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Cleary Discusses SEC’s Freeze of Allegedly Fraudulent “Decentralized Bank” ICO

On January 30, 2018, the U.S. Securities and Exchange Commission (SEC) announced[1] that it had obtained an order from a U.S. District Court in Dallas, Texas, halting an allegedly fraudulent initial coin offering scheme.  The SEC’s complaint alleges that defendants AriseBank and AriseBank founders Jared Rice Sr. and Stanley Ford violated the anti-fraud and registration provisions of the U.S. federal securities laws, including by falsely claiming that AriseBank’s customers’ accounts and transactions were FDIC insured, falsely claiming that AriseBank’s customers could spend 700 different virtual currencies using AriseBank’s Visa card, and failing to disclose the criminal history of two … Read more

Financial Supervisors and RegTech: Four Roles and Four Challenges

Financial institutions and their regulators have long been early adopters of new information technologies (IT). In a short essay based on two posts for the Oxford Business Law Blog (available here and here), I first identify four uses of regulatory technology, or RegTech, and then describe four roles for financial regulators in RegTech, and the challenges they face.

The various ways that regulators and policymakers use forms of IT such as data scraping tools, big data analysis, artificial intelligence, and machine learning algorithms can be divided into four categories. The first is Operations RegTech, which targets illegal behavior, such … Read more

Does Conservative Reporting Deter Securities Class Action Lawsuits?

The number of accounting-related class action lawsuits has increased in recent decades, imposing billions of dollars of direct and indirect costs on public companies and, eventually, their shareholders each year. Although accounting theory says that litigation risk generates accounting conservatism as a pre-emptive defense, there is little empirical evidence on whether and how this defense works. In our paper, available here, we provide evidence that accounting conservatism helps companies avoid GAAP-related litigation and improve its outcome.

Accounting conservatism refers to the practice of requiring more verification to recognize good news as gains than to recognize bad news as losses.  … Read more

SEC Chair Clayton Testifies About Virtual Currencies

Chairman Crapo, Ranking Member Brown and distinguished senators of the Committee, thank you for the opportunity to testify before you today.[1]  I am pleased that the Committee is holding this hearing to bring greater focus to the important issues that cryptocurrencies, initial coin offerings (ICOs) and related products and activities present for American investors and our markets.

I am also pleased to join my counterpart, Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo, for our second time testifying together before Congress. Since I joined the Commission in May, Chairman Giancarlo and I have built a strong relationship. Cryptocurrencies, ICOs … Read more

Optimal Disclosure and Litigation Rules around IPOs and SEOs

In recent years, there have been a number of reforms to the legal and regulatory framework governing disclosures and litigation around initial public offerings (IPOs) and seasoned equity offerings (SEOs). The most prominent of these are the JOBS Act of 2012 and the Securities Offering Reform of 2005. In a recent paper, we develop a theoretical analysis of the optimality of allowing firms to disclose various kinds of information prior to IPOs and SEOs, and of alternative rules to govern private securities litigation. In our model, firm insiders, with private information about variables affecting their firm’s future performance, may make … Read more

How Chinese Investments Can Pass CFIUS Scrutiny

It is no secret that Chinese investments in the United States can face an uphill battle at the Committee on Foreign Investment in the United States (“CFIUS”). CFIUS is an interagency committee of the U.S. government that has broad jurisdiction to review transactions that could result in control of a U.S. business by a foreign person. The CFIUS process is a joint, voluntary process that parties initiate based on the perceived risk that the President of the United States might require divestment post closing if there are national security or critical infrastructure concerns associated with a particular transaction within the … Read more

Materiality Disclosures and Their Effect on Investors’ Decisions

Auditors consider misstatements or omissions in financial statements to be material if they could influence the economic decisions of financial statement users. Additionally, materiality affects how auditors plan and perform an audit and evaluate identified misstatements. Regulators in the UK (Financial Reporting Council) and the Netherlands (Nederlandse Beroepsorganisatie van Accountants) require auditors to disclose their threshold for materiality in auditors’ reports of listed companies. The International Auditing and Assurance Standards Board does not require disclosure of the materiality threshold in an audit report but does not preclude auditors from voluntarily disclosing that threshold.[1] In the U.S., however, the Public … Read more

Wachtell Discusses What to Expect in White Collar and Regulatory Enforcement for 2018

In our memo last year, we acknowledged that it was close to impossible to predict the likely impact that the newly elected Trump administration would have on white-collar and regulatory enforcement.  (White Collar and Regulatory Enforcement: What to Expect in 2017)  Instead, we set out a list of initiatives we urged the new administration to consider, including clarifying standards for when cooperation credit would be given, reducing the use of monitors, and giving greater weight to a company’s pre-existing compliance program when exercising prosecutorial discretion, among other suggestions.  While the DOJ under Attorney General Jeff Sessions has, for … Read more

Clifford Chance on France’s Pioneering Blockchain Legal Framework for Unlisted Securities

While blockchain, legally referred to as distributed ledger technology (DLT), or dispositif d’enregistrement électronique partagé (DEEP) in French, was first developed for the creation of virtual currencies such as bitcoin, it is also a technology that allows for transactions to be instantaneously concluded through the use of cryptographic keys. In order for businesses involved in the financial sector to take advantage of this disruptive technology, the current legal framework needs to undergo some modifications. This is what the French order no. 2017-1674 dated 8 December 2017 (the “DLT Order”) contemplates.

To know more about blockchain please read our … Read more

Gibson Dunn Offers Securities Enforcement Update for 2017

2017 was the prototypical transition year for the SEC.  In contrast to many other federal agencies under the current administration, the new SEC leadership did not promise a wholesale rethinking of the agency’s mandate.  Rather, they seemed to signal minor changes around the edges, at least for the Division of Enforcement.  That said, the new Chair and new Division Co-Directors focused their public statements on “Main Street” fraud – crooked brokers, Ponzi schemes, pump & dumps – while at times downplaying the more complex securities industry-focused cases favored by the prior SEC administration.

Indeed, a quick scan of some of … Read more

Preserving Capital Markets Efficiency in the High-Frequency Trading Era

Automation and new technology have dramatically changed trading on equity markets over  the past 20 years, and algorithmic and High-Frequency Trading (HFT) have become prominent in U.S. and European financial markets, while regulation has been slow to adapt. Despite increasing liquidity, narrowing spreads, and diminishing short-term volatility, HFT can lower market quality and stability and render marketplaces more vulnerable, especially during crises or periods of uncertainty.

Regulations affecting HFT have prioritized, in both the U.S. and Europe, preventing market disruption and manipulation, while failing to closely consider how HFT-related inequalities in information interact with the allocative function of price discovery. … Read more

SEC Chair Talks Blockchain Scrutiny, Dodd-Frank Rulemaking, and Expectations for Gatekeepers

Thank you for that warm welcome.[1]  I am delighted to join you today by videoconference. I know Meredith [Cross] has prepared questions. I look forward to answering those, as well as questions from this distinguished audience. When I was teaching at UPenn law school, the best classes were the ones where students asked difficult, but informed, questions. With Meredith and this audience, I know that I am in for a treat.

Before we get to the question and answer session, I want to take a few moments to highlight two issues: (1) my expectations for market professionals, particularly when

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Nonfinancial Risk Disclosure and the Costs of Private Ordering

2017 was a year of major developments that are changing how companies disclose nonfinancial environmental, social, and governance (ESG) risk to investors.  In January, regulations implementing the European Union’s 2014 Nonfinancial Reporting Directive took effect for certain large companies operating in Europe and the U.K.  Under these rules, affected companies must prepare a non-financial statement disclosing material environmental, social, human rights, anti-bribery, and diversity matters.  In March, Nasdaq’s Nordic and Baltic stock exchanges introduced voluntary ESG reporting guidelines as part of their contribution to the United Nation’s Sustainable Stock Exchanges initiative on nonfinancial disclosure reform.  And in June, the Task … Read more

Sheppard Mullin Discusses the Future of CFIUS After Proposed Reforms

‘Tis the season to wonder, what will 2018 bring? We may speculate on things like a private company making a moon landing or a peace accord with North Korea. We may be certain of things like well-intentioned gym memberships and a host of new-you products.

Somewhere between speculation and certainty we find the U.S. Government’s scrutiny of foreign direct investment in the United States. The recently proposed Committee on Foreign Investment in the United States (CFIUS) reform introduced in Congress sheds some light on the future of CFIUS reviews.

Congress Proposes CFIUS Reform

As discussed in Sheppard Mullin’s March 2017 … Read more

Poetic Expansions of Insider Trading Liability

The courts have consistently held since the Supreme Court decided Dirks v. SEC in 1983[1] that tipper-tippee insider trading liability requires proof that the tipper personally benefited from the tip.

This personal benefit test can pose significant challenges to prosecutors in bringing tipper-tippee cases where the original tip may have been offered gratuitously.

In particular, the government’s recent efforts to bring insider trading actions against ever more remote tippees has been frustrated by the Second Circuit’s 2014 holding that tippee liability requires proof that the charged tippee had knowledge of the original tipper’s personal benefit.[2] This knowledge element … Read more

K&L Gates Discusses the SEC’s TPG Settlement and Approach to Private Equity Fees

On December 21, 2017 the U.S. Securities and Exchange Commission (the “SEC”) published a settlement order[1] with TPG Capital Advisors, LLC (“TPG”) arising from insufficient disclosure regarding the acceleration of monitoring fees paid by portfolio companies owned by private equity funds under TPG’s management. The settlement order follows several recent SEC enforcement proceedings alleging failures by private equity managers to adequately disclose fee practices and other conflicts of interest to fund investors. While the order against TPG is similar in many respects to these recent proceedings, private equity managers should take note of the SEC’s positions in the order, … Read more

SEC Chair’s Remarks at Ceremonial Swearing In of New Commissioners Jackson and Peirce

Good Morning.

I hope that everyone had a very nice weekend and enjoyed the holiday on which we commemorate the life and contributions of Dr. Martin Luther King, Jr.

I note that this August will be the 55th anniversary of Dr. King’s “I Have A Dream” speech here in Washington and April will be the 50th anniversary of his death at age 39.

His lasting impact on America is remarkable and even more remarkable in the context of his short life with us. It is amazing the difference one person can make.

In preparation for our event today,

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Editor's Tweet |
Editor's Tweet: SEC's Clayton officially swears in Rob Jackson and Hester Peirce as new commissioners, finally getting the commission fully staffed.

The Spotify Listing: Can an “Underwriter-less” IPO Attract Other Unicorns?

Press reports indicate that Spotify, the music streaming company, is planning an initial public offering in March or April of this year, and that it plans to use a novel “direct listing” approach that has not previously been used at the New York Stock Exchange.[1] Already, it has made a confidential filing of its registration statement with the SEC.  Eager to accommodate Spotify, the NYSE has filed amendments to its listing rules with the SEC (and twice amended this filing, most recently in December).[2] If the news stories are accurate, the SEC has signaled its willingness to approve … Read more

SEC Chair Clayton Talks Fixed Income Markets

I am delighted to welcome all of you to the inaugural meeting of the Fixed Income Market Structure Advisory Committee, or “FIMSAC” as many of us like to call it.[1]  This is a significant day for the Commission.  There are a few matters of importance to discuss, and I will try to be efficient, as I know we are all eager to kick off today’s discussion on bond market liquidity.[2]

To start, I would like to extend a warm welcome to our two new Commissioners, Robert Jackson and Hester Peirce.  With Commissioners Stein and Piwowar, we have benefited

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The Economics of Disclosure and Financial Reporting Regulation

Disclosure and reporting regulation is a central and recurring policy issue that has received significant attention in academic research on accounting, finance, and economics. Further fueling demand for this research are increasingly frequent requests that policy makers and regulators conduct cost-benefit or economic analyses of both existing and planned regulations and standards.

In a recent paper, we review the empirical literature on the economic consequences of disclosure and financial reporting regulation, drawing on U.S. and international evidence. We also extensively review the literature on mandatory International Financial Reporting Standards (IFRS). Our efforts are timely, because three developments have spurred disclosure … Read more