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Securities Regulation

Arnold & Porter Discusses Insider Trading’s Personal Benefit Test After Martoma, Gupta, and Other Recent Cases

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On January 24, former SAC Capital Advisors portfolio manager Mathew Martoma petitioned the Supreme Court to review his 2014 conviction for insider trading.  Martoma’s conviction stems from activity in 2008 when he paid a doctor from the University of Michigan for tips about clinical trials of a potential Alzheimer’s medication.  Before the results of the clinical trial were announced, Martoma caused SAC Capital to enter into substantial short-sale and options trades that resulted in approximately $275 million in gains and losses avoided.  Martoma’s appeal is the latest in a series of insider trading cases, mostly in the Second Circuit, attempting … Read more

Debevoise & Plimpton Discusses SEC’s Nissan Inquiry and Non-U.S. Issuers of ADRs

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It was reported on January 27 that Nissan Motor Co., Ltd. (“Nissan”) had received an inquiry from the United States Securities and Exchange Commission (the “SEC”), regarding alleged disclosure violations involving payments to its former Chairman, Carlos Ghosn. The reported inquiry is an unusual instance where the SEC has opened an inquiry into possible disclosure violations of a company without securities listed in the United States. Nissan has Level I American Depositary Receipts (“ADRs”) traded over-the-counter in the United States, but is not listed there and thus is not subject to U.S. reporting and record keeping requirements.[1]

The announcement … Read more

SEC Commissioner Offers Inside View of the Regulation Machine

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I had high expectations when I picked up Thom [Lambert’s] book on regulation shortly after it first came out several years ago.[1] Those expectations were exceeded by the clear and compelling way in which the book wrestles with the difficulties faced by regulators as they seek to design regulations that solve problems without creating larger problems in the process. As the book explains, “regulation . . . always involves trade-offs. The $64,000 question is how policymakers should proceed to ensure that they strike those trade-offs in a manner that creates as much social welfare as possible.”[2] I appreciate

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SEC Chair Discusses Shareholder Proposals Seeking Mandatory Arbitration Provisions in Bylaws

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The issue of mandatory arbitration provisions in the bylaws of U.S. publicly-listed companies has garnered a great deal of attention.  As I have previously stated, the ability of domestic, publicly-listed companies to require shareholders to arbitrate claims against them arising under the federal securities laws is a complex matter that requires careful consideration.[1]

On various occasions, I have been asked about this issue in the hypothetical context of whether the staff of the Division of Corporation Finance would declare effective the registration statement of a domestic company seeking to include mandatory arbitration provisions in its governing documents at the

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Securities Disclosure As Soundbite: The Case of CEO Pay Ratios

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Since 2018, U.S. public companies have had to calculate and report a new, unconventional statistic—a CEO pay ratio—which links CEO pay to the pay of rank-and-file workers. Based on a last-minute addition to the Dodd-Frank Act of 2010, the disclosure requirement generated significant controversy during the lengthy SEC rulemaking process. Companies and their executive compensation consultants spent years and considerable resources preparing to comply with the rule. Once the pay ratio figures started arriving in 2018, they captured public imagination in ways that the typically long and technical corporate disclosure documents never do. The sizeable pay gaps highlighted by the … Read more

Debevoise Discusses Possible EU Approach to ICOs and Crypto-Assets

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In the first week of 2019, both the European Securities and Markets Authority (“ESMA”) and the European Banking Authority (“EBA”) issued reports advising EU legislators on the regulation of “crypto-assets” and initial coin offerings (“ICOs”). The European Supervisory Authorities (“ESAs”), a body consisting of ESMA, EBA and the European Insurance and Occupational Pensions Authority, concurrently issued a joint report on innovation hubs and regulatory sandboxes.

The reports aim at clarifying the applicability and suitability of the EU financial regulatory framework to crypto-assets and providing recommendations for regulatory adjustments to address its shortcomings.

ESMA’S ADVICE ON CRYPTO-ASSETS AND INITIAL COIN OFFERINGS

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Latham & Watkins Discusses Key Compensation Items for 2019 Proxy Season

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Even as the US government shutdown continues to create complexities for many companies,[1] it is business as usual for US public companies that are continuing their annual planning for the upcoming proxy season. Although 2019 introduces fewer significant changes than 2018 to the executive compensation landscape, this Client Alert offers a brief summary of the key executive compensation-related reminders and considerations that public companies should continue to prioritize early in 2019 and in the course of their preparations for the proxy season.

New Requirement to Disclose Hedging Practices and Policies

As mandated under the Dodd-Frank Act, the Securities and … Read more

The Changing Character of Securities Litigation in 2019: Why It’s Time to Draw Some Distinctions

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Securities litigation is growing at a prodigious rate. Is that good or bad? This column will answer that we have to unpack this phenomenon and realize that very different things (with very different implications) are happening simultaneously. Let’s begin with the basic data: Some 403 federal securities class actions were filed in 2018, down slightly from 412 in 2017 (which was the highest year since 2001), but more than 200% of the average number for 1996 to 2016 (which was 193).[1] Viewed together, 2017 and 2018 show that the rate of securities class action filings is accelerating, and this … Read more

SEC Chair Discusses EDGAR-Hacking Enforcement Action

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In August 2017, shortly after my arrival at the Commission, I was informed that an intrusion into the SEC’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system took place in 2016.   We immediately initiated a series of review and response initiatives, including promptly disclosing the incident and our anticipated response to the public and to Congress.[1]

In the subsequent months, we have pursued various review and uplift efforts around the EDGAR system and the SEC’s information technology systems more broadly.  These efforts are discussed in more detail in my Congressional testimony and our agency financial report.[2]

Importantly, one

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The Impact of IPOs on Peer-to-Peer Lending Platforms

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In a new paper, we investigate how initial public offerings affect peer-to-peer lending platforms and, more specifically, whether the platforms tend to alter their operational decisions in anticipation of going public.

Peer-to-peer lenders are essentially online services that match anonymous lenders with borrowers at a lower cost than traditional banking institutions do. Consequently, borrowers can pay lower interest rates, and lenders can potentially earn higher returns. Interest rates are usually set by an intermediary platform on the basis of the borrower’s creditworthiness (based on features such as credit score, employment status, annual income, debt-to-income ratio, and credit history). The intermediary … Read more

Debevoise & Plimpton Discusses Custody of Digital Assets

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Interest in cryptocurrencies and other digital assets on blockchains or distributed ledgers[1] has increased exponentially in recent years. The total market capitalization of cryptocurrencies and other digital assets on blockchains increased from slightly more than $17.5 billion in January 2017 to an all-time high of more than $813.5 billion in January 2018. While prices and market capitalization have dropped significantly since then, readings in the neighborhood of $135 billion as of late November 2018 still suggest significant, longer-term interest in digital assets for investment and other purposes.[2]

Significant uncertainties remain, however, in applying existing laws, regulations and practices … Read more

Cryptocurrency Pump-and-Dump Schemes

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Initial coin offerings (ICOs) have recently emerged as a popular method of financing blockchain-related startups. In an ICO, a startup creates and distributes its digital tokens, typically in exchange for Bitcoin, Ethereum, or fiat currencies such as U.S. dollars to raise capital to fund its operations. The startling growth of this market, coupled with rampant speculation and volatility, has both generated excitement and raised concern about potential exploitation or fraud.

In a new paper, we study “pump-and-dump” schemes (P&Ds) in the cryptocurrency market. P&D is a form of price manipulation that involves artificially inflating an asset price before selling … Read more

Ballard Spahr Discusses SEC Case Against Clearing Broker Under Bank Secrecy Act

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On December 11, Judge Denise Cote of the Southern District of New York granted, in part, the Securities and Exchange Commission’s (“SEC”) motion for summary judgement in its action against Alpine Securities, Inc. (“Alpine”), finding that the clearing broker was liable for thousands of violations of Rule 17a-8 of the Securities Exchange Act of 1934 (“Exchange Act”), which requires broker-dealers to report potentially illegal trading activity under the Bank Secrecy Act (“BSA”). This enforcement action is significant in numerous respects, including the question raised repeatedly by Alpine – and what appears to be one of first impression – as … Read more

Skadden on Delaware Chancery’s Rejection of Forum Selection Limits on Securities Act Claims

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On December 19, 2018, the Delaware Court of Chancery held that forum selection provisions contained in the certificate of incorporation of Delaware corporations are invalid to the extent that they require any claim under the Securities Act of 1933 to be filed only in federal court.

Congress enacted the Securities Act of 1933 (the 1933 Act) after the stock market crash of 1929. The 1933 Act requires a company offering securities to the public “to make full and fair disclosure of relevant information” by filing a registration statement with the Securities and Exchange Commission. In order to ensure compliance with … Read more

Debevoise & Plimpton Discusses SEC Enforcement Against Private Equity Advisers

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On December 13, 2018, the U.S. Securities and Exchange Commission (“SEC”) announced a settled enforcement action against private equity adviser Yucaipa Master Manager, LLC (“Yucaipa”) for alleged negligent failure to disclose conflicts of interest and misallocation of fees and expenses to the funds it advised.[1] The action originated from concerns raised by staff from the Office of Compliance Inspections and Examinations. Yucaipa paid nearly $3 million to resolve the case.

The SEC’s order faulted Yucaipa for not providing pre-commitment disclosure that compensation of in-house employees who assisted in preparing the funds’ tax returns would be allocated to fund clients … Read more

The Protection of Investors and the Compensation for their Losses: Australia

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Investor protection has been an ideal in corporate and securities law ever since the early 20th century, when Berle and Means famously highlighted shareholder vulnerability in modern public corporations. In more recent times, investor protection has been treated as a litmus test for the quality of a jurisdiction’s corporate governance and as having a direct link to capital market structure.

Our recent working paper examines the adequacy of Australian law in protecting public company investors in a particular situation – namely, when they rely to their detriment on inadequate, false, or misleading information released by the company. As our … Read more

Transparency and the (E)valuation of Asset-Backed Securities

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In 2011, the commission appointed by Congress to investigate the causes of the financial crisis concluded that “a combination of excessive borrowing, risky investments, and lack of transparency put the financial system on a collision course with crisis” (The Financial Crisis Inquiry Report, 2011, p. xix).  In particular, the opacity of asset-backed securities (ABS) greatly inhibited the ability of investors and regulators to fully understand the risks held by institutions that owned these products.  As part of the post-financial crisis effort to reform the securitization process, the Dodd-Frank Act directed the SEC to “require issuers of asset-backed securities, … Read more

SEC Chair Clayton Talks Small Business Capital Formation

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Every year the SEC staff does a tremendous job identifying topics, selecting speakers and coordinating the behind the scenes work necessary to organize this all-day event focused on small business capital formation.[1]  Thank you Bill, Jennifer [Zepralka] and the staff in the Division of Corporation Finance and the Office of Minority and Women Inclusion for coordinating this year’s forum. This year I also want to extend a special thank you to our co-hosts—Dean Makhija [Muh-kee-sha] and the rest of the staff at The Ohio State University Fisher College of Business—for opening your doors to us. It is nice to

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Common Ownership: The Investor Protection Challenge of the 21st Century

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Thank you so much, Scott [Hemphill], for that incredibly kind introduction.* It’s a real honor to be here with you—and to be invited to testify before the Federal Trade Commission (FTC). I share your commitment to making sure our markets are competitive and fair for all Americans. And I’m delighted that the FTC has convened this important conversation about the increasingly concentrated ownership profiles of America’s public companies.

I should begin, of course, with the standard disclaimer: the views I express here are my own and do not reflect the views of the Securities and Exchange Commission, my … Read more

New York Attorney General Overreaches in Climate-Change Complaint Against Exxon

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The New York Attorney General (“NYAG”) recently filed a complaint against ExxonMobil alleging that the company violated the Martin Act, New York State’s securities law, by making material misstatements concerning how it was accounting for the possibility of increasingly stringent climate-change regulations in the future.[1]  Exxon publicly projected costs arising from the regulation of carbon emissions that, for OECD countries, would reach $60 per ton of CO2  by 2030 and $80 per ton by 2040, with similar regulations in non-OECD countries also starting to impose costs by 2030.  The complaint alleges that in making many of its investment … Read more