Securities Regulation

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This post alerts everyone to a comment letter, drafted by Jill Fisch, George Georgiev, Donna Nagy, and Cindy Williams (signed by the four of them and 26 other securities law scholars, including yours truly and Ann Lipton), affirming that the Securities and Exchange Commission’s recent proposal related to the enhancement and standardization of climate-related disclosures for investors is within its rulemaking authority.  The letter was filed with the Commission yesterday and has been posted to SSRN.  The SSRN abstract is included below.

This Comment Letter, signed by 30 securities law scholars, responds to the SEC’s request for comment on its March 2022 proposed rules for the “Enhancement and Standardization of Climate-Related Disclosures for Investors” (the “Proposal”). The letter focuses on a single question—whether the Proposal is within the SEC’s rulemaking authority—and answers this question in the affirmative.

The SEC’s authority for the Proposal is grounded in the text, legislative history, and judicial interpretation of the federal securities laws. The letter explains the objectives of federal regulation and demonstrates that the Proposal’s requirements are properly understood as core capital markets disclosure in the service of those objectives. The statutory framework requires the SEC to adjust and update the content of the…

I am excited to be promoting here an inventive and interesting paper, Total Return Meltdown: The Case for Treating Total Return Swaps as Disguised Secured Transactions, written by friend-of-the-BLPB Colin Marks (St. Mary’s School of Law).   The SSRN abstract follows.

Archegos Capital Management, at its height, had $20 billion in assets. But in the spring of 2021, in part through its use of total return swaps, Archegos sparked a $30 billion dollar sell-off that left many of the world’s largest banks footing the bill. Mitsubishi UFJ Group estimated a loss of $300 million; UBS, Switzerland’s biggest bank, lost $861 million; Morgan Stanley lost $911 million; Japan’s Nomura, lost $2.85 billion; but the biggest hit came to Credit Suisse Group AG which lost $5.5 billion. Archegos, itself lost $20 billion over two days. These losses were made possible due to the unique characteristics of total return swaps and Archegos’ formation as a family office, both of which permitted Archegos to skirt trading regulations and reporting requirements. Archegos essentially purchased beneficial ownership in large amounts of stocks, particularly ViacomCBS Inc. and Discovery Inc., on credit. Under Regulation T of the Federal Reserve Board, up to 50 percent of the purchase price…

In the fall, I posted on Professor Kevin R. Douglas’s article, “How Creepy Concepts Undermine Effective Insider Trading Reform” (linked below), which is now forthcoming in the Journal of Corporation Law. The following post comes from Professor Douglas. In it, he develops one theme from that article:

Would U.S. officials imprison real people for failing to adhere to the most unrealistic assumptions in prominent economic models? Yes, if the assumption is that no one can generate risk-free profits when trading in efficient capital markets. What are risk-free profits, and why should you go to jail for trying to generate them? Relying on the ordinary dictionary definition of “risk” makes the justification for criminal penalties described above seem absurd. One dictionary defines risk as “the possibility of loss, injury, or other adverse or unwelcome circumstance,” and another simply defines risk as “the possibility of something bad happening.” Why should someone face criminal liability for attempting to generate trading profits without something bad happening—without losing money? The absurdity is especially jarring when thinking about securities markets, where hedge fund managers rely heavily on risk reduction strategies.

However, if we turn to the definition of “risk” used in prominent models…

It’s a lovely Friday night for grading papers for my Business and Human Rights course where we focused on ESG, the Sustainable Development Goals (SDGs), and the UN Guiding Principles on Business and Human Rights. My students met with in-house counsel, academics, and a consultant to institutional investors; held mock board meetings; heard directly from people who influenced the official drafts of EU’s mandatory human rights and environmental due diligence directive  and the ABA’s Model Contract Clauses for Human Rights; and conducted simulations (including acting as former Congolese rebels and staffers for Mitch McConnell during a conflict minerals exercise). Although I don’t expect them all to specialize in this area of the law, I’m thrilled that they took the course so seriously, especially now with the Biden Administration rewriting its National Action Plan on Responsible Business Conduct with public comments due at the end of this month.

The papers at the top of my stack right now:

  1. Apple: The Latest Iphone’s Camera Fails to Zoom Into the Company’s Labor Exploitation
  2. TikTok Knows More About Your Child Than You Do: TikTok’s Violations of Children’s Human Right to Privacy in their Data and Personal Information
  3. Redraft of the Nestle

…

Earlier this month, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing on the Insider Trading Prohibition Act (ITPA), which passed the house with bipartisan support in May of last year. Some prominent scholars, like Professor Stephen Bainbridge, have criticized the ITPA as ambiguous in its text and overbroad in its application, while others, like Professor John Coffee, have expressed concern that it does not go far enough (mostly because the bill retains the “personal benefit” requirement for tipper-tippee liability).

My own view is that there are some good, bad, and ugly aspects of the bill. Starting with what’s good about the bill:

  • If made law, the ITPA would end what Professor Jeanne L. Schroeder calls the “jurisprudential scandal that insider trading is largely a common law federal offense” by codifying its elements.
  • The ITPA would bring trading on stolen information that is not acquired by deception (e.g., information acquired by breaking into a file cabinet or hacking a computer) within its scope. Such conduct would not incur Section 10b insider trading liability under the current enforcement regime.
  • The ITPA at least purports (more on this below) to only proscribe “wrongful” trading, or trading

…

I’m doing what may seem crazy to some- teaching Business Associations to 1Ls. I have a group of 65 motivated students who have an interest in business and voluntarily chose to take the hardest possible elective with one of the hardest possible professors. But wait, there’s more. I’m cramming a 4-credit class into 3 credits. These students, some of whom are  learning the rule against perpetuities in Property and the battle of the forms in Contracts while learning the business judgment rule, are clearly masochists. 

If you’re a professor or a student, you’re coming close to the end of the semester and you’re trying to cram everything in. Enter Elon Musk. 

I told them to just skim Basic v. Levenson and instead we used Rasella v. Musk, the case brought by investors claiming fraud on the market. Coincidentally, my students were already reading In Re Tesla Motors, Inc. Stockholder Litigation because it was in their textbook to illustrate the concept of a controlling shareholder. Elon’s pursuit of Twitter allowed me to use that company’s 2022 proxy statement and ask them why Twitter would choose to be “for” a proposal to declassify its board, given all that’s going on. Perhaps…

Shortly after President Barack Obama’s first press conference in 2009, the Huffington Post published an article, “When Did You Stop Beating Your Wife?”, that challenged the false premises of many of the questions being asked of the new president. The article opens by noting:

Sooner or later every human being on the face of this planet is confronted with tough questions. One of the toughest and most common is the infamous loaded question, “when did you stop beating your wife?” which implies that you have indeed been beating your wife. How do you answer without agreeing with the implication? How do you not answer without appearing evasive?

The author’s solution is that you should refuse to answer the question by simply responding, “no,” or by challenging the false assumption imbedded in the question. But what if the question is not asked at a press conference, by opposing counsel in the courtroom, or at a cocktail party, but as part of a federally mandated disclosure regime? This is a dilemma issuers may face if the Securities and Exchange Commission’s (SEC’s) proposed rule to “Enhance and Standardize Climate-Related Disclosures for Investors” is adopted.

Existing SEC disclosure rules and guidance already require…

Last May, I posted on a wonderful two-day event–a symposium hosted over Zoom by Brooklyn Law School celebrating the career of Professor Roberta Karmel.  As I noted then, I was honored to be invited to speak at the event. It was so inspiring.

I have just posted the essay that I presented at the symposium, “Federalized Corporate Governance: The Dream of William O. Douglas as Sarbanes-Oxley Turns 20” (recently published by the Brooklyn Journal of Corporate, Financial & Commercial Law), on SSRN.  It can be found here. 

The roadmap paragraph from the essay’s introduction offers a brief description of the essay’s contents.

This essay focuses on the federalization of U.S. corporate governance since Sarbanes-Oxley—and, more specifically, since Roberta’s article was published in 2005 [Realizing the Dream of William O. Douglas — The Securities and Exchange Commission Takes Charge of Corporate Governance, 30 DEL. J. CORP. L. 79 (2005)]—pulling forward key aspects of Roberta’s work in Realizing the Dream. To accomplish this purpose, the essay first briefly reviews the contours of Roberta’s article. It then offers observations on corporate governance in the wake of (among other things) the public offering reforms adopted by the U.S.

The following post comes to us from George Georgiev at Emory Law.  It follows quite nicely on Ann’s post yesterday on Climate Change and Wahed Invest.  I know a bunch of us will be commenting over time on the SEC’s climate change release, and we are grateful that George has offered his ideas here.  Please note that more of the post is below the fold and can be accessed by clicking on the “continue reading” jump link.

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The SEC’s Climate Disclosure Proposal: Critiquing the Critics
George S. Georgiev

The SEC released its long-awaited Climate Disclosure Proposal a few days ago, on March 21, 2022. The Proposal is expansive, the stakes are high, and, predictably, the critical arguments that started appearing soon after the SEC kicked off this project a year ago are being raised ever more forcefully in preparation for a potential court challenge. A close review of the Proposal, however, suggests that it is firmly grounded within the traditional SEC disclosure framework that has been in place for close to nine decades. The Proposal is certainly ambitious (and overdue), but it is by no means extraordinary. This, in turn, suggests that challenges to the Proposal’s legitimacy ought to fail, even if certain aspects of the Proposal could stand to be improved as part of the ongoing rulemaking process.

This view is not universally held. In voting against the Proposal, SEC Commissioner Hester Peirce admonished that it “turns the disclosure regime on its head” and erects “a hulking green structure” that will “trumpet” a “revised mission” for the SEC: “‘protection of stakeholders, facilitating the growth of the climate-industrial complex, and fostering unfair, disorderly, and inefficient markets.’” This certainly sounds problematic—and, indeed, quite dramatic. But once we set aside the entertaining rhetorical flourishes, we see that many of the arguments against the Proposal misstate the applicable legal constraints and mischaracterize important aspects of the Proposal. Moreover, even though Commissioner Peirce goes out of her way to praise “the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures,” her lengthy dissenting statement reveals that she actually opposes many important and established elements of the very framework she says she wants to conserve.

I will make the case that the SEC’s Climate Disclosure Proposal is in keeping with longstanding regulatory practice by examining several features of the traditional disclosure regime and the new Proposal. I will focus my analysis on arguments I’ve developed in prior research, certain other less-known arguments, and the particular aspects of the new Proposal. This piece is not intended to be comprehensive, and I want to note that the broader issue of ESG disclosure has generated extensive debate and much insightful analysis. As always, I welcome comments and amendments via email.

Shareholders, Stakeholders, and Expert Groups

The SEC’s Climate Disclosure Proposal immediately prompts the well-worn question: Is this disclosure intended for shareholders or for stakeholders? But posing this as a binary choice automatically shifts the terms of the debate in favor of opponents of climate-related disclosure, regardless of the actual content of the Proposal. Since climate change has society-wide implications, information about it will inevitably resonate beyond the boundaries of the disclosing firm and the capital markets, even when the focus is on financially-material disclosure relying on investor- and issuer-generated disclosure frameworks (as is the case here). The social resonance of climate-related disclosure can drown out its clear-cut financial relevance, render any proposed disclosure rule suspect, and lead to a situation that, when we stop and think about it, is quite illogical: A subject matter’s relevance to one audience (stakeholders) is used as an argument to cancel out the well-established relevance of that same subject matter to another audience (investors). This is a general vulnerability that applies not just to climate-related disclosure, but to other ESG disclosure as well. It is important to understand it and de-bias policymaking accordingly.

Commissioner Peirce’s dissenting statement deftly zeroes in on this vulnerability by asserting that the Proposal “tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies” and “forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.” Reading this, one would think that the Proposal was written by the Sierra Club and the National Resources Defense Council—or by a D.C. bureaucrat, who, in Peirce’s telling, is both clueless and corruptible. Yet, nothing could be further from the truth. 

The SEC’s Proposal draws on technical frameworks for financially-material disclosure developed by expert groups such as the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol. Take the TCFD, for example: Its members include representatives of mainstream investors (including BlackRock and UBS Asset Management), banks (JP Morgan, Citibanamex), insurance companies (Aviva, Swiss Re, Axa), giant industrial firms (BHP, Eni, Tata Steel, Unilever), rating agencies (Moody’s, S&P), accounting firms (Deloitte, E&Y), and others. Its secretariat is headed by a leader in the financial industry and capital markets, Mary Schapiro, who holds the unique distinction of having served as Chair of the SEC, Chair of the CFTC, and CEO of FINRA. And, for better or worse, no environmental NGOs or stakeholder organizations are represented on the TCFD. As its name suggests, the TCFD’s focus is on financial disclosures of the kind that investors require and use. The TCFD has generated an impressive roster of supporters and official adopters in just over six years, and, importantly, each of the “big three” (BlackRock, State Street, and Vanguard) has endorsed the TCFD framework.

Commissioner Peirce rightly points out that the SEC does not have the depth of expertise on climate-related matters that other, specialized regulators have. Such expertise, however, is not necessary here since the SEC is not setting GHG emission limits, calculating carbon trading prices, drawing up climate transition plans, or setting climate resilience standards for businesses. The SEC’s Proposal is limited to disclosure—and only disclosure—on a technical topic, and the SEC has decades-long experience handling disclosures on technical topics. For example, the SEC is not an energy regulator, but it drew up a specialized disclosure framework for oil and gas extraction activities in the 1970s (with help from expert groups, much like it has done here), and it has administered this framework successfully since then. As the composition of the economy has changed, the SEC has had to develop some expertise in cybersecurity disclosure, tech disclosure, and in other specialized areas. The Climate Disclosure Proposal does not veer away from this time-tested approach; the only difference is that it concerns a hot-button topic.

Statutory Authority and Regulatory Practice: Recalling Schedule A of the Securities Act

A central challenge to the Proposal is that it goes beyond the authority given to the SEC by Congress because the rules are too prescriptive, not rooted in “materiality” (more on which later), and because Congress has not directed the SEC to pursue rulemaking on this particular topic. A fair amount of debate has focused on what it means for the SEC to act as “necessary or appropriate in the public interest or for the protection of investors”—language that has been part of the securities laws since they were passed in the 1930s but that has not been tested in court.

The following comes to us from Professor Mike Guttentag in response to my recent post on his excellent and thought-provoking new article, Avoiding Wasteful Competition: Why Trading on Inside Information Should be Illegal. This is a worhy discussion I look forward to continuing–and I hope others will engage in the comments below. Now, here is Professor Guttentag’s response:

As always, I am honored and impressed by the seriousness and respect with which Professor Anderson approaches my work.  I would, however, take exception to the reasons he offers for rejecting my conclusions.

The debate about insider trading over the past five decades has suffered from limited evidence of either benefits or harms. Those who have objected to a strict insider trading prohibition have reasonably asked: what evidence is there that the harms of insider trading justify a broad prohibition?

In my article I believe I have answered that challenge.  First, I explain why there is a significant mismatch between private gains and social gains when trading on inside information. This mismatch arises both because of how inside information is produced (largely as a byproduct of other activities) and how trading on this information generates profits (at the expense of others). I…