Crown image Columbia Law School

Securities Regulation

SEC Commissioner Jackson on Re-Opening Comment Period for Security-Based Swap Dealer Rules

By by

Thank you, Mr. Chairman, and thank you to my colleague Commissioner Peirce and the terrific Staff in the Division of Trading and Markets for all of the hard work that so clearly went into this proposal. I’m especially grateful to Tom McGowan from Trading and Markets and Meredith Mitchell from our Office of General Counsel for being so patient with me and my office throughout this process.

Standing up our securities-based swap regime is an important step for the Commission and for the Nation. And our proposal has been sitting on the shelf since 2012.[1] The Commission’s failure to

… Read more

The Real but Exaggerated Threat of Financial Institution Mobility to Financial Regulation

By by

Where jurisdictions differ in how they regulate an activity, migration allows private parties to choose between regulatory regimes.  In the context of financial regulation, scholars assert that harmonization of regulation across jurisdictions is necessary to prevent institutions from opting into the laxest regulatory regime through relocation.[1]  This assertion relies on two assumptions: (1) financial institutions indeed move in response to burdensome regulations, and (2) unilateral regulation is insufficient to achieve regulatory objectives with respect to offshore institutions.  My recent project provides the first empirical evidence supporting that financial institutions relocate activities in response to derivatives regulation.  Charges that unilateral … Read more

Insider Trading and the Myth of Market Confidence

By by

Promoting public confidence in securities markets is a policy goal that is frequently cited by commentators, Congress, the courts, regulators, and prosecutors for the adoption and vigorous enforcement of insider trading laws.

For example, in the seminal insider trading case United States v. O’Hagan, the U.S. Supreme Court explained that “investors likely would hesitate to venture their capital in a market where [insider trading] is unchecked by law.”[1] More recently, Preet Bharara, who earned the title of “Wall Street Sheriff” by successfully prosecuting scores of insider trading cases in the wake of the 2008 financial crisis, emphasized that … Read more

Financial Misconduct and Strategic Corporate Disclosures

By by

Financial misconduct can lead to significant financial and reputational penalties for a firm and its managers, including hefty fines from regulators and steep drops in stock price. In fact, recent research finds that firms accused of fraud lose an average of 38 percent of their value when the news is announced, two-thirds of which is attributed to lost reputation (Karpoff, Lee, and Martin 2008). How, then, can managers best mitigate this financial and reputational damage?   Prior research points to a few solutions: firing guilty parties, improving corporate governance, and cooperating with regulators.  While these are undeniably important, there may be … Read more

Debevoise on Material Omissions in Private Equity Secondary Transactions

By by

As private equity funds approach the end of their lives, a fund’s general partner is often encouraged by the fund’s limited partners and third-party buyers to consider secondary liquidity solutions. Liquidity solutions can involve fund extensions, asset sales to third-party buyers, tender offers to limited partners, or other creative structures to maximize value in remaining fund assets. When properly executed, these structures can satisfy all stakeholders by allowing some to realize value while others remain invested in the assets. These structures, however, can be rife with conflicts of interest. A vivid example of the possible pitfalls—and the vigilance of the … Read more

SEC’s Co-Chief of Enforcement Talks Remedies and Relief

By by

My remarks today come a little over a year after Stephanie Avakian and I were appointed Co-Directors of the SEC’s Division of Enforcement and just a few days after the close of the first full fiscal year in which we have held our positions.  So this is a fitting time to look back on the work of the Division of Enforcement over the past year and to discuss the Division’s priorities over the next year.  Before I begin, I am required to give a standard disclaimer that the views I express here today are my own, and do not necessarily

… Read more

Bonfire of the Vanities–2018 Style: The Case of Elon Musk

By by

Elon Musk came close to doing something truly unique. No, not his electric car. Rather, he was about to roll the dice with his shareholders’ equity.

Securities analysts estimate that somewhere between 25 and 35 percent of the value of Tesla would be sacrificed if Musk were no longer its CEO. No one else in Tesla’s management can credibly run the company, and Musk alone appears to be the visionary that can maintain its technological superiority. Yet, he placed this value at risk by rejecting a relatively generous (even soft) settlement offered by the SEC to resolve his notorious tweet … Read more

Resolving the Tension Between Efficiency and Inclusivity in Crowdfunding

By by

There’s a contradiction at the core of securities crowdfunding, a form of Internet-based public stock market modelled on Kickstarter and its ilk.  On the one hand, crowdfunding seeks to create an inclusive system where entrepreneurs, regardless of where they are or whom they know, are invited to pitch their company directly to “the crowd” (the broad public).  On the other hand, crowdfunding is supposed to be an efficient system that allows startups and small businesses to be financed so that they can grow, create jobs, and contribute to the economy.  Unfortunately, these policy goals of inclusivity and efficiency are in … Read more

Latham & Watkins Discusses Principles Guiding FINRA Enforcement Action

By by

The Financial Industry Regulatory Authority (FINRA) relies on a framework of core principles in deciding whether to bring an Enforcement action in response to a given set of facts, and the key consideration is an assessment of “risk.” These core principles were designed to promote consistent, foreseeable outcomes to effect change in member firms, if appropriate. Susan Schroeder, Head of Enforcement at FINRA, has been conveying this message during several appearances, in conjunction with addressing the merging of two previously distinct FINRA enforcement branches into a unified Enforcement group. Member firms may find this message helps them to better understand … Read more

SEC Commissioner Airs Her Beef With Stakeholders

By by

Last time I flew to California, the skies were so clear that I was able to keep an eye on the changing landscape below all the way across the country. The vastness and great variety was striking. Having grown up in Ohio, I can attest to the fact that the magnificence of the landscape is just one of the features that makes so-called flyover country remarkably beautiful.  The wealth of talent and ingenuity in the people of the heartland is where the real beauty lies.

Indeed, one of the issues on which I am committed to working with Chairman Clayton

… Read more

Cleary Gottlieb on Government Scrutiny of Cryptocurrencies and ICOs

By by

On Tuesday, September 11, 2018, Judge Raymond J. Dearie of the Eastern District of New York issued a decision holding that Initial Coin Offerings (“ICO”) may qualify as securities offerings and therefore be subject to the criminal federal securities laws. This ruling came as two U.S. regulators—the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”)—announced separate actions under securities laws against companies engaged in the cryptocurrency marketplace, including the sale of digital tokens. As the popularity of cryptocurrencies grows and businesses and entrepreneurs increasingly turn to ICOs to raise capital, these developments may serve as guideposts … Read more

The Market for Lead Plaintiffs

By by

A drama is playing out in Boston federal court before a respected judge that could prove to be a legal “Watergate,” one that could reshape class action practice.[1] Combining elements that are both sordid and comic, this litigation has already shown that the leading experts on legal ethics disagree significantly over what must be disclosed to the court approving a class action settlement. More importantly, although this episode could prove to be an isolated aberration, the other possibility is that the behavior at issue in this case may occur regularly. As all New York City tenants know when they … Read more

SEC’s Co-Director of Enforcement Talks About Her Division’s Impact

By by

My speech today [1] happens to fall a little less than two weeks before the close of Steve Peikin’s and my first full fiscal year as Co-Directors of the SEC’s Division of Enforcement.  In many respects, a year is an arbitrary time period to measure the Division’s effectiveness and impact.  However, as our first full fiscal year as Co-Directors draws to a close, it is a natural time to look back and assess how successful we have been in accomplishing our mission of protecting investors.

But what does it mean for a civil law enforcement program like ours to be

… Read more

SEC Commissioner Jackson on the State of America’s Stock Markets

By by

Thank you so much, J.W. [Verret] and Ty [Gellasch], for that incredibly kind introduction. It’s a real honor to be here with you both today at George Mason, talking about the only issue you two have ever agreed on.[*] Literally. They say that politics makes for strange bedfellows,[1] and, for reasons that will soon become clear, nowhere is that more true than when it comes to reforming America’s stock markets—so I’m grateful to both of you for your leadership on these issues.

Now, before I begin, let me just give the standard disclaimer: the views I express

… Read more

Sullivan & Cromwell Discusses SEC’s Withdrawal of Proxy Advisory Guidance

By by

On September 13, the SEC’s Division of Investment Management withdrew two interpretive letters issued in 2004 to Egan-Jones Proxy Services (“Egan-Jones”) and Institutional Shareholder Services, Inc. (“ISS”). The letters described some of the guidelines under which an investment adviser could rely on a proxy advisory firm as an independent third party for purposes of making proxy voting recommendations.  In particular, the letters focused on the steps an investment adviser should take to ensure that voting recommendations were made in an impartial manner and that the proxy advisory firm’s potential conflicts of interest were addressed.  The SEC staff stated that it … Read more

Did Deregulation End the “Quiet Period” of Low-Risk Banking?

By by

From the New Deal until the 1970s, banks were on a tight leash. Regulators controlled the rate of interest they could pay on deposits. Banks could not underwrite or deal in corporate securities. With some exceptions, they could not expand geographically.

These restrictions were gradually eliminated beginning in the 1970s. Simultaneously, banking grew riskier. From the end of World War II to 1970, bank failures were virtually nonexistent. From that time on, the U.S. experienced waves of bank distress culminating in the financial crisis of 2007-09.

It is tempting to conclude that the deregulation caused the instability. I believe, however, … Read more

Was Glass-Steagall’s Demise Both Inevitable and Unimportant?

By by

The financial crisis of 2007-09 caused the Great Recession, the most severe global economic downturn since the Great Depression.  The financial crisis began with the collapse of the subprime mortgage market in the U.S. and spread to financial markets around the world.  Similarly, the disastrous financial events of the Great Depression began with the Great Crash on Wall Street in October 1929 and spread throughout the U.S. and Europe during the early 1930s.[1]

Congress responded to the Great Depression by passing the Glass-Steagall Banking Act of 1933.  Two of Glass-Steagall’s key provisions – Sections 20 and 32 – separated … Read more

The Deregulation Debate: The Challenge of Using Static Rules to Govern a Dynamic System

By by

In their lively disagreement about the role of deregulation in contributing to the 2007-2009 financial crisis, professors Arthur Wilmarth and Paul Mahoney inadvertently illuminate why the processes through which finance is regulated are so ill-suited to that purpose.  Finance is dynamic.  Today’s financial system bears only a coarse resemblance to the financial system of the 1950s.  Tomorrow, the system will evolve yet further and in ways we may not be able to imagine today.   In contrast, the legal regime is designed to stagnate. Frictions make statutes and regulations difficult to change, even when market changes have already altered the substantive … Read more

How Credit Default Swaps Affect Managers’ Voluntary Disclosure

By by

Credit Default Swaps (CDSs) enable lenders to distribute credit risk to parties more willing and able to bear it, thereby enhancing the liquidity and flexibility of individual lenders and the financial system (Greenspan 2004). However, empirical evidence suggests that CDSs lead to a significant decline in the rigor and efficiency of monitoring by lenders (e.g., Ashcraft and Santos, 2009; Parlour and Winton 2013; Subrahmanyam, Tang, and Wang 2014). In our paper, “Credit Default Swaps and Managers’ Voluntary Disclosure,” we predict and find that CDS reference firms enhance their voluntary disclosure to offset the negative effect of reduced  lender … Read more

SEC Commissioner Jackson Issues Statement on Shareholder Voting

By by

Today, the Office of the Chairman and the Division of Investment Management at the Securities and Exchange Commission suddenly raised questions about long-resolved issues regarding shareholder voting.[1] Because the Investor Advisory Committee’s critical work in this area is ongoing, it’s important to clarify the path ahead for those interested in giving shareholders real access to the levers of corporate democracy.

First, the law governing investor use of proxy advisors is no different today than it was yesterday. The Commission has long recognized that proxy advisors—the companies that develop recommendations regarding how investors should vote on corporate questions—serve an important … Read more