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From Texas Gulf Sulphur to Chiarella: A Tale of Two Duties

The Second Circuit’s en banc decision in SEC v. Texas Gulf Sulphur Corp.[1] (“TGS”) is approaching its 50th anniversary, and it’s still well-known for several important holdings. Perhaps the most celebrated (or condemned) accepted the SEC’s argument that corporate insiders have a duty to “abstain or disclose” from trading while in possession of material nonpublic information.  The opinion makes a bold claim that the law in play (Rule 10b-5’s antifraud prohibition) “is based in policy on the justifiable expectation of the securities marketplace that all investors trading on impersonal exchanges have relatively equal access to material information.”… Read more

Gibson Dunn Discusses SEC Guidance on How the New Tax Law Affects Disclosure and Accounting

On December 22, 2017, the Securities and Exchange Commission’s Office of the Chief Accountant and Division of Corporation Finance (“Staff”) issued important guidance that provides significant relief and helpful answers on some of the accounting and disclosure issues raised by the comprehensive tax act, commonly called the Tax Cut and Jobs Act,[1] that was signed into law on that same date (the “Tax Act”).  The Staff’s guidance is contained in two pronouncements:  (1) Staff Accounting Bulletin No. 118 (“SAB 118”), which essentially allows companies to take a reasonable period of time to assess, measure and record the effects of … Read more

How Effective Is the SEC in Identifying Financial Reporting Errors?

The Securities and Exchange Commission (SEC) Division of Corporate Finance (DCF) reviews and regulates information in public filings to “deter fraud and facilitate investor access to information necessary to make informed investment decisions.”

Commentators criticize the SEC for being an ineffective regulator, with specific concerns about its ability to identify financial reporting errors or fraud in companies such as Enron.  These concerns led to a General Accountability Office (GAO) review, new regulations codified in the Sarbanes-Oxley Act, calls for increased funding, and a renewed focus on detecting accounting errors.  Despite ample anecdotal evidence of … Read more

Who Falls Prey to the Wolf of Wall Street?

Seniors [are] particularly vulnerable to investment scams” read one headline. “We are taking further steps to find and eliminate from our system pump-and-dump scammers, those who prey on retirees,” noted Jay Clayton, chairman of the Securities and Exchange Commission. The news media, movies like “The Wolf of Wall Street,” and even regulators have long portrayed the elderly and other vulnerable people as the most frequent victims of these fraudulent schemes. Yet, do we actually know who invests in pump-and-dump scams? It is a critical question, because designing effective investor protection requires understanding who invests and why.… Read more

How Five Jurisdictions Enforce Financial Market Manipulation and Insider Trading Laws

Insider trading and market manipulation — two of the most high-profile categories of financial misconduct — have resulted in several major cases, and significant sanctions in recent years. Our recent article examines the type, frequency, and severity of sanctions imposed for insider trading and trade-based financial market manipulation (“market manipulation”) over seven years from 2009 to 2015 in Australia, Ontario (Canada), Hong Kong, Singapore, and the United Kingdom (UK).

Regulatory Enforcement Approaches – Market Manipulation

What we found from our empirical research was that even in jurisdictions with similar insider trading and market manipulation laws, enforcement approaches differed significantly. A … Read more

Sheppard Mullin Discusses SEC’s Streamlined Enforcement Agenda

One of the most eye-catching items in the recently released 2017 Annual Report of the Enforcement Division of the Securities and Exchange Commission (SEC or the Commission) is the significant decline in enforcement activity from 2017. The report, issued on November 15th and summarizing the agency’s activity from October 1, 2016 to September 30, 2017, has drawn scrutiny from numerous commentators, who view the decline as the result of an ideological shift from the aggressive, prosecutorial style of enforcement of ex-Chairwoman Mary Jo White to a more restrained approach under new Chairman Jay Clayton. However, the SEC insists that despite … Read more

SEC Chair Talks Cryptocurrencies and Initial Coin Offerings

The world’s social media platforms and financial markets are abuzz about cryptocurrencies and “initial coin offerings” (ICOs).  There are tales of fortunes made and dreamed to be made.  We are hearing the familiar refrain, “this time is different.”

The cryptocurrency and ICO markets have grown rapidly.  These markets are local, national and international and include an ever-broadening range of products and participants.  They also present investors and other market participants with many questions, some new and some old (but in a new form), including, to list just a few:

  • Is the product legal?  Is it subject to regulation,

Read more

Davis Polk Discusses Solicitor General’s Change of Heart on SEC Judges

On November 29, 2017, the Solicitor General filed a brief in the Supreme Court on behalf of the Securities and Exchange Commission (“SEC”) reversing the agency’s position and arguing that SEC administrative law judges (“ALJs”) have been unconstitutionally appointed to their posts. The Solicitor General’s brief was filed in response to Raymond Lucia’s petition for a writ of certiorari after the D.C. Circuit Court of Appeals rejected a challenge to the constitutionality of the appointment of SEC ALJs (detailed here). The Solicitor General also raised questions regarding the validity of statutory restrictions that protect SEC ALJs from removal. The … Read more

Latham & Watkins Discusses Supreme Court Hearing on State Jurisdiction Over Securities Claims

On November 28, 2017, the Supreme Court of the United States held oral argument in the highly anticipated case of Cyan, Inc. v. Beaver County Employees Retirement Fund, No. 15-1439, to decide whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) divested state courts of subject matter jurisdiction in lawsuits solely alleging claims under the Securities Act of 1933 (the Securities Act). Because of the procedural roadblocks to challenging remand motions in federal court, the Supreme Court took review from an appeal from the California Supreme Court. Defendants/Petitioners argued that state courts did not have jurisdiction over “covered … Read more

Investor Choice in Global Markets for Securities

In a recent paper, we explore how globalization has affected the operation of securities markets and the challenges this poses for their regulation. The paper is part of the first phase of the New Special Study of the Securities Markets Project.

Securities markets have experienced unprecedented levels of cross-border activity over the past 30 years. Three secular trends have contributed to this phenomenon of globalization. First, liberalization: the removal of national foreign exchange controls and barriers to trade and investment. Second, the growth of collective investment, encouraged by favorable tax treatment of retirement saving. This has fostered a shift … Read more

Debevoise & Plimpton Discusses Developments in the Enforcement of Token Sales

Securities and Exchange Commission (“SEC”) Chairman Jay Clayton recently discussed the uncertainties surrounding token offerings and other forms of distributed ledger-based financing.[1] Mr. Clayton cautioned that the lack of information regarding online platforms that list and trade virtual coins or tokens may lead to price manipulation and other fraudulent trading practices on these platforms. The Chairman stated, “The [SEC] recently warned that instruments such as ‘tokens’ offered and sold in ICOs may be securities, and those who offer and sell securities in the United States must comply with the federal securities laws.” The Chairman’s statements regarding token sales reiterate … Read more

Gibson Dunn Discusses CFTC and EC Plans to Harmonize Derivatives Regulation

This alert discusses the U.S. Commodity Futures Trading Commission’s (“CFTC”) and European Commission’s (“EC”, together with the CFTC, the “Commissions”) announcements on October 13, 2017 regarding the international harmonization on two key derivatives regulatory requirements.[1]  The Commissions first announced that they had separately adopted comparability and equivalence determinations related to their respective uncleared swap margin regulations (“Uncleared Margin Determinations”).[2]  The Commissions then announced that they had reached a common plan to recognize each other’s authorized derivatives trading venues as comparable and equivalent (“Common Plan on Trading Venues”).[3]Read more

How Missing SEC Filing Deadlines Affects a Company’s Stock Value

Investors, hedge funds, regulators, banks, and attorneys want to know: What really happens when a company misses a regulatory deadline? In a new paper, we offer theory and quantitative analysis of the consequences of missing U.S. Securities and Exchange Commission (SEC) regulatory deadlines for filing quarterly (Form 10-Q) and annual (Form 10-K) financial statements. Timely disclosure of financial statement information is a critical requirement for firms and well-functioning capital markets. Late filings delay disclosures that help investors make informed investment decisions and, as a result, increase information asymmetry and trading costs. Late filings may also trigger costly regulatory penalties and … Read more

Why Do Retail Investors Ignore Accounting Information?

Prior research finds that individual (retail) investors often fail to use accounting information when making stock trading decisions. Instead, many individuals underperform by trading on attention-grabbing technical trends such as high past stock returns.

A number of Securities and Exchange Commission (SEC) regulations are designed to help individual investors make better trading decisions by reducing their costs of using accounting information. For example, part of the SEC’s motivation for recent regulations on hyperlinking and XBRL was to aid individuals by reducing their costs of monitoring and accessing firms’ accounting reports. In a recent study, we investigate why many individual investors … Read more

King & Spalding Discusses the Fading of Home Field Advantage for SEC Litigators

As the season changes to fall, and baseball playoffs and football dominate sports headlines, the home field advantage has proven important once again. But in the regulatory litigation game, it appears that even a home field advantage cannot help the Securities and Exchange Commission consistently win its enforcement trials in administrative proceedings. The SEC clearly expected to do better when it announced it would be bringing more cases in its administrative forum as opposed to district court. But in the last 25 months, the SEC has lost a number of high-profile administrative cases, notwithstanding the fact that the SEC has … Read more

Does Insider Trading Law Change Behavior?

Despite the extensive scholarship on insider trading, relatively little attention has been directed to a basic but fundamental question:  Does insider trading law actually affect the amount of insider trading?  In a new article, available here, I seek to empirically evaluate that question by leveraging a change in insider trading law that occurred in 2014 when the Second Circuit issued its seminal decision in United States v. Newman, which substantially limited the scope of tippee liability.  The article provides strong empirical evidence that changes in insider trading law do affect the amount of insider trading, sometimes dramatically.

The … Read more

SEC Chair Clayton Talks SEC and Market Transparency

Thank you, Keith [Higgins], for that gracious introduction.[1] Let me return the sentiment. Keith – you are a member of an esteemed group of Division Directors, some of whom are here today, who have served the Commission and, most importantly, investors very well. The PLI 49th Annual Institute on Securities Regulation demonstrates the efforts by many to ensure that there is continuous education about the securities laws, as well as ongoing, candid dialogue about the state of our securities markets. I am honored to be here.

My remarks will focus on governance and transparency. These issues are, of

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What Do Corporate Insiders Do with Newly Vested Equity?

In a new study, we examine restricted-stock vesting events, through which directors and high-level executives (“insiders”) receive stock but face fewer reporting requirements and selling restrictions than if the stock had been purchased on the open market. Using a detailed dataset that tracks restricted stock vesting schedules from Equilar, we find that insiders realize gains by retaining vested stock. A trading strategy that mimics insiders’ trading patterns by buying on the vesting date and selling on the subsequent open-market sales date yields positive abnormal returns.

The vast majority of previous insider-trading literature focuses on open-market transactions, but insiders acquire significantly … Read more

PwC Discusses SEC’s Increased Scrutiny of Robo-Advisers

Earlier this year, the Securities and Exchange Commission (SEC) issued guidance regarding “robo-advisers,” automated investment advice tools accessed via web-based or mobile platforms with minimal human interaction.1 The guidance is an important reminder to the industry that robo-advisers are subject to the same regulatory framework as traditional advisers and highlights several unique regulatory considerations stemming from their distinct business model. The SEC also, for the first time, included these considerations as a part of this year’s examination priorities.

The SEC’s sharpened focus on robo-advisers is a response to their dramatic increase in use over the past several years, largely … Read more

Admissions and Accountability in Civil Enforcement

Whether and when targets of civil enforcement admit wrongdoing has been in and out of the public spotlight since the 2007-2008 financial crisis, when the issue seemed tied up in frustrations that suspected wrongdoers—especially banks and corporations—were getting off too lightly.  And the Securities and Exchange Commission has been at the heart of the debate.  Its policy of allowing targets to settle without admitting they did anything wrong prompted judicial rebukes, a public debate, and ultimately an announced policy change in 2013.  Admissions would be required when they furthered “public accountability” and “acceptance of responsibility.”  The decision to ask for … Read more