am asked to explain how I can support the disproportionate voting found in dual class shares while at the same time strongly criticizing the “empty voting” of mutual fund advisors. While both are corporate governance issues that need to be addressed separately, both do involve the same phenomenon, the ability of certain shareholders to obtain voting power that is much greater than their economic interest. . . . Dual class shares are a value maximizing result of a specific firm’s private ordering of corporate governance arrangements.  They are only agreed to when it is expected to result in a successful offering to new investors.  In contrast, empty voting has become a new systemic risk for all those who invest in the equities of U.S. public companies and for public companies in general.  It is an agency cost that needs to be addressed and controlled.

July 5, 2018 | Permalink | Comments (0)

Sunday, July 1, 2018

Book Announcement: Anderson on Insider Trading

John P. Anderson has just published a new book with Cambridge University Press, Insider Trading: Law, Ethics, and Reform.  The description of the book from the website is as follows:

As long as insider trading has existed, people have been fixated on it. Newspapers give it front page coverage. Cult movies romanticize it. Politicians make or break careers by pillorying, enforcing, and sometimes engaging in it. But, oddly, no one seems to know what’s really wrong with insider trading, or - because Congress has never defined it - exactly what it is. This confluence of vehemence and confusion has led to a dysfunctional enforcement regime in the United States that runs counter to its stated goals of efficiency and fairness. In this illuminating book, John P. Anderson summarizes the current state of insider trading law in the US and around the globe. After engaging in a thorough analysis of the practice of insider trading from the normative standpoints of economic efficiency, moral right and wrong, and virtue theory, he offers concrete proposals for much-needed reform.

More information about the book can be obtained here.  Although Professor Anderson and I reach different conclusions on insider trading in some instances, I highly recommend this text for anyone interested in the topic.  The book has already received excellent reviews from many top corporate law scholars.  A discounted copy can by obtained by using this flyer.



July 1, 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.

July 1, 2018 | Permalink | Comments (0)

Gurrea-Martínez & Remolina on Initial Coin Offerings

Aurelio Gurrea-Martínez and Nydia Remolina have posted The Law and Finance of Initial Coin Offerings on SSRN with the following abstract:

The rise of new technologies is changing the way companies raise funds. Along with the recent increase of crowdfunding in the past years, a new form of funding has emerged more recently: the use of Initial Coin Offerings (ICOs). In 2017, companies raised more than $4 billion through ICOs in the United States, and more than $11billion has been raised during the first semester of 2018. In a typical ICO, a company raises cryptocurrencies giving some rights in return. The different nature and features of these rights, known as “tokens”, are generating many controversies among securities regulators around the world. Namely, it is not clear whether and, if so, when these tokens should comply with securities law. Securities regulators are addressing this issue in a very different manner across jurisdictions: while countries like the United States, Switzerland and Singapore are requiring companies to comply with existing securities rules only when a company issues “security tokens”, other jurisdictions, such as China and South Korea, have prohibited ICOs, and Mexico subject any issuance of tokens to a system of full control ex ante. Nevertheless, ICOs not only generate these challenges for securities regulators. They also arise many other issues from an accounting, finance, corporate governance, data protection, anti-money laundry and insolvency law perspective. By providing a comparative and interdisciplinary analysis of ICO, our paper seeks to provide regulators and policy-makers with a set of recommendations to deal with ICOs in a way that may promote innovation and firms’ access to finance without harming investor protection, market integrity and the stability of the financial system.

July 1, 2018 | Permalink | Comments (0)

Anand, Choi, Pritchard & Puri on Insider Trading

Anita Anand, Stephen J. Choi, Adam C. Pritchard, and Poonam Puri have posted An Empirical Comparison of Insider Trading Enforcement in Canada and the United States on SSRN with the following abstract:

Canadian and American securities market regulators have differing approaches to enforcement. In this article, we present the results of an empirical study comparing a highly salient aspect of securities enforcement—insider trading—in Canada and the United States. We make a number of important findings. First, adjusting for trading volume, Canada has a greater intensity of enforcement when compared to the U.S. Second, Canadian securities regulators primarily concern themselves with insider trading in Canadian companies, while the SEC brings more enforcement actions involving insider trading in companies incorporated outside the U.S. Third, we do not find significant differences in the fraction of actions involving multiple traded companies between Canada and the U.S.. However, we do see that U.S. investigations involve a significantly greater number of defendants and that the SEC is more than twice as likely to pursue tippers or tippees (although we observe no significant difference in the likelihood that top insiders will be pursued). Fourth, we find that U.S. cases are significantly more likely to result in a criminal referral leading to prosecution. Fifth, we find that settlements are more likely in the U.S. Finally, in terms of penalties, we find no significant difference in monetary penalties between the two countries. However, we do find that Canada is more likely to apply a bar as a sanction, but if a bar is applied, the U.S. is more likely to make the bar permanent. These findings neither demonstrate a need for systemic reform in either jurisdiction nor suggest that centralized regulation is necessarily better from an enforcement perspective. But, they do provide insight into the differing points of regulatory emphasis in two jurisdictions. From a comparative perspective, our research thus allows regulators to begin to evaluate whether their enforcement approach is optimal on the basis of quantitative data.

July 1, 2018 | Permalink | Comments (0)

Monday, June 25, 2018

New Securities Law Articles in Print

The following law review article relating to securities regulation is 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)