This news story in the Cowboy State Daily, Kraken: World’s First Digital Bank to Open in Wyoming, came to my attention this afternoon.  Wyoming granted Kraken a Special Purpose Depository Institutions Charter, a type of state bank charter enacted into Wyoming law in 2019.  The Kraken blog notes that “From paying bills and receiving salaries in cryptocurrency to incorporating digital assets into investment and trading portfolios, Kraken Financial will enable Kraken clients in the U.S. to bank seamlessly between digital assets and national currencies.”  Its “vision is to become the world’s trusted bridge between the crypto economy of the future and today’s existing financial ecosystem.”      

Not surprisingly, the banking law academic in me has lots of questions, and I’ll look forward to sharing some with BLPB readers when I’ve had more time to learn about this development.   

As a side note, in July 2020, the Office of the Comptroller of Currency (OCC) announced that “federally chartered banks and thrifts may provide custody services for crypto assets.”  The OCC charters national banks, and individual states grant state bank charters.     

 

This is the third installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on the public’s views concerning the morality of insider trading.

The survey asked participants (1) whether they would trade on inside information if it came into their possession; (2) whether they believe that insider trading is morally wrong; and (3) whether they believe that insider trading should be illegal. The following table offers a demographic breakdown of the results.

 

Would you trade based on inside info?

Is insider trading morally wrong?

Should insider trading be illegal?
 

Yes

No

Yes

No

Yes

No

Overall

44.9%

55.1%

62.8%

35.5%

66.7%

33.3%

Gender

Female

45.9%

54.1%

59.4%

39.3%

62.5%

37.5%

Male

43.6%

56.4%

66.7%

31.2%

71.5%

28.5%

Race

Asian

56.1%

43.9%

56.1%

42.4%

62.1%

37.9%

Black

59.0%

41.0%

43.3%

55.1%

45.5%

54.5%

Latinx

61.5%

38.6%

45.8%

51.8%

48.2%

51.8%

Native Am.

66.7%

33.3%

58.3%

41.7%

58.3%

41.7%

White

39.7%

60.2%

68.6%

29.7%

72.6%

27.4%

Other

40.9%

59.1%

59.1%

40.9%

72.7%

27.3%

Trading Status

Invest

51.3%

48.7%

66.5%

31.6%

71.3%

28.7%

Abstain

40.3%

59.7%

59.3%

39.3%

62.4%

37.6%

As expected, a majority of respondents (63%) view insider trading as immoral and 66% think it should be illegal. These numbers are relatively close—at the margin of error for the poll. But the story is more complex when considered in light of responses concerning trading preferences. 18% of respondents said insider trading is immoral but also said they would trade on it—reflecting some cognitive dissonance or a lack of moral clarity. 10% said insider trading is not immoral but also said they would not trade on it–call them cautious abstainers.

We attempted to use these figures to get a clearer sense of respondents’ “true” moral attitudes regarding insider trading. If we take the number who said it is immoral and subtract out those who’s moral clarity is weak, we get 44.2% who have a clear sense that insider trading is wrong. If we take those who would not trade on inside information and subtract those who abstain only out of caution (e.g., fear of prosecution), we get 44.6% who abstain on moral grounds. It is interesting that these two numbers are so close, and this consistency tracks across most demographic subgroups. The numbers suggest that there is a core group of respondents (~44%) who have moral clarity that insider trading is wrong, and who would not trade on inside information for that reason.

The data therefore offers some evidence that the “true” percentage of respondents who believe that insider trading is immoral is probably less than 62%, and could be as low as 44%. See here for a more complete discussion of these and other findings from our survey.

The next installment of this post will share survey responses to a number of scenario-based questions.

Lawyers as leaders.
Reputation is sacred.
So, guard it closely.

In my new role as Interim Director of UT Law’s Institute for Professional Leadership (IPL, for short), I have made a commitment to sit in on the classes in the Institute’s curriculum.  One of them, Lawyers as Leaders, is the flagship course–the course that catalyzed the establishment of the IPL.  This semester, it is being hosted on Zoom.

In that course this afternoon, the students wrestled with attorney misconduct–and how to punish it.  During the first hour of the two-hour session, they spent time in breakout rooms discussing three cases that involved different lapses of professional responsibility rules (and, in some cases, criminal law rules).  They were asked to report out/comment on several things about those cases, including the propriety and relative severity of the penalties imposed on the respective transgressor attorneys.  During the second hour of class, the students had the opportunity to listen to one of the three offenders tell his story and share what he learned about leadership through his misconduct.  They also were invited to ask him questions.

The story that the students heard was the one involved in this case.  But they heard about the facts in a way that the Tennessee Supreme Court could not possibly convey them.  And they heard about the personal family tragedy that intersected with the case. 

The class was a very moving experience for me–even though I have heard the story told before.  I can only hope that the learning done by the students was as powerful as the teaching.  The haiku that introduces this post only covers the top line; there is so much more richness there that can only be appreciated by hearing the story in person.  I found myself wishing that I had been afforded the opportunity to learn about professional responsibility and leadership in a similarly compelling way during my law school career.  I am grateful for the opportunity to lead this program.

Dear BLPB readers:

The AALS Section on Financial Institutions and Consumer Financial Protection invites submissions of no more than five pages for the 2021 annual meeting. Selected speakers would present on Tuesday, January 5, from 1:15 to 2:30 pm ET.  The submission can be the abstract and/or introduction from a longer paper, and it should relate to the following session description:

After the 2008 financial crisis, Congress overhauled financial regulation. The Dodd-Frank Act of 2010 created a new consumer protection agency, limited bank investment, imposed new capital and liquidity requirements, created an umbrella financial council, and reworked derivatives oversight, among many significant pieces. This session will explore ideas about what the next sweeping financial legislation should entail.

Please send your anonymized materials by September 15, 2020, to Joseph Graham, jgraham@bu.edu. Please also indicate (a) whether you are tenured, pre-tenure, or other; (b) how far along the full article is, and (c) optionally, any other information that might benefit the committee in selecting a diverse panel of speakers.

On behalf of the Section on Financial Institutions and Consumer Financial Protection

Chair: Rory Van Loo (Boston University)

Chair-Elect: Pat McCoy (Boston College)

Executive Committee Members:

Hilary Allen (American University)

Felix Chang (University of Cincinnati)

Gina-Gail Fletcher (Duke University)

Kathryn Judge (Columbia University)

Michael Malloy (University of the Pacific)

Christopher Odinet (University of Iowa)

Paolo Saguato (George Mason University)

Jennifer Taub (Western New England University)

Andrew Tuch (Washington University)

David Zaring (University of Pennsylvania)

 

Welcome to the final guest blog discussing the work of the ULC study committee that focuses on coercive labor practices.  In previous blogs I have discussed other frameworks the study committee is considering, including disclosure-based regimes and frameworks that are centered on procurement.  In this final blog, I will examine what some consider the next frontier for combating coercive labor practices in supply chains: mandatory human rights due diligence.   

More after the jump …

Continue Reading Guest Blog: ULC’s work on Coercive Labor Practices in Supply Chains, Part 5

I write briefly to call attention to the opinion in SEB Investment Mgmt v. Align Tech., 2020 U.S. Dist. LEXIS 164661 (N.D. Cal. Sept. 9, 2020), partially dismissing a 10(b) action against Align Technology, the manufacturer of Invisalign teeth-straightening products.  Plaintiffs alleged, among other things, that the company’s financial projections were false for failing to consider what would happen when its patents expired and competitors entered the space.  The court rejected this claim on the ground that the projections were protected by the PSLRA’s safe harbor, which insulates forward-looking statements if they are “accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement.”  15 U.S.C. § 78u-5.  According to the PSLRA’s legislative history, “boilerplate warnings will not suffice…. The cautionary statements must convey substantive information about factors that realistically could cause results to differ materially from those projected.”  Thus, in the Align case:

The Court agrees with Defendants that the statement was accompanied by adequate warnings. Defendants explain that, at the beginning of the investor call, Align’s representative stated:

As a reminder, the information that the presenters discuss today will include forward-looking statements, including statements about Align’s future events, product outlook and the expected financial results for the third quarter of 2018. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary significantly, and Align expressly assumes no obligation to update any forward-looking statement. We’ve posted historical financial statements, including the corresponding reconciliations and our second quarter conference call slides on our website under Quarterly Results. Please refer to these files for more detailed information.

The warning, in turn, thus explicitly incorporated risks identified in written filings with the SEC, specifically with respect to “competition, promotions, and decreased ASP.” …

Defendants are correct that substantially similar disclaimers have repeatedly been held by the Court to be a sufficient “meaningful cautionary statement” for purposes of the PSLRA Safe Harbor. For example, in In re Fusion-io, Inc. Securities Litigation, the Court found sufficient a disclosure at the beginning of an earnings call “that forward-looking statements were predictions based on current expectations and assumptions, that these expectations and assumptions involved risks and uncertainties, and [that] referred listeners to Fusion’s registration statements and reports filed with the SEC.” No. 13-CV-05368-LHK, 2015 WL 661869, at *13 (N.D. Cal. Feb. 12, 2015). Similarly, in McGovney v. Aerohive Networks, Inc., the Court found sufficient a disclaimer at the beginning of a call “that the call would contain ‘forward-looking statements’ that involve a ‘number of risks and uncertainties,’ and that investors should reference the ‘Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our recent annual report on Form 10-K and quarterly report on Form 10-Q.’“ McGovney v. Aerohive Networks, Inc., 367 F. Supp. 3d 1038, 1061 (N.D. Cal. 2019).

Moreover, these cautionary statements are virtually identical to language approved by the Ninth Circuit as “meaningful cautionary language” for purposes of the PSLRA Safe Harbor. See, e.g., Police Ret. Sys. v. Intuitive Surgical, Inc., 759 F.3d at 1059-60 (approving cautionary language in earnings call warning that comments may contain forward-looking statements, that such statements may differ based on “certain risks and uncertainties,” and referring listeners to “the company’s [SEC] filings”); In re Cutera Sec. Litig., 610 F.3d 1103, 1112 (9th Cir. 2010) (approving cautionary language at beginning of earnings call that remarks contained forward-looking statements “concerning future financial performance and guidance,” and that “Cutera’s ability to continue increasing sales performance worldwide could cause variance in the results.”) (internal quotation marks omitted).

Plaintiff’s arguments to the contrary are unpersuasive. For example, Plaintiff argues that these warnings were “boilerplate risk disclosures” that were thus too generic. Opp’n at 17. However, as explained above, this Court as well as the Ninth Circuit has found substantially similar disclosures to be adequate cautionary statements.

See, these warnings are exactly like the warnings of every other company for past 10 years; therefore they’re not generic!

(Yes, apparently the defendants made reference to the SEC filings, which may have had more detail, but the court seemed entirely unconcerned with the contents of those filings.)

Suffice to say, when warnings for “risks and uncertainties” and that “[a]ctual results may vary significantly” are held not to be boilerplate, we really have given up on the concept of “meaningful cautionary statements” altogether.  Which really goes to show that there’s something very incongruous about relying on precedent to determine whether a risk warning passes muster under the PSLRA in the first place.  These warnings are supposed to be tailored to each company’s circumstances; that one company’s warning, concerning particular statements at a particular time, satisfied the PSLRA, should have little relevance to the sufficiency of the warnings of a completely different company, facing different risks, and often operating in an entirely different industry.

In fact, I previously blogged about a paper that purports to show that judges, and the SEC, reward longer, more generic warnings, which only encourages companies to copy the warnings of their industry peers.

To be fair, the SEC has been trying to improve the situation.  In its latest amendments to Regulation S-K, the SEC is now requiring that a summary of risk factors be provided if the full list is particularly lengthy, and that issuers group their risk factors by topic, with generally-applicable risk factors to be included in a “General Risk Factors” category.  So, I guess we’ll see whether that makes a difference, either to issuers or to regulators.

Earlier today, The Institute for the Fiduciary Standard held a panel on financial advice.  I served as the moderator for three fantastic panelists, Donald Langevoort, James Cox, and Ann Lipton.  As part of my role, I opened the panel with a summary of the current landscape for financial advice.  Hopefully this helps others who are trying to understand the current state of play:

In the past, American retirements had often been supported by three different sources of retirement income: an employer-sponsored, defined-benefit pension; social security; and personal savings.  Today, few Americans have all three sources of support.  Employers have largely shifted to offering defined-contribution retirement plans, allowing participants to contribute a portion of their salary to a 401k plan or similar plan, which the employer may or may not also make some contributions to.  At the same time, Americans, on the whole, generally lack financial sophistication, and often struggle to navigate our increasingly complex financial landscape.  In short, Americans need access to competent, trustworthy advice to make decisions.

 

Sadly, far too many Americans struggle to access high-quality and trustworthy financial advice.  Our fragmented regulatory system makes this even harder.  A person holding themselves out as a financial adviser might actually be a stockbroker, a registered investment adviser, an insurance salesperson, something else entirely, or some combination of the forgoing!  Unsurprisingly, investors often do not understand the system.  One survey found that about half of investors over the age of sixty either didn’t understand how they paid for financial advice or mistakenly assumed that financial advisers work for free.  And you can’t blame them.  It’s dizzyingly complex with a mixture of different federal and state laws coming into play.

 

A variety of reforms have been implemented, struck down, and proposed.  I’ll attempt to sketch the current state of play by breaking the persons giving financial advice into categories.

 

Let’s start with stockbrokers.  The broker-dealer industry is primarily regulated by the FINRA, the Financial Industry Regulatory Authority.  It’s a self-regulatory organization sitting somewhere in between a trade group and part of the federal government.  Although funded by member dues, its rules are approved by the Securities and Exchange Commission.  FINRA had long required brokers to give advice that was “suitable” for investors.  These brokers receive transaction-based compensation.  In essence, they collect commissions for selling financial products.  This creates a rather obvious conflict of interest to sell the product which pays the most—so long as it remains suitable.

 

Earlier this year, the SEC supplanted the suitability standard with Regulation Best Interest, which requires stockbrokers to “act in the best interest of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker. . . ahead of the interest of the retail customer.”  If you’re not quite sure what that means, you’re not alone.

 

Let’s turn to the second category of persons giving financial advice. Registered Investment Advisers have long owed a fiduciary duty under the Advisers Act.  The duty was recognized by the Supreme Court a famous case called Capital Gains. 

 

These fiduciaries generally do not sell products on commission and are paid for their advice.  Historically, the fiduciary duty owed by Advisers has been understood as requiring them to put their clients’ interests first. 

 

When it issued regulation best interest, the SEC also issued a new interpretation of an advisers duty of loyalty.  Now, the SEC says that “the duty of loyalty requires that an adviser not subordinate its clients’ interests to its own.”  If you’re not quite sure what that means, you’re not alone.

 

The SEC also issued a new regulation calling for brokers and advisers to distribute a short customer relationship summary describing their duties.  Early testing revealed that many ordinary humans struggled to understand the system even after receiving the SEC’s template.

 

Adding to the confusion, insurance salespeople also give financial advice and sell complex financial products.  The states have historically regulated their sales practices, but their duties have not been as clear.  In 2016, the Department of Labor issued a Fiduciary Rulemaking under the Employee Retirement Income Security Act, which would have affected all three categories of advice-givers. In short, the rulemaking would have applied a tough fiduciary standard to advice about assets held within retirement accounts.  It would have also applied to insurance sales.  In a case filed by Eugene Scalia, the Fifth Circuit struck down Labor’s fiduciary rulemaking.  Later, President Trump appointed Scalia to run the Department of Labor, which recently proposed a new fiduciary rulemaking—largely unwinding the changes and proposing to generally defer to the SEC’s standards. 

 

But wait, there is more.  Private self-regulatory groups also offer their own standards and certifications.  Investors who struggle to understand this system may simply choose to work with an adviser who holds the right badge or certification.  The largest such group is the CFP Board which certifies financial planners.  In October of 2019, it updated its standards and requires its representatives to act in the best interest of clients, properly disclose conflicts, and to manage conflicts.

 

As you can see, it’s a complex environment.  We have three panelists here to help talk about these developments and what they mean.  My brief introductions . . . 

 

Just today, Professor Christopher Odinet posted Predatory Fintech and the Politics of Banking (forthcoming, Iowa Law Review) to SSRN (here).  It’s already been downloaded over 100 times, and I can’t wait to read it!  Here’s the Abstract:

With American families living on the financial edge and seeking out high cost loans even before COVID-19, the term financial technology or “fintech” has been used like an incantation aimed at remedying everything that’s wrong with America’s financial system. Scholars and supporters from both the public and private sector proclaim that innovations in financial technology will “bank the unbanked” and open new channels to affordable credit. This exuberance for all things tech in finance has led to a quiet yet aggressive deregulatory agenda, including, as of late, a federal assault via rulemaking on the ability of states to police the cost and privilege of extending credit within their borders. This deregulation and the ethos behind it have made space for growth in high cost, predatory lending that reaches across state lines via websites and smart phones and that is aggressively targeting cash-strapped families. These loans are made using a business model whereby funds are funneled through a group of lightly regulated banks in a way designed to take advantage of federal preemption. Fintech companies rent out and profit from the special legal status of these bank partners, which in turn keeps the bank’s involvement in the shadows. Stripping down fintech’s predatory practices and showing them for what they really are, this Article situates fintech in the context of this country’s longstanding dual banking wars, both between states and the federal government and between consumer advocates and banking regulators. And it points the way forward for scholars and regulators willing to shake off fintech’s hypnotic effect. This means, in the short term, using existing regulatory tools to curtail the dangerous lending identified here, including by taking a more expansive view of what it means for a bank to operate safely and soundly under the law. In the long term, it means having a more comprehensive and national discussion about how we regulate household credit in the digital age, specifically through the convening of a Twenty-First Century Commission on Consumer Finance. The Article explains how and why the time is ripe to do both. As the current pandemic wipes out wages and decimates savings, leaving desperate families turning to predatory fintech finance ever more, the need for reform has never been greater.

This is the second installment of a multi-part guest blog presenting some of the results of the first comprehensive, large-scale, national survey of public attitudes regarding insider trading. My co-authors (Jeremy Kidd and George Mocsary) and I present the survey’s complete results in our forthcoming article, Public Perceptions of Insider Trading. This installment focuses on some of our results pertaining to the effect of insider trading on the public’s confidence in the integrity of our capital markets.

It turns out that most Americans believe that insider trading is pervasive. The following table breaks down respondents’ answers to the question, “How common do you think insider trading is?”

 

Very Common

Common

Rare

Very Rare

Overall

25.4%

55.0%

15.0%

4.6%

Gender

Female

24.0%

57.0%

14.4%

4.5%

Male

26.8%

52.7%

15.9%

4.6%

Race

Asian

25.8%

51.5%

18.2%

4.5%

Black

41.6%

38.8%

15.2%

4.5%

Latinx

25.3%

55.4%

14.5%

4.8%

Native Am.

25.0%

58.3%

0.0%

16.7%

White

22.3%

58.3%

15.1%

4.3%

Other

22.7%

54.6%

13.6%

9.1%

Trading Status

Invest

30.5%

52.1%

14.4%

3.0%

Abstain

21.5%

56.9%

15.9%

5.7%
           

Approximately 80% of Americans believe insider trading is common or very common. If insider trading’s perceived pervasiveness undermines market confidence, we would expect that those who actually invest in the stock market would be less likely to believe that insider trading is common or very common. But, in fact, the opposite is true: investors are actually slightly more likely (82.6%) to believe insider trading is pervasive than those who abstain from investing in the stock market (78.4%).

Respondents were also asked the following open-ended question with an opportunity to fill in a response: “If you had done your research and found a company that you liked and wanted to invest in, is there anything that might keep you from buying stock in that company?” Notably, despite knowing that the study was about insider trading, only 0.4% indicated that insider trading in the company would deter them from investing in that company. This suggests that, if awareness of insider trading does undermine market confidence, it is not among the public’s principal concerns.

The study did, however, find some support for the market-confidence theory. For example, consider the responses to the following questions that specifically address the market confidence issue:

 

 “If you thought that a small number of people were trading on inside information concerning a company you have been researching, would it make you more likely to buy stock in that company, less likely, or make no difference?”

 

Less

Likely

No Difference

More Likely

Δ Less Likely vs. Market

Overall

48.2%

34.3%

17.5%

+4.9%

“If you knew insider trading was common in the stock market, would you be more likely to invest, less likely, or would it make no difference?”

 

Less

Likely

No Difference

More Likely

Δ Less Likely vs. Company

Overall

43.3%

40.6%

14.9%

-4.9%

While fewer than half of the survey’s participants said that they would be less likely to trade in a given stock (48.2%) or the market generally (43.3%) if they knew insider trading was taking place, these are not trivial numbers. Assuming that some of these respondents who would be less likely to trade do actually abstain from trading for that reason, this offers support for the market confidence justification for the regulation of insider trading. For a full demographic breakdown of the answers to these questions, as well as a table summarizing respondents’ explanations for their responses, see here.

The next installment of this post will explore public perceptions of the morality of insider trading, whether it should be illegal, and what penalties should be imposed.

I have written here in the past about laboring on Labor Day.  Most recently.  I wrote about the relationship between work and mindfulness in this space last year.  But it seems I also have picked up this theme here (in 2018) and here (at the end of my Labor Day post in 2017).  Being the routine “Monday blogger” for the BLPB does give me the opportunity to focus on our Monday holidays!

This year, however, Labor Day–like so many other days in 2020–is markedly different in one aspect: I am required to teach today.  When I logged in to the campus app on my phone this morning to do my routine daily health screening, I was greeted by this (in clicking through from the main event schedule page):

This is the first day in my 20 years of teaching, and maybe in my 35 years of post-law school work, that I have been required to work on Labor Day.  My daughter, a Starbucks night shift manager, is required to work every year on Labor Day.  But this is new to me . . . .

Of course, the ongoing pandemic is the reason for this change.  By compacting the semester, we are endeavoring to keep folks who are attending class in person here on campus in a more constrained environment until the holidays (at which time we will release everyone to their families and friends until the new semester begins in January).  Our campus website offers the following by way of a top-level explanation of the adjustments to the ordinary, customary academic calendar:

Thank you, COVID-19, for yet one more “first” in this year of many unprecedented things (including the 2019 novel coronavirus itself).

I have tried to make the best of teaching on the holiday, especially given the great weather we are having here in East Tennessee right now.  I taught both of my classes today in the outfit I would have worn if I had been at home (as shown above at the top of the post and below, in both cases in my Corporate Finance class this morning–photo credits to Kaleb Byars and Landon Foody and mask design and sewing credit to my sister, Susan) and encouraged my in-person Business Associations students (almost half of my hybrid class) to come to school in the clothes they would typically wear to a Labor Day BBQ.  I also brought in a special treat for my Corporate Finance students (what could be better at 8:30 am than equity instruments and donuts?) and sent my online Business Associations students into breakout rooms to connect over one of our assigned cases with a smaller group of their classmates while the in-person students wrestled with a case of their own.  There was sparse but constructive attendance at Zoom office hours after class.  In the end, it all has worked out fine.  Not a bad day.

Wishing a happy Labor Day 2020 to all.  Whether you are working today (at home or at a workplace outside the home) or taking the day off, stay safe and well.  Personally, I look forward to Labor Day hamburgers tonight!