Securities Regulation

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Today I will pose a simple question: Is Entity Type Material?  

Of course, context matters, so here’s where this is coming from: On July 1, 2016, Canterbury Park Holding Corporation filed an 8-K making the following announcement: 

SHAKOPEE, Minnesota (July 1, 2016) – Canterbury Park Holding Corporation, a Minnesota corporation (Nasdaq Global Market: CPHC) (the “Company”), today announced that it has completed its previously announced reorganization of the Company’s business into a holding company structure (the “Reorganization”), pursuant to which a recently-formed Minnesota corporation with the same name, Canterbury Park Holding Company (“New Canterbury”), has replaced the Company as the publicly held corporation owned by the Company’s shareholders. At the market open today, July 1, 2016, the shares of common stock of New Canterbury will commence trading on the Nasdaq Global Market under the ticker symbol “CPHC,” the same ticker symbol previously used by the Company.

As a result of the Reorganization, the Company has been merged into a limited liability company subsidiary, Canterbury Park Entertainment LLC. In addition, the Company’s shareholders have automatically become shareholders of New Canterbury on a one-for-one basis, holding the same number of New Canterbury shares and the same ownership percentage after the Reorganization as they

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Two weeks ago, I blogged about the potential unintended consequences of (1) Dodd-Frank whistleblower awards to compliance officers and in-house counsel and (2) the Department of Justice’s Yates Memo, which requires companies to turn over individuals (even before they have determined they are legally culpable) in order to get any cooperation credit from the government.

Today at the International Legal Ethics Conference, I spoke about the intersection of state ethics laws, common law fiduciary duties, SOX §307 and §806, and the potential erosion of the attorney-client relationship. I posed the following questions regarding lawyer/whistleblowers and the Yates Memo at the end of my talk:

  • How will this affect Upjohn warnings? (These are the corporate Miranda warnings and were hard enough for me to administer without me having to tell the employee that I might have to turn them over to the government after our conversation)
  • Will corporate employees ask for their own counsel during investigations or plead the 5th since they now run a real risk of being criminally and civilly prosecuted by DOJ?
  • Will companies have to pay for separate counsel for certain employees and must that payment be disclosed to DOJ?
  • Will companies turn people

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Professor William Birdthistle at Chicago-Kent College of Law is publishing his new book, Empire of the Fund with Oxford University Press.  A brief introductory video for the book (available here) demonstrates both Professor Birdthistle’s charming accent and talent for video productions (this is obviously not his first video rodeo). Professor Birdthistle has generously provided our readers with a window into the book’s thesis and highlights some of its lessons.  I’ll run a second feature next week focusing on the process of writing a book—an aspiration/current project for many of us.

Empire of the Fund is segmented into four digestible parts:  anatomy of a fund describing the history and function of mutual funds, diseases & disorders addressing fees, trading practices and disclosures, alternative remedies introducing readers to ETFs, target date funds and other savings vehicles, and cures where Birdthistle highlights his proposals. For the discussion of the Jones v. Harris case alone, I think I will assign this book to my corporate law seminar class for our “book club”.  As other reviewers have noted, the book is funny and highly readable, especially as it sneaks in financial literacy.  And now, from Professor Birdthistle:

Things that the audience might learn:

The SEC does practically zero enforcement on fees.  [pp. 215-216]  Even though every expert understands the importance of fees on mutual fund investing, the SEC has brought just one or only two cases in its entire history against advisors charging excessive fees.  Section 36(b) gives the SEC and private plaintiffs a cause of action, but the SEC has basically ignored it; even prompting Justice Scalia to ask why during oral arguments in Jones v. Harris?  Private plaintiffs, on the other hand, bring cases against the wrong defendants (big funds with deep pockets but relatively reasonable fees).  So I urge the SEC to bring one of these cases to police the outer bounds of stratospheric fund fees.

The only justification for 12b-1 fees has been debunked.  [pp. 81-83]  Most investors don’t know much about 12b-1 fees and are surprised by the notion that they should be paying to advertise funds in which they already invest to future possible investors.  The industry’s response is that spending 12b-1 fees will bring in more investors and thus lead to greater savings for all investors via economies of scale.  The SEC’s own financial economist, however, studied these claims and found (surprisingly unequivocally for a government official) that, yes, 12b-1 fees certainly are effective at bringing in new investment but, no, funds do not then pass along any savings to the funds’ investors.  I sketch this out in a dialogue on page 81 between a pair of imaginary nightclub denizens.

Target-date funds are more dangerous than most people realize.  [pp. 172-174]  Target-date funds are embraced by many as a panacea to our investing problem and have been extremely successful as such.  But I point out some serious drawbacks with them.  First, they are in large part an end-of-days solution in which we essentially give up on trying to educate investors and encourage them simply to set and forget their investments; that’s a path to lowering financial literacy, not raising it (which may be a particularly acute issue if my second objection materializes).  Second, TDFs rely entirely on the assumption that the bond market is the safety to which all investors should move as they age; but if we’re heading for a historic bear market on bonds (as several intelligent and serious analysts have posited), we’ll be in very large danger with a somnolent investing population

SEC disclosures are meant to provide material information to investors. As I hope all of my business associations students know, “information is material if there is a substantial likelihood that a reasonable investor would consider the information important in deciding how to vote or make an investment decision.”

Regulation S-K, the central repository for non-financial disclosure statements, has been in force without substantial revision for over thirty years. The SEC is taking comments until July 21st on on the rule however, it is not revising “other disclosure requirements in Regulation S-K, such as executive compensation and governance, or the required disclosures for foreign private issuers, business development companies, or other categories of registrants.” Specifically, as stated in its 341-page Comment Release, the SEC seeks input on:

  • whether, and if so, how specific disclosures are important or useful to making investment and voting decisions and whether more, less or different information might be needed;
  • whether, and if so how, we could revise our current requirements to enhance the information provided to investors while considering whether the action will promote efficiency, competition, and capital formation;
  • whether, and if so how, we could revise our requirements to enhance the protection of

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This post concerns the rights and responsibilities of whistleblowers. I sit on the Department of Labor Whistleblower Protection Advisory Committee. These views are solely my own.

Within a week of my last day as a Deputy General Counsel and Chief Compliance Officer for a Fortune 500 company and shortly before starting my VAP in academia, I testified before the House Financial Services Committee on the potential unintended consequences of the proposed Dodd-Frank whistleblower law on compliance programs. I blogged here about my testimony and the rule, which allows whistleblowers who provide original information to the SEC related to securities fraud or violations of the Foreign Corrupt Practices Act to receive 10 to 30 percent of the amount of the recovery in any action in which the Commission levies sanctions in excess of $1 million dollars. During my testimony in 2011, I explained to some skeptical members of Congress that:

…the legislation as written has a loophole that could allow legal, compliance, audit, and other fiduciaries to collect the bounty although they are already professionally obligated to address these issues. While the whistleblower community believes that these fiduciaries are in the best position to report to the SEC on wrongdoing…

SEC Chair Mary Jo White yesterday presented the keynote address, for the International Corporate Governance Network Annual Conference, “Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability.” The full speech is available here.    

In reading the speech, I found that I was talking to myself at various spots (I do that from time to time), so I thought I’d turn those thoughts into an annotated version of the speech.  In the excerpt below, I have added my comments in brackets and italics. These are my initial thoughts to the speech, and I will continue to think these ideas through to see if my impression evolves.  Overall, as is often the case with financial and other regulation, I found myself agreeing with many of the goals, but questioning whether the proposed methods were the right way to achieve the goals.  Here’s my initial take:   

On Wednesday, the EU finally outlined its position on conflict minerals. The proposed rule will affect approximately 900,000 businesses. As I have discussed here, these “name and shame” disclosure rules are premised on the theories that: 1) companies have duty to respect human rights by conducting due diligence in their supply chains; 2) companies that source minerals from conflict zones contribute financially to rebels or others that perpetuate human rights abuses; and 3) if consumers and other stakeholders know that companies source certain minerals from conflict zones they will change their buying habits or pressure companies to source elsewhere.

As stated in earlier blog posts, the US Dodd- Frank rule has been entangled in court battles for years and the legal wranglings are not over yet. Dodd-Frank Form SD filings were due on May 31st and it is too soon to tell whether there has been improvement over last year’s disclosures in which many companies indicated that the due diligence process posed significant difficulties.

I am skeptical about most human rights disclosure rules in general because they are a misguided effort to solve the root problem of business’ complicity with human rights abuses and assume that consumers care…

The New York Times ran the article How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions last weekend. It’s an interesting piece that provides a look at Donald Trump’s east coast casino experience.  The article is, as one might expect, critical of his dealings and notes that Trump made money even when his ventures when bankrupt.  

Though I will not defend any of Trump’s dealings, there are few issues raised that I think are worthy of a some discussion and clarification.1  The post that follows suggests how to consider Trump’s business history and place that history in a political context.

A colleague sent me a link to a White House blog post focusing on Title III of the Jumpstart Our Business Startups Act (JOBS Act), known as the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act (CROWDFUND Act).  The main theme of the blog post, entitled The Promise of Crowdfunding and American Innovation, is stated in its summary: ”Crowdfunding’ rule makes it possible for entrepreneurs across the country to raise small-dollar investments from ordinary Americans.”  This much is true.  And the post accurately notes that “previous forms of crowdfunding” also already did this.

But the post goes on to extol the virtues of the CROWDFUND Act, which offers (among other things) a registration exemption for investment (or securities) crowdfunding–a very special type of crowdfunding involving the offer or sale of debt, equity, investment contracts, or other securities.  Or at least the blog post tries to extol the virtues of the CROWDFUND Act.  I am not buying it.  In fact, the post doesn’t come up with much of substance to praise . . . .

The coauthors focus a key paragraph on explaining why the CROWDFUND Act is heavy on investor protection provisions.  But they do not talk…

This year, my research and writing season has started off with a bang.  While grading papers and exams earlier this month, I finished writing one symposium piece and first-round-edited another.  Today, I will put the final touches on PowerPoint slides for a presentation I give the second week in June (submission is required today for those) and start working on slides for the presentation I will give Friday.

All of this sets into motion a summer concert conference, Barbri, and symposium tour that (somewhere along the line) got a bit complicated.  Here are the cities and dates:

New Orleans, LA – June 2-5
Atlanta, GA – June 10-11
Nashville, TN – June 17
Chicago, IL – June 23-24
Seattle, WA – June 27

I know some of my co-bloggers are joining me along the way.  I look forward to seeing them.  Each week, I will keep you posted on current events as best I can while managing the research and writing and presentation preparations.  The topics of my summer research and teaching run the gamut from insider trading (through by-law drafting, agency, unincorporated business associations, personal property, and benefit corporations) to crowdfunding.  A nice round lot.

This coming week, I will be at the Law and Society Association annual conference.  My presentation at this conference relates to an early-stage project on U.S. insider trading cases.  The title and abstract for the project and the currently envisioned initial paper (which I would, of course, already change in a number of ways) are as follows: