Securities Regulation

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The blogosphere has been a-twitter with commentary on Jamie Dimon’s revelation earlier this week that he has throat cancer and will be undergoing treatments in the hope of eradicating it.  From the public news, his prognosis sounds good.  For that, I am sure all are grateful.

As some of you may know, my interest in issues relating to disclosures of facts from executives’ private lives stems from my fascination, starting about 12 years ago, with the Martha Stewart disclosure cases (about which I wrote in law journals and in several chapters of a book that I edited).  After co-writing the book about the basic concerns in Stewart’s insider trading, misstatements/omissions securities fraud, and derivative fiduciary duty actions, I focused in additional articles on some finer points relating to her case.  Two of these works covered the disclosure of private facts.  Among the types of private facts covered are those relating to executive health concerns.

So, the Hobby Lobby decision is out.  I wrote my thoughts here and here after oral arguments, and I think the court got this wrong.  Not the concept, but the execution. 

Rather than try to rehash what is now done, I will pose a different question: How does one reconcile this religious exercise with the profit-seeking mandate that the Delaware court imposes from time to time.  As Chancellor Chandler noted in eBay v. Newmark (more here):

The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. 

Note that “purely” is not an entirely accurate modifier here.  Craigslist made a profit and had some ventures that raised money.  They just did not monetize the majority of the endeavors

So what about an entity that operates for purely religious ends? Hobby Lobby and those similarly situated seem to be saying that religion trumps profit (see, e.g., Chik_Fil-A closing on Sundays).  This is not the argument that our business model is stronger because of our choices, which I have argued before should be protected, but this is saying we…

I have been catching up on my long backlist of reading and recently read an excellent article on litigation challenging the fees of mutual fund advisers: Quinn Curtis and John Morley, The Flawed Mechanics of Mutual Fund Fee Litigation.

As you may know, section 36(b) of the Investment Company Act of 1940 gives mutual fund investors and the SEC a cause of action to challenge excessive investment adviser fees.
Section 36(b) has generated quite a bit of academic commentary; Curtis and Morley’s footnote listing those articles (fn. 4, if you’re interested) takes up more than a page of single-spaced text. The Supreme Court has also recently chimed in on section 36(b). Jones v. Harris Assocs. L.P., 559 U.S. 335 (2010) discussed the standard for reviewing advisors’ fees under section 36(b).

Don’t worry; Curtis and Morley don’t rehash all of the earlier commentary. Instead, they take the existence of a section 36(b) cause of action as a given and ask how it can be improved to better achieve its purposes. Here’s the abstract:

We identify a number of serious mechanical flaws in the statutes and judicial doctrines that organize fee liability for mutual fund managers. Originating in section…

I always enjoy reading Bryan Cave partner Scott Killingsworth’s comments in various LinkedIn groups. In addition to practicing law, he’s a contributing editor to a treatise on the duties of board members. He’s just published a short but thorough essay on “The Privatization of Compliance.” It reminds me of some of the comments that Dean Colin Scott made at Law and Society about tools of private transnational regulation, which include self-regulation, contracts, consumers, industry initiatives, corporate social responsibility programs and meta-regulators. Killingsworth’s abstract is below.

Corporate Compliance is becoming privatized, and privatization is going viral. Achieving consistent legal compliance in today’s regulatory environment is a challenge severe enough to keep compliance officers awake at night and one at which even well-managed companies regularly fail. But besides coping with governmental oversight and legal enforcement, companies now face a growing array of both substantive and process-oriented compliance obligations imposed by trading partners and other private organizations, sometimes but not always instigated by the government. Embodied in contract clauses and codes of conduct for business partners, these obligations often go beyond mere compliance with law and address the methods by which compliance is assured. They create new compliance obligations and enforcement mechanisms and…

Harumph.  Business as usual at the SCOTUS . . . .  As a student and teacher of Basic v. Levinson and its progeny, I guess I had hoped for more from the U.S. Supreme Court’s opinion in Halliburton, released two days ago.  I haven’t yet read all the articles on the case that were published since the release of the opinion (as usual, quite a number), so my thoughts here represent my personal reflections.

After engaging in some self-analysis, I have determined that my disappointment with the Court’s opinion stems from the fact that I am a transactional lawyer . . . and the Court’s opinion is about procedure.  Not that civil and criminal procedure do not impact transactional law.  Au contraire.  The procedure and substance of Section 10(b)/Rule 10b-5 claims are intertwined in many fascinating ways.  I will come back to that somewhat in a minute.  But the Court’s opinion in Halliburton just doesn’t satisfy the transactional lawyer in me.

This also is somewhat true of the SCOTUS opinions in both Dura Pharmaceuticals and Tellabs, which deal with pleading (in)sufficiencies in Section 10(b)/Rule 10b-5 litigation rather than (as in Halliburton) class certification questions.  In its class certification focus, Halliburton is much more the sibling of Amgen, which I find infinitely more satisfying because it (like Basic and Matrixx) focuses on materiality, which infuses all disclosure decisions.  All of these cases, however, center on a defendant’s ability to get dismissal of an action at an early stage, something that defendants in Section 10(b)/Rule 10b-5 cases desperately want to do.  The longer the case goes on, the more incentive defendants have to settle–oftentimes (in my experience) foregoing the opportunity to defend themselves against specious claims because of the ongoing drain on financial and human resources.

Regular readers of this blog have seen several posts discussing the materiality of various SEC disclosures. See here and here for recent examples. I have been vocal about my objection to the Dodd-Frank conflict minerals rule, which requires US issuers to disclose their use of tin, tungsten, tantalum and gold deriving from the Democratic Republic of Congo and surrounding nations, and describe the measures taken to conduct audits and due diligence of their supply chains. See this post and this law review article.

Last year SEC Chair Mary Jo White indicated that she has concerns about the amount and types of disclosures that companies put forth and whether or not they truly assist investors in making informed decisions.  In fact, the agency is undergoing a review of corporate disclosures and has recently announced that rather than focusing on disclosure “overload” the agency wants to look at “effectiveness,” duplication, and “holes in the regulatory regime where additional disclosure may be good for investors.”

I’m glad that the SEC is looking at these issues and I urge lawmakers to consider this SEC focus when drafting additional disclosure regulation. One possible test case is the Business Supply Chain Transparency on Trafficking and…

A new poll, conducted by Greenberg Quinlan Rosner Research, suggests that the desire for new Wall Street regulations has not been maximized by candidates for political office.  Here are some of the poll’s key findings.  The release about the poll states:

A strong, bipartisan majority of likely 2014 voters support stricter federal regulations on the way banks and other financial institutions conduct their business. Voters want accountability and do not want Wall Street pretending to police themselves: they want real cops back on the Wall Street beat enforcing the law.

As evidence, the release notes that David Brat’s upset win over Eric Cantor in the Virginia 7th District Republican primary, may have been related to Brat’s attack on Wall Street, sharing Brat’s words from a radio interview: “The crooks up on Wall Street and some of the big banks — I’m pro-business, I’m just talking about the crooks — they didn’t go to jail, they are on Eric’s Rolodex.”

The poll found that voters consider Wall Street and the large banks as “bad actors,” with 64% saying,  “the stock market is rigged for insiders and people who know how to manipulate the system.”  Another 60% want “stricter regulation on the way banks and other…

I have been working on a draft article for the University of Cincinnati Law Review based on a presentation that I gave this spring at the annual Corporate Law Symposium.  This year’s topic was “Crowdfunding Regulations and Their Implications.”  My draft article addresses the public-private divide in the context of the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act–more commonly known as the CROWDFUND Act.  I am using two pieces coauthored by Don Langevoort and Bob Thompson (here and here), as well as three works written by Hillary Sale (here, here, and here) to engage my analysis.

I also will be participating in a discussion group at the Southeastern Association of Law Schools annual conference in August on the publicness theme.  That session is entitled “Does The Public/Private Divide In Federal Securities Regulation Make Sense?” and is scheduled for 3:00 pm on Augut 6th, for those attending the conference.  Michael Guttentag was good enough to recruit the group for this discussion.

All this work on publicness has my head spinning!  There are a number of unique conceptions of pubicness, some overlapping or otherwise interconnected, with different conceptions being useful in different…

A few weeks ago, Tim Carney wrote a piece in the Washington Examiner that is stuck in my mind. The piece titled Conservatives, big government and the duty to care for the poor discusses what Carney sees as a shift in the rhetoric conservatives are using in reference to the poor and other vulnerable populations.  Carney notes that Senate Minority Leader Mitch McConnell (R-KY) recently referenced a “shared responsibility for the weak.”  Carney continues:

Step away from policy debates and think about that phrase. Do you have a responsibility to help the weak? Do you have a responsibility to feed the hungry? To aid the poor?

 I think I do. I think everyone does. The Catholic Church teaches us we do.

Conservatives sometimes shy away from this idea, though. One reason is a strong (and overblown) distaste to “helping the lazy.” Another reason is that conservatives fear it implies the Left’s answer: big federal programs.

But, in fact, you can grant that you have a duty to the poor and the weak, and then have a really good debate:

Is that duty individual, or some sort of a communal duty?

Does the government have the legitimate right to transfer wealth to satisfy

…

Today, we finished two days of amazingly rich discourse on business law issues at the Association of American Law Schools (AALS) Workshop on Blurring Boundaries in Financial and Corporate Law in Washington, DC.  (Full disclosure:  I chaired the planning committee for this AALS midyear meeting.)  All of the proceedings have been phenomenally interesting.  I have learned so many things and been forced to think about so much . . . .  For those of you who couldn’t be there, I tried to faithfully pick up a bunch of salient points from the talks and discussions on Twitter using #AALSBB2014.  Moreover, some of the meeting was recorded.  I will try to remember to let you know when, to whom, and how those recordings are being made available. (Feel free to remind me if I forget . . . .)

One idea shared at the workshop that I am particularly intrigued by is the use of a new standard in federal securities regulation, suggested by Tom Lin in his talk as part of this morning’s plenary panel on “Complexity”.  He argues for an “algorithmic investor” standard (working off/refining the concept of the reasonable investor) in light of the growth of algorithmic trading.  It’s  predictable that I would be interested in this idea, given that I write about materiality in securities regulation (especially insider trading law, in articles posted here and here), in which the reasonable investor standard is central.  (In fact, Tom was kind enough to mention my work on  the resonable investor standard in his talk.)

Tom is not the first to argue for a securities regulation standard that better serves specific investor populations.  Memorable in this regard, at least for me, is Maggie Sachs’s paper arguing for a standard focused on the “least sophisticated investor”.  But many other fine works contending with materiality or the concept of the reasonable investor in securities regulation also question (among other things) the clarity and efficacy of the reasonable investor standard in specific contexts.