The first half of 2017 brought with it a nearly unprecedented rate of new filings (a pace few predicted), as well as several important developments in the securities laws. Among other things, the U.S. Supreme Court decided to weigh in on several key issues, including state court jurisdiction over Securities Act class actions and whether omissions of disclosures under Item 303 of Regulation S-K are actionable under Section 10(b). We also highlight a key change in public company audit standards that may very well play a role in future securities litigation, as well as new decisions interpreting and applying Omnicare … Read more
On July 25, 2017, the Securities and Exchange Commission (“SEC”) Division of Enforcement issued a report of investigation under Section 21(a) (the “Report”) concluding that blockchain tokens sold by The DAO (“DAO Tokens”) were securities as defined under relevant law. These blockchain tokens are analyzed under the so-called Howey test, and the SEC found that DAO Tokens allowed the holders to profit from the efforts of others, a key element of that test. We labeled a blockchain token that meets the definition of security a “security token” in our memorandum that accompanied “A Securities Law Framework … Read more
It has been well documented that in the U.S. and other countries with developed stock markets, sound public disclosure practices strengthen the reputation and credibility of firms. However, it’s unclear whether good disclosure practices are also beneficial in emerging markets that have weak systems of financial controls. Does disclosure build investor confidence? If so, are public disclosures the most effective way to disseminate information?
In my paper, “Catering through Disclosure: Evidence from Shanghai-Hong Kong Connect,” I use China to explore these questions and find that, although firms operating in developing markets use disclosure to boost investor confidence, it … Read more
The Supreme Court’s decision last December in Salman v. United States settled important issues concerning Rule 10b-5’s reach over trades based on a tip of confidential material information. One important question, however, remains unanswered: In tipping cases based on the misappropriation theory, is it necessary, as some courts have stated, to show that the tipper enjoyed a personal benefit of which the trader was aware? There are commentators who assume the need for such a showing, but in fact the lower courts have split on the issue and the Supreme Court in Salman explicitly said that it was … Read more
Old frauds never die. Nor do they fade away. Rather, they mutate and morph into new configurations in response to new opportunities (which new technologies usually create). Thus, the traditional boiler room “pump and dump” scheme was a product of the widespread adoption of the telephone, which allowed high pressure salesmen to reach hundreds of gullible customers in a day. Today, an analogous new technological development is inviting new forms of fraud. The new development is algorithmic trading (which by some estimates now accounts for 30 percent of stock trading). Computers are programmed to trade in a micro-second … Read more
A few years ago, signs of change started to appear in the startup world. Media headlines began reporting battles between regulators and Uber and Airbnb. Sharing economy companies faced worker classification issues, and fintech companies bumped up against securities regulation, lending laws, and licensing requirements. Former politicians and government aides joined startup boards. A top-tier venture capital firm created the first policy and regulatory affairs group to help its portfolio companies navigate laws affecting their businesses and foster contacts with policy makers, regulators, and investors.
In June, the Office of the Comptroller of the Currency (OCC), the regulator of national banks, federal savings associations, and federal savings banks, issued additional guidance on the oversight and risk management of third-party relationships (Bulletin 2017-21). The guidance takes the form of responses to fourteen “frequently asked questions” about the OCC’s prior guidance in its Bulletin 2013-29. In that Bulletin, the OCC required banks to adopt risk management and oversight procedures for third-party relationships based on the level of risk and complexity of the applicable relationship. OCC Bulletin 2013-29 also outlined a recommended risk management process consisting of: (i) … Read more
Consider a world in which contracts are performed by computers and drafted in computer code by legal software engineers. What kind of efficiencies in terms of speed of execution, legal certainty and transparency could be gained? Conversely, what are the risks of trusting machines to execute contracts, and perhaps even to enter into contracts with other machines? These are some of the questions raised by smart contracts, an emerging technology that promises self-executing contracts implemented in computer code and performed by networks of computers, with minimal intervention from human agents after they have been “launched” by the parties. Backers of … Read more
The Supreme Court announced last month that it will take up the question of whether state courts have subject matter jurisdiction over class actions under the Securities Act of 1933 (the Securities Act). Cyan, Inc. v. Beaver Cty. Employees Ret. Fund, — S. Ct. —- No. 15-1439, 2017 WL 2742854, at *1 (June 27, 2017). The first cases to adopt the view that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) divested state courts of jurisdiction over class actions that allege only Securities Act claims were litigated by Cleary Gottlieb over a decade ago. See Rovner v. Vonage … Read more
On June 12, the U.S. Department of the Treasury issued the first of four reports to President Trump (the “Report,” available here) in response to the executive order signed on February 3 (see our client alert here) (the “Executive Order”) setting forth “Core Principles” intended to guide the reform of the U.S. financial regulatory system.
This first report addresses the U.S. depository system, covering banks, savings associations and credit unions. The upcoming reports will cover the regulation of the following areas: capital markets; the asset management and insurance industries; and non-bank financial institutions, financial technology and financial innovation.The … Read more
I am delighted to speak to you here at the Economic Club of New York. The Club has established itself as an esteemed, non-partisan forum for economic discourse. It is an ideal place to discuss policy of the U.S. Securities and Exchange Commission (“SEC” or “the Commission” or “the agency”) and its effects on the U.S. economy and the American people. I intend to do just that in this, my first public speech as Chairman of the SEC.
Nearly six months ago, my predecessor Mary Jo White gave her last public address as SEC Chair in this same forum. … Read more
On July 7, 2017, the U.S. Court of Appeals for the Second Circuit offered significant guidance regarding the circuit’s class certification requirements in In re Petrobras Securities, No. 16-1914. In addressing an issue of first impression, the Second Circuit underscored the need to consider the individualized nature of determining whether a plaintiff engaged in a “domestic” securities transaction under the U.S. Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). The decision effectively creates an additional hurdle for plaintiffs seeking to certify a class of investors in nonexchange-traded securities.
In In re Petrobras … Read more
In late May, Target Corporation (“Target”) reached an $18.5 million settlement with the Attorneys General (“AGs”) of 47 states and the District of Columbia, resolving the AGs’ investigation into Target’s 2013 data security breach. Target, like other victims of cyber breaches, has faced intense regulatory inquiries based on the incident, along with extensive civil litigation by consumers, shareholders, and financial institutions.
Target’s multistate settlement with regulators – the largest such data breach settlement to date – brings the total amount paid by the company to settle legal claims arising out of the breach to over $130 million, including settlements paid … Read more
This is the first time that I have addressed the emergence of AI in one of my talks. But I have spoken previously on the two core elements that are allowing the world to wonder about its future: big data and machine learning. Like many of your institutions, the Commission has made recent and rapid advancements with analytic programs that harness the power of big data. They are driving our surveillance programs and allowing innovations in our market risk assessment initiatives. And the thoughts I’m about to share reflect my view on the promises – and also the limitations … Read more
In the aggregate, retail investors allocate tremendous amounts of capital and often turn to financial advisers to help them pick the best investment opportunities. In a recently published article, I describe how financial adviser conflicts of interest now distort overall capital allocation by driving capital to investment opportunities that reward financial advisers—altering the flow of capital.
Our capital markets work best when they efficiently move capital from savers to opportunities in need of capital. Financial intermediaries make our capital markets work by connecting savers to these opportunities. Of course, these intermediaries do not work for free. Stockbrokers receive commissions … Read more
Private Rule 10b-5 lawsuits have inspired volumes of academic literature, much of it focused on the suits’ social benefits (or lack thereof, depending on the author’s perspective). In a chapter for the forthcoming Research Handbook on Representative Shareholder Litigation, I introduce readers to this aspect of the Rule 10b-5 literature, which is best understood in light of the historical and doctrinal evolution of Rule 10b-5.
In its early years, the implied right of action under Rule 10b-5 operated as essentially a federalized version of the common law fraud cause of action focused on securities transactions. The service of process provisions … Read more
Professor John C. Coffee, Jr. of Columbia Law School is scheduled to speak on June 22 before the Securities and Exchange Commission’s Investor Advisory Committee, which asked him to address the CHOICE Act’s impact on the SEC’s enforcement powers. These are his remarks:
The Financial CHOICE Act of 2017 has now passed the House of Representatives on a strict party-line vote (winning not a single Democratic vote), but its prospects in the Senate seem dim. Nonetheless, a fair chance exists that individual provisions of this bill will make it through the Senate in one or more watered-down compromises. But which … Read more
In the week since the Supreme Court’s unanimous decision in Kokesh v. SEC, which rejected the Securities and Exchange Commission’s longstanding position that disgorgement was an equitable remedy not subject to the five-year statute of limitations in 28 U.S.C. § 2462, many have commented about the increased need for the SEC’s enforcement attorneys to complete their investigations quickly and the frustration that hidden ill-gotten gains would never be recovered due to the five-year limit. These are important and valid ramifications, and we include them in this article.
But the Kokesh decision raises other potential consequences that have not … Read more
Fair lending compliance and community benefit plans are increasingly important factors in the merger and acquisition (M&A) approval process. In 2016 and the first quarter of 2017, the Board of Governors of the Federal Reserve System (Federal Reserve) approved 20 bank or bank holding company M&A applications. Fair lending compliance history was an essential element of the regulatory analysis in these cases. While the Federal Reserve focused on compliance issues beyond fair lending —such as the Bank Secrecy Act, overdraft policies, residential servicing, commercial real estate concentration, and enterprise risk management—fair lending was one of the hottest compliance issues that … Read more
Two decisions by the Delaware Court of Chancery in the past two weeks reached seemingly disparate outcomes on fair value for the companies involved, but together stand for the general trend of recent appraisal decisions that deal price is the best indicator of fair value if the price resulted from a fair and robust sale process. However, the court will rely on other methods to determine fair value if the record suggests that the process could not have resulted in a deal price that is a reliable indicator of fair value (for example, where there were board conflicts or other … Read more