If you’ve been following along, you know all about the pending challenge to FINRA in the D.C. Circuit.  Many amicus briefs have come in, including my own.  To make it easier for people to see what’s happening, I’ve pulled the briefs and put them in a Google Drive folder for easier access.  The briefs in the folder include:

• FINRA
• Alpine Opening
• DTC & Clearing Groups
• National Futures Association
• North American Securities Administrators Association
• Public Investor Advocate Bar Association
• Securities Exchanges
• Horseracing
• Free Enterprise Chamber of Commerce
• New Civil Liberties Alliance
• The United States of America
• Benjamin P. Edwards

We also have additional litigation raising similar issues now pending in North Carolina.

I predicted that we’d see these challenges and that they could pose big risks to the financial system in my Supreme Risk article.  So far, I’ve been cited by Alpine and the DTC and other clearing corporation’s amicus.  The DTC  brief agreed with my assessment and block quoted the article.

Any perceived weakness in Amici’s authority to enforce their rules could undermine their ability to deliver critical functions to the markets, such as individual participant risk monitoring, the setting of collateral requirements to cover credit, market, and liquidity risk present in financial markets, and the orderly management of participant defaults. These functions not only enable Amici to manage risk for their participants throughout the exchange of trillions of dollars’ worth of assets every trading day; they also create a firewall that prevents single instances of firm failure from spreading to other markets and throughout the economy–a responsibility that falls uniquely on Amici’s shoulders as SIFMUs. A ruling that undermines Amici’s abilities to execute these functions invites economic chaos by paving the way to frontal attacks on the SRO clearing-agency rules that undergird those singular abilities in the first instance. As one commentator describes, citing Amici as examples:

If a market participant successfully challenged a clearing firm decision on the ground that the clearing firm rules were unconstitutional, markets may cease to function. If clearing firms were not able to clear trades, enormous downstream consequences would ensue. People would not be able to buy or sell securities or derivatives. Consequentially, all of the wealth stored within these financial products would become suddenly inaccessible.

 

Texas Tech University School of Law, Lubbock, Texas

Summary Information

The School of Law at Texas Tech University invites applications for a full-time, 9-month tenure-track Professor of Law position to begin in August of 2024.  The position is open to both entry-level candidates and candidates who are on the tenure-track or tenured at another school.  Candidates who satisfy Texas Tech University’s requirements to be hired with tenure will also be eligible to hold the Frank McDonald Endowed Professorship in business law.

Required Qualifications

In line with TTU’s strategic priorities to engage and empower a diverse student body, enable innovative research and creative activities, and transform lives and communities through outreach and engaged scholarship, applicants should have experience or demonstrated potential for working with diverse student populations at the undergraduate and/or graduate levels within individual or across the areas of teaching, research/creative activity, and service.

Specific required qualifications are:

1. Candidates should have a J.D.;
2. Candidates should have a demonstrated potential for excellence in research, teaching, and service; and
3. Candidates should have demonstrated potential for excellence in the areas of Contracts and in corporate/business law, such as Business Entities, Securities Regulation, Mergers & Acquisitions, and related courses.

Preferred Qualifications

In addition to the required qualifications, individuals with the following preferred qualifications are strongly encouraged to apply:  Experience teaching corporate/business law courses and scholarly publications in corporate/business law areas.

About the University and School of Law

Established in 1923, Texas Tech University is a Carnegie R1 (very high research activity) Doctoral/Research-Extensive, Hispanic Serving, and state-assisted institution. Located on a beautiful 1,850-acre campus in Lubbock, a city in West Texas with a growing metropolitan-area population of over 300,000, the university enrolls over 40,000 students with 33,000 undergraduate and 7,000 graduate students.  As the primary research institution in the western two-thirds of the state, Texas Tech University is home to 10 colleges, the Schools of Law and Veterinary Medicine, and the Graduate School.  The flagship of the Texas Tech University System, Texas Tech is dedicated to student success by preparing learners to be ethical leaders for a diverse and globally competitive workforce.  It is committed to enhancing the cultural and economic development of the state, nation, and world.

The School of Law has approximately 440 students and 38 full-time faculty members.  The School of Law is an integral part of the University and offers 10 dual-degree programs with other Texas Tech schools and colleges. The School of Law has a strong focus on students and is committed to a practical education to produce practice-ready graduates.

About Lubbock

Referred to as the “Hub City” because it serves as the educational, cultural, economic, and health care hub of the South Plains region, Lubbock boasts a diverse population and a strong connection to community, history, and land.  With a mild climate, highly rated public schools, and a low cost of living, Lubbock is a family-friendly community that is ranked as one of the best places to live in Texas.  Lubbock is home to a celebrated and ever-evolving music scene, a vibrant arts community, and is within driving distance of Dallas, Austin, Santa Fe, and other major metropolitan cities.  Lubbock’s Convention & Visitors Bureau provides a comprehensive overview of the Lubbock community and its resources, programs, events, and histories.

Equal Opportunity Statement

All qualified applicants will receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, gender expression, national origin, age, disability, genetic information or status as a protected veteran.

To Apply for this Position

Please include the following documents in your application at the Texas Tech Jobs website  https://www.depts.ttu.edu/hr/workattexastech/

• Curriculum Vitae
• Cover Letter
• List of references

Questions about this position should be directed to Jarod Gonzalez, J. Hadley and Helen Edgar Professor of Law and Chair, Faculty Appointments Committee at jarod.gonzalez@ttu.edu. For your application to be considered, you must submit it at the Texas Tech Jobs website. If you need assistance with the application process, contact Human Resources, Talent Acquisition at hrs.recruiting@ttu.edu or 806-742-3851.

Application Process

Submission of applications is preferred by December 31, 2023. To ensure full consideration, please complete an online application at https://www.depts.ttu.edu/hr/workattexastech/ Requisition # 34777BR. 

The Financial Times recently reported that

A group of veteran US financial journalists is teaming up with investors to launch a trading firm that is designed to trade on market-moving news unearthed by its own investigative reporting.

The business, founded by investor Nathaniel Brooks Horwitz and writer Sam Koppelman, would comprise two entities: a trading fund and a group of analysts and journalists producing stories based on publicly available material…

The fund would place trades before articles were published, and then publish its research and trading thesis….

I saw a lot of online commentary asking why this isn’t just a model for insider trading, and even though Matt Levine went through some of the issues here and here, I am moved to do something I rarely do and delve into insider trading law to explain the matter further.  For a lot of readers, this is probably nothing new, but hopefully this will be helpful for some of you.

So, the first thing to make clear is that the rules for what counts as insider trading in the U.S. are bizarre and arcane.  And the reason for that is, with a few exceptions like the “Eddie Murphy” provisions of Dodd-Frank, there are no statutory prohibitions on insider trading.  What the statutes prohibit is fraud, mainly through Section 10(b) of the Securities Exchange Act.  And, beginning in the 1960s, courts and the SEC began to interpret Section 10(b) fraud to include insider trading.  Except that meant they had to define the contours of what kind of trading is and is not permitted, and those definitions came about through meandering and contradictory common law rulemaking.  The caselaw is meandering and contradictory because people have very different instincts about what should be illegal and what should not be illegal.  As one article amusingly summed it up:

Manifesting the extent to which even authorities on the subject are unable to articulate a compelling legal theory of what insider trading is and why the conduct it encompasses should be declared unlawful, a large body of case law and commentary, for instance, variously portrays insider trading doctrine as based on principles drawn from or analogous to the law of fraud, breach of fiduciary duty, agency, theft, conversion, embezzlement, trusts, property, contracts, corporations, confidential relationships, unjust enrichment, lying, trade secrets, and corruption.

Andrew W. Marrero, Insider Trading: Inside the Quagmire, 17 Berkeley Bus. L.J. 234 (2020).

In general, there are those who believe insider trading should try to level the playing field, by giving all traders equal access to information, or at least equal opportunity to attain access, and there are those who believe that equal access is impossible – ordinary retail traders will never match the resources of professional firms – and what actually protects ordinary traders is market efficiency, which only comes about from informed trading that sets the price appropriately for everybody.  So the caselaw tends to contain rhetoric that switches back and forth between extolling the virtues of a level playing field versus extolling the virtues of informed market prices.  I also think some of the instincts here are driven by specific distributional concerns – i.e., the print shop employees of the world usually have less access to information than the white-shoe M&A lawyers of the world – and so when prohibitions on insider trading are very narrow, the poor stay poor and the rich get rich.

Anyway, you end up drawing a lot of distinctions that do not, from the outside, appear to make a lot of moral sense.

So, back to this new fund model.  The company is called Hunterbrook, and financial journalists will be tasked with writing articles about publicly traded companies.  The plan, quite explicitly, is for the journalists to rely solely on public information.  I.e., carefully read SEC filings and news reports and use big data calculations and perhaps access obscure but not secret information (Matt Levine suggested FOIA requests).  Before publication, the fund will decide whether to place a trade – long, or short, securities, but also commodities and currencies.  And then, the article will run, and the hope of course is that the article’s insights will move markets, which will then permit the traders to profit from their position. 

That model is similar, but not identical, to those of activist short sellers – they too ferret out information and publish reports, but less formalized as journalism, and only for shorting purposes; this model wants to have some kind of regular news arm attached, and will go long as well as short.  It is, under current law, legal.  The entity is generating its own in-house information – including information about which stories it will run – and trading on the information that it generates.

This is very different than, say, the R. Foster Winans case, where a columnist for the Wall Street Journal tipped a broker about the companies he planned to feature in Heard on the Street. Because in that case, the information – which columns would run – did not belong to Winans, but to the Wall Street Journal, and Winans misappropriated it.  (No, David Carpenter was not Winans’s “roommate,” but this was 1986, so.)

But the Hunterbrook model envisions that the trader is the same entity that owns the information.

That raises the question whether, in the Winans case, the Wall Street Journal could have traded on its own knowledge of upcoming columns – or sold that information to a third party.  And the answer to that is, it depends.  Remember, the Hunterbrook model is that all the information used in the articles is public.  If that were true of the Heard on the Street columns, then yes, the Wall Street Journal could have traded on advance knowledge of its own publication plans.  But Wall Street Journal articles are typically based on inside sources.  Trading on that information, whether by the WSJ or anyone else, depends on an analysis of those sources and their relationship to the WSJ.

Let’s say the sources were revealing inside information about someone else – like, say, information about their employers, or clients, or people they do business with.  There might be all kinds of laws that those sources broke by revealing information to a newspaper (trade secret laws, employment contracts and NDAs, etc), but for the law of insider trading, the only issue is whether that source revealed information to the journal wrongfully, and wrongfully is defined in a particularly convoluted manner. 

First, the source must be bound by some kind of duty to keep the information confidential – that duty can come from law, or contract, or just a personal relationship where there is an expectation of privacy.  And second, the source must be revealing the information to the WSJ for an improper reason.  For a long time, improper reasons meant the source/tipper expected to “personally benefit” from the tip.  And that usually meant, the tipper was paid – like, someone paid them off for their information.  Or the tipper expected to receive confidential tips in return, that he could trade on, and there was a regular practice of people going back and forth tipping each other.  Sometimes, it meant that the tipper expected to “gift” the information to a close friend, in lieu of monetary compensation.  “Happy birthday, Mom, I didn’t have a chance to buy flowers, but Amazon is acquiring Whole Foods.  Buy yourself something nice!”  It might even mean the source expected a job offer – “Look how valuable I am to you, I can tell you that Amazon is buying Whole Foods!”  What it did not mean was, say, whistleblowing.

So, on first order analysis, if the WSJ’s sources were whistleblowing – and not expecting any personal benefit by talking to the paper, they were not being paid for their information – then the information would not have been wrongfully revealed, and the WSJ would be free to trade on it.

But we are not done.

The “personal benefit” test is difficult to apply; it sent government prosecutors searching for any quid pro quo, including steak dinners or theater tickets or plumbing services or other kinds of trivial rewards.  Eventually, then, in United States v. Martoma, the Second Circuit declared that it would be sufficient if the government could show the source tipped someone in the expectation that the recipient of the information would trade – i.e., instead of hunting for a personal benefit to the source, we’d look to see if the source was trying to benefit someone else – like the Mom’s birthday hypothetical above, but now extended to all relationships, not just especially close ones.

Additionally, in United States v. Blaszczak I, the Second Circuit looked at a brand new securities fraud statute – not Section 10(b) of the Exchange Act, but Section 1348 of Sarbanes Oxley – and held that the fraud prohibitions in Section 1348 do not require a showing that the tipper personally benefitted.  I, personally, never understood that logic – the “personal benefit” requirement was, in a roundabout way, intended to identify when tipping inside information constituted deceptive conduct, and since Section 1348 prohibits fraud, just like Section 10(b), you’d think they’d be read the same.  But no matter, because in Blaszczak I, the Second Circuit held that instead of showing a personal benefit, it would be sufficient to show that the information was “misappropriated” for one’s own use – including to give to another to trade on.  In the end I don’t see a whole lot of daylight between that standard and Martoma, so, fine, they are roughly the same. (Then, the Second Circuit decided United States v. Blaszczak II and two judges on a 3-judge panel suggested they might want to go back to a personal benefit test even for Section 1348 fraud, so who knows what that even means now).

Under this analysis, the question would be, did the WSJ’s source provide information intending that the newspaper would trade on it?

Again, the answer would probably be no, and so – on first blush – the information was not provided wrongfully, and the WSJ would be free to trade.

But we still are not done.

Because if the source gave this information to the WSJ as, say, a whistleblower – not for the purpose of having the WSJ trade – it’s possible a court would say that if the WSJ traded, then the WSJ violated its own duty of confidentiality to the source, in a manner of speaking, and misused the information for its own benefit. 

That would be sort of a weird argument, because the source never intended confidentiality – the source intended publication! – but courts tend to punish based on gut instincts of fairness and it’s not at all difficult to imagine a court holding that the WSJ misappropriated information that was given to it for a specific purpose, and, hence, fraud.

But now let’s translate all of this to the Hunterbrook context.  If the journalism arm is attached to a trading arm, then for sure any source who gives the journalist information knows it will be used for trading.  And we’re back to that first analysis: It’s wrongful to give someone confidential information, derived from an employer or a client or whatever, so that they can trade.  And maybe our source could thread the needle – “I knew they would trade but that’s not why I told them; I told them to expose the bad stuff!!” – but I wouldn’t want to be that source’s lawyer, is what I’m saying.

Anyway, all of this means that Hunterbrook will not be talking to confidential sources, but instead believes it has a viable business model by synthesizing and digesting public information, which it can use to earn a trading advantage and move markets.  Note, for whatever reason, Hunterbrook does not thinking trading alone will do it – it does not trust that the market will eventually catch up to Hunterbrook’s own wisdom, or, will do so on a fast enough time frame for Hunterbrook to profit.  No, Hunterbrook has to trade, and then move things along by publishing what it discovers. 

And I don’t know if they can pull it off or they can’t, but if they do manage to regularly publish breaking news stories culled entirely from public information, which have the effect of moving markets and allowing Hunterbrook to earn outsized returns – what do you imagine will happen when securities fraud plaintiffs bring follow-on complaints against the companies targeted with Hunterbrook’s negative information?  Do you think the obvious evidence that this “public” information was nonetheless not incorporated into market prices will make courts any more likely to accept that transaction causation and loss causation have been properly alleged?  (Reader, it will not.)

In an address on Halloween, President Biden announced his support for a new rule proposal from the Department of Labor.  The rule would impose a fiduciary duty on persons giving advice about retirement assets.  His remarks framed the issue as addressing “junk fees” in financial services.

The rule targets critical transactions.  In 2022, Americans moved about $800 billion from 401(k) type plans into individual retirement accounts.  The decisions people make when moving their funds out of their 401(k) and into something else matter.  It’s also often a vulnerable point for many.  We know that cognitive decline affects a greater percentage of the population as they age. Yet our regulatory infrastructure does not currently impose consistent standards on persons giving advice about that pot of money.

The kind of advice a retiree receives depends on the person and product at issue.  A registered investment adviser will owe a fiduciary duty under the Investment Advisers Act.  A stockbroker will owe an obligation to give advice in the investor’s “best interest” under the SEC’s regulation “Best Interest.” 

What about the duties owed by insurance producers who often aim to divert retirement savings into insurance products?  An insurance agent selling equity-indexed or fixed-indexed annuities will owe an obligation defined by state law.  Although the NAIC has a “best interest” regulation, that regulation makes the odd decision to explicitly exclude commissions or other compensation from its definition of a conflict of interest.  The regulation actually provides that “‘Material conflict of interest’ does not include cash compensation or non-cash compensation.”   The Council of Economic Advisers estimates that “the amount lost to conflicted investment advice could be as high as $5 billion annually” for fixed-indexed annuities alone.

The proposed regulatory change is significant and information can be found at these links:

• Retirement Security Landing Page
• EBSA Press Release
• EBSA Fact Sheet
• EBSA Blog Post
• Proposed Retirement Security Rule
• Proposed Amendment to PTE 2020-02
• Proposed Amendment to PTE 84-24
• Proposed Amendment to PTEs 75-1, 77-4, 80-83, 83-1, and 86-128
• White House Fact Sheet
• CEA Blog