What are cryptocurrencies: securities, commodities, or another form of established currency – a non-sovereign fiat currency? In my forthcoming article, “Cryptocommunity Currencies,” I argue that, like other self-governing bodies, communities that issue cryptocurrencies should be judged on how well they support their currencies, an approach very similar to how we have evaluated traditional sovereign issuers of currency. Indeed, as traditional-sovereign-issued currency becomes entirely digital, functional distinctions between it and widely-accepted non-sovereign fiat currency start to disappear. The primary way, then, to distinguish between the value of such currencies is to compare the quality of their institutional backing… Read more
The law of insider trading generally moves with the speed of molasses in February. For every two steps forward, there is one (or more) steps backward. But this winter has seen a rapid succession of developments. First, the Himes Bill passed the House of Representatives by an overwhelming margin, but only after its sponsors retreated on its most important provision: the elimination of the “personal benefit rule” from insider trading law. Second, the Bharara Task Force on Insider Trading reported, with a strong and unanimous recommendation that the personal benefit rule be abolished and a new statute passed.… Read more
The number of securities cases filed in federal court continued at a furious pace for the third year in a row. This year-end update highlights what you most need to know in securities litigation trends and developments for the last half of 2019:
- Oral argument in Liu v. SEC, No. 18-1501, is scheduled for March 3, 2020, when the Supreme Court will consider the power of the SEC—and potentially, by extension, other federal agencies—to order “equitable disgorgement” in light of the Supreme Court’s prior ruling in Kokesh v. SEC, 137 S. Ct. 1635 (2017).
- Anticipation for the Supreme
… Read more
President Donald Trump’s proposed $4.8 trillion budget calls for folding the Public Company Accounting Oversight Board (PCAOB), America’s audit watchdog, into the Securities and Exchange Commission, the nation’s primary financial regulator. The stated goal is to eliminate duplicative regulations and save money. It would do neither. Instead, it would send a harmful message that high quality audits are no longer a priority.
The Sarbanes-Oxley Act of 2002 established the PCAOB as a not-for-profit corporation whose mission is to inspect audits, establish audit standards, and enforce compliance with those standards. Sarbanes-Oxley was itself a bipartisan landmark, enacted in response to the … Read more
On 16 January 2020, the Bank of England (the “BoE”), the UK Financial Conduct Authority (the “FCA”) and the Working Group on Sterling Risk-Free Reference Rates (“RFRWG”) published a set of documents outlining priorities and milestones for 2020 on LIBOR transition.
UK regulators have signalled that 2020 is a critical year in the transition efforts from LIBOR to alternative risk-free rates such as the Sterling Overnight Index Average (“SONIA”), the RFRWG recommended replacement rate for Sterling LIBOR-referenced transactions. The suite of publications released last month set out key priorities and milestones for transition progress in 2020, and help to … Read more
[Editor’s Note: This and the piece that immediately follows offer a point/counterpoint on the SEC’s proxy advisor proposal.] The Council of Institutional Investors opposes the SEC’s proposal to create a new regulatory structure for proxy advisory firms. The proposed rules would codify August 2019 guidance from the commission (issued with no public comment or economic analysis) that proxy advice is “solicitation” under securities law, and then create new conditions for exemptions from solicitation rules necessary to do business as a proxy advisor. CII has provided extensive feedback in response to the SEC’s request for comments on the … Read more
The Securities and Exchange Commission’s (SEC’s) recently proposed Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice are an efficient and necessary response to the “collective action” problem that is imbedded in the shareholder voting of public companies and the deficiencies that this problem creates in the voting recommendations of proxy advisors. The amendments will enhance the value of voting recommendations by requiring proxy advisors to make much needed investments in a few key areas of the voting recommendation process.
The Collective Action Problem Imbedded in Shareholder Voting
Shareholder voting suffers from a significant “collective action” problem. According … Read more
Short selling serves a critical function in the capital markets by encouraging price discovery and preventing the formation of asset bubbles. But recent years have seen a rise in “negative activism,” a novel phenomenon that has flourished in the era of social media and algorithmic trading. The typical negative activist opens a large short position; disseminates sometimes aggressive negative opinion about a public company (often stopping just short of factual falsehoods) on Twitter and elsewhere, which induces a panic and run on the stock price; and rapidly closes that position for a profit, prior to the stock price partially … Read more
On January 30, the Securities and Exchange Commission Chair Clayton and Commissioners Lee and Peirce each issued statements on climate-related disclosures in SEC filings. The statements evidence some debate within the SEC on this topic, which has attracted considerable recent attention among investors, companies and regulators. The outcome for companies is generally the status quo, as the SEC chose not to include specific requirements on climate change or other environmental, social and governance (ESG) disclosure in the amendments to MD&A it proposed yesterday.
The three statements can be found here: Chair Clayton’s statement; Commissioner Lee’s statement and Commissioner Peirce’s … Read more
Over the past 20 years, civil penalties have become an increasingly important part of the SEC’s enforcement program. The agency frequently imposes large monetary penalties, highlights those penalties in press releases, and touts them in end-of-year statistics. Civil penalties are justified as a necessary deterrent to unlawful conduct and a powerful tool for promoting ethical and legal behavior. But with respect to one category of cases – those involving public companies – civil penalties have always been controversial, because the cost of the penalty is ultimately borne by the shareholders who had nothing to do with the misconduct and indeed … Read more
On September 26, 2019, the SEC released the much-anticipated new rule and form amendments designed to modernize the regulation of Exchange-Traded Funds (ETFs). Rule 6c-11 under the Investment Company Act permits ETFs that satisfy certain conditions to operate without the expense and delay of obtaining an exemptive order from the commission under the act – and it is most welcome.
There is something fascinating about this initiative. What started 28 years ago as a way to avoid the taxation of mutual funds has avoided extensive SEC regulation. Now, there are about 3,000 U.S. ETFs with a total value of … Read more
There were significant developments in 2019 as courts continued to issue important decisions in this space and significant legislation impacting the residential mortgage-backed securities (“RMBS”) market came into effect. A number of cases have called into question firmly rooted practices in the securitization market. In two actions commenced over the summer in New York federal courts, Petersen v. Chase Card Funding, LLC and Cohen v. Capital One Funding, LLC, credit card holders claimed that their loans became usurious in violation of state usury laws once they were securitized. While federal law permits the originating national banks to … Read more
We write as legal scholars and economists who conduct research and teach in areas of corporate law, securities law, and administrative law. In addition, one of us has previously worked at the Securities and Exchange Commission (“Commission”) as a financial economist and an attorney advisor between 2007 and 2012, in what is now called the Division of Economic & Risk Analysis. None of us is being compensated or otherwise assisted in developing the opinions articulated below. Every word is our own, drafted solely by the three of us.
We submit this letter pursuant to the notice-and-comment request issued by the … Read more
The U.S. Securities and Exchange Commission (SEC) has a three-part mission: to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. SEC investigations and enforcement actions play a critical role in carrying out each of these objectives. One of the hallmarks of the investigative process is that it is shrouded in secrecy: The SEC explicitly seeks to protect the identity of those under investigation (SEC, 2017; SEC, 2019). With respect to corporate malfeasance, only SEC staff, senior managers of the company being investigated, and outside counsel are aware of active investigations. While some companies choose to disclose … Read more
For too long, insider trading law has lacked clarity, generated confusion, and failed to keep up with the times. Without a statute specifically directed at insider trading, the law has developed through a series of fact-specific court decisions applying the general anti-fraud provisions of our securities laws across a broadening set of conduct. As a consequence, the law has suffered—and continues to suffer—from uncertainty and ambiguity to a degree not seen in other areas of law, with elements of the offense defined by—and at times, evolving with—court opinions applying particular fact patterns. The rules of the road have … Read more
We show that positive daily stock returns contain more information on the long-term change in stock value than do negative daily stock returns that are noisier on average and more prone to subsequent reversals. This difference in the informativeness of negative and positive returns is larger on nondisclosure days and decreases significantly on disclosure days. Our findings suggest that while positive information about firms is constantly flowing to the market, the flow of negative information is more limited and mostly confined to disclosure days.
There are reasons why negative information is more likely to reach investors on disclosure days rather … Read more