Securities Regulation

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Calling attention today to Sue Guan’s paper, Finfluencers and the Reasonable Retail Investor, posted on SSRN and forthcoming to the University of Pennsylvania Law Review Online.  The abstract is copied in below.

Much recent commentary has focused on the dangers of finfluencers. Finfluencers are persons or entities that have outsize impact on investor decisions through social media influence. These finfluencers increasingly drive investing and trading trends in a wide range of asset markets, from stocks to cryptocurrency. They do so because they can provide powerful coordination mechanisms across otherwise diffuse investor and trader populations. Of course, the more influence wielded over their followers, the easier it is for finfluencers to perpetrate fraud and manipulation.

The increase in finfluencing has highlighted a gray area in the securities laws: a finfluencer’s statements may not be factually untrue or clearly deceptive, but they can be interpreted as misleading depending on the context and the particular beliefs held by the finfluencer’s social media followers. Moreover, such statements can harm investors who buy or sell based on their interpretation of the finfluencer’s activity. In other words, finfluencers can easily profit off of their followers’ trading activity while steering clear of the securities laws.…

I learned earlier this week of the death of Brooklyn Law Professor Roberta Karmel.  Roberta was extraordinary, and I miss her already.  Much has been written about her role in our profession–including her service as the first female commissioner at the Securities and Exchange Commission.  I will only add a few personal reflections here.

Roberta was both exacting and compassionate–traits that we sometimes think of as being mutually exclusive.  Small in stature, she somehow was still formidable.  When I first met her in a setting where she was commenting on academic work, I was impressed and intimidated.  Despite my extroversion, I was hesitant to introduce myself and reach out to her in friendship.  When I later admitted that to her, she laughed and (in that inimitable voice we all know and will remember) let me know how silly that was.

Roberta was the honored keynote speaker at our 2009 law graduation (hooding) ceremony at The University of Tennessee College of Law.  She was invited by a student committee that understood well her significance to the law and legal education communities.  She shared details of her life and career with us.  It was inspirational for me, even though I knew…

The University of Chicago Business Law Review recently published an interesting and engaging article written by David Rosenfeld.  The article is entitled “Insider Abstention and Rule 10b5-1 Plans” and is available on SSRN.  The SSRN abstract for David’s article follows.

Company insiders will typically be in possession of material non-public information (MNPI) about their companies. In order to allow insiders the opportunity to trade, the SEC adopted Rule 10b5-1, which provides an affirmative defense to insider trading liability if the trades are made pursuant to a written plan or trading instruction entered into when the trader was not aware of MNPI. Over the years, there has been considerable concern that insiders were abusing Rule 10b5-1 plans by adopting plans just prior to trading, adopting multiple plans, or even terminating plans when they turned out to be unprofitable. The SEC recently adopted new rules designed to curb some of the more abusive practices, but one significant problem remains: while Rule 10b5-1 plans are supposed to be irrevocable, insiders who back out of plans have so far escaped liability under the central anti-fraud provision of the federal securities laws, principally because a violation of that provision requires an actual trade.

The…

Tomorrow morning, the U.S. Supreme Court will be hearing oral arguments on a securities fraud case for which I am an amicus brief coauthor.  The case is: Macquarie Infrastructure Corporation, et al. v. Moab Partners, L.P., et al. (No. 22–1165, Certiorari to the C. A. 2nd Circuit).  The Court convenes at 10 am and has allotted one hour for oral argument: 30 minutes for the petitioners, 20 minutes for the respondent, Moab Partners, and 10 minutes for the U.S. Securities and Exchange Commission (“SEC”), as amicus supporting the respondents.  An audio feed of the argument is live-streamed on the Court’s website, and the Court posts the audio later in the day.

The question presented to the Court is: “May a failure to make a disclosure required under Item 303 of SEC Regulation S-K support a private claim under Section 10(b) of the Securities Exchange Act of 1934, even in the absence of an otherwise misleading statement?”  The issue in the case, in essence, is whether a mandatory disclosure rule properly adopted by the SEC gives rise to a duty to disclose that can be the basis of a securities fraud claim under Section 10(b) of and Rule 10b-5 under…

In June, at the National Business Law Scholars Conference in Knoxville, I sat in on a paper panel featuring Sarah Williams’s work in process, Regulating Congressional Insider Trading: The Rotten Egg Approach.  A draft of the resulting paper, forthcoming in the Cardozo Law Review, has been made available on SSRN.  The abstract is copied in below.  

A 2004 study revealed that the stock portfolios of members of Congress were consistently outperforming those of the investing public. The financial success of federal lawmakers was statistically correlated to the use of nonpublic information obtained in connection with the performance of legislative responsibilities – reasonably characterizable as insider trading. Cries of dismay over such profiteering by lawmakers have been echoing in the public domain since Samuel Chase, Maryland’s representative in the Continental Congress, cornered the flour market in 1788 after learning that copious quantities of the product would be purchased by the government to support the Continental Army. Notwithstanding efforts to apply insider trading law to curb this behavior and the enactment of the Stop Trading on Congressional Knowledge (“STOCK”) Act, fortuitous securities transactions by members of Congress continue to occur in connection with headlining national events; it was recently observed…

Over the summer, friend-of-the-BLPB Bernie Sharfman posted a draft paper to SSRN that was the subject of a short colloquy between us.  The paper, The Ascertainable Standards that Define the Boundaries of the SEC’s Rulemaking Authority, asserts, among other things, that materiality is one of three “ascertainable policy standards that Congress has placed in the Acts to guide the SEC’s rulemaking discretion.”  The reasoning? 

  • “[T]here are multiple references to materiality in the Acts.”
  • The SEC’s 1972 annual report avers that “[a] basic purpose of the Federal securities laws is to provide disclosure of material financial and other information on companies seeking to raise capital through the public offering of their securities, as well as companies whose securities are already publicly held.”
  • “As observed by Professor Ruth Jebe, it is fair to say that materiality ‘constitutes the primary framing mechanism for financial reporting.'”

Bernie acknowledges that “there is no explicit statutory language in the Acts that forbids the SEC from promulgating rules requiring non-material disclosures.”  I might add that nothing in either the Securities Act of 1933, as amended (“1933 Act”), or the Securities Exchange Act of 1934, as amended (“1934 Act”), explicitly limits the SEC’s rulemaking…

It was so much find to have our business law prof colleague Erik Gerding and two fabulous key members of his staff here in Knoxville yesterday.  I had posted on this visit last week.  Our visitors regaled us on the role of the U.S. Securities and Exchange Commission (“SEC”) Division of Corporation Finance, the registration requirements and exemptions under the Securities Act of 1933, as amended (“1933 Act”), and the rule-making part of the Division’s (and SEC’s) mission.

Erik explained how, when he is teaching Securities Regulation, he spends two classes at the beginning of the semester putting the “fear of God” into his students about the registration requirement in Section 5 of the 1933 Act.  (His point is to make the dangers clear up front, since students tend to drop the class who should take it, given that they plan to practice business law in one way or another.)  Erik’s colleague, Jennifer Zepralka, Chief of the SEC’s Office of Small Business Policy, similarly noted in her remarks that there are only three kinds of securities offerings: registered, exempt from registration, and illegal.  Erik’s Counsel, Jeb Byrne, echoed this.  And in the session at lunch time, one of my…

We are excited to welcome our colleague Erik Gerding, the Director of the U.S. Securities and Exchange Commission Division of Corporation Finance, together with members of his staff, to The University of Tennessee College of Law a week from today. Information about the visit is included below.  If you are in the neighborhood, stop by!

SECFlyer

Thanks to Ann for her great “So, Ripple” post last week.  I have been waiting for a case like this—one that engages a court in the details of how the Howey test applies to the way different types of  cryptoassets work.  I was especially interested in how the court in the SEC v. Ripple Labs opinion would handle the different ways in which cryptoassets are sold and traded.  Well, now we have an opinion to work with.

I especially appreciate Ann setting the stage so well with the doctrinal legal background of the case.  Well done, friend!  Like Ann, I teach Securities Regulation every year.  Unlike Ann, I am gleeful about teaching definitional content in the federal securities laws, including the definition of the term “security.”  It is amazing how, as financial investment instruments have evolved, significant numbers of practitioners and their clients have paid insufficient attention to the niceties of that definition and the definition of the embedded term “investment contract.”

Like Ann, I am comfortable that a single financial instrument can be a security in some contexts and not in others.  And, like Ann, I have questions about the court’s analysis in Ripple.  Specifically, I…

Ciao, from Italy.

Tomorrow, I have the privilege of sharing my work in an international symposium at the University of Genoa at the invitation of Vanessa Villanueva Collao.  This symposium offers a unique opportunity for transnational collaboration among corporate governance scholars.  We also are celebrating Vanessa’s completion of her J.S.D. degree (University of Illinois 2023).  

I am presenting my paper, forthcoming in the Michigan State Law Review, on civil insider trading in personal networks.  This is the companion paper to my article on criminal insider trading in personal networks, recently published in the Stetson Business Law Review and part of my larger, long-term project on U.S. insider trading in friendships and family situations.  As many readers may know, this project has fascinated me for a number of years now.  Each phase of the project offers new insights.  And each audience helps provide valuable food for thought. I am confident that the participants in and audience members at tomorrow’s symposium will be no exception.  I look forward to the interchanges on my work and the work of others being featured.

The program for the symposium is included below.  You will see more than a few fascinating members of the U.S.