Securities Regulation

The Financial CHOICE Act of 2017: Will Collective Amnesia Triumph?

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Notwithstanding decidedly hostile testimony last month from this humble columnist,[1] the U.S. House of Representatives will soon pass legislation (probably on a strict party-line basis) entitled, “The Financial CHOICE Act of 2017” (H.R. 10) (which acronym stands for “Creating Hope and Optimism for Investors, Corporations, and Entrepreneurs”).  Despite this cutesy and innocuous title, the CHOICE Act proposes dangerous and radical surgery that would gut those provisions of the Dodd-Frank Act that seek to prevent the failure of a single major bank from setting off a chain reaction that could bring down all interconnected banks.  Indeed, the Act reads as … Read more

The Case for Federal Preemption of State Blue Sky Laws

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Society imposes legal requirements on businesses (issuers) when they offer or sell their securities to investors.  These rules governing capital formation are generated both at the federal and state levels.  State securities rules are generally referred to as “state blue sky laws.”[1]

Both the federal rules and state blue sky laws contain antifraud provisions, which prohibit issuers that offer or sell their securities to investors from engaging in manipulative or deceptive acts.  Federal and state rules also contain registration rules, which typically require issuers to provide closely prescribed investment information to designated state and federal governmental agencies (the Securities … Read more

Arnold & Porter Discusses Revised Financial CHOICE Act

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Republicans on the House Financial Services Committee, led by Chairman Jeb Hensarling (R-TX), approved their “Financial CHOICE Act” (FCA) legislation on a party-line 34-26 vote on May 4, clearing the way for consideration on the House floor in the coming weeks. The Committee held this vote following a marathon three-day markup session that saw Committee Republicans defeat numerous Democratic amendments and other delaying tactics. The markup session was a clearly partisan affair that is indicative of the bill’s uncertain future in the closely divided Senate.

The bill, numbered H.R. 10, would make major, comprehensive changes to the Dodd-Frank Wall Street … Read more

Paul Weiss Discusses Review of Dodd-Frank Provisions

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On April 21, 2017, President Trump signed two presidential memoranda calling for review of portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). These presidential memoranda follow the executive order signed on February 3 (see our client alert here) setting forth “Core Principles” intended to guide the regulation of the U.S. financial system.

Orderly Liquidation Authority

The first presidential memorandum (available here) directs the Secretary of the Treasury to review the Dodd-Frank Orderly Liquidation Authority, which provides a mechanism for the seizure, break up and winding down of a failing non-bank … Read more

SEC Discusses Advancing the Capital Markets with High-Quality Information

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Thank you for the kind introduction.  I’m grateful for the opportunity to speak at this financial reporting conference for the second time.

Before I continue, let me remind you that the views expressed today are my own and not necessarily those of the Commission, the individual Commissioners, or other colleagues on the Commission staff.

Let me also express a word of gratitude to the entire OCA team for their work in providing advice to the Commission regarding accounting and auditing matters arising in the administration of the federal securities laws.  I want to also acknowledge their valuable assistance in preparing … Read more

A Response to Dolgopolov’s Critique of “How Rigged Are Stock Markets?”

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In his May 5 post, available here, Stanislav Dolgopolov states that the Securities and Exchange Commission’s recent settlement with Citadel “undermines the so-called ‘Berkeley Study’ which concluded that off-exchange market makers can neither profitably engage in data feed arbitrage by ‘filling marketable orders at (or within) the SIP-generated NBBO [National Best Bid and Offer] . . . at stale prices to the disadvantage of retail investors’ nor ‘choose as their pricing benchmark the slower SIP-generated NBBO to boost their performance metrics.’”  Mr. Dolgopolov further states that our study “skirted the fact that relevant strategies do not rely on choosing … Read more

Ropes & Gray Discusses Limits of Delaware’s Corwin Decision

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The Delaware Supreme Court’s decision in Corwin v. KKR Financial Holdings LLC set a high bar for plaintiff stockholders seeking to challenge public company mergers. Assuming a transaction that is not subject to entire fairness review was approved by a fully informed, uncoerced, disinterested vote of a majority of the stockholders of a target corporation, the business judgment rule applies to post-closing damage suits and, as further clarified by the Supreme Court decision in Singh v. Attenborough, a plaintiff could only challenge such a merger on the basis that it constituted waste. The decision in Co… Read more

The Citadel Settlement, Off-Exchange Market Makers, and Giant Brokerages

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The recent settlement between the U.S. Securities and Exchange Commission (“SEC”) and Citadel Securities[1] is a landmark in the market structure enforcement program. In a nutshell, the regulators targeted high-speed algorithms that opportunistically used different market data benchmarks and involved undisclosed order handling mechanics. Importantly, this settlement may have revealed more than just the SEC’s skillful exposure of yet another hidden wrinkle in the modern electronic marketplace or a description of discontinued practices at one firm. This settlement could shed light on the opaque overlap between high-frequency trading (“HFT”) and off-exchange market making, thus subjecting to scrutiny—whether regulatory, legal, … Read more

Columbia Law Professors Write Three of Top 10 Corporate and Securities Articles

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Merritt Fox, Zohar Goshen, and Eric Talley were among the authors of three of the 10 best corporate and securities articles last year, the Corporate Practice Commentator has announced. The Columbia Law School professors were joined by Gabriel Rauterberg, who was a research scholar at the school when he wrote one of the selected pieces with Fox and Lawrence Glosten, a professor at Columbia Business School.

The Corporate Practice Commentator’s Robert Thompson, a professor at Georgetown Law School, conducted the 23rd annual poll to compile the top-10 list. Teachers of corporate and securities law voted to select the best … Read more

Insider Tips as Gifts: Re-examining Newman After Salman

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Three pending cases – United States v. Martoma, and the habeas corpus cases Gupta v. United States and Whitman v. United States[1] – will allow the U.S. Court of Appeals for the Second Circuit to examine United States v. Newman[2] in light of Salman v. United States.[3]  In Salman, the Supreme Court rejected a Newman-based argument and held that a banker’s gratuitous tips to his brother violated Dirks v. SEC’s[4] ban on insider gifts of information to trading relatives and friends.  However, Martoma, Gupta, and Whitman have argued that Newman remains … Read more

Fed Governor Brainard Discusses Where Banks Fit in the Fintech Stack

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We can learn a lot from the evolution of smartphones as we try to envisage where the fintech ecosystem–and banks’ role within it–might be heading in the future. Smartphones have ushered in an age when different companies can easily work with each other’s products to seamlessly provide services to consumers. Today I want to reflect on what we might learn from that model about the increasingly interconnected world of financial services.

On the 10th anniversary of the iPhone, a Wired.com article revealed that even Steve Jobs hadn’t predicted the smartphone’s potential as a platform.1 Apple was just trying to … Read more

Insiders’ Investment Horizons Matter in Interpreting Their Trades

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Executives, directors and other corporate insiders have privileged access to material non-public information. Previous research shows that trades by insiders are informed, on average. For example, insider purchases tend to precede positive stock returns. In addition, like other investors, corporate insiders may have different investment horizons (i.e., anticipated stock-holding periods) when they trade their company’s stock, depending on their personal investment objectives and styles; desire for liquidity, diversification, or corporate control;, compensation contracts; or understanding and attitude toward insider trading laws.

In our recent paper, “Insider Investment Horizon,” we examine the relation between the investment horizon of corporate … Read more

Skadden Discusses Third-Party Litigation Funding

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The use of third-party litigation financing — generally defined as the funding of litigation activities by entities other than the parties themselves, their insurers or their counsel — continues to increase in the United States. One recent survey showed that nearly 30 percent of private practice attorneys and firms surveyed reported using alternative litigation funding, compared to 7 percent in 2013. In March 2017, a third-party litigation financier reported that its current average investment in new cases is approximately $13 million, up from less than $4 million in 2013. In 2016, the worldwide market for third-party litigation financing was estimated … Read more

Paul Weiss Offers Lessons Learned from the OCC Review of Wells Fargo Sales Practices

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On April 19, 2017, the Office of the Comptroller of the Currency (“OCC”) released its “Lessons Learned Review of Supervision of Sales Practices at Wells Fargo.”[i] The report results from Comptroller Thomas Curry’s directive for an “independent review” of the Wells Fargo supervisory record to “identify any supervision gaps and lessons learned to improve the OCC’s supervisory processes going forward.”

The OCC report mirrors some of the themes of the Wells Fargo investigation report, which we have discussed in a prior memorandum.[ii] According to the OCC report, examiners missed opportunities to probe more deeply into sales practices problems, search for … Read more

Insider Trading, Delaware Courts and SEC Regulation Get Lively Airing at M&A and Corporate Governance Conference

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Insider trading law may be headed for even more disruption, as federal and state watchdogs press broad theories that include hacking and so-called Insider Trading 2.0, the early release of information for a fee, a panel of legal experts said on April 20.

Speaking at the M&A and Corporate Governance Conference in New York, the panel of lawyers and regulators tested the bounds of rules against insider trading in response to a series of hypotheticals posed by Professor John C. Coffee, Jr. of Columbia Law School. An attorney with the U.S. Securities and Exchange Commission said, for example, that the … Read more

Paul Weiss Discusses Delaware Court of Chancery Decision on Equity Incentive Plan Ratification

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In a recent decision in In re Investor Bancorp, Inc. Stockholder Litigation, the Delaware Court of Chancery held that a fully informed stockholder vote approving adoption of an equity incentive plan also ratified subsequent equity awards to individual directors under the plan. The court found that the plan included limits on grants to directors as a beneficiary group, as opposed to “generic” limits applicable to all plan beneficiaries.  In dismissing the shareholder derivative suit, the court applied the business judgment standard of review to the directors’ decision to make the awards to themselves.

Background

In 2015, the directors of … Read more

Skadden Discusses Antitrust Enforcement in the Trump Administration

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Although the Trump administration has announced only one of its selections for top positions at the Antitrust Division of the U.S. Department of Justice (“DOJ”) or the Federal Trade Commission (“FTC”), the election of President Donald J. Trump sets the stage for a potentially significant recalibration of federal antitrust enforcement by the U.S. agencies.

Republican administrations historically have taken a less interventionist approach to antitrust enforcement than their Democratic counterparts, and the Trump administration has an unprecedented opportunity to shape antitrust policy through several key appointments.

Still, many of President Donald Trump’s policy positions have not tracked traditional Republican paradigms, … Read more

Columbia Launches New Special Study of Securities Markets

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Over the last three decades, U.S. and global securities markets have undergone tremendous change, driven by globalization, advances in information technology, and regulatory choices at the federal and international levels. The days of adventuresome floor trading and concerns of safeguarding ink-and-paper securities have given way to electronic order books within a multi-venue exchange system and to concerns about safeguarding interconnected global trade networks lead by SIFI’s. Artificial intelligence systems and distributed ledger technologies on the horizon have further potential to disrupt the landscape.

Markets today are dramatically different from those of 30 or 50 years ago, and a new comprehensive … Read more

The SEC as Financial Stability Regulator

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The Financial Stability Oversight Council is the only regulatory body in the United States with an express mandate to “identify risks to the financial stability of the United States” and to “respond to emerging threats to the stability of the United States financial system.” But the FSOC is not a stand-alone agency; rather it is a council of regulators, lacking sufficient staff or resources to operate on its own.  To function, the FSOC must leverage the expertise of its component agencies – including the Securities and Exchange Commission.

There have been several subtle (and not-so-subtle) tugs-of-war between the FSOC and … Read more

Proskauer Rose Discusses the SEC’s Extraterritorial Reach

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A federal court in Utah recently held that the Securities and Exchange Commission may bring an enforcement action based on allegedly foreign securities transactions involving non-U.S. residents if sufficient conduct occurred in the United States.

The March 28, 2017 ruling in SEC v. Traffic Monsoon, LLC (D. Utah) appears to be the first decision squarely resolving whether the Dodd-Frank Act succeeded in allowing the Government to pursue such claims. The court recognized that the Act’s grant of “jurisdiction” to federal courts over enforcement actions relating to non-U.S. securities transactions had inartfully responded to the Supreme Court’s ruling in Morrison v. … Read more