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
Regulation A+, an exemption from registration that took effect in 2015 and allows small companies to issue stock to the general public, presents interesting questions of corporate governance.
The maximum offering size of $50 million means that most Reg A+ issuers will not qualify for listing on a national exchange, which means that they will not be subject to the minimum corporate governance requirements contained in the national exchanges’ listing standards.
This has led to some criticism of Reg A+ offerings on corporate governance grounds. In a recent comment letter, state securities regulators charged that Reg A+ issuers often:… Read more
On December 30, 2019, the Securities and Exchange Commission (SEC) announced proposed amendments to its auditor independence requirements. Comments on the proposed amendments will be due 60 days after publication in the federal register, meaning comments likely will be due by the beginning of March 2020. If approved, these proposed amendments would significantly modify the framework that public companies and their auditors use to evaluate auditor independence, providing additional clarity for certain particularly difficult and recurring issues. The proposed amendments principally focus on complications that arise from auditor independence assessments with respect to affiliates of the audit client. Such issues … Read more
A major issue in United States v. Blaszczak, 2019 WL 7289753 (2d Cir.), was whether the government needed to prove the elements of a Rule 10b-5 tipping violation from Dirks v. SEC, 463 U.S. 646 (1983), when charging a tipper and tippees with the crimes of wire fraud and securities fraud in Title 18. The Second Circuit’s answer was no. In an insider trading case based on tipping charged as a Title 18 fraud, the government did not need to prove that an insider received a personal benefit in exchange for disclosing material, non-public information to an outsider.… Read more
2019 was, by many measures, the most significant year ever in Foreign Corrupt Practices Act (“FCPA”) enforcement. More than $2.6 billion in corporate fines sets a new high-water mark, driven by the two largest corporate resolutions in the statute’s history. Fifty-four FCPA enforcement actions, or 73 total cases including ancillary actions, brought by the FCPA Units of the U.S. Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”), each rank second only to 2010 in the annals of FCPA enforcement. Four FCPA and FCPA-related trials is the most ever. Add on top of this new FCPA enforcement policy guidance … Read more
As issuers prepare their Form 10-K and 20-F filings for fiscal year 2019, they should consider recent changes to Securities and Exchange Commission (“SEC”) disclosure rules, trending disclosure topics and the implementation of critical audit matters disclosure in the audit report. This memorandum summarizes several of those disclosure and accounting considerations, and highlights the key changes to SEC rules that will affect Form 10-K and 20-F filings this upcoming reporting season.
General Disclosure Trends
As issuers prepare their annual SEC reports, they should consider a number of disclosure topics that have continued to receive SEC and investor attention over the … Read more
Thank you as always to our dedicated Staff, especially Christian Sabella, David Shillman, Deborah Flynn, John Roeser, and Jennifer Colihan, for their extensive work on today’s proposed order. I’m also deeply grateful to Division Director Brett Redfearn, whose leadership in this area—and so many others—continues to reflect the very best in public service.
As today’s release explains, America’s stock markets are riven by a fundamental conflict of interest: exchanges both operate public data feeds and profit from selling superior private ones. Because exchanges have no economic reason to produce robust public data on stock prices, investors have long demanded … Read more
I want to start by thanking Chairman Clayton, Director Redfearn, and our dedicated staff for their work over the past couple of years to address some of the more complex and conflicted areas of equity market structure such as the transaction fee pilot, order handling disclosure reforms, and the regulation of alternative trading systems. I’m grateful for this work and the continued focus on these issues, including today’s proposal.
Our regulatory regime currently places for-profit trading venues in the position of setting many of the rules and costs for how our markets function. The regime was established decades ago, and … Read more
Insider trading is back in the news, although some would argue it never left. Last month, the U.S. House of Representatives passed the Insider Trading Prohibition Act, which seeks to create a new provision, Section 16A of the 1934 Securities Exchange Act, devoted to banning the trading of securities while “aware of material nonpublic information.” If the bill is enacted, it would represent the first time the phrase “insider trading” has been defined by congressional statute. Typically, charges of insider trading are brought under Section 10(b) and the SEC’s Rule 10b-5, which does not mention the term “insider trading” but … Read more
Does regulation deter insider trading? This has been a controversial question, with mixed empirical findings. One set of studies finds that insider trading regulations have been effective in reducing the frequency and profitability of opportunistic trades (e.g., Agrawal and Jaffe (1995) and Garfinkel (1997)), while several other studies cast doubt on the efficacy of regulations (see, e.g., Seyhun (1992), and Banerjee and Eckard (2001)). A possible reason for the disagreement is the difficulty in establishing a causal connection between regulation and insider trading. There are two main obstacles to doing so. First, most modern insider trading laws in the United … Read more
In a new paper, I add to the debate over hedge fund regulation by introducing empirical evidence that hedge fund registration requirements reduce misreporting. Using three alternating changes in hedge fund regulation, my study finds consistent evidence that registration reduces hedge funds’ misreporting — and provides evidence on why this regulatory regime is effective. In particular, my analysis suggests that the disclosure requirements led funds to make changes in their internal governance, such as hiring or switching the fund’s auditor, and that these changes induced funds to report their financial performance more accurately.
It was initially unclear whether regulation would … Read more
On December 10, 2019, the Second Circuit, in Gamm v. Sanderson Farms, held that when a securities fraud complaint alleges that statements were rendered false or misleading through the non-disclosure of illegal activity, the facts of the underlying wrongdoing must be pleaded with particularity in accordance with Federal Rule of Civil Procedure (“FRCP”) 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). The decision places a high bar on Section 10(b) claims based on undisclosed wrongdoing, requiring that the details not only of the misstatement or omission be pleaded with particularity, but also those of the underlying misconduct. … Read more
Following the SEC’s rejection last week of its proposed rule change on direct listings, the NYSE filed a revised rule change proposal with the SEC yesterday. The new rule change proposal is substantially similar to the proposal the NYSE filed in November, except that issuers can meet the NYSE’s market value requirement by selling $100 million of shares (rather than $250 million under the initial proposal). Consistent with the initial proposal, the revised rule change proposal would provide the same flexibility for an issuer to sell newly issued primary shares into the opening auction in a direct listing, and would … Read more
On December 3, 2019, Japan’s Government Pension Fund (GPIF) announced that it would suspend share lending to short sellers. This is the latest development in a growing global regulatory skepticism of shorting, with Reuters recently reporting that short selling bans are under consideration in South Korea, Germany, France, Italy, and Turkey. Prominent short activists have characterized these regulatory efforts as a “war on truth,” calling themselves modern-day Davids fighting corporate Goliaths, powerful companies who commandeer protectionist instincts to shield local industry from legitimate criticism.
To be sure, a large academic literature has found that short selling improves price … Read more