Securities Regulation

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Today, rather than my usual profound insights, I’m going to pose a question to our readers. (What do you mean, what “usual profound insights”?)

I have been thinking about applying for a Fulbright to teach overseas. The problem is that Fulbright applications are country-specific and I’m having trouble deciding where I would like to teach.

There are several ways to approach this problem. The first approach would be to look for the greatest possible geographical distance from Lincoln, Nebraska. I think this would be my Dean’s preference. But, as my Dean will tell you, pleasing her is almost never one of my criteria.

The second approach would be to choose the place with the greatest beach. This seems like a sound approach to me, but there seems to be a serious shortage of teaching opportunities in places like Tahiti.

That leaves but one possibility—choosing a location that best fits my particular teaching and research interests. My primary focus is securities regulation, particularly the application of securities law to small businesses. Given that focus what would be the best country to visit? Where would I find both (1) interesting things going on in securities regulation of small businesses and (2) people…

Last week I posted about proxy advisory firm ISS and its recommendations regarding Wal-Mart and Target.

This week the US Chamber of Commerce weighed in on the two main proxy advisory firms, what the organization sees as their potential conflict of interests and the lack of transparency, and the SEC’s imminent release of guidance on the firms. It’s worth a read and has some great links.

Next week I will be blogging from Salvador, Brazil where I will be enjoying the World Cup. I will post a brief recap of some of the business-related Law and Society sessions I attended in Minneapolis last weekend. With all of the controversy that invariably surrounds a large sporting event in a country that scores high on the corruption perception index, I may even be inspired to write a law review article on the FCPA. 

Thanks for the warm welcome to the Business Law Prof Blog, Stefan et al.  Having avoided a regular blogging gig for many years now (little known fact: I was the first guest blogger on The Conglomerate – or at least the first one formally listed as a guest – back in 2005), I recently determined that I should sign on to work with this band of thieves scholars on a regular basis.  I appreciate the invitation to do so.

I already feel right at home, given that my post for today, like Steve Bradford’s, is on mandatory disclosure.  Unlike Steve, however, my focus is on the creep of mandatory disclosure rules in U.S. securities regulation into policy areas outside the scope of securities regulation.  I think we all know what “creep” means in this context.  But just to clarify, my definition of “creep” for these purposes is: “to move slowly and quietly especially in order to not be noticed.”  I participated in a discussion roundtable in which I raised this subject at the Law and Society Association annual meeting and conference last week.

My concerns about this issue were well expressed by Securities and Exchange Commission Chair Mary Jo White back in early October 2013 in her remarks at the 14th Annual A.A. Sommer, Jr. Corporate Securities and Financial Law Lecture at Fordham Law School:

When disclosure gets to be too much or strays from its core purposes, it can lead to “information overload” – a phenomenon in which ever-increasing amounts of disclosure make it difficult for investors to focus on the information that is material and most relevant to their decision-making as investors in our financial markets.

To safeguard the benefits of this “signature mandate,” the SEC needs to maintain the ability to exercise its own independent judgment and expertise when deciding whether and how best to impose new disclosure requirements.

For, it is the SEC that is best able to shape disclosure rules consistent with the federal securities laws and its core mission.  But from time to time, the SEC is directed by Congress or asked by interest groups to issue rules requiring disclosure that does not fit within our core mission.

She goes on to note that some recent disclosure rules mandated by Congress:

. . . seem more directed at exerting societal pressure on companies to change behavior, rather than to disclose financial information that primarily informs investment decisions.

That is not to say that the goals of such mandates are not laudable.  Indeed, most are.  Seeking to improve safety in mines for workers or to end horrible human rights atrocities in the Democratic Republic of the Congo are compelling objectives, which, as a citizen, I wholeheartedly share.

But, as the Chair of the SEC, I must question, as a policy matter, using the federal securities laws and the SEC’s powers of mandatory disclosure to accomplish these goals.  

Parts of these remarks—those on information overload—were echoed in a speech that Chair White gave to the National Association of Corporate Directors Leadership Conference.  

Chair White’s words ring true to me.  I derive from them two main contestable points for thought and commentary.

Professor Joan MacLeod Heminway (Tennessee) has a new article posted on SSRN entitled Investor and Market Protection in the Crowdfunding Era: Disclosing to and for the ‘Crowd.’ I look forward to reading the article this summer.  The article abstract is posted below:

This article focuses on disclosure regulation in a specific context: securities crowdfunding (also known as crowdfund investing or investment crowdfunding). The intended primary audience for disclosures made in the crowdfund investing setting is the “crowd,” an ill-defined group of potential and actual investors in securities offered and sold through crowdfunding. Securities crowdfunding, for purposes of this article, refers to an offering of securities made over the Internet to a broad-based, unstructured group of investors who are not qualified by geography, financial wherewithal, access to information, investment experience or acumen, or any other criterion.

To assess disclosure to and for the crowd, this short symposium piece proceeds in three principal parts before concluding. First, the article briefly describes securities crowdfunding and the related disclosure and regulatory environments. Next, the article summarizes basic principles from scholarly literature on the nature of investment crowds. This literature outlines two principal ways in which the behavioral psychology of crowds interacts with securities markets.

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Tomorrow kicks off the 2014 Law & Society Annual meeting in Minneapolis, MN.  Law & Society is a big tent conference that includes legal scholars of all areas, anthropologists, sociologists, economists, and the list goes on and on.  A group of female corporate law scholars, of which I am a part, organizes several corporate-law panels. The result is that we have a mini- business law conference of our own each year.  Below is a preview of the schedule…please join us for any and all panels listed below.

Thursday 5/29

Friday 5/30

Saturday 5/31

8:15-10:00

0575 Corp Governance & Locus of Power

U. St. Thomas MSL 458

Participants: Tamara Belinfanti, Jayne Barnard, Megan Shaner, Elizabeth Noweiki, and Christina Sautter

10:15-12:00

1412 Empirical Examinations of Corporate Law

U. St. Thomas MSL 458

Participants: Elisabeth De Fontenay, Connie Wagner, Lynne Dallas, Diane Dick & Cathy Hwang

12:45-2:30

1468 Theorizing Corp. Law

U. St. Thomas MSL 458

Participants: Elizabeth Pollman, Sarah Haan, Marcia Narine, Charlotte Garden, and Christyne Vachon

1:00 Business Meeting Board Rm 3

2:45-4:30

Roundtable on SEC Authority

View Abstract 2967

Participants: Christyne Vachon, Elizabeth Pollman, Joan Heminway, Donna Nagy, Hilary Allen

1473 Emerging International Questions in

…

Last week I had the pleasure of speaking on a panel on global human rights compliance and enterprise risk management with Mark Nordstrom of General Electric and John Sherman of Shift. The panel was part of a conference entitled New Challenges in Risk Management and Compliance at the UConn School of Law Insurance Law Center. 

I spoke about the lack of direct human rights obligations under international law for multinationals, the various voluntary initiatives such as the Universal Declaration of Human Rights, the ILO Tripartite Declaration, the UN Global Compact, ISO 26000, the OECD Guidelines for Multinational Enterprises, the Global Reporting Initiative, and accusations of bluewashing. I also discussed Dodd-Frank 1502 (conflict minerals), sustainable stock exchange indices, ESG reporting, SEC proxy disclosure on risk management oversight, socially responsible investors, and the roles of the Sustainability Accounting Standards Board and the International Integrated Reporting Council in spurring transparency and integrated reporting. 

Sherman focused on the UN Guiding Principles on Business and Human Rights, which were unanimously endorsed by the UN Human Rights Council in 2011 and which contain three pillars, namely the state duty to protect people from human rights abuses by third parties, including business; business’ responsibility to respect…

[The following post comes to us from Lawrence E. Mitchell, Joseph C. Hostetler – Baker & Hostetler Professor of Law at Case Western Reserve University School of Law.  All formatting errors should be attributed to me, Stefan Padfield.]

The March 5, 2014 oral argument in Halliburton Co. v. Erica P. John Fund, Inc.1 made clear that one of the issues being considered by the Supreme Court is whether to supplant the “market efficiency” analysis currently required at the class certification stage in securities fraud class action cases with a “price impact” analysis instead. Our purpose is not to debate the relative merits of that potential change. Rather, it is to identify a critical point that seemed to get lost in the argument: neither the Justices nor the advocates addressed what a price impact analysis would look like in the context of the most common securities fraud scenario—the making of false statements designed to mask bad news. While some of the briefing before the Court touches on the issue, the authors of a working paper cited by proponents of both sides have supplemented their views with a recent blog post that, while brief, discusses potential approaches to measuring the …

Last week the DC Circuit Court of Appeals generally upheld the Dodd-Frank conflict minerals rule but found that the law violated the First Amendment to the extent that it requires companies to report to the SEC and state on their websites that their products are not “DRC Conflict Free.” The case was remanded back to the district court on this issue.

As regular readers of the blog know I signed on to an amicus brief opposing the law as written  because of the potential for a boycott on the ground and the impact on the people of Congo, and not necessarily because it’s expensive for business (although I appreciate that argument as a former supply chain professional). I also don’t think it is having a measurable impact on the violence. In fact, because I work with an NGO that works with rape survivors and trains midwives and medical personnel in the eastern Democratic Republic of Congo, I get travel advisories from the State Department. Coinicidentally, I received one today as I was typing this post warning that “armed groups, bandits, and elements of the Congolese military [emphasis mine] remain security concerns in the eastern DRC….[they] are known to pillage, steal…

In an opinion released earlier today, the D.C. Circuit Court struck down the SEC’s Dodd-Frank Conflict Mineral Rule under the compelled speech doctrine for failing the least restrictive alternative prong.  

We therefore hold that 15 U.S.C. § 78m(p)(1)(A)(ii) & (E), and the Commission’s final rule, 56 Fed. Reg. at 56,362-65, violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have “not been found to be ‘DRC conflict free.’”

Not striking down the need for information about conflict minerals, but rather the required approach, the Court suggested that: 

[A] centralized list compiled by the Commission in one place may even be more convenient or trustworthy to investors and consumers. The Commission has failed to explain why (much less provide evidence that) the Association’s intuitive alternatives to regulating speech would be any less effective.

In August, 2012, the SEC released final Dodd-Frank rules for conflict minerals “requir[ing] companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (DRC) or an adjoining country.”

-AT