Securities Law Commons^™

Equity Market Structure Regulation: Time To Start Over, Paul G. Mahoney

Michigan Business & Entrepreneurial Law Review

Over the past half-century, the U.S. Securities and Exchange Commission (SEC)’s regulations have become key determinants of the way in which stocks trade and the fees that exchanges charge for their services. The current equity market structure rules are contained primarily in the SEC’s Regulation NMS. The theory behind Regulation NMS is that a system of dispersed markets operating pursuant to SEC-mandated information and order routing links will provide the benefits of consolidation and competition simultaneously.

This article argues that Regulation NMS has failed in that quest. It has produced fragmented markets and created questionable incentives for market participants, possibly …

From Inactivity To Full Enforcement: The Implementation Of The "Do No Harm" Approach In Initial Coin Offerings, Marco Dell'erba

Michigan Technology Law Review

This Article analyzes the way the Securities and Exchange Commission (“SEC”) has enforced securities laws with regard to Initial Coin Offerings (“ICOs”). In a speech held in 2016, the U.S. Commodities Futures Trading Commission (“CFTC”) Chairman Christopher Giancarlo emphasized the similarities between the advent of the blockchain technology and the Internet era. He offered the “do no harm” approach as the best way to regulate blockchain technology. The Clinton administration implemented the “do no harm” approach at the beginning of the Internet Era in the 1990s when regulators sought to support technological innovations without stifling them with burdensome rules.

This …

Accusers As Adjudicators In Agency Enforcement Proceedings, Andrew N. Vollmer

University of Michigan Journal of Law Reform

Largely because of the Supreme Court’s 1975 decision in Withrow v. Larkin, the accepted view for decades has been that a federal administrative agency does not violate the Due Process Clause by combining the functions of investigating, charging, and then resolving allegations that a person violated the law. Many federal agencies have this structure, such as the Securities and Exchange Commission (SEC) and the Federal Trade Commission.

In 2016, the Supreme Court decided Williams v. Pennsylvania, a judicial disqualification case that, without addressing administrative agencies, nonetheless raises a substantial question about one aspect of the combination of functions at agencies. …

Third-Party Institutional Proxy Advisors: Conflicts Of Interest And Roads To Reform, Matthew Fagan

University of Michigan Journal of Law Reform

With the rise of institutional activist investors in recent decades—including a purported 495 activist campaigns against U.S. corporations in 2016 alone—the role that third-party institutional proxy advisors play in corporate governance has greatly increased. The United States Office of Government Accountability estimates that clients of the top five proxy advisory firms account for about $41.5 trillion in equity throughout the world. For several years, discussions have developed regarding conflicts of interest faced by proxy advisors. For example, Institutional Shareholder Services, the top proxy advisory firm in the world, frequently provides advice to institutional investors on how to vote proxies while …

Protecting Whistleblowing (And Not Just Whistleblowers), Evan J. Ballan

Michigan Law Review

When the government contracts with private parties, the risk of fraud runs high. Fraud against the government hurts everyone: taxpayer money is wasted on inferior or nonexistent products and services, and the public bears the burdens attendant to those inadequate goods. To combat fraud, Congress has developed several statutory frameworks to encourage whistleblowers to come forward and report wrongdoing in exchange for a monetary reward. The federal False Claims Act allows whistleblowers to file an action in federal court on behalf of the United States, and to share in any recovery. Under the Dodd- Frank Act, the SEC Office of …

Reforming Sec Alj Proceedings, Joanna Howard

University of Michigan Journal of Law Reform

This Note considers the current constitutional challenges to SEC administrative proceedings and suggests process reforms to enhance fairness for respondents. Challenges have developed since the Dodd-Frank Act expanded the SEC’s ability to use administrative proceedings. Arguments that there is a pre-existing flaw in the method of appointing administrative law judges provide the most potential for success. The Tenth Circuit’s December 2016 decision against the SEC in Bandimere has created a split, diverging from the D.C. Circuit’s analysis of that question in Lucia. Resolution by the Supreme Court may be inevitable. Even if the challengers do ultimately succeed, this will …

3(A)(10) Financing: New Predatory Financing Using The Securities Act, Thomas S. Glassman

Michigan Business & Entrepreneurial Law Review

The Section 3(a)(10) exemption of the Securities Act of 1933 is meant to exempt securities transactions where a fairness hearing by a judge or government agency’s ruling replaces the usual SEC registration requirements. Recently, there has been a rise in 3(a)(10) financing schemes, where a third party investor, what I call a “3(a)(10) financier,” will offer to purchase the outstanding debts of a company from its creditors in exchange for discounted, and unregistered, shares of stock. In many cases these exchanges are done with no notification to current shareholders whose value falls precipitously when the 3(a)(10) financier begins not only …

Rebutting The Fraud On The Market Presumption In Securities Fraud Class Actions: Halliburton Ii Opens The Door, Victor E. Schwartz, Christopher E. Appel

Michigan Business & Entrepreneurial Law Review

In Halliburton Co. v. Erica P. John Fund, Inc. (Halliburton II), the United States Supreme Court reaffirmed the validity of the “fraud on the market” presumption underlying securities fraud class action litigation. This presumption is vital to bringing suits as class actions because it excuses plaintiffs from proving individual reliance on an alleged corporate misstatement on the theory that any public statements made by the company are incorporated into its stock price and consequently relied upon by all investors. Thus, the Court’s decision to uphold the validity of the presumption has been hailed as a significant victory for those …

Dual-Class Capital Structures: A Legal, Theoretical & Empirical Buy-Side Analysis, Christopher C. Mckinnon

Michigan Business & Entrepreneurial Law Review

“The advantage of a dual-class share structure is that it protects entrepreneurial management from the demands of ordinary shareholders. The disadvantage of a dual-class share structure is that it protects entrepreneurial management from the demands of shareholders.” Issuing dual classes of stock has become hotly debated since two major events transpired in 2014: (1) Facebook acquired WhatsApp for $19 billion and (2) Alibaba chose to list its shares on the New York Stock Exchange (NYSE) instead of the Hong Kong Exchange. Because dual-class managers, like those at Facebook and Alibaba, retain a controlling voting block, their decisions are immune from …

Revisiting The Accredited Investor Standard, Syed Haq

Michigan Business & Entrepreneurial Law Review

The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and the Jumpstart Our Business Startups (JOBS) Act provided the impetus for several changes in the financial regulatory regime. In the securities markets, Dodd-Frank included provisions that lifted a ban on general solicitation and mandated a review of the accredited investor standard. These changes, while intended to increase capital formation within our private markets, also brought to light serious investor protection issues. This note advocates for a new accredited investor standard that more accurately reflects the risks associated with investing in the private markets.

Admit Or Deny: A Call For Reform Of The Sec's "Neither-Admit-Nor-Deny" Policy, Priyah Kaul

University of Michigan Journal of Law Reform

For four decades, the SEC’s often-invoked policy of settling cases without requiring admissions of wrongdoing, referred to as the “neither-admit-nor-deny” policy, went unchallenged by the courts, the legislature, and the public. Then in 2011, a harshly critical opinion from Judge Jed Rakoff in SEC v. Citigroup incited demands for reform of this policy. In response to Judge Rakoff’s opinion, the SEC announced a modified approach to settlements. Under the modified approach, the Commission may require an admission of wrongdoing if a defendant’s misconduct was egregious or if the public markets would benefit from an admission. Many supporters of the neither-admit-nor-deny …

The Fragmented Regulation Of Investment Advice: A Call For Harmonization, Christine Lazaro, Benjamin P. Edwards

Michigan Business & Entrepreneurial Law Review

Decades of short-term thinking and regulatory fixes created the bewilderingly complex statutory and regulatory structures governing the giving of personalized investment advice to retail customers. Although deeply flawed, the current systems remain entrenched because of the difficulties inherent in making radical alterations. Importantly, the current patchwork systems do not seem to serve retail customers particularly well. Retail customers tend to make predictable and costly mistakes in allocating their assets. Some of this occurs because many investors lack basic financial literacy. A recent study released by the staff of the Securities and Exchange Commission (the “Commission”) on financial literacy among investors …

The Two Faces Of Janus: The Jurisprudential Past And New Beginning Of Rule 10b-5, John Patrick Clayton

University of Michigan Journal of Law Reform

Section 10(b) of the Securities Exchange Act and its implementing Rule 10b-5 are the primary antifraud provisions for both private and public enforcement of the federal securities laws. Neither the statute nor the rule expressly provides for a private right of action, but federal courts have long recognized such an implied right, and the Securities and Exchange Commission has supported the implied private right of action as a “necessary supplement” to its own efforts. However, after a decade of applying an expansive interpretation to Section 10(b), in the early 1970s the U.S. Supreme Court began to narrowly interpret this implied …

From Revolutionary To Palace Guard: The Role And Requirements Of Intermediaries Under Proposed Regulation Crowdfunding, Andrew D. Stephenson, Brian R. Knight, Matthew Bahleda

Michigan Business & Entrepreneurial Law Review

Intermediaries in securities crowdfunding face significant requirements as a result of the statutory mandates of Title III of the JOBS Act. The SEC, in its proposed rules, provided structure to these requirements. The proposed rules would create strict requirements for intermediaries regarding their relationships with investors and how they undertake crowdfunding transactions under Section 4(a)(6) of the Securities Act. The proposed rules would also create and establish the guidelines for funding portals, a new type of limited purpose securities broker. While some commentators decry the SEC for placing undue burdens and legal liabilities on intermediaries in securities crowdfunding, the SEC …

The Corporate Monitor: The New Corporate Czar?, Vikramaditya Khanna, Timothy L. Dickinson

Michigan Law Review

Following the recent spate of corporate scandals, government enforcement authorities have increasingly relied upon corporate monitors to help ensure law compliance and reduce the number of future violations. These monitors also permit enforcement authorities, such as the Securities & Exchange Commission and others, to leverage their enforcement resources in overseeing corporate behavior. However there are few descriptive or normative analyses of the role and scope of corporate monitors. This paper provides such an analysis. After sketching out the historical development of corporate monitors, the paper examines the most common features of the current set of monitor appointments supplemented by interviews …

Moving Toward A Clearer Definition Of Insider Trading: Why Adoption Of The Possession Standard Protects Investors, Lacey S. Calhoun

University of Michigan Journal of Law Reform

In recent years, insider trading has become a publicized focus of securities law enforcement. The definition of insider trading has emerged slowly through case law, and the term has been clarified by new theories of liability. The use and possession tests are two standards of liability used to judge the treatment of inside information. The use standard offers a defense to insider trading liability while the possession standard premises liability on mere possession of inside information. This Note argues that courts should adopt the possession standard because this standard better protects investors, a primary goal of the Securities Exchange Act …

Decreasing The Costs Of Jurisdictional Gridlock: Merger Of The Securities And Exchange Commission And The Commodity Futures Trading Commission, Mark Frederick Hoffman

University of Michigan Journal of Law Reform

Jurisdictional conflict exists between the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), primarily due to the language of the 1974 CFTC Act. This Act grants the CFTC exclusive jurisdiction to regulate certain financial instruments which, given the increasing complexity and "hybrid" nature of such instruments, might simultaneously be subject to SEC regulation. This Note first explores the history of the two agencies and the statutory language giving rise to the jurisdictional conflict. This Note then examines several instances of jurisdictional conflict that resulted in extensive costs for the respective agencies and the United States' financial …

The Obsolescence Of Wall Street: A Contextual Approach To The Evolving Structure Of Federal Securities Regulation, Joel Seligman

Michigan Law Review

As a matter of analytical style, this article illustrates a contextualist approach. For a considerable period of time, the dominant analytical style in corporate and securities .law has been a variant of economic, or law and economics, analysis. The virtue of this type of analysis is that it focuses on what its authors deem to be crucial variables and reaches conclusions derived from the core of a specific legal problem. The defect of this type of analysis is that so much is assumed or often assumed away.

Auditor Changes And Opinion Shopping- A Proposed Solution, Dale R. Rietberg

University of Michigan Journal of Law Reform

This Note argues that the existing regulatory mechanism has failed to address adequately the problem of opinion shopping, and that better means of ensuring the reliability of financial statements are needed. Part I describes the nature and extent of the opinion-shopping problem, including a discussion of its larger, macroeconomic impact. Part II argues that the underlying causes of the problem are systemic and that present safeguards against opinion shopping are inadequate. Finally, Part III examines some alternative solutions and proposes a system of Accounting Issue Inquiry Centers under the direction and auspices of the SEC. These Centers would be designed …

The Internationalization Of The Securities Markets: Preface To A Symposium, Joel Seligman

Michigan Journal of International Law

This preface begins by tracing certain of the initial steps taken by the SEC in the internationalization of securities trading. Regulations involving issuers of new securities are discussed in two contexts. First, when foreign private issuers offer securities into the United States, and second, when securities are simultaneously offered in the United States and abroad. The preface concludes by introducing each of the articles in this symposium.

The Changing Structure Of The Securities Markets And The Securities Industry: Implications For International Securities Regulation, Aulana L. Peters, Andrew E. Feldman

Michigan Journal of International Law

This article addresses the impact internationalization has had on the world's securities markets with a particular focus on its role in forcing change in the structure of those markets. Part I describes the forces involved in the internationalization process, and analyzes capital movement and other phenomena that demonstrate the extent of internationalization. Next, it reviews the structural changes that securities markets and the securities industry have made in response to the internationalization process. Part II analyzes the measures regulators have taken to address the implications of those developments. Part III discusses the October Market Break and how it illustrates the …

Securities Regulation In The International Marketplace: Bilateral And Multilateral Agreements, Daniel L. Goelzer, Anne Sullivan, Robert Mills

Michigan Journal of International Law

This article examines the experience of the SEC in securities regulation with respect to the international securities markets, focusing first as background upon recent developments in those markets, and then on the actual regulation of issuer disclosure, the trading markets, and enforcement in general. In each of the latter three areas, the article will consider the Commission's direct domestic actions in response to international trade, and compare those with international approaches to establish standards in these areas. This comparison demonstrates that international cooperation can, and should, develop new protections and predictable, common themes of regulation, for disclosure, market regulation, and …

Materiality, Law Reform, And Regulation By Prosecution, Michael Rosenzweig

Michigan Law Review

A Review of Regulation by Prosecution: The Securities & Exchange Commission Versus Corporate America by Roberta S. Karmel

The Sec And Corporate Disclosure: Regulation In Search Of A Purpose, Michigan Law Review

Michigan Law Review

A Book Notice about The SEC and Corporate Disclosure: Regulation in Search of a Purpose by Homer Kripke

Controlling Administrative Sanctions, Fredrich H. Thomforde Jr.

Michigan Law Review

This Article will consider some of the possibilities for controlling and guiding the SEC's discretion to impose sanctions upon broker-dealers. Although it is limited to an examination of the Commission's practice and a discussion of possibilities for reform, the analysis contains obvious implications for any agency with the power to impose sanctions.

Competition And Regulation In The Stock Markets, Robert Pozen

Michigan Law Review

Part I of this article suggests that the courts have not satisfactorily resolved the tension between competition and regulation in the stock markets, and that the proposed legislation would in fact aggravate that tension. Part II uses an economic model of stock transactions to derive an alternative approach for reconciling competitive and regulatory considerations. Part III applies this approach to several key governmental decisions in the transition from fixed commission rates to the central market system.