Securities Law Commons^™

Global Standards For Securities Holding Infrastructures: A Soft Law/Fintech Model For Reform, Charles W. Mooney Jr.

Michigan Journal of International Law

This Article outlines a “soft-law-to-hard-law” approach for the development and implementation of reforms to systems for the holding of publicly traded securities. It proposes the development of global standards for securities holding systems (“Global Standards”), to be led by the International Organization of Securities Commissions (the “IOSCO”). This approach contemplates that States would be encouraged and expected to implement the Global Standards by adopting “hard law” reforms through statutory and regulatory adjustments to their securities holding systems as well as modifications of the architecture of their securities holding systems. The successes of past IOSCO initiatives inspire this Article’s proposal, as …

Alpha Duties: The Search For Excess Returns And Appropriate Fiduciary Duties, Ian Ayres, Edward Fox

Articles

Modern finance theory and investment practice have shifted toward “passive investing.” The current consensus is that most savers should invest in mutual funds or ETFs that are (i) well-diversified, (ii) low-cost, and (iii) expose their portfolios to age-appropriate stock market risk. The law governing trustees, investment advisers, broker–dealers, 401(k) plan managers, and other investment fiduciaries has evolved to push them gently toward this consensus. But these laws still provide broad scope for fiduciaries to recommend that clients invest instead in specific assets that they believe will produce “alpha” by outperforming the market. Seeking alpha comes at a cost, however, in …

Securities Law In The Sixties: The Supreme Court, The Second Circuit, And The Triumph Of Purpose Over Text, Adam C. Pritchard, Robert B. Thompson

Articles

This Article analyzes the Supreme Court’s leading securities cases from 1962 to 1972—SEC v. Capital Gains Research Bureau, Inc.; J.I. Case Co. v. Borak; Mills v. Electric Auto-Lite Co.; Superintendent of Insurance v. Bankers Life & Casualty Co.; and Affiliated Ute of Utah v. United States—relying not just on the published opinions, but also the Justices’ internal letters, memos, and conference notes. The Sixties Court did not simply apply the text as enacted by Congress, but instead invoked the securities laws’ purposes as a guide to interpretation. The Court became a partner of Congress in shaping the securities laws, rather …

Texas Gulf Sulphur And The Genesis Of Corporate Liability Under Rule 10b-5, Adam C. Pritchard, Robert B. Thompson

Articles

This Essay explores the seminal role played by SEC v. Texas Gulf Sulphur Co. in establishing Rule 10b-5’s use to create a remedy against corporations for misstatements made by their officers. The question of the corporation’s liability for private damages loomed large for the Second Circuit judges in Texas Gulf Sulphur, even though that question was not directly at issue in an SEC action for injunctive relief. The judges considered both, construing narrowly “in connection with the purchase or sale of any security,” and the requisite state of mind required for violating Rule 10b-5. We explore the choices of the …

The Elephant In The Room: Helping Delaware Courts Develop Law To End Systemic Short-Term Bias In Corporate Decision-Making, Kenneth Mcneil, Keith Johnson

Michigan Business & Entrepreneurial Law Review

Short-termism in corporate decision-making is as problematic for long-term investors as relying on a three-mile radar on a supertanker. It is totally inadequate for handling the long-term risks and opportunities faced by the modern corporation. Yet recent empirical research shows that up to 85% of the S&P 1500 have no long-term planning. This is costing pension funds and other long-term investors dearly. For instance, the small minority of companies that do long-term planning and risk management had a long-term profitability that was 81% higher than their peers during the 2001–2014 period—with less stock volatility that costs investors dearly as well. …

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. …

Informed Trading And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel V. Rauterberg

Articles

Informed trading--trading on information not yet reflected in a stock's price-- drives the stock market. Such informational advantages can arise from astute analysis of varied pieces of public news, from just released public information, or from confidential information from inside a firm. We argue that these disparate types of trading are all better regulated as part of the broader phenomenon of informed trading. Informed trading makes share prices more accurate, enhancing the allocation of capital, but also makes markets less liquid, which is costly to the efficiency of trade. Informed trading thus poses a fundamental trade-off in how it affects …

Do Institutional Owners Monitor? Evidence From Voting On Connected Transaction Proposals In Hong Kong-Listed Companies, Félix E. Mezzanotte, Simon Fung

Michigan Business & Entrepreneurial Law Review

The conventional view in Hong Kong has been that institutional owners tend to be passive owners and that they do little to monitor the companies’ management. We investigated whether the presence of institutional owners in Hong Kong-listed companies was associated with greater monitoring of management through dissent voting by hand-collecting information for a sample (n= 96) of connected transaction proposals (“CT proposals”) and of their voting outcomes, as announced in the Stock Exchange of Hong Kong during the period from 2012–14. Our study shows that voting approval rates on CT proposals were lower (i.e. greater dissent voting) when institutional owners …

Theories And Solutions On Wolf Pack Activism, Kimberly Goldman

Michigan Business & Entrepreneurial Law Review

Section I will describe the key players involved in wolf pack activism and their conflicting motives, including both the members of wolf packs and those affected by them. Given that not all shareholders have common interests, this will include an analysis of the motives of various types of shareholders and an analysis of how these diverse motives may affect the wealth sustainability of companies. Section II will explain the phenomenon of wolf packs in corporate governance by describing the circumstances that lead to their formation and the various regulations (or lack thereof) pertaining to them. Section III will describe divergent …

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 …

Insider Trading Law And The Ambiguous Quest For Edge, A. C. Pritchard

Michigan Law Review

A review of Sheelah Kolhatkar, Black Edge.

High‐Frequency Trading And The New Stock Market: Sense And Nonsense, Merritt B. Fox, Lawrence R. Glosten, Gabriel V. Rauterberg

Articles

The stock market has been transformed during the last 25 years. Human suppliers of liquidity like the NASDAQ dealers and NYSE specialists have been replaced by algorithmic market making; stocks that once traded on a single venue now trade across twelve exchanges and a multitude of alternative trading systems. New venues like dark pools, and new participants like high‐frequency traders, have emerged to take on prominent roles. This new market has had more than its share of controversy and regulatory scrutiny, particularly in the wake of Michael Lewis’s bestseller Flash Boys. In this article, the authors analyze five of the …

Stock Market Manipulation And Its Regulation, Merritt B. Fox, Lawrence R. Glosten, Gabriel Rauterberg

Articles

More than eighty years after federal law first addressed stock market manipulation, the federal courts remain fractured by disagreement and confusion concerning manipulation law's most foundational issues. There remains, for example, a sharp split among the federal circuits concerning manipulation law's central question: Whether trading activity alone can ever be considered illegal manipulation under federal law? Academics have been similarly confused-economists and legal scholars cannot agree on whether manipulation is even possible in principle, let alone on how to properly address it in practice.

The Regulation Of Trading Markets: A Survey And Evaluation, Paul G. Mahoney, Gabriel V. Rauterberg

Book Chapters

This chapter was prepared for a conference exploring the desirability and structure of a new special study of the securities markets. Our objective is not to resolve all of the questions that commentators have raised about the new equity markets, but to lay the groundwork for a new special study by surveying the state of market regulation, identifying issues, and offering preliminary evaluations.

Corporate Governance, Capital Markets, And Securities Law, Adam C. Pritchard

Book Chapters

This chapter explores the dividing line between corporate governance and securities law from both historical and institutional perspectives. Section 2 examines the origins of the dividing line between securities law and corporate governance in the United States, as well as the efforts of the SEC to push against that boundary. That history sets the stage for section 3, which broadens the inquiry by examining the institutional connections between capital markets and corporate governance. Are there practical limits to the connection between securities law and corporate governance? The US again illustrates the point, as Congress has increasingly crossed the traditional boundary …

The Commodification Of Cryptocurrency, Neil Tiwari

Michigan Law Review

Cryptocurrencies are digital tokens built on blockchain technology. This allows for a product that is fully decentralized, with no need for a third-party intermediary like a government or financial institution. Cryptocurrency creators use initial coin offerings (ICOs) to raise capital to build their tokens. Cryptocurrency ICOs are problematic because they do not fit neatly within either of two traditional categories—securities or commodities. Each of these categories has their own regulatory agency: the SEC for securities and the CFTC for commodities. At first blush, ICOs seem to be a sale of securities subject to regulation by the SEC, but this is …

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 …

Piling On? An Empirical Study Of Parallel Derivative Suits, Stephen J. Choi, Jessica Erickson, Adam C. Pritchard

Articles

Using a sample of all companies named as defendants in securities class actions between July 1, 2005 and December 31, 2008, we study parallel suits relying on state corporate law arising out of the same allegations as the securities class actions. We test several ways that parallel suits may add value to a securities class action. Most parallel suits target cases involving obvious indicia of wrongdoing. Moreover, we find that although a modest percentage of parallel suits are filed first, over 80 percent are filed after a securities class action (termed “follow-on” parallel suits). We find that parallel suits and, …

Break From Tradition: Questioning The Primacy Of Self-Regulation In American Securities Law, John I. Sanders

Michigan Business & Entrepreneurial Law Review

This Comment outlines the circular path of American securities law—one that begins and ends with the primacy of self-regulation. Part I of this paper describes American securities law between 1792 and 1911 (the “Buttonwood Era”). In this era, a group of New York stock brokers utilized private contract law to create securities regulation for their private club, thereby establishing a tradition of self-regulation. Part II describes a short period of history in which individual states attempted to regulate the se-curities market through state statutes, the so-called “Blue Sky Laws.” Part III details the creation of the federal securities law regime …

Enforcement Of Corporate And Securities Laws In India: The Arrival Of The Class Action?, Vikramaditya S. Khanna

Book Chapters

Chapter from Enforcement of Corporate and Securities Law: China and the World. Howson, N.C. and Huang, R.H., eds.

Corporate governance in Asia has garnered a great deal of recent scholarly attention.1 One topic that permeates discussions across countries is the enforcement of corporate and securities laws – with some countries relying primarily on public enforcement (i.e. enforcement by government) while others rely on some combination of public and private enforcement (i.e. enforcement by private shareholders). Further, understanding how enforcement is operationalised and its concomitant strengths and weaknesses enables us to better appreciate the actual corporate governance situation in many …

Conclusion - Between "Law In Books" And "Law In Action", Nicholas C. Howson, H. Huang

Book Chapters

Any attempt to comprehensively analyse the enforcement of corporate law and securities regulation is difficult, not only because there are so many distinct national systems in play, but also because, we need to examine both formal enforcement mechanisms and the way in which such mechanisms are applied in practice. If nothing else, the expert analyses presented in the foregoing chapters of this book confirm that with respect to enforcement issues a rather large gap does exist between what Roscoe Pound memorably called 'law in books' and 'law in action'.

Private Enforcement Of Company Law And Securities Regulation In Korea, Hwa-Jin Kim

Book Chapters

This chapter offers a brief overview of the private enforcement of corporate law and securities regulation in Korea, with particular reference to the current legislative efforts in the Korean National Assembly and recent court cases. This chapter also talks about Korea’s ill-fated and misguided adoption of the fraud-on-the-market theory in securities fraud litigation.

Stock Market Futurism, Merritt Fox, Gabriel Rauterberg

Articles

The U.S. stock market is undergoing extraordinary upheaval. The approval of the application of the Investors Exchange (IEX) to become the nation's newest stock exchange, including its famous "speed bump," was one of the SEC's most controversial decisions in decades. Other exchanges have proposed a raft of new innovations in its wake. This evolving equity market is a critical piece of national infrastructure, but the regulatory scheme for its institutions is increasingly frayed. In particular, current regulation draws sharp distinctions among different kinds of markets for trading stocks, treating stock exchanges as self-regulatory organizations immune from private civil litigation, while …

Lead Plaintiffs And Their Lawyers: Mission Accomplished, Or More To Be Done?, Adam C. Pritchard, Stephen Choi

Law & Economics Working Papers

This chapter, written for the Research Handbook on Shareholder Litigation, surveys empirical work studying the lead plaintiff provision of the Private Securities Litigation Reform Act (PSLRA). That work finds that the lead plaintiff provision has encouraged institutional investors to participate in securities class actions and that those institutional investors have negotiated lower attorneys' fees. Those benefits from the lead plaintiff provision are undercut, however, by political contributions made by plaintiffs' lawyers. We suggest additional reforms to promote transparency and competition among lawyers for lead plaintiffs. We also suggest reforms to the lead plaintiff provision intended to enhance the screening effect …

Implementing High Frequency Trading Regulation: A Critical Analysis Of Current Reforms, Michael Morelli

Michigan Business & Entrepreneurial Law Review

Technological developments in securities markets, most notably high frequency trading, have fundamentally changed the structure and nature of trading over the past fifty years. Policymakers, both domestically and abroad, now face many new challenges influencing the secondary market’s effectiveness as a generator of economic growth and stability. Faced with these rapid structural changes, many are quick to denounce high frequency trading as opportunistic and parasitic. This article, however, instead argues that while high frequency trading presents certain general risks to secondary market efficiency, liquidity, stability, and integrity, the practice encompasses a wide variety of strategies, many of which can enhance, …

Finance And Growth: The Legal And Regulatory Implications Of The Role Of The Public Equity Market In The United States, Ezra Wasserman Mitchell

Michigan Business & Entrepreneurial Law Review

The important study of the relationship between finance and economic growth has exploded over the past two decades. One of the most significant open questions is the role of the public equity market in stimulating growth and the channels it follows if it does. This paper examines that question from an economic, legal, and historical perspective, especially with regard to its regulatory and corporate governance implications. The US market is my focus.

In contrast to most studies, I follow both economic history and the actual flow of funds in addition to empirics and theory to conclude that the public equity …

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 …

Sec Enforcement Attorneys: Should I Stay Of Should I Go?, Adam C. Pritchard, Stephen J. Choi

Law & Economics Working Papers

We examine the career paths of attorneys in the Enforcement Division at the SEC. Using a variety of performance metrics, we find evidence that long term lawyers and lawyers in regional offices do not perform as well as other SEC attorneys. We also report that men and women may differ in their career paths in this field. We find that early-stage female attorneys perform just as well as male attorneys. Notwithstanding their comparable performance, these early-stage women are less likely to get a raise or promotion. We find that women are more likely to stay at the SEC, at least …

A Big Gap Between ‘Law In Books’ And ‘Law In Action’ And "A New Taxonomy Of Enforcement Strategies", Robin H. Huang, Nicholas C. Howson

Other Publications

Any attempt to comprehensively analyse the enforcement of corporate law and securities regulation is difficult, not only because there are so many distinct national systems in play, but also because, we need to examine both formal enforcement mechanisms and the way in which such mechanisms are applied in practice. If nothing else, the expert analyses presented in the foregoing chapters of this book confirm that with respect to enforcement issues a rather large gap does exist between what Roscoe Pound memorably called ‘law in books’ and ‘law in action’.

Preface, Robin H. Huang, Nicholas C. Howson

Book Chapters

This volume collects the fruits of an unprecedented international academic conference, ‘Public and Private Enforcement of Company Law and Securities Regulation – China and the World’, which was held at the Chinese University of Hong Kong (CUHK) in December 2014 and convened by the Centre for Financial Regulation and Economic Development (CFRED) of the Faculty of Law of CUHK, the University of Michigan Law School and the Lieberthal Rogel Center for Chinese Studies at the University of Michigan. The aim of the conference was to gather, in one place and at one time, some of the world’s top academic specialists, …