Securities Law Commons^™

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 …

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 …

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 …

Reconciling Tax Law And Securities Regulation, Omri Marian

University of Michigan Journal of Law Reform

Issuers in registered securities offerings must disclose the expected tax consequences to investors investing in the offered securities (“nonfinancial tax disclosure”). This Article advances three arguments regarding nonfinancial tax disclosures. First, nonfinancial tax disclosure practice, as the Securities and Exchange Commission (the SEC) has sanctioned it, does not fulfill its intended regulatory purposes. Currently, nonfinancial tax disclosures provide irrelevant information, sometimes fail to provide material information, create unnecessary transaction costs, and divert valuable administrative resources to the enforcement of largely-meaningless requirements. Second, the practical reason for this failure is the SEC and tax practitioners’ unsuccessful attempt to address investors’ heterogeneous …

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 …

The Unjustified Judicial Creation Of Class Certification Merits Trials In Securities, Michael J. Kaufman, John M. Wunderlich

University of Michigan Journal of Law Reform

The class action device is vital to deterring securities fraud and remedying its victims, who almost never suffer losses sufficient to justify an individual suit. Nonetheless, the federal courts have begun to convert the class certification process into a premature trial on the merits, thereby precluding victims of securities fraud from pursuing otherwise valid claims of financial wrongdoing. In particular, in a series of important decisions, the federal courts have required plaintiffs to prove the essential elements of their securities fraud claims at the preliminary class certification stage.

This Article demonstrates why this trend should end. The judicial creation of …

Give Smaller Companies A Choice: Solving Sarbanes-Oxley Section 404 Inefficiency, Paul P. Arnold

University of Michigan Journal of Law Reform

This Note argues that smaller public companies should have the option to opt out of Section 404 of the Sarbanes-Oxley Act of 2002. Optional compliance is economically preferable to the current approach of mandatory compliance. Companies that choose to comply with Section 404 will send a signal to the financial markets that their internal controls meet the high standards Section 404 demands, and investors will reward such companies if they actually value the benefit of that company's additional controls. Similarly, companies that benefit less from additional internal accounting will be able to avoid Section 404's high costs. To clarify the …

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 …

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 …

Proposed Regulation Of Limited Partnership Investment Programs, Ivan J. Schell

University of Michigan Journal of Law Reform

Limited partners have long been admonished to scrutinize potential investments; this advice is often ignored, however, by investors eager to reap quick profits. Furthermore, the proliferation of limited partnership interests in a single enterprise diffuses the focus of investor vigilance and increases the potential for undetected abuses. Thus a need for regulation, either governmental or private, has developed. Currently the Uniform Limited Partnership Act and blue sky laws provide some control of limited partnership abuses at the state level. On the interstate level, the Midwest Securities Commissioners Association, the National Association of Securities Dealers, and the Securities and Exchange Commission …

Proposed Sec Rules For Private Offerings: The Impact On Venture Capital Financing, Gregory A. Kearns

University of Michigan Journal of Law Reform

In order to facilitate venture capital financing, corporations rely upon the private offering exemption from the registration and prospectus requirements of the Securities Act of 1933. In an attempt to prevent this exemption from serving as a conduit for the flow of securities into the public securities markets, the Securities and Exchange Commission (SEC) has proposed new rules regulating the resale of securities purchased in a private offering. These proposals would alter, among other things, the existing holding period, sales limitation, and financial information requirements. This article will examine the impact of the proposed *rules on venture capital financing of …