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Securities Regulation

The Difference in the Informativeness of Positive and Negative Stock Returns

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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

Corporate Governance for Regulation A+ Issuers

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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

SEC Chair Clayton Speaks at Inaugural Meeting of Asset Management Advisory Committee

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I am delighted to welcome you in this new year to the inaugural meeting of the Commission’s newest advisory committee—the Asset Management Advisory Committee, or the “AMAC.”[1] I apologize that I am not there to speak to you in person. I am in Europe for meetings with my international counterparts on matters that relate directly to the evolution and globalization of the asset management industry, including (1) whether there is a mismatch in investor expectations and market realities regarding liquidity depth in various equity, fixed income and alternative asset markets, and (2) issues raised by the reference rate transition

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Skadden Discusses Proposed SEC Amendments to Auditor Independence Rules

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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

Insider Trading: “Blaszczak” Continues the Siege of “Dirks”

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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

Gibson Dunn Offers 2019 Year-End FCPA Update

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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

Sullivan & Cromwell Discusses Key Considerations for Fiscal-Year 2019 SEC Filings

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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

SEC Chair Clayton Addresses Proposed Order on Access to Equity Market Data

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Good morning.  This is an open meeting of the U.S. Securities and Exchange Commission on January 8, 2020, under the Government in the Sunshine Act.  The Commission today will consider a staff recommendation to issue for public comment a Proposed Order that would require self-regulatory organizations to propose a new national market system plan to govern the public dissemination of real-time, consolidated market data for NMS stocks.

In July of 2017, in my first public remarks as SEC Chairman, I identified market structure as an area where the Commission and its staff should focus our analytical resources.[1]  The U.S.

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SEC Commissioner Jackson Issues Statement on Reforming Stock Exchange Governance

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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.[1] Because exchanges have no economic reason to produce robust public data on stock prices, investors have long demanded … Read more

SEC Commissioner Lee on Proposed Order for Equity Market Data Plans

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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

SEC Commissioner Roisman Addresses Proposed Order on Equity Market Data Plans

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Today, the Commission considers steps to change the governance of equity market data plans under Regulation National Market System (“NMS”) (the “Proposed Order”). The Proposed Order seeks to modernize governance of the Securities Information Processors, or “SIPs,” by providing a proposed framework for how the Commission preliminarily believes governance should be conducted in a new consolidated equity market data NMS plan.

I would like to thank Director Brett Redfearn of the Division Trading and Markets and all the staff who worked on this recommendation.  I also thank Robert Stebbins and the staff of Office of General Counsel and our Chief

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The New Insider Trading

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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 Litigation Risk Deter Insider Trading?

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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

Chairman Clayton Delivers Statement at Open Meeting of SEC

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Good morning.  This is an open meeting of the U.S. Securities and Exchange Commission, under the Government in the Sunshine Act.

Today, we have six items on the agenda.  As I’ve remarked in the past, we must efficiently allocate the Commission’s limited resources to a combination of statutory mandates and the needs of the day.  The diverse array of items on today’s agenda illustrates this point – we are considering actions that represent the Commission’s continued efforts to complete the remaining, complex mandates of the Dodd-Frank Act, as well as a proposal that reflects our continued efforts to update and

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The Effects of Mandatory Disclosure Rules on Hedge Fund Governance

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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

Cleary Gottlieb Discusses Second Circuit’s High Bar for Securities Fraud Pleadings

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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”).[1]  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

Davis Polk Discusses NYSE Revised Direct Listing Proposal

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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

SEC Commissioner Peirce Speaks before National Economists Club

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Thank you, Cliff [Waldman] for that kind introduction.  It is an honor to be among economists today.  I am not sure why, but every time I speak to economists, I feel compelled to tell a joke. Maybe it is because the securities lawyers of which I am one and with whom I routinely surround myself can be a rather serious bunch.  Instead of starting with jokes, they insist that we start our talks with the following disclaimer:  The views I represent are my own and not necessarily those of the Securities and Exchange Commission or my fellow Commissioners.  That duty

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SEC Chair Delivers Testimony on Oversight to U.S. Senate Banking, Housing, and Urban Affairs Committee

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Chairman Crapo, Ranking Member Brown and Senators of the Committee, thank you for the opportunity to testify before you today about the work of the U.S. Securities and Exchange Commission (SEC or Commission or agency).[1]  I am honored to discuss the great work of the women and men of the SEC over the past year in furtherance of our tripartite mission of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation.

Chairing the Commission is a great privilege, and I am fortunate to be able to observe firsthand the incredible work done by the agency’s almost

… Read more

Long-Run Short Selling

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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