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Facebook’s Libra Heightens Debate Over the Regulation of Cryptocurrencies

Cryptocurrencies like Ether, DAO, Bitcoin and Facebook’s Libra are electronically generated and stored currencies by which users can trade real or virtual objects with one another, bypassing traditional central clearinghouses. Given that these cryptocurrencies are starting to replace some national currencies and financial products, should they be regulated? And, if so, how? Some countries, such as China and Russia, prohibit Initial Coin Offerings (ICOs) altogether, while others strive to reach an understanding of the currencies in order to come up with coherent regulation. As for the U.S., in April 2019 the Securities and Exchange Commission (SEC) finally issued its framework … Read more

The Readability of Company Responses to SEC Comment Letters

The Securities and Exchange Commission published its Plain English Handbook in 1998 with a goal of promoting “clearer and more informative disclosure documents” (SEC 1998).  Warren Buffet authored the preface, where he states, in part:

For more than forty years, I’ve studied the documents that public companies file. Too often, I’ve been unable to decipher just what is being said or, worse yet, had to conclude that nothing was being said. If corporate lawyers and their clients follow the advice in this handbook, my life is going to become much easier. (SEC 1998).

Consistent with the SEC’s goal, a number … Read more

SEC Commissioner Peirce Addresses the American Chamber of Commerce in Japan

It is an honor to be with you today [August 7, 2019]. I have long wanted to visit Japan. Indeed, one of the options I explored following college was coming to Japan to teach English. Instead I ended up in Austria—not teaching English. My would-have-been students are certainly better off for it, but I am pleased to finally have the chance to be here in a learning, rather than teaching, capacity. Before I begin, I must give a standard disclaimer: the views I express today are my own views and not necessarily those of the United States Securities and Exchange

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Riding the Mania of Blockchain: Public Firms’ Speculative 8-K Disclosures

The price of Bitcoin, a cryptocurrency based on blockchain technology, increased dramatically from less than a penny when it was launched in 2009 to $900 in January 2017 and peaked at over $19,500 in December 2017. This rise coincided with a dramatic surge in public interest, debate, and prognostication about the cryptocurrency as well as its underlying blockchain technology. According to Google, “Bitcoin” was the second most searched news term in 2017, ranking just below “Hurricane Irma” and just above “Las Vegas Shooting.” Figure 1 shows that the number of Google searches on “bitcoin,” “blockchain,” and “cryptocurrency(ies)” closely mirrored Bitcoin … Read more

SEC Commissioner Discusses Cross-Border Cooperation in Digital-Asset Regulation

Thank you, Robby [Greene], for that kind intro. I am delighted to see that Robby, once my research assistant, has clearly gone on to bigger and better things. I also am delighted to be here in Singapore, by some accounts the global crypto-hub,[1] and appreciate the hospitality of the Singapore University of Social Sciences. I am particularly grateful for the opportunity to learn about the developments in crypto in Asia, which, as I do not need to tell this audience, is home to a very active part of the crypto community. Before I get too far along in my

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The Potential Rewards for Blowing the Whistle on Wall Street Just Went Up

As an incentive to blow the whistle, the Securities and Exchange Commission awards tipsters who supply credible information resulting in successful enforcement actions up to 30 percent of monetary penalties paid by securities violators. The unique features of the program encourage tipsters from all walks of life and sectors to step forward. For example, the SEC paid $4.5 million to a former Brazilian orthopedic surgeon for blowing the whistle on a kickback scheme orchestrated by a global medical device manufacturing company. To date in 2019, the SEC has awarded nearly $60 million to five individuals.[1]

The size of a … Read more

SEC Chairman Clayton Speaks to Fixed-Income Committee

Thank you, Michael [Heaney]. Good morning everyone. Thank you all for being here. I want to extend a warm welcome to our newest Commissioner, Allison Lee — Welcome back to the Commission and to your first FIMSAC meeting. We have a full agenda today with four panels, including recommendations from the Corporate Bond Transparency Subcommittee and the Municipal Securities Transparency Subcommittee. We will also hear updates from the Technology and Electronic Trading Subcommittee and the ETFs and Bond Funds Subcommittee. I will endeavor to be efficient, as I know we are all eager to engage on these substantive matters.


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Blockchain Will Not Solve the Proxy Voting Problem

The U.S. proxy voting process is widely viewed as inefficient, opaque, and frequently inaccurate. The conventional wisdom is that voting inaccuracy has arisen largely as a result of decisions made in the 1960s to transition to a system of share immobilization[1] pursuant to which most shares are held in “street name”[2],[3] by securities intermediaries as a fungible mass of shares that is not directly traceable to any individual.[4] In particular, although the street name system facilitates securities trading, holding shares in fungible bulk makes it difficult, if not impossible, for street name investors to confirm … Read more

The Costs of Complying with SOX’s Internal-Controls Audit Requirement

Section 404(b) of the Sarbanes Oxley Act (SOX) requires auditors to test and report on the effectiveness of internal control over financial reporting (ICFR) for accelerated and large accelerated filers. Although Iliev (2010) documents substantial costs to initially comply with 404(b), proponents of Section 404(b) argued that compliance costs would decrease over time as companies shift from implementation to maintenance mode and improve efficiency related to ICFR oversight and testing. Likewise, auditor and client experience with the requirements of Section 404(b) may improve the effectiveness of ICFR audits and their ability to detect and remediate existing material weaknesses, thus increasing … Read more

SEC Chairman Clayton Speaks to Investor Advisory Committee

Thank you, Anne [Sheehan].  Good morning everyone, and I want to extend a special welcome to our new commissioner, Allison Lee.

I am interested in today’s discussion.  I understand the Committee first will be talking about the SEC approach to regulation in areas where competition may be limited.  Competition is important to the functioning of our capital markets and, over the years, some of the Commission’s most effective actions have fostered competition.

Personally, I often think of the work of the Commission under Chairman Levitt, where the elimination of opacity in our trading markets fostered competition which, in turn, brought

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Do Managers Bias Earnings Forecasts in Response to Current Earnings Surprises?

Each quarter, managers provide a summary of their firm’s accounting performance – a disclosure known as a quarterly earnings announcement. Earnings announcements attract significant attention from investors and media outlets because, if earnings are different than market expectations, stock price will change and financial analysts will revise their forecasts of future earnings. These effects are magnified if investors and analysts view the current earnings as persistent.  Managers are therefore justifiably concerned with the extent to which current earnings fall in line with market expectations, and the extent to which investors and analysts view any differences as being persistent.

To assist … Read more

Gibson Dunn Offers 2019 Mid-Year Securities Enforcement Update

The first half of 2019 has seen a continuation of the Securities and Exchange Commission’s emphasis on protecting the interests of Main Street investors. Chairman Clayton reiterated these themes in his testimony in May before the Financial Services and General Government Subcommittee of the U.S. Senate Committee on Appropriations.[1] In addition to the no less than 43 references to Main Street investors, the Chairman’s testimony highlighted: (1) the Retail Strategy Task Force, formed in 2017, to use data-driven strategies to generate leads for investigation of industry practices that could harm retail investors, as well as (2) the mutual fund … Read more

SEC Chairman Clayton Kicks Off SEC Roundtable on Short-Termism

Bill [Hinman] thanks a lot. I’m going to highlight three items to try and kick us off here. First, a thank you to Bill, Coy, Shelley and the other staff from the Division of Corporation Finance for the work you did in hosting today’s roundtable and on a day to day basis. This event demonstrates the commitment of the Division to important issues that have a direct impact on our Main Street Investors and your commitment to fair and transparent markets.

I also want to thank our panelists. As I look across here if I was investing my money for

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The Supreme Court Misses an Opportunity in Securities Law Enforcement

In Lorenzo v. SEC, the U.S. Supreme Court continued the struggle to define the difference between primary liability and aiding and abetting liability in Rule 10b-5 and other securities fraud claims.  The difference matters because private plaintiffs do not have a claim against an aider and abettor.  After several decisions narrowing the category of primary liability, the Court tacked back toward the plaintiff’s side in Lorenzo, but the decision resolved little about the difference between primary and aiding-and-abetting liability and created new questions.

Lorenzo was the director of investment banking at a broker-dealer.  His boss prepared and approved a … Read more

Fragmented Securities Regulation: Neglected Insider Trading in Stand-Alone Banks

The financial regulatory structure in the U.S. is complex, consisting of multiple agencies with overlapping responsibilities. Regulators have raised concerns that regulatory fragmentation may undermine the stability and efficiency of the U.S. financial system (GAO 2016). In this paper, we suggest that fragmented securities regulation increases information asymmetries and the costs of searching filed documents and thus negatively affects capital markets. Specifically, we examine the consequences of separate disclosure systems due to regulatory fragmentation on stock price efficiency.

Publicly traded banks without a bank holding company (hereinafter stand-alone banks) in the U.S. are exempt from Securities and Exchange Commission (SEC) … Read more

Insider Trading As Fraud

U.S. Insider trading law is strange. Because Congress has never adopted a comprehensive statute on the subject, insider trading law is largely a species of federal common law. That’s not to say that the Supreme Court has nothing to go on — since 1980, it has developed its insider trading jurisprudence around Section 10(b) of the Securities Exchange Act of 1934 and the SEC’s Rule 10b-5. But in some ways, this fact makes things even stranger because Rule 10b-5 simply creates liability for securities fraud. And yet, what does insider trading have to do with fraud?

A lot, or so … Read more

SEC Staff Offers Views on the Transition from LIBOR

Division of Corporation Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant[1]

LIBOR[2] is an indicative measure of the average interest rate at which major global banks could borrow from one another.  LIBOR is quoted in multiple currencies and multiple time frames using data reported by private-sector banks.[3]  LIBOR is used extensively in the U.S.[4] and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other

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SEC Proposes to Exempt More Firms from Required Attestation of Internal Controls

The Securities and Exchange Commission has proposed changes to its rules requiring companies to obtain attestation on their internal controls from an independent public accountant. The proposal rests on the idea that attestation’s costs often exceed its benefits. The SEC’s principal empirical support for that idea is a Journal of Finance article using data from 2004.[1] Since markets have changed since then, over 40 law and accounting professors have petitioned the SEC to replicate the Journal of Finance study using recent data before proceeding with the proposed changes.

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The attestation requirement, known as Section 404(b), is … Read more

SEC Chair Clayton Discusses Regulation Best Interest and Investment Advisers

As many of you know, in June, the Securities and Exchange Commission adopted a package of rules and interpretations that will enhance the quality and transparency of retail investors’ relationships with broker-dealers and investment advisers.[1] Importantly, they bring the legal requirements and mandated disclosures for broker-dealers and investment advisers in line with reasonable investor expectations. These actions do not attempt to favor one type of service or relationship. Rather, they are designed to increase investor protection while preserving access for Main Street investors—both in terms of choice and cost—to a variety of investment services and products.

Our rules and

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SEC Statements on the Retirement of Delaware Chief Justice Leo Strine

Yesterday, Chief Justice Leo Strine announced his retirement after more than twenty years on the Delaware Court of Chancery and Supreme Court of Delaware, two of the most important courts for our markets and our investors.

Chief Justice Strine deserves our thanks for bringing his unparalleled combination of energy, intellect, experience, legal knowledge and pragmatism to the bench. His contributions have extended well beyond the courtroom and the Commission has benefited substantially from his willingness to engage with us on a range of topics important to our investors and our markets. Finally, and critical to the work of the SEC,

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