It was predictable. Given a solidly Republican Congress and a Republican president, sooner or later, an effort would be made in the Trump administration to curb class actions. Not surprisingly, it has come sooner, with the “Fairness in Class Action Litigation Act of 2017” (H.R. 985). A motley assortment of procedural “reforms”—some good, many bad, and most overbroad—H.R. 985 has been introduced by Representative Bob Goodlatte (R-Va.), chairman of the House Judiciary Committee. Much of this bill is a reincarnation of a similar class action “reform” bill that passed the House in 2015, but died in the Senate (possibly because … Read more
Swaps transactions, virtually unregulated before the 2008 financial crisis, are regulated in the U.S. under Title VII of the Dodd-Frank Act. Title VII empowers the Commodity Futures Trading Commission (CFTC), for most swaps, and the Securities and Exchange Commission, for the balance of swaps (securities-based swaps), to adopt a comprehensive regulatory framework. Many other G-20 countries have added similar responsibilities for financial regulators given the role swaps played in the financial crisis.
The CFTC now is being run by Acting Chairman J. Christopher Giancarlo. He is the lone Republican CFTC commissioner and recently criticized many, but not all, of the … Read more
State securities laws—generally referred to as “blue sky laws”— contain both registration provisions and antifraud provisions. Registration provisions require that a company offering its securities to investors in a particular state register its securities with the state or meet the requirements for an exemption from the state’s registration provisions. State antifraud provisions prohibit fraud in connection with the offer and sale of securities.
Blue sky laws – in particular, state registration provisions—have been a significant, unfair and inefficient impediment to small business capital formation. A small business offering its securities as a way to raise capital is required to meet … Read more
How much do corporate insiders make on their trades? It has long been shown that insiders realize significant positive abnormal returns on their transactions, in percentage terms. Surprisingly, however, there has been little research examining insiders’ dollar profits, even though it is dollar profits, rather than percentage returns, that insiders themselves likely care about.
Why is it important to make this distinction? Even if insiders realize high percentage returns, they may trade small amounts or trade infrequently, so that overall profits are still small. Conversely, even small percentage returns may lead to high profits if an insider trades large … Read more
In recent years, the Securities and Exchange Commission has focused on using quantitative analysis to identify statistical outliers and anomalies through programs like the Aberrational Performance Inquiry, which evaluates hedge fund returns, and the Accounting Quality Model (informally known as “RoboCop”), which scours public company filings to estimate “peer-level risk metrics.” Using enforcement actions involving the allocation of securities as an example, we explore issues raised by the use of statistics in SEC enforcement actions and inquiries.
Recent trade allocation actions by the SEC
In the last few years, the SEC has announced multiple enforcement actions against investment … Read more
In the fall of 2016, UFP, LLC, d/b/a uFundingPortal (UFP), became the subject of FINRA’s first enforcement action against a registered funding portal. During the course of the investigation, UFP shut down its website and withdrew its registration as a funding portal with the Securities and Exchange Commission (SEC). Despite its withdrawal from registration, UFP remained subject to FINRA’s jurisdiction and submitted a Letter of Acceptance, Waiver and Consent (AWC) to settle the alleged rule violations without admitting or denying the findings. FINRA accepted the AWD, finding that UFP violated two Regulation Crowdfunding Rules and three FINRA Funding Portal Rules, … Read more
On January 19, 2017, the U.S. Commodity Futures Trading Commission (the “CFTC”) Division of Enforcement (the “Division”) issued two Enforcement Advisories setting forth the factors that the Division may consider in assessing cooperation by companies and individuals in the context of CFTC enforcement proceedings.
The Enforcement Advisories provide greater guidance on the Division’s view as to what constitutes effective cooperation by a company and/or an individual in a CFTC investigation and enforcement action. They also continue a broader trend of authorities, both in the U.S. and abroad, articulating demanding standards that a company must meet to … Read more
The Delaware Supreme Court requested further consideration of the federal due-process issues that might arise where a court is asked to hold that a shareholder derivative action is precluded because a prior derivative action was dismissed based on the first plaintiff’s failure to make a demand on the company’s board before filing suit. The Court’s January 18, 2017 decision in California State Teachers’ Retirement System v. Alvarez squarely focuses on an issue that has been raised several times in the Delaware Court of Chancery: whether federal due-process principles prevent the actions of a named plaintiff in a derivative action from … Read more
Securities disclosure is under fire, with professors and politicians launching two basic criticisms against it. The first is that it causes “information overload:” Investors cannot process all the disclosure that securities rules require. The idea can be traced back to a 2003 paper by then-professor, and now former SEC commissioner, Troy Paredes, and it is built on research in behavioral economics. Information overload has recently caught fire, being cited by former Securities and Exchange Commission Chair Mary Jo White, two other SEC Commissioners, SEC staff, and members of Congress as a rationale for the SEC’s Disclosure … Read more
The observed prices of financial assets are a function of the information available to investors regarding the assets. The revelation of new information regarding the future prospects of a firm affects the price of the firm’s financial securities. The news of a corporate merger, the announcement of a CEO resignation, or the announcement of the development of a new product all provide investors with new information regarding the economic prospects of the firm, and thus affect the valuation of outstanding financial claims on the firm’s assets. In our study, we examine one such source of new information. Specifically, we examine … Read more
On December 27, the United States Court of Appeals for the Tenth Circuit in Bandimere v. S.E.C. found that the Securities and Exchange Commission’s (“SEC”) use of administrative law judges (“ALJs”) violated the U.S. Constitution. While the court’s opinion relies on a somewhat arcane question of administrative law—whether the hiring of SEC ALJs must comply with the Appointments Clause of the Constitution—its decision to set aside an SEC order imposing sanctions for securities laws violations raises significant questions about future SEC claims brought before ALJs rather than in federal courts, as well as prior adjudications. With the D.C. Circuit … Read more
How will derivatives regulation change in the Trump Administration? During the campaign and since the election, President-elect Trump and his advisors, as well as key Congressional Republicans and other market participants, have suggested that aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), should be rolled back, or even repealed outright. Derivatives regulation, however, has not been the focus of much of the discussion around financial regulation more generally, and some market participants have suggested that it would not necessarily be feasible or desirable to roll back the Dodd-Frank reforms completely. It will likely be some time … Read more
Company insiders trade for a variety of reasons. While there has been empirical evidence suggesting that insiders buy their firm’s shares ahead of good news, in the case of insider sales, the evidence has been mixed. In particular, the academic literature has largely failed to distinguish genuine liquidity-motivated sales from information-based trades, thwarting efforts to uncover whether the average sale contains any information relevant to the value of the stock. In a new paper, I and my co-authors, Jonathan Faasse and Juliane Lotz, offer new evidence of what information insider sales convey, using voluntary disclosures in the footnotes of insider … Read more
In our new article, available here, we examine what we term “regulatory entrepreneurship”: companies pursuing a line of business in which changing the law is a significant part of the business plan. Regulatory entrepreneurship is not a new phenomenon, but it has become increasingly salient in recent years, as a host of high-profile companies – from startups such as Airbnb, DraftKings, and Uber to public companies such as Tesla and Alphabet (formerly Google) – have adopted this strategy. These companies, and other regulatory entrepreneurs, have spent enormous amounts of resources pursuing lines of business that reside in legal gray … Read more
On November 15, 2016, the Securities and Exchange Commission (SEC) approved a plan to establish a Consolidated Audit Trail (CAT), which will contain a complete record of all equities and options traded in the U.S. The plan will require national securities exchanges and FINRA (self-regulatory organizations or SROs), alternative trading systems (ATSs), and broker-dealers (collectively, CAT reporters) to submit information on trade events, including customers and prices, to the CAT on a daily basis. The approval of the plan is an important milestone towards full operation of the CAT, which is projected by the end of 2019 … Read more
The dominant narrative about Salman v. United States, the first insider trading case decided by the U.S. Supreme Court in almost 20 years, is that it was a big win for federal prosecutors. That is only part of the story.
There is certainly good news in the Salman decision for prosecutors. It reaffirms the prohibition against trading based on material nonpublic information provided to a friend or family member as a gift. Moreover, the opinion explicitly rejects the suggestion in United States v. Newman, a 2014 federal appeals court decision, that a tip made to a friend or family … Read more
The fiduciary standards for institutions and individuals providing investment advice throughout the retail investment and municipal securities markets are currently undergoing significant change. Following on the heels of the issuance of a final Department of Labor (the “DOL”) fiduciary rule is the pending effectiveness of new fiduciary standards for municipal advisors, and the expected release of a proposed uniform fiduciary standard for investment advisers and broker-dealers by the U.S. Securities and Exchange Commission (“SEC”). The election of Donald J. Trump as President of the United States, along with a Republican majority in both the House of Representatives and the Senate, … Read more
The election of Donald J. Trump as president and continued Republican control of both the US Senate and House of Representatives may provide the new president the opportunity to immediately remake the Consumer Financial Protection Bureau (CFPB) after he takes office in January 2017.
When a panel of the US Court of Appeals for the District of Columbia Circuit held in October that the structure of the CFPB is unconstitutional, we wrote that the flaw was cured by converting the CFPB’s director from a position that may only be terminated “for cause” to one where the director, as with other … Read more
The Silicon Valley ecosystem has changed profoundly since the dizzying heights of the dot-com era. Consider two of that era’s iconic companies: Yahoo! and eBay. At the time of their IPOs, both of these companies were mere infants by today’s standards. Yahoo reported having 49 employees, net revenue of only $1.3 million, and a total market capitalization of about $400 million. eBay reported having 76 employees, annual net revenue of less than $20 million, and a market capitalization of approximately $700 million.
Google and Facebook ushered in a new era of mature startup. At the time of its 2004 IPO, … Read more
On December 2, 2016, Comptroller of the Currency Thomas J. Curry announced formally that the Office of the Comptroller of the Currency (OCC) will move forward with chartering financial technology (FinTech) companies that offer bank products and services as special purpose national banks. The announcement was accompanied by the OCC’s release of a guidance paper (Paper) entitled “Exploring Special Purpose National Bank Charters for Fintech Companies” that provided both initial guidance on the special purpose chartering process and posed a set of thirteen questions for public comment. The OCC will accept comments on its Paper until January 15, 2017. … Read more