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Can Technology Solve Information Overload and Complexity in Securities Disclosure?

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

Joshua Filzen, Accountancy, Studio portrait
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Do Investors Understand Quarterly Risk Factor Reports?

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

Cleary Explores Appeals Court Split Over SEC Administrative Cases

On December 27, the United States Court of Appeals for the Tenth Circuit in Bandimere v. S.E.C.[1] 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

Shearman & Sterling Discusses Derivatives Regulation Under Trump

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

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Are All Insider Stock Sales Created Equal?

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

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Regulatory Entrepreneurship

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

PwC Offers 10 Key Points on SEC’s Consolidated Audit Trail Plan

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.[1] 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,[2] including customers and prices, to the CAT on a daily basis.[3] 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

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Salman Insider-Trading Case a Hollow Win for Prosecutors

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

Shearman & Sterling Examines the Changing Fiduciary Duty Landscape in a Trump Presidency

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

Morgan Lewis Discusses The Future of the CFPB Under a Trump Administration

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

Abraham Cable

Fool’s Gold? Equity Compensation and the Mature Startup

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

Arnold & Porter Discusses OCC Plan to Charter FinTech Firms as Special Purpose National Banks

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.[1] The OCC will accept comments on its Paper until January 15, 2017. … Read more

Davis Polk Cites Financial CHOICE Act as Potential Starting Point for Trump Reforms

President-Elect Trump’s transition website promises to “dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.” For those who wonder what that might mean in more detail, we believe that Rep. Jeb Hensarling’s (R-TX) Financial CHOICE Act, introduced earlier this year, is a starting point that signals a potential general direction of travel for financial reform. It is not the end, however, as we expect that the Republican Congress and Administration will have more ambitious plans for a significant reorientation of the regulatory framework (for instance, Rep. Hensarling has stated that he will … Read more

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Does Readability of Financial Disclosures Affect the Bond Market?

Going back as far as the Securities Act of 1933, the Securities and Exchange Commission has taken action to improve the readability and understandability of financial data. In 1969, a report commissioned by the SEC, the Wheat Report, indicated that the length and complexity of prospectuses made it difficult for the average investor to understand them. The Wheat Report recommended the avoidance of long, complex, or verbose writing. In 1997, while chairman of the SEC, Arthur Levitt revisited the issue of writing complexity in financial reports during a speech to the Securities Regulation Institute, suggesting that “[i]n many cases, the … Read more

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Understanding Runs in the Shadow Banking System

There are two established explanations for bank runs: coordination problems among depositors and information asymmetries between bank managers and depositors.  In a new paper, “Information Gaps and Shadow Banking,” forthcoming in the Virginia Law Review and available here, I offer a novel, complementary explanation for why short-term creditors run: information nobody possesses.

Both the banking and shadow banking systems use short-term debt to fund longer-term, less liquid assets.  That short-term debt is designed to pose sufficiently minimal credit, liquidity, and duration risk that holders can treat the claims as close substitutes for money.  This reduces funding costs and has … Read more

Mutual Funds and the Regulatory Capture of the SEC

Regulatory agencies are created to act in the public interest but often end up acting in the interests of those regulated. This is known as regulatory capture. The theory of regulatory capture may be given both a broad and narrow interpretation. Under a broad interpretation, a group of entities seeking regulatory favor or “a special interest” affect state intervention in various areas, including taxation, monetary policy and legislation. Under a narrow interpretation, special interest groups manipulate regulators directly.

Mutual fund assets in the U.S. currently exceed $16 trillion, and these assets generate more than $100 billion per year in revenue … Read more

Weil, Gotshal Discusses Universal Proxy Cards in a Trump Administration

On October 26, 2016 the U.S. Securities and Exchange Commission proposed proxy rule amendments that would require, in a contested election of directors, the public company and the shareholder activist to each use a “universal” proxy card – i.e., a card that includes the names of both parties’ nominees.  Under the proposal, shareholders would be able to vote by proxy for a mix of company and dissident nominees of their choosing (i.e., “splitting the vote”).  Currently, split-ticket voting can be accomplished only by attending the shareholder meeting and voting by ballot.  The proposed changes are an attempt by the SEC … Read more

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Quacks or Bootleggers: Who’s Behind Hedge Fund Regulation?

Attempts by U.S. federal officials to regulate corporate governance have been criticized by prominent scholars as “quackery.”[1] Major reforms like Sarbanes-Oxley and Dodd-Frank may in fact do far more harm than good. But what if these efforts at healing our financial system are more than just poorly designed and executed? What if, instead, they are achieving precisely what they were designed to achieve? What if they were designed not by quacks but by bootleggers?

In 1999, Bruce Yandle, emeritus dean and professor of economics at Clemson University, proposed a public-choice economics version of the old saying, “politics makes strange … Read more

Debevoise & Plimpton Discusses The SEC’s Robare Decision

On November 7, 2016, the U.S. Securities and Exchange Commission (the “Commission”) overturned an Administrative Law Judge’s (the “ALJ”) initial decision[1] and issued an opinion In re The Robare Group, Ltd., Advisers Act Rel. No. 4566 (Nov. 7, 2016), finding that investment adviser The Robare Group, Ltd. (“TRG”) and its principals, Mark Robare and Jack Jones (collectively, the “Respondents”), negligently failed to fully and fairly disclose potential conflicts of interest arising from an arrangement with a mutual fund manager (the “Fund Manager”) pursuant to which the Fund Manager paid Robare for maintaining client assets in certain mutual funds … Read more

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SEC Chair White Offers a New Model for Enforcement

Good morning and thank you, Dean (Trevor) Morrison (of New York University Law School) for that very kind introduction. It is a pleasure to be here today and I want to thank the NYU Program on Corporate Compliance and Enforcement and the NYU Pollack Center for Law and Business for co-sponsoring this program. These programs provide important forums for sophisticated dialogue on critical white collar enforcement issues, which have an increased prominence post-financial crisis. I am honored to join your list of distinguished speakers.

Consistent with the core missions of these programs, I will talk to you today primarily about

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