These days you rarely hear the name Financial Industry Regulatory Authority (“FINRA”) in this town [Washington, D.C.]  without some mention of “FINRA 360,” the comprehensive self-evaluation initiated by FINRA President and CEO Robert Cook. From what I have seen and heard thus far, FINRA 360 is more than just a genius marketing strategy developed to kick off Robert’s tenure. Over the past several weeks, I have heard from a number of people that this review is generating constructive feedback and engagement from the industry in ways that will help FINRA chart a new path forward.
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Investor relations (IR) connects the preparers of financial information with its users, aiming to facilitate efficient and effective interaction between the firm and the investment community. Historically, the IR function has been viewed as a communications role, and the investor relations officer (IRO) has had a background or training in communications and public relations. Recently, however, more companies turn to Wall Street to fill IR positions. For example, in a recent step toward a much-anticipated IPO, Spotify hired a former Wall Street veteran who had run the internet and media research groups at Barclays as head of IR. A … Read more
In 2013, the Securities and Exchange Commission announced a new policy of sometimes requiring admissions when settling enforcement actions. The policy was a radical departure from the agency’s more than four decades-old practice of allowing companies and individuals to settle cases without admitting or denying the allegations against them. The change came in the wake of the financial crisis of 2008 and in response to widespread criticism that the agency was being too soft on wrongdoers, allowing them to resolve matters without taking responsibility for their actions. Since the new policy went into effect, the SEC has repeatedly trumpeted its … Read more
Research has begun to analyze the tone and narrative structure of earnings announcements after decades of focusing on market reactions to the earnings news itself. One conclusion from this literature is that language matters – the tone (i.e., the excess of optimistic over pessimistic language) and opacity of the earnings announcement text is associated with future firm performance and with the market reaction to the earnings press release. In other words, managers’ language choices convey information beyond that captured by earnings, and investors respond accordingly.
In a recent paper, we study another aspect of managers’ disclosure choice: the decision to … Read more
On October 11, 2017, the SEC proposed a collection of amendments to its rules and forms intended to modernize and simplify some of the disclosure requirements applicable to U.S. public companies. The proposals would implement a statutory directive under the 2015 FAST Act. They span a number of topics, including MD&A, property, risk factors, confidential treatment requests and exhibits, and are generally modest changes, although some may prove quite helpful for companies in practice.
We discuss the more significant of the proposed amendments below and summarize many of the proposal’s other, more ministerial amendments in a list at the … Read more
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
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
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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
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
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
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
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
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 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
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
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
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
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
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) of the Securities Exchange … Read more