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Securities Regulation

Is It Time to Retire Securities Act Form S-8?

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Every securities lawyer knows that offers and sales of securities must either be registered under the Securities Act of 1933 (Securities Act) or made pursuant to an applicable exemption.  This rule is so fundamental that we often neglect to think about its purpose: investor protection.  We spend countless hours analyzing whether some instrument or another is a security and, if it is, whether an offer or sale is taking place.  These are often difficult questions, to be sure, but I often wonder whether we approach them more as intellectual explorations into the metaphysics of the Securities Act than as important … Read more

SEC Chair Clayton Speaks at Open Meeting on Reg S-K Reform

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Good morning.  This is an open meeting of the United States Securities and Exchange Commission on October 11, 2017 under the Government in the Sunshine Act.

This also marks my first open meeting as Chairman.  I am delighted that today the Commission will consider and vote on a recommendation from the staff to propose amendments based on the staff’s Report on Modernization and Simplification of Regulation S-K.  This proposal is a welcome first item on the Commission’s rulemaking calendar during my tenure.  I firmly believe in our disclosure-based regulatory system for public companies and the investor-oriented approach that we have

… Read more

Davis Polk Explains How New Revenue Recognition Rules May Slow 2018 Offerings

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New revenue recognition rules (ASC 606 and IFRS 15) are required to be adopted by most public companies starting January 1, 2018 and most private companies starting January 1, 2019. These changes are widely regarded as some of the most significant accounting changes since the adoption of the Sarbanes-Oxley Act of 2002. Companies may choose between the full retrospective method and the modified retrospective method to implement the new rules.

  • Companies implementing with the full retrospective method must revise and reissue fiscal 2016 and 2017 financial statements in connection with their Form 10-K for 2018
  • Companies implementing with the modified

… Read more

Insider Tainting: Strategic Tipping of Material Non-Public Information

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In an article forthcoming in the Northwestern University Law Review, I analyze the strategic use of insider trading law to disable the trading activity of an information recipient. I call this phenomenon “insider tainting.” While most tips of information open doors, insider tainting closes them. Rather than empowering and enriching the tippee, the tipper conveys information to constrain her. Tainted with inside information, the tippee faces legal risks to her preexisting or potential trading plans.

Consider an instance of arguable insider tainting involving Dallas Mavericks owner Mark Cuban. He sold his stake in Mamma.com soon after the company’s chief executive … Read more

CamberView Partners Discusses SEC Guidance on New Pay Ratio Rule

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On September 21, the U.S. Securities and Exchange Commission (SEC) issued guidance on the implementation of the Pay Ratio disclosure requirement as well as separate guidance from SEC staff concerning the use of sampling and other methodologies. Concurrently, the staff of the SEC’s Division of Corporation Finance issued revised Compliance and Disclosure Interpretations (“C&DIs”) related to implementing the new requirement.

While many issuers have been preparing to disclose a pay ratio in 2018, these documents put to rest any questions regarding whether the SEC may take action to materially delay or discard the requirement before the coming proxy season. This … Read more

Confidential Distortion: Dealing with Confidential Witnesses in Securities Litigation

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In a recent article prepared for the ABA’s National Institute on Class Actions, which is now posted on SSRN (available here), I and Professor Alexandra Lahav survey recent class action developments, and I focus particularly on the special case of securities litigation. Here, a unique and problematic feature of securities litigation is the frequent reliance placed by plaintiff’s counsel on confidential witnesses. Nowhere else does one regularly encounter detailed complaints that cite as many as 20 or more confidential witnesses (listed in order as CW-1, CW-2, CW-3, etc.), most describing damaging admissions allegedly made to these unnamed witnesses … Read more

How Investor Attention Affects Fraud Discovery and Value Loss in Securities Class Actions

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A securities class action is a complex event characterized by scarce information, high uncertainty, and increased information asymmetry between stakeholders and firms.  In our paper “The Effect of Investor Attention on Fraud Discovery and Value Loss in Securities Class Action Litigation,” we argue that investor attention helps to disseminate information regarding fraudulent activity and to shape the market’s reaction to the lawsuit filing.  Specifically, we find that higher investor attention improves learning about fraudulent activity and exacerbates the negative effect of the litigation event.  As more investors learn about fraudulent activity, the negative effect of litigation on a firm’s reputational … Read more

Paul Weiss Discusses the Extension of the M&F Worldwide Doctrine

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Recently, in In re Martha Stewart Living Omnimedia, Inc. Stockholder Litigation, in an opinion by Vice Chancellor Slights, the Delaware Court of Chancery extended the Kahn v. M&F Worldwide roadmap for invoking business judgment review in controller buyouts to third-party transactions where the controller acts as a seller only, but is purported to receive disparate consideration. Under the roadmap, the court found that the sale of Martha Stewart Living Omnimedia, Inc. (“MSLO”) to Sequential Brands Group, Inc. satisfied M&F Worldwide’s requirements to invoke business judgement review, and because plaintiffs did not plead a claim for waste, their claims … Read more

Latham Discusses How Second Circuit Broadened Personal Benefit Test for Insider Trading

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On August 23, 2017, the Second Circuit issued its second significant decision on insider trading liability in the past three years, United States v. Martoma. In its 2014 decision in United States v. Newman, the Second Circuit limited the circumstances in which the government could prove insider trading on evidence that someone privy to inside information (a tipper) passed that information to another person (a tippee) who then traded on the information. Last year, the US Supreme Court’s decision in United States v. Salman called into doubt some of the limits imposed in Newman, but the scope … Read more

The Rise of Financial Regulation by Settlement

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The dramatic escalation in enforcement activity by federal agencies against large financial institutions since the financial crisis is well known. These days the latest multi-billion dollar deal between regulators and Wall Street banks has lost blockbuster status and hardly even makes front page news. In my forthcoming article, Regulation by Settlement, I take stock of the broader significance of this development for both the financial system and the regulatory process. The main claim is that settlements have emerged as a primary tool for setting policy in financial regulation.

“Regulation by settlement” refers to a specific enforcement tactic that has … Read more

Fried Frank Discusses Coin Offerings

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Recently, the Securities and Exchange Commission (the “SEC”) issued two publications relating to initial coin offerings, or “ICOs”: The SEC’s Office of Investor Education and Advocacy published an investor bulletin1 (the “Investor Bulletin”) highlighting the risks of ICO investing and providing guidance for potential investors before investing in an ICO, and the SEC’s Division of Enforcement (the “Division”) issued a report of investigation2 (the “Report”) concluding that an issuance of tokens by a virtual organization in its ICO may have violated U.S. federal securities laws. Both the Investor Bulletin and the Report address the possibility that an offering … Read more

Skadden Discusses LIBOR Replacement Plans

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Plans to end the long reign of the London Interbank Offered Rate (LIBOR) as one of the world’s most often-used interest rate benchmarks have recently been confirmed by several top financial regulators. On July 27, 2017, Andrew Bailey, chief executive of the U.K. Financial Conduct Authority (FCA), announced that LIBOR is to be transitioned to alternative rates during the next four years,1 marking a sharp departure from the FCA’s prior recommendation to reform the benchmark.2 Less than a week later, J. Christopher Giancarlo, chairman of the U.S. Commodity Futures Trading Commission (CFTC), and Jerome Powell, a governor of … Read more

King & Spalding Discusses Stock Indices’ Exclusion of Multi-Class Share Structures

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The S&P Dow Jones and FTSE Russell indices recently took actions designed to exclude companies with multi-class share structures from several of the most prominent market indices.

On July 31, S&P Dow Jones announced that companies with multi-class share structures will no longer be eligible to be added to the S&P 500, the S&P MidCap 400 or the S&P SmallCap 600. Existing companies included in these indices will not be affected by this change. Companies with multiple share classes or with classes having limited or no voting rights will remain eligible for inclusion in the S&P Global BMI Indices and … Read more

Mandatory Arbitration Does Not Give Stockholders a Choice

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An August 21 blog post, “Shareholders Deserve Right to Choose Mandatory Arbitration,” by Professor Hal S. Scott, argues that the introduction of mandatory arbitration clauses into corporate charters would be good for stockholders. Nothing could be further from the truth.

Professor Scott argues that the current system of federal oversight is sufficient to inhibit and remedy corporate fraud. He states that he is in favor of “shareholders’ right to opt out of the costly and ineffective system of securities class action litigation…” and that mandatory arbitration will be more effective to redress corporate fraud. The facts contradict all of these … Read more

How the SEC Neglects to Enforce Control Person Liability

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Scholars and politicians alike have spoken and written at great length about the importance of gatekeepers in our current corporate governance system. However, relatively little has been done to discipline  gatekeepers who seem to have lost the keys to the gate.  Meanwhile, the country’s primary securities regulator, the Securities and Exchange Commission, refuses to employ one of its most powerful tools to keep gatekeepers in check.  Our recent article, Laxity at the Gates:  The SEC’s Neglect to Enforce Control Person Liability, examines the SEC’s reluctance to bring claims against corporate insiders under Section 20(a)[1] of the Securities Exchange … Read more

Gibson Dunn Offers Second-Quarter Update on Class Actions

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This update provides an overview of key class action developments during the second quarter of 2017 (April through June):

  • Part I explores a significant decision from the Supreme Court concerning defeating novel attempts by plaintiffs to obtain appellate review of denials of class certification.
  • Part II addresses rulings from the Supreme Court and Ninth Circuit regarding the breadth of the American Pipe tolling doctrine for statutes of limitations in class actions.
  • Part III analyzes recent decisions interpreting and applying the Supreme Court’s Article III standing decision in Spokeo, Inc. v. Robins.
  • Part IV discusses noteworthy rulings interpreting the Class

… Read more

Shareholders Deserve Right to Choose Mandatory Arbitration

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On July 17, SEC Commissioner Michael Piwowar extended an important invitation to U.S. public companies. “For shareholder lawsuits,” Piwowar offered, “companies can come to [the SEC] to ask for relief to put… mandatory arbitration into their charters.” To some, this idea may be unfamiliar or even controversial. But, as someone who has studied the U.S. securities class action system and its impact on our capital markets extensively, I know this policy is a sound one that serves U.S. investors and markets well.

Indeed, the Committee on Capital Markets Regulation, which I direct, first introduced the idea of corporation-stockholder non-class arbitration … Read more

Cleary Gottlieb Discusses Federal Spoofing Conviction

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On August 7, 2017, the U.S. Court of Appeals for the Seventh Circuit unanimously upheld Michael Coscia’s conviction on spoofing and commodities fraud charges in United States v. Coscia, No. 16-3017 (KFR), 2017 WL 3381433 (7th Cir. Aug. 7, 2017), rejecting Coscia’s constitutional challenge to the anti-spoofing statutory provision and finding Coscia’s conviction adequately supported by the evidence and testimony adduced at trial.

Coscia was the first trader to be convicted under the anti-spoofing provision of the Commodity Exchange Act (“CEA”), 7 U.S.C. § 6c(a)(5).  The Seventh Circuit’s decision upholding Coscia’s conviction marks the first time a federal appellate … Read more

Simpson Thacher Discusses Combating Securities Fraud Allegations With10b5-1 Trading Plans

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A recent decision issued by the United States District Court for the District of Massachusetts, Harrington v. Tetraphase Pharmaceuticals, Inc., highlights the value of established trading plans in defending against securities fraud allegations.[1] These trading plans, which are established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, are not absolute defenses, but do offer corporate directors and officers (“insiders”) a greater level of protection in the event they purchase or sell company shares during the putative class period of a subsequent securities litigation. There are, however, several factors to consider in deciding whether a 10b5-1 … Read more

The Twilight Zone: OTC Regulatory Regimes and Market Quality

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More than 8,000 domestic equity securities were publicly traded in the U.S. over-the-counter (OTC) market in 2010.  Yet, research studying this market is limited.  On the one hand, the OTC market attracts stocks of firms that tend to be small and growing.  On the other hand, it generally offers investors less protection than the traditional exchanges do, and fraudulent and abusive practices in this market can cause significant economic harm to investors.  Thus, the OTC market illustrates the trade-off that securities regulators face between ensuring investor protection and creating a viable market for small growth firms.  This trade-off has come … Read more