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Securities Regulation

Blue Sky Banter Podcast: SEC’s Robert Jackson on Dual Class Shares, Arbitration, and More

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Robert Jackson, a commissioner of the U.S. Securities and Exchange Commission and a former professor at Columbia Law School, speaks with Reynolds Holding about becoming a commissioner, the problem of perpetual dual class stock, and what the commission can do about mandatory arbitration for shareholder disputes.  Click on “read more” for a link to the conversation on the Blue Sky Banter podcast.

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Video: The Biggest Issues Facing Securities Markets in the 21st Century

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An esteemed panel of regulators, scholars, and lawyers gathered at Columbia Law School on March 29 to discuss Securities Market Issues for the 21st Century, a new e-book on the most important areas of inquiry for securities regulation and the financial markets. The book marks the culmination of the first phase in a multi-year New Special Study of the securities markets being conducted by the Program in the Law and Economics of Capital Markets, a joint initiative of Columbia Law School and Columbia Business School. The study is the first of its kind in more than five decades … Read more

Sticking Around Too Long? Dynamics of the Benefits of Dual-Class Structures

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Lawyers and academics generally have a dim view of dual-class share structures. When Snap Inc., a technology-based social media company, was preparing for its initial public offering (IPO) in early 2017, for example, CalPERS and many other prominent institutional investors harshly criticized the company’s move to create another share class with no voting rights.[1]

The main drawback of a dual-class share structure is, of course, that insiders who control the firm with voting rights that are disproportionately greater than their cash flow rights can easily take advantage of dispersed outside shareholders. (Co-founders Bobby Murphy and Evan Spiegel, for example, … Read more

Cleary Gottlieb Discusses the SEC’s New Cyber Unit, Six Months On

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On September 25, 2017, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) announced the creation of a Cyber Unit within the Enforcement Division in order to further the Division’s “substantial expertise in the detection and pursuit of fraudulent conduct in an increasingly technological and data-driven landscape.”1 Commenting on the launch of the new unit, Enforcement Division Co-Director Stephanie Avakian described “[c]yber-related threats and misconduct” as “among the greatest risks facing investors and the securities industry.”2

In the six months since the Cyber Unit was launched, cybersecurity has remained at the forefront of the SEC’s priorities, repeatedly … Read more

Do Firms Under-Report Information on Cyber-Attacks?

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A cyber-attack is a risk that every firm must manage. Prior studies raised doubts about how harmful cyber-attacks actually are. In particular, studies used the market reaction to cyber-attacks to show that they cause only small losses that decrease over time. These studies conjecture that as news media increasingly report that data breaches cause relatively minor damage, investors will lower their assessment of the costs of data breaches.

Most prior studies, however, rely almost entirely on cyber-attacks that were disclosed by firms. In contrast, we collect data on cyber-attacks from different sources and distinguish between cyber-attacks that were voluntarily disclosed … Read more

Kirkland & Ellis Discusses Trump Administration’s Ban on Dealings in Venezuelan Cryptocurrency

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On March 19, 2018, President Trump issued an Executive Order “Taking Additional Steps to Address the Situation in Venezuela” (“Executive Order”) that prohibits U.S. persons from engaging in dealings in any digital currency, digital coin, or digital token issued by, for, or on behalf of the government of Venezuela.[i] The same day, the U.S. Department of the Treasury Office of Foreign Assets Control (“OFAC”) issued corresponding guidance that lays the groundwork for potential sanctions related to digital currency transactions more generally. Taken together, these actions reflect tightening sanctions on Venezuela, and may foreshadow OFAC asserting jurisdiction over cryptocurrency in … Read more

SEC Discusses Online Trading Platforms — With a Word of Caution

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On March 7, 2018, the Securities and Exchange Commission’s Enforcement Division and its Trading & Markets Division issued a joint “Statement on Potentially Unlawful Online Platforms for Trading Digital Assets.”[1]  The release appeared to be the strongest signal yet of a broadening of the SEC’s enforcement and regulatory interest beyond its focus over the last year on the need for certain coin offerings to be registered or to qualify for an exemption as private placements.

The SEC staff’s release provided a laundry list of potential regulatory pitfalls for digital asset trading platforms and urged market participants to exercise caution … Read more

Simpson Thacher Discusses Supreme Court Ruling on State Court Jurisdiction Over Securities Class Actions

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On March 20, 2018, the Supreme Court in Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439, unanimously held that state courts have jurisdiction over class actions alleging only violations of the Securities Act of 1933.[1]  The Court rejected the issuer’s argument that the Securities Litigation Uniform Standards Act passed in 1998 eliminated the jurisdiction of state courts to hear such class actions.  In resolving a split among state and federal courts, the Court likewise rejected a middle-of-the-road position advanced by the Solicitor General that such actions should be removable from state to federal court.

Statutory Framework

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How Cross-Border Cooperation Improves Securities Enforcement and Financial Reporting

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In a recent study, I investigate cross-border coordination among national securities regulators and its impact on enforcement and financial reporting. The paper provides an in-depth look at the cross-border enforcement program at the U.S. Securities and Exchange Commission (SEC), using publicly available data. The results are consistent with the conclusion that the IOSCO Multilateral Memorandum of Understanding  (MMOU) acts as a catalyst for increasing the SEC’s ability to pursue cross-border cases and improve financial reporting through stronger enforcement.

Studies that seek to isolate the economic effects of regulation, enforcement, and new laws often suffer from the criticism that changes … Read more

Debevoise Discusses the New SEC Cybersecurity Guidance

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On February 21, 2018, the SEC issued new Guidance regarding cybersecurity disclosure and governance requirements applicable to SEC reporting companies. In our earlier Client Update on this topic, we discussed the disclosure considerations addressed in the Guidance. In this Client Update, we focus on the cyber-related governance issues addressed in the Guidance[1].

Cybersecurity and Risk Governance

The Guidance addresses three governance topics in the context of cybersecurity: (1) the adoption and regular assessment of cyber-related disclosure controls and procedures; (2) the establishment of policies and procedures to address the risk of insider trading based on material nonpublic cybersecurity … Read more

Ropes & Gray Discusses the Regulatory Push to Rein in ICO Market

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On March 1, 2018, Overstock.com disclosed that its ongoing $250 million initial coin offering has been under investigation by the U.S. Securities and Exchange Commission since February.1 The investigation appears to be part of a widespread probe pursuant to which “scores” of companies and advisers in the ICO industry have reportedly received subpoenas and requests seeking information from numerous SEC regional offices relating to the structure and marketing of the offerings.2 This initiative suggests the onset of a broad regulatory push to rein in the burgeoning ICO market after a series of “warning shots” in the form of … Read more

Securities Litigation in 2017: “It Was the Best of Times, It Was the Worst of Times”

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Securities class actions soared in 2017, jumping from 271 filings in 2016 to a near record 412 filings in 2017 — well above the average of 193 per year for the years 1997 to 2016.[1] Only 2001 was comparable, although both 2001 and 2017 were inflated by special factors.[2] Now add to this growth the $3 billion settlement in the Petrobras litigation earlier this year (plus the highly favorable ruling by the Second Circuit in Petrobras last year).[3] The result may be the same as when the discovery of gold at Sutter’s Mill was announced to the … Read more

Latham & Watkins Discusses SEC Charges Against BitFunder and the State of Digital Asset Trading

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The SEC continues to send messages to the nascent cryptocurrency market. The agency has recently brought enforcement actions and issued a public statement that illustrate the agency’s views on how the federal securities laws apply to crypto or digital asset trading platforms. In the latest enforcement action,[1] the SEC in U.S. District Court, Southern District of New York alleging that a bitcoin trading platform functioned as an unregistered exchange, facilitated unregistered offerings and trading of securities, and defrauded investors by failing to disclose a cyberattack on the platform. The SEC’s Divisions of Enforcement and Trading and Markets also issued … Read more

Gibson Dunn Discusses Delaware Supreme Court Ruling on Stockholder Ratification of Director Compensation

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In a December 19, 2017, decision, In re Investors Bancorp, Inc. Stockholder Litigation, No. 169, 2017 (Del. Dec. 19, 2017), the Supreme Court of the State of Delaware considered the limits of a stockholder ratification defense when directors make equity awards to themselves under an equity incentive plan or “EIP.” Justice Collins J. Seitz, Jr. wrote for a unanimous court that when “stockholders did not ratify the specific awards the directors made under the EIP,” and instead ratified only “general parameters” for director compensation, the proper standard for review of those awards is entire fairness. As the Supreme Court … Read more

Silence is Safest: Non-Disclosure When the Audience’s Preferences are Uncertain

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An important and long-standing question in the economics of information is whether voluntary disclosure leads to full disclosure. A compelling and intuitive argument, often described as the “unraveling” argument (see Milgrom, 1981), suggests that the answer is, yes. In brief, the argument is that the firm, or more generally the “sender,” with the most favorable information will voluntarily disclose. So the audience for the disclosure—the “receiver”—will interpret non-disclosure as indicating that the firm does not have the most favorable information. But given this, the firm with the second most favorable information will disclose, and so on. All the firms thus … Read more

Fact and Fiction: The SEC’s Oversight of Administrative Law Judges

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I’ve had the honor of serving as a commissioner of the SEC for just over a month now— and I’ve learned a lot in that time, mostly from the outstanding staff.  I’ve been schooled about cryptocurrency, spent hours wading through enforcement recommendations, and have been left in awe of the breadth of knowledge and expertise across our agency.

One thing that I always tried to bring to my work as an academic, and that I now hope to bring to my work as a policy-maker, is a focus on data and facts.  Numbers are powerful things. A well-placed statistic can … Read more

SEC Commissioner Talks Old Law and New Frontiers at RegTech Summit

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Questions of FinTech and RegTech have been paramount in my mind and, I think it is safe to say, the minds of my fellow Commissioners in recent months.[1]

Old Fields and New Corn

On the paneled walls of the rare books room of Harvard Law School’s library are painted the words, “Out of the ould fields must spring and grow the new Corne.”[2] A paraphrase from a lesser-known work of Chaucer,[3] the line reminds us that even dusty old fields may yield new corn—or “grain,” as we would say today. Chaucer expresses something very civilized here. Deprived

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SEC Warns About Online Platforms for Trading Digital Assets

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Online trading platforms have become a popular way investors can buy and sell digital assets, including coins and tokens offered and sold in so-called Initial Coin Offerings (“ICOs”).  The platforms often claim to give investors the ability to quickly buy and sell digital assets.  Many of these platforms bring buyers and sellers together in one place and offer investors access to automated systems that display priced orders, execute trades, and provide transaction data.

A number of these platforms provide a mechanism for trading assets that meet the definition of a “security” under the federal securities laws.  If a platform offers

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SEC Allows Exclusion of Conflicting Proposals on Special Meeting Thresholds – With a Twist

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Late last year, the SEC’s Division of Corporation Finance issued a no-action letter in which it agreed that a proposal seeking to lower the threshold for calling a special meeting from 25 percent to 10 percent of the outstanding shares directly conflicted with a company proposal to ratify its existing bylaw with the 25 percent threshold.  The AES Corporation, December 19, 2017.  In the staff’s view, a reasonable shareholder could not logically vote in favor of both proposals, which is the standard it enunciated for Rule 14a-8(i)(9) in Staff Legal Bulletin 14H issued in October 2015.  The letter was … Read more

Whistleblower Provisions of Dodd-Frank Deter Aggressive Financial Reporting

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In 2011, the Securities and Exchange Commission (SEC) introduced a Whistleblower (WB) program as part of the Dodd-Frank Act to protect investors through greater deterrence of securities law violations and more effective enforcement. The program offers financial incentives to provide original information that leads to a successful enforcement action. SEC officials have called the program a “game changer,” improving their ability to detect illegal conduct and speed investigations with fewer resources.[1] Since the program’s introduction, the SEC has received over 18,000 tips, with the highest number coming in three categories: corporate disclosures and financials (financial reporting fraud); Ponzi schemes … Read more