Securities Regulation

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In recent weeks, co-bloggers Ann Lipton and Anne Tucker both have posted on issues relating to the upcoming Supreme Court oral argument in Salman v. U.S.  Indeed, this is an important case for the reason they each cite: resolution of the debate about whether the receipt of a personal benefit should be a condition to tippee liability for insider trading (under Section 10(b) of/Rule 10b-5 under the Securities Exchange Act of 1934, as amended), when the tipper and tippee are close family members.  Certainly, many of us who teach and litigate insider trading cases will be watching the oral argument and waiting for the Court’s opinion to see whether, and if so, how, the law evolves.

Having noted that common interest (as among many) in the Salman case, as I earlier indicated, I have a broader interest in the Salman case because of a current project I am working on relating to family relationships and friendships in insider trading–both as a matter of tipper-tippee liability (as in Salman) and as a matter of the duty of trust and confidence necessary to misappropriation liability.  The project was borne in part of a feeling that I had, based on reported investigations…

Fresh from the presidential debate,** I find myself writing about board room diversity.*** Over the 2016 summer, SEC Chairwoman Mary Jo White signaled intent to revisit diversity in U.S. boardrooms.  In 2009 the SEC adopted a diversity disclosure rule requiring companies to disclose how their nominating committees considered diversity and whether the company had a diversity policy. The full rule can be viewed here.  The SEC did not define (nor did it mandate a singular definition of ) diversity, and companies have been left to define diversity individually, often without regard to gender, ethnic, racial or religious identities.  The result, criticized by Chairwoman White,  has been vague disclosures without apparent impact. 

SEC diversity rule making (past and future) was the backdrop for a recent corporate governance seminar class where I asked students:  Why should they care about board room diversity? And if the 2009 disclosure rule changes, how should it change? How do other countries approach the issue of boardroom diversity?  Can it be a mandated or legislated endeavor?  To guide our discussion we read  Aaron A Dhir’s brilliant and thorough: Challenging Boardroom Homogeneity: Corporate Law, Governance and Diversity and consulted Catalyst.org to understand the panoply of diversity choices…

The enticing facts of insider trading have me writing about the topic again (see an earlier post here) as the US Supreme Court prepares to hear oral argument in Salman v. US on October 5th.  In Salman, the Supreme Court is asked to draw some careful lines in the questions: what benefit counts and how to prove such a benefit under Dirks v. SEC.  

Recall that in Dirks, the Supreme Court focused the test on whether an insider benefitted—either by trading or by tipping in exchange for a benefit from the person to whom she tipped material nonpublic information. After Dirks, the 10b inquiry is whether the insider breached a duty by conveying the information for the insider’s personal benefit, and whether the tippee knows or at least should know of the breach. The Court explained that even in a case against a tippee who trades “Absent some personal gain [by the insider], there has been no breach of duty to stockholders. And absent a breach by the insider, there is no derivative breach [by the tippee].”

The Salman case highlights a circuit split:  the Second Circuit case United States v. Newman and the Ninth…

Earlier this week the House Financial Services Committee voted to repeal the Dodd-Frank Conflict Minerals Rule, which I last wrote about here and in a law review article criticizing this kind of disclosure regime in general.

Under the proposed Financial Choice Act (with the catchy tagline of “Growth for All, Bailouts for None”), a number of Dodd-Frank provisions would go by the wayside, including conflict minerals because:

Title XV of the Dodd-Frank Act imposes a number of overly burdensome disclosure requirements related to conflict minerals, extractive industries, and mine safety that bear no rational relationship to the SEC’s statutory mission to protect investors, maintain fair, orderly, and efficient markets, and promote capital formation. The Financial CHOICE Act repeals those requirements. There is overwhelming evidence that Dodd-Frank’s conflict minerals disclosure requirement has done far more harm than good to its intended beneficiaries – the citizens of the Democratic Republic of Congo and neighboring Central African countries. SEC Chair Mary Jo White, an Obama appointee, has conceded the Commission is not the appropriate agency to carry out humanitarian policy. The provisions of Title XV of the Dodd-Frank Act are a prime example of the increasing use of the federal securities laws as…

I previously wrote on the Commonsense Principles of Corporate Governance released by high profile investors and corporate titans such as Jamie Dimon and Warren Buffet. Others, such as Steve Bainbridge have also weighed in. Now proxy advisory firm Glass Lewis has spoken, stating in part:

While the Principles may disappoint investors expecting a more comprehensive and robust approach similar to that found in the UK and other countries, there are a few areas where the principles promote forward-thinking stances. For example, the Principles criticize dual class voting structures and state that companies should consider specific sunset provisions based upon time or a triggering event to eventually eliminate dual class structures. This is notwithstanding the dual class structure at signatory Warren Buffet’s company Berkshire Hathaway…

There are several areas the Principles do not address, including key anti-takeover defenses such as poison pills, supermajority vote requirements and classified boards. The Principles generally address some issues such as special meeting rights and term/age limits for directors but do not recommend specific thresholds or tenure limits…

Despite the Principles’ relatively narrow scope and high level, we believe they contain enough substance to spark a dialogue inside boardrooms, which could lead to increased…

House Representative Carolyn B. Maloney, Democrat of New York, sent a formal request to a slew of federal agencies to share trading data collected in connection with the Volcker Rule. The Volcker Rule prohibits U.S. banks from engaging in proprietary trading (effective July 21, 2015), while permitting legitimate market-making and hedging activities.  The Volcker Rule restricts commercial banks (and affiliates) from investing investing in certain hedge funds and private equity, and imposes enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities.

Representative Maloney requested  the Federal Reserve, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Office of the Comptroller of the Currency, and the Securities and Exchange Commission to analyze seven quantitative trading metrics that regulators have been collecting since 2014 including: (1) risk and position limits and usage; (2) risk factor sensitivities; (3) value-at-risk (VaR) and stress VaR; (4) comprehensive profit and loss attribution; (5) inventory turnover; (6) inventory aging; and (7) customer facing trade ratios.

Representative Maloney requested the agencies analyze the data and respond to the following questions:

  • The extent to which the data showed significant changes in banks’ trading activities leading up to the July 21, 2015 effective date for the prohibition on

…

We are now more than three months into the Title III crowdfunding experiment.  I have been wanting to get back to posting on Title III crowdfunding since my “LIVE” post back in May, but so much other fun stuff has been going on!  So, to make me feel a bit better on that point, I will share some current crowdfunding data with you all in this post based on publicly available information obtained from a Westlaw search performed yesterday (Sunday, August 21, 2016).  [Note to the powers that be at the SEC:  EDGAR makes it hard to find the aggregated set of Form C filings unless you are collecting data on an ongoing basis.  I hope that changes as EDGAR continues to improve . . . .]  

At the outset, I will note that others have offered their own reports on Title III crowdfunding since I last posted (including here, here, and here).  These reports offer some nice summaries.  This post offers a less comprehensive data dump focusing in on completed offerings and withdrawn offerings.  At the end, I offer some limited observations from the information provided here about crowdfunding as a small-business capital-raising alternative, the need for EDGAR adjustments, inferences about the success of Title III crowdfunded offerings, and platform disclosure about withdrawn offerings.

First, however, the top-level Westlaw-based summary:

Total Form C filings: 85 (275 filings show on Westlaw, but only 85 are non-exhibit filings representing distinct offerings)
Total Form C/A filings (amendments, including exhibit filings): 153
Total Form C-U filings (updates): 4
Total Form C-W filings (withdrawals): 2

The remainder of this post takes a shallow dive into the updates and withdrawals.  Filings in each case are presented in reverse chronological order by filing date.  All referenced dates are in 2016.  Issuer names are copied from filings and may not be the actual legal names of the entities.

The concept of private prisons has always seemed off to me.  Prisons have a role in society, but the idea of running such institutions for profit, it seems to me, aligns incentives in an improper way. The U.S. Justice Department apparently agrees and said yesterday that it plans to end the use of private prisons.  The announcement sent stocks tumbling for two private prison companies, Corrections Corp. of America (CCA) and GEO.  Both dropped as much as 40% and remain down more than 30% from where they were before the announcement.   

Obviously, this can’t make shareholders happy, but I figured this had to be a known risk. I was right — CCA’s 10-K makes clear that such government decisions related to future contracts could lead to a reduction in their profitability.  So, the disclosure seems proper from a securities regulation perspective. Still, reading the disclosure raises some serious questions for me about the proper role of government.  I frankly find this kind of outsourcing chilling.  For example, CCA states: 

Our results of operations are dependent on revenues generated by our jails, prisons, and detention facilities, which are subject to the following risks associated with the corrections and detention industry.

We are subject to fluctuations in occupancy

…

I was recently invited to write a short piece on crowdfunding and investor protection for a special issue of one of the publications of the CESifo Group Munich, the CESifo DICE Report–“a quarterly, English-language journal featuring articles on institutional regulations and economic policy measures that offer country comparative analyses.”  The group of authors for this publication (present company excluded) was truly impressive, and I have enjoyed reading their submissions.  My contribution is published here on the CESifo website and here on SSRN, for those who care to look it over.  

I did not hesitate to accept the CESifo Group’s invitation to publish this paper, even though it is not primary scholarship and the deadline was tight for me given other professional obligations.  (The editors did allow me to negotiate a bit on the timing, however.)  The purpose of my post today is to explain why I decided to take this opportunity.  With the limited time that we all have to produce research papers, why would I invest in this kind of an “extra” publication–one that is not likely to get me full scholarly credit (whatever that may mean) in a critical assessment of my body of work?  Here are four reasons why I value this kind…

Jamie Dimon (JP Morgan Chase), Warren Buffet (Berkshire Hathaway), Mary Barra (General Motors), Jeff Immet (GE), Larry Fink (Blackrock) and other executives think so and have published a set of “Commonsense Principles of Corporate Governance” for public companies. There are more specifics in the Principles, but the key points cribbed from the front page of the new website are as follows:

Truly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management. Every board should meet regularly without the CEO present, and every board should have active and direct engagement with executives below the CEO level;

■ Diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences. It’s also important to balance wisdom and judgment that accompany experience and tenure with the need for fresh thinking and perspectives of new board members;

■ Every board needs a strong leader who is independent of management. The board’s independent directors usually are in the best position to evaluate whether the roles of chairman and CEO should be separate or combined; and if the board decides on a combined role, it is essential that the…