Securities Law Commons^™

Activist Shareholders At De Facto Controlled Companies, Gaia Balp

Brooklyn Journal of Corporate, Financial & Commercial Law

Activist campaigns are likely to increasingly target controlled companies. Studies concerning activism at controlled companies focus on shareholder-empowering tools, such as the right to nominate and elect minority directors on the board, as a pathway for limiting the principal-principal agency problem. However, not enough attention has been paid to the distinction between de jure and de facto controlled companies. Building on a recent case concerning a leading Italian corporation, this Article analyzes the possible unexpected corporate governance consequences of successful activist intervention at de facto controlled companies, showing that, where minority shareholders are granted the right to appoint directors on …

The Market For Corporate Control In The Zone Of Insolvency: Symposium Introduction, Edward J. Janger

Brooklyn Journal of Corporate, Financial & Commercial Law

No abstract provided.

Corporate Distress, Credit Default Swaps, And Defaults: Information And Traditional, Contingent, And Empty Creditors, Henry T. C. Hu

Brooklyn Journal of Corporate, Financial & Commercial Law

Federal securities law seeks to ensure the quality and quantity of information that corporations make publicly available. Informational asymmetries associated with companies in financial distress, but not in bankruptcy, have received little attention. This Article explores some important asymmetries in this context that are curious in their origin, nature, and impact. The asymmetries are especially curious because of the impact of a world with credit default swaps (CDS) and CDS-driven debt “decoupling.” The Article explores two categories of asymmetries. The first relates to information on the company itself. Here, the Article suggests there is fresh evidence for the belief that …

Insider Trading: Are Insolvent Firms Different?, Andrew Verstein

Brooklyn Journal of Corporate, Financial & Commercial Law

Federal law restricts insider trading. Yet these restrictions operate differently on insolvent or bankrupt firms. The law is more constraining in some respects: federal law extensively regulates the trading of residual claims in solvent firms but not insolvent firms. However, the law is more constraining in other respects: insider trading law does little to limit debt-trading at solvent firms, but a bankruptcy enmeshes all creditors in a web of insider trading rules. This Article identifies insolvency’s economic and legal influence on insider trading law and then normatively evaluates this transformation.

Badges Of Opportunism: Principles For Policing Restructuring Support Agreements, Edward J. Janger, Adam J. Levitin

Brooklyn Journal of Corporate, Financial & Commercial Law

Bankruptcy is a market for corporate control. Current bankruptcy practice offers two alternative mechanisms for effectuating changes in control of a firm: (1) a pre-plan all-asset sale under section 363(b) of the Bankruptcy Code; or (2) an asset sale or recapitalization pursuant to a plan of reorganization under section 1129 of the Code. Pre-plan sales under section 363(b) are fast, but lack the procedural protections associated with a restructuring or sale pursuant to a plan. Plan confirmation can be costly and uncertain, however. Restructuring support agreements (“RSAs”)—contractual agreements to support a future restructuring that has certain agreed-upon characteristics—appear to offer …

Backstop, Not Bailout: The Case For Preserving The Orderly Liquidation Authority Under Dodd-Frank, Mark R. Maciuch

Brooklyn Journal of Corporate, Financial & Commercial Law

The Trump Administration and Republicans have initiated efforts to repeal certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), one of which is the Orderly Liquidation Authority (OLA) under Title II of Dodd-Frank. Critics of the OLA argue that it enables, rather than prevents, future bailouts funded by taxpayers. These critics are concerned with the Federal Deposit Insurance Corporation’s (FDIC) discretion to decide when and how to resolve distressed financial firms, as well as the FDIC’s access to large amounts of funds from the U.S. Department of the Treasury to carry out these functions. Proponents of …

Essay: Insiders, Outsiders, & Fair Access: Identifying Culpable Insider Trading, Jonathan D. Glater

Brooklyn Law Review

The Supreme Court’s insider trading doctrine has become increasingly convoluted as each effort to cope with novel fact patterns results in a new rule not tethered to principled understanding of the nature of the wrong committed. That this is not a terribly controversial claim is evidence of how far the Court’s jurisprudence has drifted. This essay proposes that the early error was abandonment of concern for third parties who trade on exchanges but who do not enjoy legal access to information possessed by insiders or tippees who receive information from insiders. The Court’s error, the essay contends, rests on a …

Essay: Corporate Triplespeak: Responses By Investor-Owned Utilities To The Epa’S Proposed Clean Power Plan, Alan R. Palmiter

Brooklyn Law Review

During the year following the EPA’s proposed Clean Power Plan to regulate CO2 emissions in the power sector, the largest investor-owned electric utilities engaged in a curious triplespeak. Employing the moral language of political conservatives, the utilities focused on whether and how the EPA had transgressed its “traditional” regulatory role, thus altering the “structure” of energy federalism and potentially “degrading” orderly power supplies. In disclosure filings with the Securities and Exchange Commission, the utilities used the moral language of political libertarians, focusing on the “financial risks” that federal government “intervention” poses to efficient power “markets” and to the “freedom” of …

Rules Are Meant To Be Amended: How Regulation Crowdfunding's Final Rules Impact The Lives Of Startups And Small Businesses, Dylan J. Hans

Brooklyn Law Review

The Securities and Exchange Commission effectuated the final crowdfunding rules in 2016, and since then, those rules have become the target of scrutiny from startups and investors. Crowdfunding, a form of public capital raising, is an exciting means by which new companies raise money. But, how long will this regulation be a viable option for startups and small businesses? Will the regulation continue to create opportunities for small market enterprises to raise capital? This Note argues that the Securities and Exchange Commission must make adjustments to the Regulation Crowdfunding exemption to improve investor protection, while also reducing draconian disclosure requirements …

Whistleblowers—A Case Study In The Regulatory Cycle For Financial Services, Ronald H. Filler, Jerry W. Markham

Brooklyn Journal of Corporate, Financial & Commercial Law

The Securities and Exchange Commission and the Commodity Futures Trading Commission were directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) to create whistleblower protection programs that reward informants with massive bounty payments. At the time of its passage, the Dodd-Frank Act was a highly controversial statute that was passed on partisan lines. Its whistleblowing authority was one of its “most contentious provisions.” As the result of the 2016 elections, the Dodd-Frank Act has come under renewed attack in Congress and by the new Trump administration. The stage is being set for possible repeal of …

Financing Green: Reforming Green Bond Regulation In The United States, Echo Kaixi Wang

Brooklyn Journal of Corporate, Financial & Commercial Law

In recent years, green bonds have emerged as a way for the financial industry to contribute to environmentally friendly projects, combat climate change, and provide funds for green infrastructures across the world. While the green bond market has expanded drastically across large nations in Europe and Asia, market growth has stalled in the United States, in part due to a lack of promising regulations in the United States. Existing regulations on green bond issuance in the United States only exists in the form of non-binding international guidelines. This Note reviews the benefits and potentials of green bonds both as an …

Regulating The “Too Big To Jail” Financial Institutions, Jerry W. Markham

Brooklyn Law Review

This article addresses the “too big to jail” regulatory model in which large banks pay hundreds of billions of dollars to settle multiple and duplicative regulatory charges brought by a horde of state, federal, and even foreign regulators. The banks pay those massive settlements in order to keep their banking charters and to obtain immunity from prosecution for senior executives. In turn, regulators benefit from the headlines these fines generate. Much criticism has been directed at these settlements because the banks are allowed to continue business as usual and no senior executives are jailed. Other critics contend that these settlements …

Opacity, Fragility, & Power: Lessons From The Law Enforcement Response To The Financial Crisis, Gregory M. Gilchrist

Brooklyn Law Review

Review of Mary Kreiner Ramirez and Steven A. Ramirez, THE CARE FOR THE CORPORATE DEATH PENALTY: RESTORING LAW AND ORDER ON WALL STREET (New York 2017) The Case for the Corporate Death Penalty, by Mary Kreiner Ramirez and Steven A. Ramirez, argues that the limited law enforcement response to the 2008 financial crisis represented an unprecedented failure of the rule of law. It further maintains that the weak response by law enforcement was caused by the economic and political power of the largest financial institutions and those who run them. It concludes that the failure to vigorously prosecute the people …

Clicks And Tricks: How Computer Hackers Avoid 10b-5 Liability, Ryan H. Gilinson

Brooklyn Law Review

This note argues that computer hackers who sell inside information instead of trading on it themselves, referred to in the note as hacker-sellers, avoid liability under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5. Rule 10b-5 criminalizes the use of a manipulative or deceptive device “in connection with the purchase or sale of any security.” Hacker-sellers fall outside the scope of this rule for two reasons. First, the type of hacking employed by hacker-sellers is not always “deceptive,” and only the forms of hacking which deceive the computer into thinking an authorized user is seeking access are …

A Bridge Too Far: A Critical Analysis Of The Securities And Exchange Commission's Approach To Equity Market Regulation, John Polise

Brooklyn Journal of Corporate, Financial & Commercial Law

Using the framework articulated by Thomas S. Kuhn in his book, The Structure of Scientific Revolutions, this Article traces the evolution of equity market regulation in terms of its epistemological foundations and operative paradigms. It examines the SEC’s growth from a more passive partner with the securities industry to being an aggressive and perhaps overly intrusive arbiter of equity market operations. This Article identifies two distinct paradigms of securities regulation—the “Self-Regulatory Paradigm” and the “Micro-Intervention Paradigm.” The Self-Regulatory Paradigm and the Micro-Intervention Paradigm are not compatible, and this Article explains how the intellectual dissonance between them ultimately allowed the Micro-Intervention …

From Systemic Risk To Financial Scandals: The Shortcomings Of U.S. Hedge Fund Regulation, Marco Bodellini

Brooklyn Journal of Corporate, Financial & Commercial Law

In the recent past, hedge funds have demonstrated that they can pose and spread systemic risk across the financial markets, and that their managers can use them to commit fraud and misappropriation of fund assets. Even if the first issue now seems to be considered a serious one by the U.S. legislature, which in 2010, as a legislative response to the global financial crisis of 2007-2008, enacted the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (Dodd-Frank), the current regulation still appears inconsistent and inappropriate to prevent and face it. By contrast, the second issue is not always considered …

Full Disclosure: Moving Beyond Disclosure Regulations To Affirmative Regulation Of Executive Compensation, Christopher Saverino

Brooklyn Journal of Corporate, Financial & Commercial Law

In the period following the financial crisis of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which compelled the Securities and Exchange Commission (SEC) to engage in substantial rulemaking. The Dodd-Frank mandate in Section 953(b) required the SEC to promulgate a rule, which it eventually finalized and is currently known as Pay Ratio Disclosure. Historically, SEC rulemaking has received great deference when rules are judicially challenged. However, following the passage of Dodd-Frank, the D.C. Circuit Court of Appeals has begun to grant less deference to SEC rulemaking where it has found that the SEC has …

Regulation A-Plus’S Identity Crisis: A One-Size-Fits-None Approach To Capital Formation, Zachary Naidich

Brooklyn Law Review

This note considers whether, and in what ways, Regulation A-Plus will change how businesses access growth capital. It concludes that Regulation A-Plus is a largely unnecessary addition to the already existing range of funding options. The Regulation is poised to change how firms access capital but is unlikely to increase total access or fundraising. Further, this change is unlikely to promote financial health. The note ultimately concludes that regulators should focus on improving existing mechanisms and not attempt to introduce a new and unnecessary one.

An Exception To The Derivative Rule: Allowing Mutual Fund Investors To Bring Suits Directly, Jamie D. Kurtz

Brooklyn Law Review

Mutual funds differ greatly from traditional corporations in the way they are formed and operated. Despite these differences, courts apply the same rules for derivative shareholder litigation to both types of entities. While these rules make sense and were mostly created with corporations in mind, courts have generally been unwilling to consider mutual funds’ unique characteristics in determining whether to allow direct litigation from shareholders. This note explores those unique characteristics and the usual policy reasons for requiring derivative litigation. It concludes that in most cases these unique characteristics make a derivative suit nearly impossible to sustain. Further, the normal …

Preserving Human Agency In Automated Compliance, Onnig H. Dombalagian

Brooklyn Journal of Corporate, Financial & Commercial Law

As technology transforms financial services, so too must it transform the regulation of financial markets and intermediaries. The imperative of real-time, prophylactic regulation increasingly compels reallocation of regulatory and compliance budgets to surveillance and enforcement technology. At the same time, in light of the well-known weaknesses of automated systems, securities firms (and their regulators) must temper investment in automation with efforts to augment the agency of compliance professionals. This symposium contribution considers how investment in the professional development of compliance personnel can better integrate automated tools within established compliance and supervisory structures and thereby advance regulatory and operational objectives.

The Choice Is (Not) Yours: Why The Sec Must Further Amend Its Rules Of Practice To Increase Fairness In Administrative Proceedings, Madeline Ilibassi

Brooklyn Journal of Corporate, Financial & Commercial Law

The Securities and Exchange Commission (SEC) plays an extremely important role within the securities industry—it oversees the financial markets, protects consumers, and maintains market efficiency. One of the most important (and recently one of most criticized) responsibilities of the SEC is its duty to enforce the securities laws and punish violators. During the past two decades, and especially after the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, the SEC’s Division of Enforcement has grown substantially and has utilized administrative enforcement proceedings at an increasing rate. However; this utilization has been occurring without any substantial …

Dashboard Compliance: Benefit, Threat, Or Both?, James Fanto

Brooklyn Journal of Corporate, Financial & Commercial Law

This Article poses the basic question that is reflected in its title and that was the subject of the conference where the Article was initially presented: whether technology poses any threats to the mission of compliance and the position of compliance officers, whether it is just another useful tool for them, or whether it is something of both. It begins by explaining the origin of compliance in broker-dealers and investment advisers and its important current position in those firms. It then discusses why compliance officers have always been drawn to technology, particularly to keep up with the business sides of …

The Cybersecurity Threat: Compliance And The Role Of Whistleblowers, Jennifer M. Pacella

Brooklyn Journal of Corporate, Financial & Commercial Law

In today’s technologically dependent world, concerns about cybersecurity, data breaches, and compromised personal information infiltrate the news almost daily. The Securities and Exchange Commission (SEC) has recently emerged as a regulator that is keenly focused on cybersecurity, specifically with respect to encouraging disclosures in this arena by regulated entities. Although the SEC has issued non-binding “guidance” to help companies navigate their reporting obligations in this sector, the agency lacks binding cybersecurity disclosure regulations as they pertain generally to public companies. Given that the SEC has already relied on such guidance in threatening enforcement actions, reporting companies are increasingly pressured for …

Mandatory Third Party Compliance Examinations For Investment Advisers: An Sec Waterloo?, Mercer Bullard

Brooklyn Journal of Corporate, Financial & Commercial Law

The Securities and Exchange Commission (SEC or Commission) appears to be on the verge of requiring investment advisers to undergo third party examinations. One justification for the rulemaking is that the Commission lacks sufficient resources to examine advisers frequently enough. Another is to create indirectly a self-regulatory organization (SRO) for investments advisers. Both may leave a rulemaking particularly vulnerable to challenge as arbitrary and capricious under the Administrative Procedures Act. This Article considers three novel grounds on which a rulemaking may be successfully challenged. Congress has repeatedly rejected SEC requests to provide additional funding for examinations or to create an …

Broker-Dealer Law Reform: Financial Intermediaries In A State Of Limbo, Alexander R. Tiktin

Brooklyn Law Review

No abstract provided.

A Cautionary Look At A Cautionary Doctrine, Andrew W. Fine

Brooklyn Journal of Corporate, Financial & Commercial Law

Optimism is an indispensable element of effective salesmanship. It is therefore quite natural for the directors of public companies to want to optimistically tout the potential long-term benefits of investing in their companies. After all, directors of public companies must be empowered to attract the attention and money of American investors. But what happens if these long-term projections fail to come true? Who is to blame for long-term projections that are simply unrealistic? A doctrine called the “bespeaks caution” doctrine has emerged in order to govern these inquiries, and holds that these optimistic forward-looking statements are legally immunized provided that …

The Challenge Of Fiduciary Regulation: The Investment Advisors Act After Seventy-Five Years, Roberta S. Karmel

Brooklyn Journal of Corporate, Financial & Commercial Law

Seventy-five years after its enactment the Investment Advisers Act of 1940 has advanced from a relatively weak statute merely registering advisers with the Securities and Exchange Commission (SEC) to a more robust law imposing fiduciary responsibilities on advisers. Over the years, the number of investment advisers and the number of their clients have increased greatly. The SEC therefore has been pressured by Congress to develop a harmonized fiduciary standard for broker-dealers and advisers and also to develop and enforce a greater degree of oversight over the advisory industry. These developments have raised the questions of how to fund such efforts …

The Customer's Nonwaivable Right To Choose Arbitration In The Securities Industry, Jill I. Gross

Brooklyn Journal of Corporate, Financial & Commercial Law

Arbitration has been the predominant form of dispute resolution in the securities industry since the 1980s. Virtually all brokerage firms include predispute arbitration agreements (PDAAs) in their retail customer contracts, and have successfully fought off challenges to their validity. Additionally, the industry has long mandated that firms submit to arbitration at the demand of a customer, even in the absence of a PDAA.

More recently, however, brokerage firms have been arguing that forum selection clauses in their agreements with sophisticated customers (such as institutional investors and issuers) supersede firms’ duty to arbitrate under FINRA Rule 12200. Circuit courts currently are …

Open Sesame: The Myth Of Alibaba's Extreme Corporate Governance And Control, Yu-Hsin Lin, Thomas Mehaffy

Brooklyn Journal of Corporate, Financial & Commercial Law

In September 2014, Alibaba Group Holding Limited (Alibaba) successfully launched a $25 billion initial public offering (IPO), the largest IPO ever, on New York Stock Exchange. Alibaba’s IPO success witnessed a wave among Chinese Internet companies to raise capital in U.S capital markets. A significant number of these companies have employed a novel, but poorly understood corporate ownership and control mechanism—the variable interest entity (VIE) structure and/or the disproportional control structure. The VIE structure was created in response to the Chinese restriction on foreign investments; however, it carries the risk of being declared illegal under Chinese law. The disproportional control …

The Sixth Pillar Of Anti-Money Laundering Compliance: Balancing Effective Enforcement With Financial Privacy, Maria A. De Dios

Brooklyn Journal of Corporate, Financial & Commercial Law

The U.S. government has responded to the increase of financial crimes, including money laundering and terrorist financing, by requiring that financial institutions implement anti-money laundering compliance programs within their institutions. Most recently, the Financial Crimes Enforcement Network exercised its regulatory powers, as authorized by the Treasury Department, by proposing regulations that now explicitly add customer due diligence to the preexisting anti-money laundering regime. The policy behind the government’s legislative and regulatory measures is clear—financial institutions must ensure that they are protected from and not aiding in the illegal efforts of criminals. The complexity and insidiousness of these financial crimes makes …